UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9187 IES INDUSTRIES INC. (an Iowa Corporation) 42-1271452
IES Tower, Cedar Rapids, Iowa 52401
319-398-4411
0-4117-1 IES UTILITIES INC. (an Iowa Corporation) 42-0331370
IES Tower, Cedar Rapids, Iowa 52401
319-398-4411
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
--- ---
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of July 31, 1997.
IES Industries Inc. Common Stock, no par value - 30,439,245 shares
IES Utilities Inc. Common Stock, $2.50 par value - 13,370,788 shares
IES INDUSTRIES INC. AND IES UTILITIES INC.
INDEX
Page No.
Part I. Financial Information.
Item 1. Consolidated Financial Statements.
IES Industries Inc.:
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3 - 4
Consolidated Statements of Income -
Three, Six and Twelve Months Ended
June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Three, Six and Twelve Months Ended
June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7 - 14
IES Utilities Inc.:
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 15 - 16
Consolidated Statements of Income -
Three, Six and Twelve Months Ended
June 30, 1997 and 1996 17
Consolidated Statements of Cash Flows -
Three, Six and Twelve Months Ended
June 30, 1997 and 1996 18
Notes to Consolidated Financial Statements 19
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition. 20 - 34
Part II. Other Information. 35 - 38
Signatures. 39 - 40
PART I - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS
June 30,
1997 December 31,
ASSETS (in thousands) (Unaudited) 1996
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,032,872 $ 2,007,839
Gas 178,588 175,472
Other 133,707 126,850
2,345,167 2,310,161
Less - Accumulated depreciation 1,085,579 1,030,390
1,259,588 1,279,771
Leased nuclear fuel, net of amortization 27,739 34,725
Construction work in progress 56,674 43,719
1,344,001 1,358,215
Other, net of accumulated depreciation
and amortization of $79,151 and
$70,031, respectively 244,386 223,805
1,588,387 1,582,020
Current assets:
Cash and temporary cash investments 8,932 8,675
Accounts receivable -
Customer, less allowance for doubtful accounts
of $976 and $1,087, respectively 24,002 50,821
Other 8,175 12,040
Income tax refunds receivable 17,740 8,890
Production fuel, at average cost 13,679 13,323
Materials and supplies, at average cost 24,183 22,842
Adjustment clause balances 0 10,752
Regulatory assets 34,644 26,539
Prepayments and other 17,017 24,169
148,372 178,051
Investments:
Nuclear decommissioning trust funds 69,490 59,325
Investment in foreign entities 46,498 44,946
Investment in McLeodUSA Inc. 28,960 29,200
Cash surrender value of life insurance policies 11,906 11,217
Other 6,217 4,903
163,071 149,591
Other assets:
Regulatory assets 195,717 201,129
Deferred charges and other 14,609 14,771
210,326 215,900
$ 2,110,156 $ 2,125,562
IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30,
CAPITALIZATION AND LIABILITIES 1997 December 31,
(in thousands, except share amounts) (Unaudited) 1996
Capitalization:
Common stock - no par value - authorized
48,000,000 shares; outstanding 30,352,843
and 30,077,212 shares, respectively $ 415,603 $ 407,635
Retained earnings 208,119 219,246
Total common equity 623,722 626,881
Cumulative preferred stock of IES Utilities Inc. 18,320 18,320
Long-term debt (excluding current portion) 719,654 701,100
1,361,696 1,346,301
Current liabilities:
Short-term borrowings 150,000 135,000
Capital lease obligations 13,923 15,125
Maturities and sinking funds 487 8,473
Accounts payable 58,188 99,861
Dividends payable 16,578 16,431
Accrued interest 8,605 8,985
Accrued taxes 45,903 43,926
Accumulated refueling outage provision 5,506 1,316
Adjustment clause balances 4,315 0
Environmental liabilities 5,661 5,679
Other 21,316 22,087
330,482 356,883
Long-term liabilities:
Pension and other benefit obligations 48,067 39,643
Capital lease obligations 13,816 19,600
Environmental liabilities 47,850 47,502
Other 21,923 18,488
131,656 125,233
Deferred credits:
Accumulated deferred income taxes 253,168 262,675
Accumulated deferred investment tax credits 33,154 34,470
286,322 297,145
Commitments and contingencies (Note 7)
$ 2,110,156 $ 2,125,562
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<TABLE>
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
For the Three For the Six For the Twelve
Months Ended Months Ended Months Ended
June 30 June 30 June 30
1997 1996 1997 1996 1997 1996
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Electric $ 137,691 $ 137,032 $ 274,977 $ 262,400 $ 586,850 $ 573,246
Gas 25,768 42,628 109,874 132,651 251,201 225,999
Other 31,674 30,988 67,969 58,793 134,831 109,773
195,133 210,648 452,820 453,844 972,882 909,018
Operating expenses:
Fuel for production 26,532 22,728 56,413 43,021 97,972 99,530
Purchased power 15,050 22,000 33,723 36,469 85,603 69,899
Gas purchased for resale 15,843 31,814 80,341 99,250 198,442 168,610
Other operating expenses 53,357 52,283 106,320 104,808 216,265 212,231
Maintenance 13,481 15,087 27,049 25,920 50,130 48,525
Depreciation and amortization 28,582 27,225 57,321 54,608 110,106 102,104
Taxes other than income taxes 12,897 12,741 26,193 26,004 48,360 48,211
165,742 183,878 387,360 390,080 806,878 749,110
Operating income 29,391 26,770 65,460 63,764 166,004 159,908
Interest expense and other:
Interest expense 15,592 12,934 30,439 25,839 59,421 51,518
Allowance for funds used
during construction -372 -691 -767 -1,380 -1,489 -2,904
Preferred dividend requirements
of IES Utilities Inc. 229 229 457 457 914 914
Miscellaneous, net 1,936 -696 1,693 -2,373 6,398 -5,016
17,385 11,776 31,822 22,543 65,244 44,512
Income before income taxes 12,006 14,994 33,638 41,221 100,760 115,396
Income taxes:
Current 4,855 5,466 20,992 19,576 39,663 51,713
Deferred -541 2,133 -6,703 817 4,314 -732
Amortization of investment
tax credits -658 -661 -1,316 -1,323 -2,639 -2,663
3,656 6,938 12,973 19,070 41,338 48,318
Net income $ 8,350 $ 8,056 $ 20,665 $ 22,151 $ 59,422 $ 67,078
Average number of common
shares outstanding 30,324 29,801 30,256 29,723 30,128 29,560
Earnings per average
common share $ 0.28 $ 0.27 $ 0.68 $ 0.75 $ 1.97 $ 2.27
Dividends declared per
common share $ 0.525 $ 0.525 $ 1.05 $ 1.05 $ 2.10 $ 2.10
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
<TABLE>
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
For the Three For the Six For the Twelve
Months Ended Months Ended Months Ended
June 30 June 30 June 30
1997 1996 1997 1996 1997 1996
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,350 $ 8,056 $ 20,665 $ 22,151 $ 59,422 $ 67,078
Adjustments to reconcile net income to
net cash flows from operating activities -
Depreciation and amortization 28,582 27,225 57,321 54,608 110,106 102,104
Amortization of principal under capital
lease obligations 3,740 4,626 7,109 9,250 14,351 19,096
Deferred taxes and investment tax credits -1,199 1,472 -8,019 -506 1,675 -3,395
Refueling outage provision 2,504 2,373 4,190 4,920 -7,104 10,374
Amortization of other assets 2,190 2,194 5,226 5,104 9,875 9,853
Other 774 285 3,053 1,390 2,616 1,223
Other changes in assets and liabilities -
Accounts receivable 12,115 9,431 30,684 2,300 6,230 -19,078
Sale of utility accounts receivable 0 7,000 0 7,000 0 9,000
Production fuel, materials and supplies -1,977 -396 -1,060 484 -894 5,365
Accounts payable -3,967 -1,554 -39,210 -10,175 -8,039 8,523
Accrued taxes -34,008 -28,680 -6,873 -12,387 -12,451 -115
Provision for rate refunds 0 -229 0 -63 -43 -10,164
Adjustment clause balances 556 -3,726 15,067 -339 1,506 2,332
Gas in storage 2,748 1,501 8,821 9,245 -1,578 2,350
Other 3,536 3,888 5,464 4,662 12,598 2,020
Net cash flows from operating activities 23,944 33,466 102,438 97,644 188,270 206,566
Cash flows from financing activities:
Dividends declared on common stock -15,934 -15,643 -31,792 -31,225 -63,306 -62,117
Proceeds from issuance of common stock 3,147 3,673 6,626 7,399 13,391 15,014
Purchase of treasury stock -83 -269 -83 -269 -83 -269
Net change in IES Diversified Inc. credit
facility 13,077 11,965 18,772 10,970 55,662 75,415
Proceeds from issuance of other long-term
debt 55,000 0 55,000 0 115,000 50,003
Reductions in other long-term debt -63,195 -217 -63,274 -296 -78,432 -50,440
Net change in short-term borrowings 24,000 33,000 15,000 24,000 25,000 38,000
Principal payments under capital lease
obligations -3,369 -4,624 -5,665 -9,536 -15,237 -17,781
Other -61 -22 35 -91 -400 -1,669
Net cash flows from financing activities 12,582 27,863 -5,381 952 51,595 46,156
Cash flows from investing activities:
Construction and acquisition expenditures -
Utility -28,466 -34,000 -48,231 -57,333 -133,147 -125,292
Other -22,254 -18,456 -35,670 -33,815 -97,985 -106,879
Oil and gas properties held for resale 0 0 0 9,843 0 0
Deferred energy efficiency expenditures -3,516 -5,090 -7,530 -8,757 -15,630 -18,808
Nuclear decommissioning trust funds -1,502 -1,502 -3,004 -3,004 -6,008 -6,338
Proceeds from disposition of assets 1,215 652 1,782 1,856 8,221 10,034
Other 304 1,152 -4,147 192 -904 -318
Net cash flows from investing activities -54,219 -57,244 -96,800 -91,018 -245,453 -247,601
Net increase (decrease) in cash and temporary
cash investments -17,693 4,085 257 7,578 -5,588 5,121
Cash and temporary cash investments
at beginning of period 26,625 10,435 8,675 6,942 14,520 9,399
Cash and temporary cash investments
at end of period $ 8,932 $ 14,520 $ 8,932 $ 14,520 $ 8,932 $ 14,520
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 17,330 $ 12,992 $ 29,638 $ 23,535 $ 59,148 $ 49,440
Income taxes $ 29,873 $ 24,277 $ 29,197 $ 32,748 $ 51,330 $ 50,877
Noncash investing and financing activities -
Capital lease obligations incurred $ 10 $ 10,243 $ 123 $ 12,846 $ 1,558 $ 13,106
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
This document contains the Quarterly Reports on Form 10-Q for the
quarter ended June 30, 1997 for each of IES Industries Inc. and IES
Utilities Inc. Information contained herein relating to an individual
registrant is filed by such registrant on its own behalf. Accordingly,
except for its subsidiaries, IES Utilities Inc. makes no representation
as to information relating to IES Industries Inc. or to any other
companies affiliated with IES Industries Inc. IES Industries Inc. and
its consolidated subsidiaries may collectively be referred to as "the
Company".
From time to time, the Company may make forward-looking statements
within the meaning of the federal securities laws that involve
judgments, assumptions and other uncertainties beyond the control of the
Company. 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 the Company's 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
of the Company 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 Company's service territory, federal and state
regulatory or government actions, the operating of a nuclear facility
and changes in the rate of inflation.
IES INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 1997
(1) GENERAL:
The interim Consolidated Financial Statements have been prepared by
IES Industries Inc. (Industries) and its consolidated subsidiaries,
without audit, pursuant to the rules and regulations of the United
States Securities and Exchange Commission (SEC). Industries' wholly-
owned subsidiaries are IES Utilities Inc. (Utilities) and IES
Diversified Inc. (Diversified). Industries is an investor-owned holding
company whose primary operating company, Utilities, is engaged
principally in the generation, transmission, distribution and sale of
electric energy and the purchase, distribution, transportation and sale
of natural gas. The Company's principal markets are located in the
State of Iowa. The Company also has various non-utility subsidiaries
which are primarily engaged in the energy-related, transportation and
real estate development businesses.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not
misleading. In the opinion of the Company, the Consolidated Financial
Statements include all adjustments, which are normal and recurring in
nature, necessary for the fair presentation of the results of operations
and financial position. Certain prior period amounts have been
reclassified on a basis consistent with the 1997 presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect: 1) the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and 2) the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
It is suggested that these Consolidated Financial Statements be
read in conjunction with the Consolidated Financial Statements and the
notes thereto included in the Company's Form 10-K for the year ended
December 31, 1996. The accounting and financial policies relative to
the following items have been described in those notes and have been
omitted herein because they have not changed materially through the date
of this report:
Summary of significant accounting policies
Leases
Utility accounts receivable (other than discussed in Note 4)
Income taxes
Benefit plans
Common, preferred and preference stock
Debt (other than discussed in Note 6)
Estimated fair value of financial instruments (other than discussed
in Note 5)
Derivative financial instruments
Commitments and contingencies (other than discussed in Note 7)
Jointly-owned electric utility plant
Segments of business
(2) PROPOSED MERGER OF THE COMPANY:
On November 10, 1995, Industries, WPL Holdings, Inc. (WPLH) and
Interstate Power Company (IPC) entered into an Agreement and Plan of
Merger, as amended (Merger Agreement). At the 1996 annual meetings, the
shareowners of all three companies approved the Merger Agreement. The
merger is still subject to approval by several federal and state
regulatory agencies. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for a further discussion.
(3) RATE MATTERS:
(a) Electric Price Announcements -
Utilities and its Iowa-based proposed merger partner, IPC,
announced in 1996 their intentions to hold retail electric prices to
their current levels until at least January 1, 2000. The companies made
the proposal as part of their testimony in the merger-related
application filed with the Iowa Utilities Board (IUB). The proposal
excludes price changes due to government-mandated programs, such as
energy efficiency cost recovery, or unforeseen dramatic changes in
operations. Utilities, Wisconsin Power and Light Company (WP&L) and IPC
also proposed to freeze their wholesale electric prices for four years
from the effective date of the merger as part of their merger filing
with the Federal Energy Regulatory Commission (FERC). The Company does
not expect the merger-related electric price proposals to have a
material adverse effect on its financial position or results of
operations.
(b) Energy Efficiency Cost Recovery -
Under provisions of the IUB rules, Utilities is currently
recovering the costs incurred through 1993 for its energy efficiency
programs, including its direct expenditures, carrying costs, a return on
its expenditures and a reward. These costs are being recovered over a
four-year period and the recovery began on June 1, 1995.
In December 1996, under provisions of the IUB rules, the Company
filed for recovery of the costs relating to its 1994 and 1995 programs.
The Company received the IUB's final order in the proceeding in May 1997
which allowed for recovery of approximately $45 million ($35 million
electric and $10 million gas) and was composed of direct expenditures
and carrying costs as well as a return on the expenditures over the
recovery period. The costs will be recovered over a four-year period
and such recovery commenced on August 1, 1997.
Iowa statutory changes enacted in 1996 have eliminated: 1)
specific electric and gas percentage spending requirements in favor of
IUB-determined energy savings targets, 2) the delay in recovery of
energy efficiency costs by allowing recovery which is concurrent with
spending and 3) the recovery of a sharing reward. The IUB commenced a
rulemaking in January 1997 to implement the statutory changes and a
final order in this proceeding was issued in April 1997. The new rules
provide that the Company recover its 1996 expenditures, and the 1997
expenditures incurred prior to August 1, 1997, over a four-year recovery
period which began on August 1, 1997. The Company also began concurrent
recovery of its prospective expenditures on August 1, 1997. The
implementation of these changes will gradually eliminate the regulatory
asset which exists under the current rate making mechanism as these
costs are recovered.
The Company has the following amounts of energy efficiency costs
included in regulatory assets on its Consolidated Balance Sheets (in
thousands):
June 30, December 31,
1997 1996
Costs incurred through 1993 $ 9,890 $ 12,834
Costs incurred in 1994-1995 34,328 33,161
Costs incurred from 1/1/96 - 6/30/97 21,451 15,087
$ 65,669 $ 61,082
The above amounts include the direct expenditures and carrying
costs incurred by the Company but do not include any amounts for a
return on its expenditures over the recovery period.
(4) UTILITY ACCOUNTS RECEIVABLE:
Utilities has entered into an agreement, which expires in 1999,
with a financial institution to sell, with limited recourse, an
undivided fractional interest of up to $65 million in its pool of
utility accounts receivable. At June 30, 1997, $65 million was sold
under the agreement.
SFAS 125, issued by the FASB in 1996 and effective for 1997,
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The accounting
for Utilities' sale of accounts receivable agreement is impacted by this
standard. As a result, the agreement was modified in the first quarter
of 1997 to comply with the SFAS 125 requirements and thus the accounting
and reporting for the sale of Utilities' receivables remains unchanged.
(5) INVESTMENTS:
(a) Foreign Entities -
At June 30, 1997, the Company had $46.5 million of investments in
foreign entities on its Consolidated Balance Sheet that included 1)
investments in two New Zealand electric distribution entities, 2) a loan
to a New Zealand company, 3) an investment in a cogeneration facility in
China, and 4) an investment in an international venture capital fund.
The Company accounts for the China investment under the equity method
and the other investments under the cost method. The geographic
concentration of the Company's investments in foreign entities at June
30, 1997, included investments of approximately $32.1 million in New
Zealand, $13.9 million in China and $0.5 million in other countries.
(b) McLeodUSA Inc. (McLeod) -
At June 30, 1997, the Company had a $29.0 million investment in
Class A common stock of McLeod and vested options that, if exercised,
would represent an additional investment of approximately $2.3 million
(1.3 million shares). During the second quarter of 1997, the Company
converted its $9.2 million investment in Class B Common Stock into
shares of Class A Common Stock. McLeod provides local, long-distance and
other telecommunications services.
McLeod completed an Initial Public Offering (IPO) of its Class A
common stock in June 1996 and a secondary offering in November 1996. As
of June 30, 1997, the Company was the beneficial owner of approximately
10.3 million total shares on a fully diluted basis. (The Company
contributed 300,000 of its McLeod Class A shares to the IES Industries
Charitable Foundation in the second quarter of 1997.) The Company
currently accounts for this investment under the cost method.
The Company has entered into an agreement with McLeod which
restricts the sale or disposal of its shares without the consent of the
McLeod Board of Directors. The agreement was modified in the second
quarter of 1997 to extend the restriction until the earlier of March
1999 or twelve months following the completion of a recently announced
merger between McLeod and Consolidated Communications Inc. (CCI). This
merger is expected to be completed in the second half of 1997. (In the
event the merger is not consummated, the restriction will be eliminated
in June 1998.) This contractual sale restriction results in restricted
stock under the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), Accounting for Certain Investments in
Debt and Equity Securities, until such time as the restrictions lapse
and such shares became qualified for sale within a one year period. As
a result, the Company currently carries this investment at cost.
The closing price of the McLeod Class A common stock on June 30,
1997, on the Nasdaq National Market, was $33.75 per share. The current
market value of the shares the Company beneficially owns (approximately
10.3 million shares) is impacted by, among other things, the fact that
the shares cannot be sold for a period of time. It is not possible to
estimate what the market value of the shares will be at the point in
time such sale restrictions are lifted. In addition, any gain upon an
eventual sale of this investment would likely be subject to a tax. The
estimated fair value of the McLeod investment at June 30, 1997, based
upon the closing price on June 30 of $33.75, was $347 million.
Under the provisions of SFAS No. 115, the carrying value of the
McLeod investment will be adjusted to estimated fair value at the time
such shares become qualified for sale within a one year period; this
will occur on the earlier of the close of the McLeod/CCI merger or March
1998 (assuming the McLeod/CCI merger consummates), which is one year
before the contractual restrictions on sale are lifted. At that time,
the adjustment to reflect the estimated fair value of this investment
will be reflected as an increase in the investment carrying value with
the unrealized gain reported as a net of tax amount in other common
shareholders' equity until realized (i.e., until the shares are sold by
the Company).
(6) DEBT:
(a) Long-Term Debt -
In August 1997, Utilities issued $135 million of 6-5/8% Senior
Debentures, due 2009. The proceeds from these debentures were used to
reduce Utilities' short-term borrowings.
Utilities repaid at maturity $8 million of 6-1/8% First Mortgage
Bonds during the second quarter of 1997.
Also in the second quarter of 1997, Utilities issued $55 million of
Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to
have their Collateral Trust Bonds redeemed, in whole but not in part, on
May 1, 2002, at 100% of the principal amount thereof, plus accrued
interest. The proceeds from the Collateral Trust Bonds were used to
refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30
million of Series M, 7.625% First Mortgage Bonds and $10 million of
7.375% First Mortgage Bonds.
Diversified has a variable rate credit facility that extends
through November 20, 1999, with two one-year extensions potentially
available to Diversified. The unborrowed portion of the agreement is
also used to support Diversified's commercial paper program. A combined
maximum of $300 million of borrowings under the agreement and commercial
paper program may be outstanding at any one time. Interest rates and
maturities are set at the time of borrowing for direct borrowings under
the agreement and for issuances of commercial paper. The interest rate
options are based upon quoted market rates and the maturities are less
than one year. At June 30, 1997, there were no borrowings outstanding
under this facility. Diversified had $190.9 million of commercial paper
outstanding at June 30, 1997, with interest rates ranging from 5.78% to
6.65% and maturity dates in the third quarter of 1997. Diversified
intends to continue borrowing under the renewal options of the facility
and no conditions exist at June 30, 1997, that would prevent such
borrowings. Accordingly, this debt is classified as long-term in the
Consolidated Balance Sheets.
(b) Short-Term Debt -
At June 30, 1997, the Company had bank lines of credit aggregating
$160.1 million. Utilities was using $145 million to support commercial
paper (weighted average interest rate of 6.13%) and $11.1 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, Utilities has an
uncommitted credit facility with a financial institution whereby it can
borrow up to $40 million. Rates are set at the time of borrowing and no
fees are paid to maintain this facility. At June 30, 1997, there was $5
million outstanding under this facility (weighted average interest rate
of 5.98%).
(7) CONTINGENCIES:
(a) Environmental Liabilities -
The Company has recorded environmental liabilities of approximately
$54 million in its Consolidated Balance Sheets at June 30, 1997. The
Company's significant environmental liabilities are discussed below.
Former Manufactured Gas Plant (FMGP) Sites
Utilities has been named as a Potentially Responsible Party (PRP)
by various federal and state environmental agencies for 28 FMGP sites,
but believes it is not responsible for two of these sites based on
extensive reviews of the ownership records and historical information
available for the two sites. Utilities has notified the appropriate
regulatory agency that it believes it does not have any responsibility
as relates to these two sites, but no response has been received from
the agency on this issue. Utilities is also aware of six other sites
that it may have owned or operated in the past and for which, as a
result, it may be designated as a PRP in the future in the event that
environmental concerns arise at these sites. Utilities is working
pursuant to the requirements of the various agencies to investigate,
mitigate, prevent and remediate, where necessary, damage to property,
including damage to natural resources, at and around the sites in order
to protect public health and the environment. Utilities believes it has
completed the remediation of twelve sites although it is in the process
of obtaining final approval from the applicable environmental agencies
on this issue for each site. Utilities is in various stages of the
investigation and/or remediation processes for the remaining fourteen
sites and estimates the range of additional costs to be incurred for
investigation, remediation and monitoring of the sites to be
approximately $24 million to $55 million.
Utilities has recorded environmental liabilities related to the
FMGP sites of approximately $35 million (including $4.7 million as
current liabilities) at June 30, 1997. These amounts are based upon
Utilities' best current estimate of the 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. 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.
Regulatory assets of approximately $35 million, which reflect the future
recovery that is being provided through Utilities' rates, have been
recorded in the Consolidated Balance Sheets. Considering the current
rate treatment allowed by the IUB, management believes that the clean-up
costs incurred by Utilities for these FMGP sites will not have a
material adverse effect on its financial position or results of
operations.
In April 1996, Utilities filed a lawsuit against certain of its
insurance carriers seeking reimbursement for investigation, mitigation,
prevention, remediation and monitoring costs associated with the FMGP
sites. Settlement discussions are proceeding between Utilities and its
insurance carriers regarding the recovery of these FMGP-related costs.
Settlement has been reached with five carriers and an agreement in
principle has been reached with three other carriers thus far. Amounts
received from insurance carriers are being deferred pending a
determination of the regulatory treatment of such recoveries.
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 Duane Arnold Energy Center
(DAEC), averages $1.4 million annually through 2007, of which Utilities'
70% share is $1.0 million. Utilities is recovering the costs associated
with this assessment through its electric fuel adjustment clauses over
the period the costs are assessed. Utilities' 70% share of the future
assessment, $9.9 million payable through 2007, has been recorded as a
liability in the Consolidated Balance Sheets, including $0.9 million
included in "Current liabilities - Environmental liabilities," with a
related regulatory asset for the unrecovered amount.
Oil and Gas Properties Dismantlement and Abandonment Costs
Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary
under Diversified, is responsible for certain dismantlement and
abandonment costs related to various off-shore oil and gas properties,
the most significant of which is located off the coast of California.
The Company estimates the total costs for these properties to be
approximately $16 million and the expenditures are not expected to be
incurred for approximately four years. Whiting accrues these costs as
reserves are extracted and such costs are included in "Depreciation and
amortization" in the Consolidated Statements of Income, resulting in a
liability of $8.6 million at June 30, 1997, in the Consolidated Balance
Sheets.
(b) Air Quality Issues -
The Clean Air Act Amendments of 1990 (Act) requires emission
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve
reductions of atmospheric chemicals believed to cause acid rain. The
provisions of the Act are being implemented in two phases; the Phase I
requirements have been met and the Phase II requirements affect eleven
other fossil units beginning in the year 2000. Utilities expects to
meet the requirements of Phase II by switching to lower sulfur fuels,
capital expenditures primarily related to fuel burning equipment and
boiler modifications, and the possible purchase of SO2 allowances.
Utilities estimates capital expenditures at approximately $12.9 million,
including $0.6 million in 1997, in order to meet the acid rain
requirements of the Act.
The acid rain program under the Act also governs SO2 allowances.
An allowance is defined as an authorization for an owner to emit one ton
of SO2 into the atmosphere. Currently, Utilities receives a sufficient
number of allowances annually to offset its emissions of SO2 from its
Phase I units. It is anticipated that in the year 2000, Utilities may
have an insufficient number of allowances annually to offset its
estimated emissions and may have to purchase additional allowances, or
make modifications to the plants or limit operations to reduce
emissions. Utilities is reviewing its options to ensure that it will
have sufficient allowances to offset its emissions in the future.
Utilities believes that the potential cost of ensuring sufficient
allowances will not have a material adverse effect on its financial
position or results of operations.
The Act and other federal laws also require the United States
Environmental Protection Agency (EPA) to study and regulate, if
necessary, additional issues that potentially affect the electric
utility industry, including emissions relating to NOx, ozone transport,
mercury and particulate control; toxic release inventories and
modifications to the PCB rules. In December 1996, the EPA issued
proposed rules that would tighten the National Ambient Air Quality
Standards (NAAQS) for ozone and particulate matter emissions. In June
1997, President Clinton gave his support for lowering the NAAQS for
ozone and particulate matter. In July 1997, the EPA issued the final
rules on these emissions issues. The impacts of these regulations are
too speculative to quantify at this point in time.
Also in the fourth quarter of 1996, the EPA announced that it
would issue a notice requiring the 37 states in the Ozone Transport
Assessment Group (OTAG), which includes Iowa, to implement further
controls on NOx. In June 1997, OTAG made their final recommendations to
the EPA. These recommendations exclude Iowa from the OTAG process with
the understanding that Iowa will work with Wisconsin in the development
of the SE Wisconsin attainment State Implementation Plan (SIP).
Utilities believes that the potential cost of this effort will not have
a material adverse effect on its financial position or results of
operations.
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 suggests that the Cedar Rapids area could be
classified as "nonattainment" for the NAAQS established for SO2. The
worst-case modeling study suggested that two of Utilities' generating
facilities contribute to the modeled exceedences and recommended that
additional monitors be located near Utilities' sources to assess actual
ambient air quality. As a result of exceedences at a relocated
monitor, the EPA issued a letter in March 1997 to the Iowa Governor's
Office directing the state to develop a plan of action within 120 days.
The Governor of Iowa then issued a letter to the EPA stating that a plan
of action would be in place with local industry to avoid the area being
declared nonattainment. In this regard, Utilities has entered into a
Consent Order with the Iowa Department of Natural Resources (IDNR). The
objective of this order is to establish the necessary commitments which
will maintain the area in attainment for SO2. Two primary commitments
are being made by Utilities in this consent order: 1) Utilities will
limit SO2 emissions from the two noted generating facilities located in
Cedar Rapids, and 2) Utilities will install a new stack at one of the
facilities at a potential aggregate capital cost of up to $4.5 million
over the next two years. It is anticipated that this consent order will
receive EPA approval in the third quarter of 1997.
Pursuant to a routine internal review of operations, Utilities
determined that certain changes undertaken during the previous three
years at one of its power plants may have required a federal Prevention
of Significant Deterioration (PSD) permit. Utilities initiated
discussions with its regulators on the matter, resulting in the
submittal of a PSD permit application in February 1997. Utilities
expects to receive the PSD permit by the fourth quarter of 1997.
Utilities may be required to accept operational limits or to install
additional controls and may be subject to a penalty for not having
obtained the permit previously; however, Utilities believes that any
likely actions resulting from this matter will not have a material
adverse effect on its financial position or results of operations.
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS
June 30,
1997 December 31,
ASSETS (in thousands) (Unaudited) 1996
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,032,872 $ 2,007,839
Gas 178,588 175,472
Other 133,707 126,850
2,345,167 2,310,161
Less - Accumulated depreciation 1,085,579 1,030,390
1,259,588 1,279,771
Leased nuclear fuel, net of amortization 27,739 34,725
Construction work in progress 56,674 43,719
1,344,001 1,358,215
Other, net of accumulated depreciation
and amortization of $1,560 and
$1,438, respectively 5,750 5,872
1,349,751 1,364,087
Current assets:
Cash and temporary cash investments 3,381 11,608
Accounts receivable -
Customer, less allowance for doubtful
accounts of $491 and $546, respectively 13,691 22,461
Other 7,797 11,270
Income tax refunds receivable 10,815 2,664
Production fuel, at average cost 13,679 13,323
Materials and supplies, at average cost 22,666 21,716
Adjustment clause balances 0 10,752
Regulatory assets 34,644 26,539
Prepayments and other 11,147 18,705
117,820 139,038
Investments:
Nuclear decommissioning trust funds 69,490 59,325
Cash surrender value of life
insurance policies 4,635 4,281
Other 79 313
74,204 63,919
Other assets:
Regulatory assets 195,717 201,129
Deferred charges and other 10,273 10,437
205,990 211,566
$ 1,747,765 $ 1,778,610
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30,
CAPITALIZATION AND LIABILITIES 1997 December 31,
(in thousands, except share amounts) (Unaudited) 1996
Capitalization:
Common stock - par value $2.50 per
share - authorized 24,000,000 shares;
13,370,788 shares outstanding $ 33,427 $ 33,427
Paid-in surplus 279,042 279,042
Retained earnings 221,622 231,337
Total common equity 534,091 543,806
Cumulative preferred stock - par
value $50 per share - authorized
466,406 shares; 366,406 shares outstanding 18,320 18,320
Long-term debt (excluding current portion) 517,265 517,334
1,069,676 1,079,460
Current liabilities:
Short-term borrowings 150,000 135,000
Capital lease obligations 13,923 15,125
Maturities and sinking funds 140 8,140
Accounts payable 46,932 76,287
Accrued interest 8,591 8,839
Accrued taxes 43,262 40,953
Accumulated refueling outage provision 5,506 1,316
Adjustment clause balances 4,315 0
Environmental liabilities 5,517 5,517
Other 18,172 17,114
296,358 308,291
Long-term liabilities:
Pension and other benefit obligations 32,992 25,826
Capital lease obligations 13,816 19,600
Environmental liabilities 39,070 40,299
Other 17,299 14,030
103,177 99,755
Deferred credits:
Accumulated deferred income taxes 245,400 256,634
Accumulated deferred investment tax credits 33,154 34,470
278,554 291,104
Commitments and contingencies (Note 7)
$ 1,747,765 $ 1,778,610
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<TABLE>
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
For the Three For the Six For the Twelve
Months Ended Months Ended Months Ended
June 30 June 30 June 30
1997 1996 1997 1996 1997 1996
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Electric $ 137,691 $ 137,032 $ 274,977 $ 262,400 $ 586,850 $ 573,246
Gas 25,776 22,445 107,203 91,686 176,382 153,951
Other 6,156 4,763 13,841 8,922 24,761 15,126
169,623 164,240 396,021 363,008 787,993 742,323
Operating expenses:
Fuel for production 26,532 22,728 56,413 43,021 97,972 99,530
Purchased power 15,050 22,000 33,723 36,469 85,603 69,899
Gas purchased for resale 15,788 12,042 76,579 59,411 121,044 99,021
Other operating expenses 38,163 36,555 74,459 74,912 149,548 153,106
Maintenance 12,644 14,333 25,450 24,325 46,995 45,621
Depreciation and amortization 23,294 22,024 46,764 44,049 87,691 82,116
Taxes other than income taxes 11,715 11,549 23,607 23,609 43,601 43,892
143,186 141,231 336,995 305,796 632,454 593,185
Operating income 26,437 23,009 59,026 57,212 155,539 149,138
Interest expense and other:
Interest expense 12,768 10,988 25,075 21,880 46,908 44,151
Allowance for funds used during
construction -372 -691 -767 -1,380 -1,489 -2,904
Miscellaneous, net 1,746 -176 1,327 -1,139 7,759 -880
14,142 10,121 25,635 19,361 53,178 40,367
Income before income taxes 12,295 12,888 33,391 37,851 102,361 108,771
Federal and state income taxes:
Current 7,313 4,994 24,395 18,355 41,370 48,847
Deferred -1,251 1,325 -8,430 -538 2,516 -821
Amortization of investment
tax credits -658 -661 -1,316 -1,323 -2,638 -2,663
5,404 5,658 14,649 16,494 41,248 45,363
Net income 6,891 7,230 18,742 21,357 61,113 63,408
Preferred dividend requirements 229 229 457 457 914 914
Net income available for
common stock $ 6,662 $ 7,001 $ 18,285 $ 20,900 $ 60,199 $ 62,494
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
<TABLE>
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
For the Three For the Six For the Twelve
Months Ended Months Ended Months Ended
June 30 June 30 June 30
1997 1996 1997 1996 1997 1996
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,891 $ 7,230 $ 18,742 $ 21,357 $ 61,113 $ 63,408
Adjustments to reconcile net income
to net cash flows from operating
activities -
Depreciation and amortization 23,294 22,024 46,764 44,049 87,691 82,116
Amortization of principal under
capital lease obligations 3,740 4,626 7,109 9,250 14,351 19,096
Deferred taxes and investment tax
credits -1,909 664 -9,746 -1,861 -122 -3,484
Refueling outage provision 2,504 2,373 4,190 4,920 -7,104 10,374
Amortization of other assets 2,166 2,194 5,181 5,104 9,802 9,853
Other 12 65 228 61 544 586
Other changes in assets and
liabilities -
Accounts receivable 11,551 8,434 12,243 975 -1,932 -13,287
Sale of utility accounts
receivable 0 7,000 0 7,000 0 9,000
Production fuel, materials and
supplies -1,564 26 -669 928 -946 5,517
Accounts payable -1,679 -3,068 -26,892 -13,365 -580 1,200
Accrued taxes -34,056 -30,028 -5,842 -12,958 -4,118 -1,153
Provision for rate refunds 0 -229 0 -63 -43 -10,164
Adjustment clause balances 556 -3,726 15,067 -339 1,506 2,332
Gas in storage 2,748 1,501 8,218 9,245 -1,578 2,350
Other 2,561 2,865 7,865 4,372 10,621 -1,703
Net cash flows from operating
activities 16,815 21,951 82,458 78,675 169,205 176,041
Cash flows from financing activities:
Dividends declared on common stock -14,000 -12,000 -28,000 -22,000 -50,000 -42,000
Dividends declared on preferred
stock -229 -229 -457 -457 -914 -914
Proceeds from issuance of
long-term debt 55,000 0 55,000 0 115,000 50,000
Reductions in long-term debt -63,140 -140 -63,140 -140 -78,140 -50,140
Net change in short-term
borrowings 24,000 34,334 15,000 19,687 20,425 36,794
Principal payments under capital
lease obligations -3,369 -4,624 -5,665 -9,536 -15,237 -17,781
Other -112 -86 -112 -172 -360 -1,936
Net cash flows from financing
activities -1,850 17,255 -27,374 -12,618 -9,226 -25,977
Cash flows from investing activities:
Construction and acquisition
expenditures -
Utility -28,486 -34,009 -48,251 -57,383 -133,249 -125,492
Other -2 -146 -7 -342 -932 -1,705
Deferred energy efficiency
expenditures -3,516 -5,090 -7,530 -8,757 -15,630 -18,808
Nuclear decommissioning trust
funds -1,502 -1,502 -3,004 -3,004 -6,008 -6,338
Other 89 1,225 -4,519 813 -897 916
Net cash flows from investing
activities -33,417 -39,522 -63,311 -68,673 -156,716 -151,427
Net increase (decrease) in cash and
temporary cash investments -18,452 -316 -8,227 -2,616 3,263 -1,363
Cash and temporary cash investments
at beginning of period 21,833 434 11,608 2,734 118 1,481
Cash and temporary cash investments
at end of period $ 3,381 $ 118 $ 3,381 $ 118 $ 3,381 $ 118
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 14,365 $ 11,046 $ 24,142 $ 19,576 $ 46,638 $ 42,072
Income taxes $ 32,422 $ 24,430 $ 31,876 $ 31,568 $ 45,691 $ 49,268
Noncash investing and financing
activities -
Capital lease obligations
incurred $ 10 $ 10,243 $ 123 $ 12,846 $ 1,558 $ 13,106
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Except as modified below, the IES Industries Inc. (Industries)
Notes to Consolidated Financial Statements are incorporated by reference
insofar as they relate to IES Utilities Inc. (Utilities). Industries'
Note 5 does not relate to Utilities and, therefore, is not incorporated
by reference.
(1) GENERAL:
The interim Consolidated Financial Statements have been prepared by
IES Utilities Inc. (Utilities) and its consolidated subsidiaries,
without audit, pursuant to the rules and regulations of the United
States Securities and Exchange Commission (SEC). Utilities' only wholly-
owned subsidiary is IES Ventures Inc. (Ventures), which is a holding
company for unregulated investments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
IES Industries Inc.'s Consolidated Financial Statements include the
accounts of IES Industries Inc. (Industries) and its consolidated
subsidiaries (collectively the Company). Industries' wholly-owned
subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc.
(Diversified). The information presented in this management's
discussion and analysis addresses the financial statements of Industries
and Utilities as presented in this joint filing. Information related to
Utilities also relates to Industries' Consolidated Financial Statements.
Information related to Diversified does not pertain to the discussion of
the financial condition and results of operations of Utilities. The
references to various Notes to Consolidated Financial Statements are all
to Industries' Notes to Consolidated Financial Statements.
COMPETITION
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
competitive pressures could result in loss of customers and an
incurrence of stranded costs (i.e., the cost of assets 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.
The National Energy Policy Act of 1992 addresses several matters
designed to promote competition in the electric wholesale power
generation market. In 1996, the Federal Energy Regulatory Commission
(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. The rules became effective in July 1996.
Utilities filed conforming pro-forma open access transmission tariffs
with the FERC which became effective in October 1995. In response to
FERC Order 888, Utilities filed its final pro-forma tariffs with FERC in
July 1996. The non-rate provisions of the tariffs were approved in
November 1996. FERC has not yet ruled on the rate provisions of the
tariffs. The geographic position of Utilities' transmission system
could provide revenue opportunities in the open access environment.
Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary
under Diversified, received approval in the 1995 FERC proceeding to
market electric power at market based rates. The Company cannot predict
the long-term consequences of these rules on its results of operations
or financial condition.
FERC does not have jurisdiction over retail distribution, and thus
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 by FERC and the states to
have resulted from retail competition.
The Iowa Utilities Board (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. In January 1996, the IUB
created its own timeline for evaluating industry restructuring in Iowa.
Included in the IUB's process was the creation of a 22-member advisory
panel, of which Utilities is a member. The IUB conducted public
information meetings around the State of Iowa. The 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 current level of relative
prices. However, they will continue the analysis and debate on
restructuring and retail competition in Iowa.
As part of Utilities' strategy for the emerging and competitive
power markets, Utilities, Interstate Power Company (IPC) and Wisconsin
Power and Light Company (WP&L) (the utility subsidiary of WPL Holdings,
Inc. (WPLH)), and a number of other utilities have proposed the creation
of an independent system operator (ISO) for the companies' power
transmission grid. The companies would retain ownership and control of
the facilities, but the ISO would set rates for access and assure fair
treatment for all companies seeking access. The proposal requires
approval from state regulators and the FERC. Various other proposals
for ISO's have been made by other companies, and Utilities is monitoring
all such proposals. Membership in an ISO could become a condition of
merger approval by the various regulatory bodies.
Utilities is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). If a portion of Utilities' operations
become no longer subject to the provisions of SFAS 71, as a result of
competitive restructurings or otherwise, a write-down of related
regulatory assets would be required, unless some form of transition cost
recovery is established by the appropriate regulatory body which would
meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period.
In addition, the Company would be required to determine any impairment
to other assets and write-down such assets to their fair value.
Utilities believes that it still meets the requirements of SFAS 71.
The Company cannot predict the long-term consequences of these
competitive issues on its results of operations or financial condition.
The Company's strategy for dealing with these emerging issues includes
seeking growth opportunities, continuing to offer quality customer
service, ongoing cost reductions and productivity enhancements. The
major objective of these is to allow Utilities to better prepare for a
competitive, deregulated electric utility industry. In this connection,
Utilities is in the final stages of a significant process improvement
program to improve its service levels, reduce its cost structure and
become more market-focused and customer oriented. (The Company's
continuous improvement efforts, in general, will be an ongoing effort,
however).
PROPOSED MERGER OF THE COMPANY
Industries, WPLH and IPC have entered into an Agreement and Plan of
Merger, as amended, dated November 10, 1995, which provides for the
combination of all three companies. The new company will be named
Interstate Energy Corporation (IEC).
WPLH is a holding company headquartered in Madison, Wisconsin, and
is the parent company of WP&L and Heartland Development Corporation
(HDC). WP&L supplies electric and gas service to approximately 385,000
and 150,000 customers, respectively, in south and central Wisconsin.
HDC and its principal subsidiaries are engaged in businesses in three
major areas: environmental engineering and consulting, affordable
housing and energy services. IPC, an operating public utility
headquartered in Dubuque, Iowa, supplies electric and gas service to
approximately 165,000 and 49,000 customers, respectively, in northeast
Iowa, northwest Illinois and southern Minnesota.
The proposed merger, which will be accounted for as a pooling of
interests, was approved by the respective shareowners on September 5,
1996. The merger is conditioned on the receipt of approvals of several
federal and state regulatory agencies. Updates to the status of these
approvals are as follows (for additional information regarding the
merger please refer to the Company's 1996 Annual Report on Form 10-K):
The FERC issued an order on January 15, 1997, finding no
substantial market-power concerns with the merger. Some limited issues
were set for hearings which began on April 23, 1997 and ended on May 2,
1997. On July 3, 1997, an administrative law judge issued a non-binding
recommendation that FERC approve the merger subject to the terms of a
stipulation agreement on competition issues entered into between the
companies and FERC trial staff. A final decision is expected in the
third or fourth quarter of 1997.
On May 7, 1997, the Illinois Commerce Commission (ICC) issued an
order approving the proposed merger.
On March 24, 1997, the Minnesota Public Utilities Commission (MPUC)
issued an order approving the merger without hearings, subject to a
number of technical conditions which the parties are willing to meet.
Included is a 4-year rate freeze for IPC's Minnesota customers.
Hearings regarding the merger were completed in July 1997 before
the IUB.
On May 7, 1997, WP&L filed testimony with the Public Service
Commission of Wisconsin (PSCW) proposing a retail electric, gas and
water rate freeze from the date of the merger approval through calendar
year 2000. Hearings regarding the merger were completed in June 1997
before the PSCW.
Given that the merger was not consummated before July 7, 1997, the
merger partners are required to submit new information to the U.S.
Department of Justice (DOJ) pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act. The DOJ completed its impact review of the merger on
market power earlier and all requirements of such review were satisfied.
The merger partners do not believe that the resubmission will cause any
material delays in finalizing the merger.
The companies expect to receive all necessary regulatory approvals
relating to the merger by the end of 1997. Refer to Note 3(a) of the
Notes to Consolidated Financial Statements for a discussion of merger-
related retail and wholesale price proposals that Utilities has
announced.
RESULTS OF OPERATIONS OF THE COMPANY
The following discussion analyzes significant changes in the
components of net income and financial condition from the prior periods
for the Company.
Summary
The Company's net income increased or (decreased) $0.3 million,
($1.5) million and ($7.7) million during the three, six and twelve month
periods, respectively. Earnings per average common share increased or
(decreased) $0.01, ($0.07) and ($0.30) for the respective periods.
Utilities' net income available for common stock decreased ($0.3)
million, ($2.6) million and ($2.3) million during the three, six and
twelve month periods, respectively. Increased electric sales resulting
from continuing growth in Utilities' service territory and a lower
effective tax rate contributed to the three month increase and partially
offset the six and twelve month decreases. Partially offsetting the
three month increase and contributing to the six and twelve month
decreases were increased interest and depreciation expense and the
recording of a $2.5 million reserve for non-utility investments at
Utilities. The impact of weather, primarily the significant positive
impact the weather had on the prior period results, on Utilities'
electric and gas sales also contributed to the decrease in earnings for
the twelve month period. Accordingly, in comparing the twelve month
periods, the Company estimates that weather impacted earnings by
approximately ($0.26) per share. The earnings for the twelve month
period were also impacted by costs incurred relating to the successful
defense of the hostile takeover attempt mounted by MidAmerican Energy
Company (MAEC) in the third quarter of 1996. The Company estimates that
the cost of the hostile takeover defense reduced earnings for the twelve
month period by ($0.15) per share.
The Company's operating income increased $2.6 million, $1.7 million
and $6.1 million during the three, six and twelve month periods,
respectively, while Utilities' operating income increased $3.4 million,
$1.8 million and $6.4 million during the same periods. The contrasting
relationship between the change in operating income and net income was
primarily due to higher interest expense and comparative decreases in
income included in "Miscellaneous, net" in the Consolidated Statements
of Income. Miscellaneous, net includes the recording of the reserve for
non-utility investments at Utilities for all three periods and hostile
takeover defense costs of $7.8 million for the twelve month period.
Electric Operations
Electric margins and Kwh sales for Utilities for the three months ended
June 30 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 50,177 $ 49,219 600,758 591,896
General service 23,197 22,261 290,815 276,484
Large general service 55,609 52,934 1,444,842 1,364,453
Sales for resale and other 7,408 7,052 129,744 136,992
Total, excluding off-
system sales 136,391 131,466 2,466,159 2,369,825
Off-system sales 1,300 5,566 73,097 384,666
Total 137,691 137,032 2,539,256 2,754,491
Fuel for production
(excluding steam) 23,156 20,464
Purchased power 15,050 22,000
Margin $ 99,485 $ 94,568
Electric margins and Kwh sales for Utilities for the six months ended
June 30 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 102,993 $ 99,071 1,291,768 1,301,307
General service 47,017 44,537 601,403 590,975
Large general service 106,709 94,532 2,855,938 2,640,417
Sales for resale and other 15,085 14,013 272,887 286,972
Total, excluding off-
system sales 271,804 252,153 5,021,996 4,819,671
Off-system sales 3,173 10,247 119,992 641,223
Total 274,977 262,400 5,141,988 5,460,894
Fuel for production
(excluding steam) 48,049 38,627
Purchased power 33,723 36,469
Margin $ 193,205 $ 187,304
Electric margins and Kwh sales for Utilities for the twelve months ended
June 30 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 216,721 $ 220,262 2,624,164 2,728,534
General service 100,677 99,668 1,241,543 1,241,351
Large general service 225,399 204,189 5,716,127 5,348,739
Sales for resale and other 31,637 27,202 573,695 585,216
Total, excluding off-
system sales 574,434 551,321 10,155,529 9,903,840
Off-system sales 12,416 21,925 710,067 1,341,191
Total 586,850 573,246 10,865,596 11,245,031
Fuel for production
(excluding steam) 84,029 92,283
Purchased power 85,603 69,899
Margin $ 417,218 $ 411,064
The electric margin increased $4.9 million, $5.9 million and $6.2
million during the three, six and twelve month periods, respectively,
primarily due to higher Kwh sales (excluding off-system sales). Large
general service Kwh sales increased during all periods due to continuing
industrial growth in Utilities' service territory. Weather was the
primary reason for the changes in residential and rural Kwh sales during
each period. Lower purchased power capacity costs also contributed to
the increase in margin for all periods. Under historically normal
weather conditions, total Kwh sales (excluding off-system sales) for the
three, six and twelve month periods would have increased 3.1%, 4.4% and
4.9%, respectively, as compared to actual increases of 4.1%, 4.2% and
2.5%.
Refer to Notes 3(a) and 3(b) of the Notes to Consolidated Financial
Statements for a discussion of merger-related retail and wholesale
electric price proposals that Utilities has announced and the energy
efficiency cost recoveries, respectively.
Utilities' 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.
Gas Operations
Gas margins and dekatherm (Dth) sales for Utilities and IEA for the
three months ended June 30 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 15,649 $ 13,358 2,478 2,370
Commercial 7,244 6,106 1,429 1,365
Industrial 2,030 1,856 599 573
Transportation and
other 853 1,125 2,455 2,478
Total Utilities 25,776 22,445 6,961 6,786
IEA (8) 20,183 3 8,651
Total 25,768 42,628 6,964 15,437
Gas purchased for resale 15,843 31,814
Margin $ 9,925 $ 10,814
Gas margins and Dth sales for Utilities and IEA for the six months ended
June 30 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 66,235 $ 57,786 10,115 10,881
Commercial 32,819 27,291 5,762 6,127
Industrial 6,270 4,664 1,434 1,414
Transportation and
other 1,879 1,945 5,220 5,304
Total Utilities 107,203 91,686 22,531 23,726
IEA 2,671 40,965 978 17,137
Total 109,874 132,651 23,509 40,863
Gas purchased for resale 80,341 99,250
Margin $ 29,533 $ 33,401
Gas margins and Dth sales for Utilities and IEA for the twelve months
ended June 30 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 106,157 $ 95,529 16,915 17,637
Commercial 52,494 44,992 9,958 10,164
Industrial 13,862 9,629 3,816 3,165
Transportation and
other 3,869 3,801 10,256 10,772
Total Utilities 176,382 153,951 40,945 41,738
IEA 74,819 72,048 26,895 35,932
Total 251,201 225,999 67,840 77,670
Gas purchased for resale 198,442 168,610
Margin $ 52,759 $ 57,389
Total gas margin decreased ($0.9) million, ($3.9) million and
($4.6) million during the three, six and twelve month periods,
respectively, primarily due to lower gas margins at IEA. IEA's reported
Dth gas sales were significantly lower during each period as a result of
IEA contributing substantially all of its gas marketing business to a
joint venture, effective January 1, 1997, in exchange for a partial
interest in the joint venture. The investment in the joint venture is
accounted for under the equity accounting method and IEA's allocated
portion of gas revenues and gas expenses resulting from the joint
venture are recorded in "Miscellaneous, net" on Industries' Consolidated
Statements of Income.
Utilities' gas margin increased or (decreased) ($0.4) million,
($1.7) million and $0.4 million during the three, six and twelve month
periods, respectively. The decrease in Utilities' margin during the six
month period was primarily due to lower Dth sales, resulting from the
milder weather conditions in the first quarter of 1997. Under
historically normal weather conditions, Utilities' gas sales and
transported volumes would have increased or (decreased) 1.1%, (1.7%) and
(0.7%) during the three, six and twelve month periods, respectively, as
compared to actual increases or (decreases) of 2.6%, (5.0%) and (1.9%).
The contrasting relationship between the change in Utilities' gas
revenues and Dths sold during the six and twelve month periods was
primarily due to higher per unit gas costs during the 1997 periods.
Utilities' gas tariffs include purchased gas adjustment clauses (PGA)
that are designed to currently recover the cost of gas sold.
Other Revenues The Company's other revenues increased $0.7 million,
$9.2 million and $25.1 million during the three, six and twelve month
periods, respectively ($1.4 million, $4.9 million and $9.6 million at
Utilities). Steam revenues at Utilities increased during all periods
due to an increase in volumes sold resulting from the addition of a new
industrial customer and increased demand from existing customers.
Increased operating activities at IEA also contributed to the increase
each period. The three and six month increases were partially offset by
decreased oil and gas revenues at Whiting resulting primarily from a
decrease in oil volumes sold. Whiting's oil and gas revenues increased
during the twelve month period primarily due to increases in oil and gas
prices.
Operating Expenses The Company's other operating expenses increased or
(decreased) $1.1 million, $1.5 million and $4.0 million during the
three, six and twelve month periods, respectively ($1.6 million, ($0.5)
and ($3.6) million at Utilities). The three month increase was
primarily due to increases in labor and benefits costs and former
manufactured gas plant (FMGP) clean-up costs, partially offset by lower
operating costs at Whiting. The six and twelve month increases were
primarily due to the increased operating activities at IEA, increased
international business development activities and higher information
technology and FMGP clean-up costs at Utilities. The six and twelve
month increases were partially offset by decreases in costs relating to
the Company's process improvement programs, decreased operating expenses
at the Duane Arnold Energy Center (DAEC), Utilities' nuclear generating
facility, and lower operating costs at Whiting. Costs incurred relating
to the Company's merger also contributed to the twelve month increase.
The Company's maintenance expenses increased or (decreased) ($1.6)
million, $1.1 million and $1.6 million during the three, six and twelve
month periods, respectively (($1.7) million, $1.1 million and $1.4
million at Utilities), primarily due to fluctuations in maintenance
activities at Utilities' fossil-fueled generating stations. The twelve
month increase was partially offset by lower maintenance expenses at the
DAEC.
The Company's depreciation and amortization expense increased $1.4
million, $2.7 million and $8.0 million during the three, six and twelve
month periods, respectively ($1.3 million, $2.7 million and $5.6 million
at Utilities), primarily because of increases in utility plant in
service. The twelve month increase was also due to increases in
amortization costs of Whiting's oil and gas properties. Depreciation and
amortization expenses for both periods include a provision for
decommissioning the DAEC, which is collected through rates. The current
annual recovery level is $6.0 million.
During the first quarter of 1996, the Financial Accounting
Standards Board (FASB) issued an Exposure Draft on Accounting for
Liabilities Related to Closure and Removal of Long-Lived Assets which
deals with, among other issues, the accounting for decommissioning
costs. If current electric utility industry accounting practices for
such decommissioning are changed: (1) annual provisions for
decommissioning could increase and (2) the estimated cost for
decommissioning could be recorded as a liability, rather than as
accumulated depreciation, with recognition of an increase in the
recorded amount of the related DAEC plant. If such changes are
required, Utilities believes that there would not be an adverse effect
on its financial position or results of operations based on current rate
making practices.
Interest Expense and Other The Company's interest expense increased
$2.7 million, $4.6 million and $7.9 million during the three, six and
twelve month periods, respectively ($1.8 million, $3.2 million and $2.8
million at Utilities), primarily because of increases in the average
amount of short-term debt outstanding at Utilities, the average amount
of borrowings under Diversified's credit facility and a higher amount of
long-term debt outstanding at Utilities. The twelve month increase was
partially offset by lower average interest rates, rate refund interest
recorded in 1995 at Utilities and the effects of an interest rate swap
agreement at Diversified.
Miscellaneous, net for the Company reflects comparative decreases
in income of ($2.6) million, ($4.1) million and ($11.4) million during
the three, six and twelve month periods, respectively (($1.9) million,
($2.5) million and ($8.6) million at Utilities). The recording of a
$2.5 million reserve for non-utility investments at Utilities
contributed to the decrease for all three periods. The twelve month
decrease was also due to approximately $7.8 million in costs incurred
relating to the successful defense of the hostile takeover attempt
mounted by MAEC and certain property write-downs at Diversified.
Dividends received from the two New Zealand entities in which the
company has investments partially offset these items during the twelve
month period.
Income Taxes The Company's income tax expense decreased ($3.3)
million, ($6.1) million and ($7.0) million during the three, six and
twelve month periods, respectively (($0.3) million, ($1.8) million) and
($4.1) million at Utilities). The decreases were primarily due to 1)
lower pretax income, 2) the impact of a tax deduction ($1.4 million)
resulting from the contribution of 300,000 shares of the Company's
investment in McLeodUSA Inc. (McLeod) to the IES Charitable Foundation
and 3) reserves recorded during the first and second quarters of 1996
related to an Internal Revenue Service (IRS) audit for tax years 1991-
1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily attributable to
Utilities' construction programs, its debt maturities and the level of
Diversified's business opportunities. The Company's pretax ratio of
times interest earned was 2.71 and 3.26 for the twelve months ended June
30, 1997 and June 30, 1996, respectively. Cash flows from operating
activities for the twelve months ended June 30, 1997 and June 30, 1996
were $188 million and $207 million, respectively.
The Company anticipates that 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
regulatory recovery of Utilities' costs. See Notes 3 and 7 of the Notes
to Consolidated Financial Statements as well as the Company's 1996
Annual Report on Form 10-K.
Access to the long-term and short-term capital and credit markets,
and costs of external financing, are dependent on the Company's
creditworthiness. The Company's debt ratings are as follows:
Moody's Standard & Poor's
Utilities - Long-term debt A2 A
- Commercial paper P1 A1
Diversified - Commercial paper P2 A2
The Company's liquidity and capital resources will be affected by
environmental, regulatory and competitive issues, including the ultimate
disposition of remediation issues surrounding the Company's
environmental liabilities and the Clean Air Act as amended, as discussed
in Note 7 of the Notes to Consolidated Financial Statements and the
Company's 1996 Annual Report on Form 10-K, and emerging competition in
the electric utility industry as discussed in the Competition section.
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.
At June 30, 1997, Utilities had approximately $66 million of energy
efficiency program costs recorded as regulatory assets. See Note 3(b)
of the Notes to Consolidated Financial Statements for a discussion of
the recovery of these costs.
At June 30, 1997, the Company had a $29.0 million investment in
Class A common stock of McLeod and vested options that, if exercised,
would represent an additional investment of approximately $2.3 million
(1.3 million shares). McLeod provides local, long-distance and other
telecommunications services. See Note 5(b) of the Notes to Consolidated
Financial Statements for further information on the Company's investment
in McLeod.
The Company has financial guarantees amounting to $22.2 million
outstanding at June 30, 1997, which are not reflected in the
consolidated financial statements. Such guarantees are generally issued
to support third-party borrowing arrangements and similar transactions.
The Company believes that any possible cash payments associated with
these agreements will not have a material adverse effect on the
financial position or results of operations of the Company.
The Company continues to explore domestic investment opportunities,
including investments in the domestic utility business. Such
investments could be significant.
At June 30, 1997, the Company had approximately $46.5 million of
investments in foreign entities (see Note 5(a) of the Notes to
Consolidated Financial Statements for a further discussion). In
addition, the Company also continues to explore other international
investment opportunities. Such investments may carry a higher level of
risk than the Company's traditional utility investments or Diversified's
domestic investments. Such risks could include foreign government
actions, foreign economic and currency risks and others. The Company
may also incur business development expenses for potential projects
pursued by the Company that may never materialize. The Company is
striving to select international investments where these risks are both
understood and manageable.
The Resale Power Group of Iowa (RPGI), consisting of virtually all
of Utilities' wholesale customers, has notified Utilities that it will
not purchase its power supply from Utilities after December 31, 1998.
It is possible that certain RPGI customers will drop out of RPGI in
order to remain as Utilities' customers; to-date, three customers have
signed contracts to remain with Utilities. All RPGI customers will
continue to purchase transmission services from Utilities after December
31, 1998. While the Company cannot determine the outcome of this issue
at this time, the result will not have a material adverse effect on its
financial position or results of operations given 1) Utilities'
wholesale sales only account for approximately 5% of Utilities' total
electric sales, excluding off-system sales; 2) Utilities currently has
to supplement its generating capability with purchased power to meet its
sales load; 3) Utilities' annual electric sales growth rate continues to
be strong; and 4) Utilities will continue to realize transmission
revenues from such customers.
Under provisions of the Merger Agreement, there are restrictions on
the amount of common stock and long-term debt the Company can issue
pending the merger. The Company does not expect the restrictions to
have a material effect on its ability to meet its future capital
requirements.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program anticipates
expenditures of approximately $225 million for 1997, of which
approximately $147 million represents expenditures at Utilities and
approximately $78 million represents expenditures at Diversified. Of
the $147 million of Utilities' expenditures, 39% represents expenditures
for electric transmission and distribution facilities, 21% represents
electric generation expenditures, 21% represents information technology
expenditures and 5% represents gas expenditures. The remaining 14%
represents miscellaneous electric, steam and general expenditures.
Diversified's anticipated expenditures include approximately $75 million
for domestic and international energy-related construction and
acquisition expenditures. The Company had construction and acquisition
expenditures of approximately $84 million for the six months ended June
30, 1997, including approximately $48 million of utility expenditures
and $36 million of non-utility expenditures.
The Company's levels of construction and acquisition expenditures
are projected to be $208 million in 1998, $212 million in 1999,
$182 million in 2000 and $198 million in 2001. It is estimated that
virtually all of Utilities' construction and acquisition expenditures
will be provided by cash from operating activities (after payment of
dividends) for the five-year period 1997-2001. Financing plans for
Diversified's construction and acquisition program will vary, depending
primarily on the level of energy-related acquisitions.
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.
Under provisions of the Merger Agreement, there are restrictions on
the amount of construction and acquisition expenditures the Company can
make pending the merger. The Company does not expect the restrictions
to have a material effect on its ability to implement its anticipated
construction and acquisition program.
LONG-TERM FINANCING
Other than Utilities' periodic sinking fund requirements, which
Utilities intends to meet by pledging additional property, the following
long-term debt will mature prior to December 31, 2001:
(in millions)
Utilities $ 184.0
Diversified's credit facility 190.9
Other subsidiaries' debt 11.0
$ 385.9
The Company intends to refinance the majority of the debt
maturities with long-term securities.
In August 1997, Utilities issued $135 million of 6-5/8% Senior
Debentures, due 2009. The proceeds from these debentures were used to
reduce Utilities' short-term borrowings.
Utilities repaid at maturity $8 million of 6-1/8% First Mortgage
Bonds during the second quarter of 1997.
Also in the second quarter of 1997, Utilities issued $55 million of
Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to
have their Collateral Trust Bonds redeemed, in whole but not in part, on
May 1, 2002, at 100% of the principal amount thereof, plus accrued
interest. The proceeds from the Collateral Trust Bonds were used to
refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30
million of Series M, 7.625% First Mortgage Bonds and $10 million of
7.375% First Mortgage Bonds.
In 1993, Utilities entered into an Indenture of Mortgage and Deed
of Trust dated as of September 1, 1993 (New Mortgage). The New Mortgage
provides for, among other things, the issuance of Collateral Trust Bonds
upon the basis of First Mortgage Bonds being issued by Utilities. The
lien of the New Mortgage is subordinate to the lien of Utilities' first
mortgages until such time as all bonds issued under the first mortgages
have been retired and such mortgages satisfied. Accordingly, to the
extent that Utilities 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 Utilities' first mortgages.
Under the terms of the New Mortgage, Utilities 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.
The indentures pursuant to which Utilities 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 June 30, 1997,
such restrictions would have allowed Utilities to issue at least
$233 million of additional First Mortgage Bonds.
In order to provide an instrument for the issuance of unsecured
subordinated debt securities, Utilities entered into an Indenture dated
December 1, 1995 (Subordinated Indenture). The Subordinated Indenture
provides for, among other things, the issuance of unsecured subordinated
debt securities. Any debt securities issued under the Subordinated
Indenture are subordinate to all senior indebtedness of Utilities,
including First Mortgage Bonds, Collateral Trust Bonds and Senior
Debentures.
In order to provide an instrument for the issuance of senior
unsecured debt securities, Utilities entered into an Indenture dated as
of August 1, 1997 (Senior Unsecured Indenture). The Senior Unsecured
Indenture provides for, among other things, the issuance of senior
unsecured debt securities. Any debt securities issued under the Senior
Unsecured Indenture will rank on parity with other unsecured
unsubordinated debt of the Company.
Subsequent to the issuance of $135 million of Senior Debentures in
August 1997, Utilities does not have any remaining authority to issue
additional long-term debt under either the current FERC docket or the
current Securities and Exchange Commission shelf registrations.
Utilities plans to evaluate future needs for authority to issue
additional long-term debt.
Diversified has a variable rate credit facility that extends
through November 20, 1999, with two one-year extensions potentially
available to Diversified. Refer to Note 6(a) of the Notes to
Consolidated Financial Statements for a further discussion of this
credit facility.
The Articles of Incorporation of Utilities authorize and limit the
aggregate amount of additional shares of Cumulative Preference Stock and
Cumulative Preferred Stock that may be issued. At June 30, 1997,
Utilities could have issued an additional 700,000 shares of Cumulative
Preference Stock and 100,000 additional shares of Cumulative Preferred
Stock. In addition, Industries had 5,000,000 shares of Cumulative
Preferred Stock, no par value, authorized for issuance, none of which
were outstanding at June 30, 1997.
The Company's capitalization ratios at June 30, 1997 were as
follows:
Long-term debt 53%
Preferred stock 1
Common equity 46
100%
Under provisions of the Merger Agreement, there are restrictions on
the amount of common stock and long-term debt the Company can issue
pending the merger. The Company does not expect the restrictions to
have a material effect on its ability to meet its future capital
requirements.
SHORT-TERM FINANCING
For interim financing, Utilities is authorized by the FERC to
issue, through 1998, up to $200 million of short-term notes. In
addition to providing for ongoing working capital needs, this
availability of short-term financing provides Utilities flexibility in
the issuance of long-term securities. At June 30, 1997, Utilities had
outstanding short-term borrowings of $150 million. In August 1997,
Utilities issued $135 million of Senior Debentures and used the proceeds
to reduce Utilities' short-term borrowings.
Utilities has an agreement, which expires in 1999, with a financial
institution to sell, with limited recourse, an undivided fractional
interest of up to $65 million in its pool of utility accounts
receivable. At June 30, 1997, Utilities had sold $65 million under the
agreement.
At June 30, 1997, the Company had bank lines of credit aggregating
$160.1 million. Utilities was using $145 million to support commercial
paper (weighted average interest rate of 6.13%) and $11.1 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, Utilities has an
uncommitted credit facility with a financial institution whereby it can
borrow up to $40 million. Rates are set at the time of borrowing and no
fees are paid to maintain this facility. At June 30, 1997, there was $5
million outstanding under this facility (weighted average interest rate
of 5.98%).
ENVIRONMENTAL MATTERS
Utilities has been named as a Potentially Responsible Party (PRP)
by various federal and state environmental agencies for 28 FMGP sites.
Utilities has recorded environmental liabilities related to the FMGP
sites of approximately $35 million (including $4.7 million as current
liabilities) at June 30, 1997. Regulatory assets of approximately $35
million, which reflect the future recovery that is being provided
through Utilities' rates, have been recorded in the Consolidated Balance
Sheets. Considering the current rate treatment allowed by the IUB,
management believes that the clean-up costs incurred by Utilities for
these FMGP sites will not have a material adverse effect on its
financial position or results of operations. Refer to Note 7(a) of the
Notes to Consolidated Financial Statements for a further discussion,
including a discussion of a lawsuit filed by Utilities seeking recovery
of FMGP-related costs from its insurance carriers.
The Clean Air Act Amendments of 1990 (Act) requires emission
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve
reductions of atmospheric chemicals believed to cause acid rain. The
acid rain program under the Act also governs SO2 allowances. The Act
and other federal laws also require the United States Environmental
Protection Agency (EPA) to study and regulate, if necessary, additional
issues that potentially affect the electric utility industry, including
emissions relating to NOx and mercury, toxic release inventories and
modifications to the PCB rules. In July 1997, the EPA issued new rules
pertaining to ozone and particulate matter emissions.
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 suggests that the Cedar Rapids area could be
classified as "nonattainment" for the National Ambient Air Quality
Standards established for SO2. The worst-case modeling study suggested
that two of Utilities' generating facilities contribute to the modeled
exceedences. Utilities entered into a Consent Order with the Iowa
Department of Natural Resources in the third quarter of 1997 on this
issue.
Pursuant to a routine review of operations, Utilities determined
that certain changes undertaken during the previous three years at one
of its power plants may have required a federal Prevention of
Significant Deterioration (PSD) permit. Refer to Note 7(b) of the Notes
to Consolidated Financial Statements for a further discussion of the
above mentioned air quality issues.
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." Refer to Note 7(a) of the
Notes to Consolidated Financial Statements for a further discussion.
The Nuclear Waste Policy Act of 1982 (NWPA) assigned responsibility
to the U.S. Department of Energy (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. Utilities entered into such
a contract and has made the agreed payments to the Nuclear Waste Fund
(NWF) held by the U.S. Treasury, however, Utilities has since been
formally notified by the DOE that they anticipate being unable to begin
acceptance of spent nuclear fuel by January 31, 1998. Furthermore, the
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. Utilities is evaluating and
pursuing multiple options including litigation and legislation to
protect its customers and its contractual and statutory rights that are
diminished by delays in the DOE program. The NWPA assigns
responsibility of interim storage of spent nuclear fuel to generators of
such spent nuclear fuel, such as Utilities. In accordance with this
responsibility, Utilities has been storing spent nuclear fuel on-site
since plant operations began in 1974 and has current on-site capability
to store spent fuel until 2001. Utilities is reviewing options for
expanding on-site storage and according to their current analysis,
construction of an on-site storage facility with dry cask modular
capability is the most favorable option. Analysis and discussion of
this and other options continues.
The Low-Level Radioactive Waste Policy Amendments Act of 1985
mandated that each state must take responsibility for the storage of low-
level radioactive waste produced within its borders. The State of Iowa
is a member of the Midwest Interstate Low-Level Radioactive Waste
Compact Commission (Compact), which is responsible for any development
of new disposal capability within the member states of the Compact. 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. At June 30, 1997, Utilities had prepaid
costs of approximately $1.1 million to the Compact. The Compact is
currently evaluating its plans for the future. Utilities continues to
ship the waste it produces to a disposal facility located near Barnwell,
South Carolina, thereby minimizing the amount of low-level waste stored
on-site. Utilities has on-site storage capability that would be
available in the event of disruptions of shipments to the Barnwell
facility.
Whiting is responsible for certain dismantlement and abandonment
costs related to various off-shore oil and gas properties. Refer to
Note 7(a) of the Notes to Consolidated Financial Statements for a
further discussion.
OTHER MATTERS
Labor Issues Utilities has six collective bargaining agreements,
covering approximately 54% of its workforce. None of the agreements
expires in 1997.
Financial Derivatives The Company has a policy that financial
derivatives are to be used only to mitigate business risks and not for
speculative purposes. Derivatives have been used by the Company on a
very limited basis. At June 30, 1997, the only material financial
derivatives outstanding for the Company were an interest rate swap
agreement at Diversified and gas futures contracts at IEA.
Accounting Pronouncements SFAS 128, Earnings Per Share, was issued by
the FASB in the first quarter of 1997. SFAS 128 deals with, among other
issues, the computation and disclosure of earnings per share amounts
when a company has stock options, warrants and/or convertible securities
outstanding. SFAS 128 is effective for periods ending after December
15, 1997, and is not expected to have a material impact upon adoption.
SFAS 130, Reporting Comprehensive Income, was issued by the FASB in
the second quarter of 1997. SFAS 130 establishes standards for
reporting of comprehensive income and its components in a full set of
general purpose financial statements. SFAS 130 will require the Company
to report a total for comprehensive income which includes, among other
items (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. SFAS 130 is effective
for periods beginning after December 15, 1997.
SFAS 131, Disclosures About Segments of an Enterprise and Related
Information, was issued by the FASB in the second quarter of 1997. SFAS
131 requires disclosures for each business segment that are similar to
those required under current standards with the addition of quarterly
disclosure requirements and a finer partitioning of geographic
disclosures. SFAS 131 is effective for periods beginning after December
15, 1997.
Joint Venture On June 11, 1997, WPLH announced the formation of a
joint venture with Cargill. The joint venture, to be named Cargill-IEC,
will be an energy-commodity trading company that will offer a range of
energy trading, marketing and risk management services to wholesale
electric customers. Power trading will begin under the joint venture
upon receipt of a FERC license which is anticipated during the third
quarter of 1997. Interstate Energy Corporation will ultimately be the
formal partner with Cargill in the new joint venture.
Inflation The Company does not expect the effects of inflation at
current levels to have a significant effect on its financial position or
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 30, 1996, Utilities 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 Company (ISU) and Iowa Electric
Light and Power Company (IE) (Utilities 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 Utilities has become or may become obligated to pay in
connection with its defense against allegations of liability for
property damage at and around Former Manufactured Gas Plant (FMGP)
sites, and indemnification for all sums that it has or may become
obligated to pay for the investigation, mitigation, prevention,
remediation and monitoring of damage to property, including damage to
natural resources like groundwater, at and around the FMGP sites.
Settlement discussions are proceeding between Utilities and its
insurance carriers regarding the recovery of these FMGP-related costs.
Settlement has been reached with five carriers and an agreement in
principle has been reached with three other carriers thus far. Amounts
received from insurance carriers are being deferred pending a
determination of the regulatory treatment of such recoveries.
Industries, Diversified, IES Energy Inc. (a wholly-owned subsidiary
of Diversified), MicroFuel Corporation (the Corporation) now known as
Ely, Inc. in which IES Energy has a 69.40% equity ownership, and other
parties have been sued in Linn County District Court in Cedar Rapids,
Iowa, by Allen C. Wiley. Mr. Wiley claims money damages on various tort
and contract theories arising out of the 1992 sale of the assets of the
Corporation, of which Mr. Wiley was a director and shareholder. All of
the defendants in Mr. Wiley's suit answered the complaint and denied
liability. Industries and Diversified were dismissed from the suit in a
motion for summary judgment. In addition, a grant of summary judgment
has reduced Mr. Wiley's claims against the remaining parties to breach
of fiduciary duty. A separate motion for summary judgment, which was
filed seeking dismissal of the remaining claims against the remaining
parties, was overruled on September 20, 1996, and the trial has been set
for May 1998. All of the defendants are vigorously contesting the
claims.
The Corporation commenced a separate suit to determine the fair
value of Mr. Wiley's shares under Iowa Code section 490. A decision was
issued on August 31, 1994, by the Linn County District Court ruling that
the value of Mr. Wiley's shares was $377,600 based on a 40 cent per
share valuation. The Corporation contended that the value of Mr. Wiley's
shares was 2.5 cents per share. The Decision was appealed to the Iowa
Supreme Court by the Corporation on a number of issues, including the
Corporation's position that the trial court erred as a matter of law in
discounting the testimony of the Corporation's expert witness. The Iowa
Supreme Court assigned the case to the Iowa Court of Appeals. On
February 2, 1996, the Iowa Court of Appeals reversed the District Court
ruling after determining the District Court erred in discounting the
expert testimony. The case was remanded back to the District Court for
consideration of the expert testimony, but with no additional evidence
taken. The District Court re-affirmed its original decision on August
28, 1996, and the Corporation has again appealed to the Iowa Supreme
Court.
On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda)
filed a request with the IUB that the IUB initiate formal complaint
proceedings against Utilities. Lambda alleges that Utilities is
discriminating against it by refusing to enter into contracts with it
for remote displacement service and by favoring IEA, a subsidiary of the
Company, in such matters. On October 17, 1996, Utilities filed a
Response which denied the allegations, and alleged, inter alia, that
Lambda is unlawfully attempting to provide retail electrical services in
Utilities' exclusive service territory. The IUB hearings were held in
March 1997. A decision is expected in the third quarter of 1997.
On October 9, 1996, the Company filed a civil suit in the Iowa
District Court in and for Linn County against Lambda, Robert Latham,
Louie Ervin, and David Charles (three former employees of the Company
and/or its subsidiaries), collectively the "Defendants", alleging, inter
alia, violations of Iowa's trade secret act and interference with
existing and prospective business advantage. On November 1, 1996, the
Defendants filed their Answer and Counterclaims alleging, inter alia,
violation of Iowa competition law, tortious interference and commercial
disparagement. The Defendants therewith also filed a Third-Party
Petition against Utilities, IEA and Lee Liu, Chairman of the Board &
Chief Executive Officer of Industries and Utilities, alleging, inter
alia, tortious interference and commercial disparagement. On April 9,
1997, Utilities amended its suit to include Central Iowa Power
Cooperative alleging that it, too, inter alia had violated Iowa's trade
secret act, and had tortiously interfered with existing and prospective
business advantage.
Reference is made to Notes 3 and 7 of Industries' Notes to
Consolidated Financial Statements for a discussion of Utilities' rate
proceedings and the Company's environmental matters, respectively, and
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition - Environmental Matters.
Item 2. Changes in the Rights of the Company's Security Holders.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Results of Votes of Security Holders.
(a) The Company held its Annual Meeting of Shareholders on May 22,
1997.
(b) The following matter was voted upon at the Annual Meeting of
Shareholders:
The election of nominees for Directors who will serve a one-year
term or until their respective successors shall be duly elected.
The nominees were all elected. The number of votes for, against or
withheld, and non-votes for each nominee were as follows:
AGAINST /
FOR WITHHELD NON-VOTES
C.R.S. Anderson 25,048,497 440,103 4,726,840
J. Wayne Bevis 25,146,326 342,274 4,726,840
Lee Liu 25,131,871 356,729 4,726,840
Jack R. Newman 25,127,426 361,174 4,726,840
Robert D. Ray 25,106,928 381,672 4,726,840
David Q. Reed 25,137,718 350,882 4,726,840
Henry Royer 25,140,584 348,016 4,726,840
Robert W. Schlutz 25,166,322 322,278 4,726,840
Anthony R. Weiler 25,139,887 348,713 4,726,840
Item 5. Other Information.
(a) IES Utilities Inc. has calculated their ratio of earnings to fixed
charges pursuant to Item 503 of Regulation S-K of the Securities
and Exchange Commission as follows:
For the twelve months ended:
June 30, 1997 3.00
December 31, 1996 3.23
December 31, 1995 3.04
December 31, 1994 3.18
December 31, 1993 3.41
December 31, 1992 2.49
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
4(a) Fifth Supplemental Indenture, dated as of April 1,
1997, supplementing Utilities' Indenture of Mortgage and Deed
of Trust, dated September 1, 1993. (Filed as Exhibit 4(a) to
Industries' Form 10-Q for the quarter ended March 31, 1997
(File No. 1-9187)).
4(b) Sixty-third Supplemental Indenture, dated as of
April 1, 1997, supplementing Utilities' Indenture of Mortgage
and Deed of Trust, dated August 1, 1940. (Filed as Exhibit
4(b) to Industries' Form 10-Q for the quarter ended March 31,
1997 (File No. 1-9187)).
4(c) Commercial Paper Dealer Agreement, dated as of
November 9, 1994, between IES Diversified Inc. and Citicorp
Securities, Inc. (Filed as Exhibit 4(c) to Industries' Form 10-
Q for the quarter ended March 31, 1997 (File No. 1-9187)).
4(d) First Amendment, dated as of March 24, 1997, to the
Commercial Paper Dealer Agreement, dated as of November 9,
1994, between IES Diversified Inc. and Citicorp Securities,
Inc. (Filed as Exhibit 4(d) to Industries' Form 10-Q for the
quarter ended March 31, 1997 (File No. 1-9187)).
4(e) Indenture (For Senior Unsecured Debt Securities),
dated as of August 1, 1997, between Utilities and The First
National Bank of Chicago, as Trustee. (Filed as Exhibit 4(j)
to Utilities' Registration Statement, File No. 333-32097).
10(a) Receivables Purchase and Sale Agreement dated as of
June 30, 1989, as Amended and Restated as of February 28,
1997, among IES Utilities Inc. (as Seller) and CIESCO L.P. (as
the Investor) and Citicorp North America, Inc. (as Agent).
(Filed as Exhibit 10(a) to Industries' Form 10-Q for the
quarter ended March 31, 1997 (File No. 1-9187)).
*10(b) Director Retirement Plan.
*12 Ratio of Earnings to Fixed Charges (IES Utilities Inc.)
*27(a) Financial Data Schedule (IES Industries Inc.)
*27(b) Financial Data Schedule (IES Utilities Inc.)
* Exhibits designated by an asterisk are filed herewith.
(b) Reports on Form 8-K -
IES Industries Inc.
None.
IES Utilities Inc.
Items Reported Financial Statements Date of Report
5 None April 28,1997
5 None July 29, 1997
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 INDUSTRIES INC.
(Registrant)
Date: August 13, 1997 By /s/ Thomas M. Walker
(Signature)
Thomas M. Walker
Executive Vice President &
Chief Financial Officer
By /s/ John E. Ebright
(Signature)
John E. Ebright
Controller & Chief Accounting Officer
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)
Date: August 13, 1997 By /s/ Thomas M. Walker
(Signature)
Thomas M. Walker
Executive Vice President &
Chief Financial Officer
By /s/ John E. Ebright
(Signature)
John E. Ebright
Controller & Chief Accounting Officer
EXHIBIT 10(b)
DIRECTOR RETIREMENT PLAN
This Retirement Plan for the benefit of the Directors of IES
INDUSTRIES, INC. is adopted this 1st day of February, 1994, amended
November 6, 1996, and revised effective May 22, 1997, by IES INDUSTRIES
INC. (hereafter the "Company").
WITNESSETH:
WHEREAS, the Company wishes to provide a non-qualified
retirement benefit for its Directors, subject to a Director satisfying
certain conditions and periods of service as a Director with the Company
as set forth herein.
NOW, THEREFORE, the Company hereby adopts the following non-
qualified Retirement Plan (the "Plan"):
ARTICLE I
1.1 Right to Participate Under This Plan and Loss of Such
Right. The only individuals eligible to participate under this Plan
shall be those Directors of the Company who are serving on the date of
the adoption of this Plan or who subsequently serve on the Board of
Directors of the Company, and who complete the required years of service
with the Company as a Director and who satisfy the other terms and
conditions of this Plan.
ARTICLE II
2.1 Director. "Director" shall mean an individual elected by
the shareholders of the Company to serve as a member of the Board of
Directors of the Company.
2.2 Qualified Director. "Qualified Director" shall mean a
Director who has served at least forty-eight (48) months (service before
the adoption of this Plan shall be taken into account for this purpose)
as a Director of the Company, as a Director of IOWA SOUTHERN INC. or IE
INDUSTRIES INC. and who has not acted in a manner detrimental to the
best interests of the Company as determined by the Board of Directors.
The service requirement may be satisfied by continuous or non-continuous
service as a Director.
2.3 Qualified Inside Director. "Qualified Inside Director"
shall mean any Qualified Director who has served as a Director while in
regular employee status with the Company, IES UTILITIES INC. or any
affiliated companies.
2.4 Annual Directors Fee. "Annual Directors Fee" shall mean
the annual outside Directors Fee in effect at the time of a Qualified
Director's termination of his or her position as a Director with the
Company. For those Directors who are Directors as of November 6, 1996,
and who will not be a Director as a result of the Merger among WPL
Holdings, Inc. and Interstate Power Company, the "Annual Directors Fee"
shall mean the annual cash fee and the value of the common stock award
in effect at the time of that Director's termination as a Director.
2.5 Surviving Spouse. "Surviving Spouse" shall mean the
individual, if any, married to a Qualified Director at the time of his
or her death.
2.6 Retirement Benefit. "Retirement Benefit," shall mean an
amount equal to eighty percent (80%) of the Annual Directors Fee. Such
benefit shall be paid on the date the Company pays Annual Directors Fee.
2.7 Death Benefit. "Death Benefit" shall mean an amount
equal to eighty percent (80%) of the Annual Directors Fee. Such benefit
shall be paid on the date the Company pays Annual Directors Fee.
2.8 Board of Directors. "Board of Directors" shall mean the
Board of Directors of the Company.
2.9 Benefit Period. "Benefit Period" shall mean a period of
four (4) years plus one (1) additional year for each additional twelve
(12) months of service as a Director after forty-eight (48) months of
service, subject to the limitation that in no event shall the Benefit
Period be more than eight (8) years.
ARTICLE III
3.1 Receipt of Retirement Benefit upon Director's Retirement
from the Company. Subject to Paragraph 3.2 of this Article and the
provisions of Article V, a Qualified Director shall receive an amount
equal to the Retirement Benefit, as established in Paragraph 2.6 of
Article II of this Plan, for the Benefit Period, as established under
Paragraph 2.9 of Article II. The Retirement Benefit shall be paid to
the Qualified Director or his or her Surviving Spouse. Payment of the
Retirement Benefit shall commence to a Qualified Director, other than a
Qualified Inside Director, on the next date, following the Qualified
Director's termination as a Director, that the Company pays the Annual
Directors Fee to its Board of Directors except that payment shall
commence 30 days following the effective date of the Merger among the
Company, WPL Holdings, Inc. and Interstate Power Company for those
Qualified Directors who are Directors as of May 22, 1997 and who will
not be a Director as a result of the above referenced Merger. Payment
of the Retirement Benefit shall be made to a Qualified Inside Director
on the next date one (1) year following the later of the Qualified
Inside Director's termination as a Director or termination of employment
with the Company or any affiliate that the Company pays the Annual
Directors Fee to its Board of Directors.
3.2 Benefit Payable to Surviving Spouse Prior to Receipt by
Director of Benefits for the Benefit Period. Subject to the provisions
of Article V, in the event of the death of the Qualified Director after
termination as a Director, but prior to the Qualified Director receiving
the Retirement Benefit payments for the Benefit Period that he or she is
entitled to receive from the Company under this Plan, the Surviving
Spouse of the Qualified Director shall be entitled to receive the
Retirement Benefit payments under this Plan until the earlier of (a) the
receipt by the Qualified Director and his or her Surviving Spouse of
Retirement Benefit payments under this Plan for the Benefit Period that
the Director was entitled to receive; or (b) the Surviving Spouse's
death.
3.3 Receipt of Retirement Benefit Upon Merger With WPL
Holdings, Inc. and Interstate Power Company. Subject to Paragraph 3.2
of the Article and the provisions of Article V, Qualified Directors and
Qualified Inside Directors, who become Directors of Interstate Energy
Corporation upon the merger of the Company with WPL Holdings, Inc. and
Interstate Power Company, shall receive an amount equal to the
Retirement Benefit, as established in Paragraph 2.6 of Article II of
this Plan, for the Benefit Period, as established under Paragraph 2.9 of
Article II. The Retirement Benefit shall be paid to the Qualified
Director or Qualified Inside Director or to his or her Surviving Spouse.
Payment of the Retirement Benefit shall commence 30 days following the
effective date of the Merger among the Company, WPL Holdings, Inc. and
Interstate Power Company.
ARTICLE IV
4.1 Death Benefit Payable Prior to Termination as a Director.
Subject to the provisions of Article V, if a Director dies while serving
as a Director with the Company and at the time of death was a Qualified
Director, the Company shall pay to the Surviving Spouse of the Qualified
Director a Death Benefit as defined in Paragraph 2.7. The Death
Benefit, if any, payable under this Article is to be made in yearly
payments (on the date that Company pays the Annual Directors Fee) for a
period equal to the Benefit Period for which the Director was entitled
to receive benefit payments at the time of his or her death. The first
payment to be made under this Article shall be on the next date that the
Company pays its Annual Directors Fee following the death of the
Director. If the Qualified Director leaves no Surviving Spouse or the
Surviving Spouse dies prior to the receipt of the yearly Death Benefit
payments that he or she is entitled to receive, the Death Benefit shall
terminate and the Company shall have no further obligation under this
Plan.
ARTICLE V
5.1 Retirement Benefit or Death Benefit Payable if No
Surviving Spouse. In the event a Qualified Director dies leaving no
Surviving Spouse or, if at any time during the Benefit Period or during
the period for payment of the Death Benefit under Article IV the
Qualified Director's Surviving Spouse dies, the payments to the
Surviving Spouse shall terminate and the Company shall have no further
obligation under Articles III or IV.
5.2 No Payment to the Qualified Director's or Surviving
Spouse's Estate. In no event shall any payment under this Plan be
payable to the estate of any Qualified Director, the estate of any
Qualified Director's Surviving Spouse or to any heir of either of the
above.
5.3 No Payment Beyond Benefit Period. In no event shall the
Director or his or her Surviving Spouse be entitled to receive a
Retirement Benefit or a Death Benefit for more than the Benefit Period.
ARTICLE VI
6.1 Unsecured Obligation. The Company's obligation under
this Plan to the Qualified Director or his or her Surviving Spouse is
solely an unsecured promise of the Company and nothing herein shall be
construed to give the Qualified Director or his or her Surviving Spouse
any right, title, interest or claim in or to any specific asset, fund,
reserve, account or property of any kind whatsoever owned by the Company
or in which it may have any right, title, or interest now or in the
future. The Qualified Director or his or her Surviving Spouse shall
have only the right to enforce a claim against the Company in the same
manner as any unsecured creditor.
ARTICLE VII
7.1 Modifications. At any time this Plan may be terminated
or amended by action of the Board of Directors in its sole and absolute
discretion without notice, consent or approval of any Director. The
right of the Board of Directors to amend or terminate this Plan at any
time shall include the absolute discretion to make any amendments
prospective or retroactive in application, except that no such amendment
or termination shall terminate or reduce any benefit to a Qualified
Director or his or her Surviving Spouse after that Qualified Director or
his or her Surviving Spouse has received one (1) annual benefit payment
under this Plan.
7.2 Administration and Interpretation of this Plan.
Interpretation by the Board of Directors shall be final and binding upon
a Director. The Board of Directors in its sole and absolute discretion
shall have the right to determine whether a Director has acted in a
manner detrimental to the best interests of the Company. The Board of
Directors may adopt rules and regulations relating to this Plan as it
may deem necessary or advisable for the administration of this Plan,
including designating a committee to act on behalf of the full Board of
Directors.
7.3 Claims Procedure. If a Qualified Director or the
Qualified Director's Surviving Spouse (hereinafter referred to as a
"Claimant") is denied the Retirement Benefit or the Death Benefit under
this Plan for any reason including a determination that the Director has
acted in a manner detrimental to the best interests of the Company, he
or she may file a claim with the Board of Directors. The Board of
Directors shall notify the Claimant within sixty (60) days of allowance
or denial of the claim, unless the Claimant receives written notice from
the Board of Directors prior to the end of the sixty (60) day period
stating that special circumstances require an extension of the time for
decision. Notice of the Board of Directors' decision shall be in
writing sent by mail to Claimant's last known address, and, if a denial
of the claim, must contain the following information:
a. specific reasons for the denial;
b. specific reference to pertinent provisions of
this Plan on which the denial is based; and
c. if applicable, a description of any additional
information or material necessary to perfect the claim, an
explanation of why such information or material is necessary
and an explanation of the claims review procedure.
7.4 Review Procedure.
a. A Claimant is entitled to request a review of
any denial of his or her claim for the Retirement Benefit or
Death Benefit by the Board of Directors. The request for
review must be submitted in writing within sixty (60) days of
mailing of the notice of the denial. Absent a request for
review within the sixty (60) day period, the claim will be
deemed to be conclusively denied. The Claimant or his or her
representative shall be entitled to review all pertinent
documents, and to submit issues and comments orally and in
writing.
b. The review shall be conducted by the Board of
Directors, which shall afford the Claimant a hearing and the
opportunity to review all pertinent documents and submit
issues and comments orally and in writing. The Board of
Directors shall render a decision within ninety (90) days
after receipt of a request for a review, provided that, in
special circumstances (such as the necessity of holding a
hearing) the Board of Directors may extend the time for
decision by not more than sixty (60) days upon written notice
to the Claimant. The Claimant shall receive written notice of
the Board of Directors' review decision, together with
specific reasons for the decision and references to the
pertinent provisions of this Plan.
ARTICLE VIII
8.1 Assignability of Benefits. Neither a Qualified
Director, nor his or her Surviving Spouse, shall have the power to
transfer, assign, anticipate, mortgage or otherwise encumber any right
to receive Retirement Benefits or Death Benefits in advance of such
payment and any attempted transfer, assignment, anticipation, mortgage
or encumbrance shall be void. No payment shall be subject to seizure
for payment of public or private debts, judgments, alimony or separate
maintenance, or be transferred by operation of law in the event of
bankruptcy, insolvency or otherwise.
ARTICLE IX
9.1 Covenant Not to Compete. Payments pursuant to this Plan
also serve as consideration for the following covenant not to compete.
Notwithstanding anything in this Plan to the contrary, it is expressly
agreed that the Retirement Benefit or the Death Benefit payment under
this Plan shall terminate as to the Qualified Director and his or her
Surviving Spouse and the Company shall have no further obligation under
this Plan upon the violation of the provisions of Paragraph 9.2 by the
Qualified Director.
9.2 If the Qualified Director, during the period set forth
herein and within the service area in which the Company or any
affiliated companies provide utility services or, in the case of any non-
utility business, within the geographic area served by such business,
accepts employment or engages in any business as an employee, officer,
consultant, director or becomes a partner or shareholder (except that
the Qualified Director and his or her Surviving Spouse may hold up to a
five percent (5%) interest in any company that is traded on the New York
Stock Exchange, American Stock Exchange or other national over-the-
counter exchange) in any company that is in competition with the
business of the Company or any of its affiliated companies, and the
Qualified Director fails to terminate such position within thirty (30)
days after notice from the Board of Directors to the Qualified Director
of the violation of this covenant not to compete, the Qualified Director
and the Qualified Director's Surviving Spouse shall forfeit all rights
to future payments under this Plan, and the Company shall have no
further obligation under this Plan. Any violation of the provisions set
forth above during the period the Qualified Director is receiving any
payments under this Plan beginning with the date of the receipt of the
first payment under this Plan shall constitute a violation of this
Article and result in the termination of all future payments under this
Plan. The determination of the Board of Directors as to whether a
business is in competition with the Company and whether the Competition
is occurring in the geographic area designated above shall be
controlling for purposes of this Plan.
ARTICLE X
10.1 Applicable Law. This Plan shall be governed by and
construed in accordance with the laws of the State of Iowa and venue for
any action brought under this Agreement shall be in Linn County, Iowa.
10.2 Tax Withholding. The Company shall withhold all
applicable taxes required on all payments under this Plan.
ARTICLE XI
11.1 Headings. The headings in this Plan are for convenience
only and shall not be used to interpret or construe its provisions.
<TABLE>
EXHIBIT 12
IES UTILITIES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Twelve Months
Year Ended December 31, Ended
1992 1993 1994 1995 1996 June 30, 1997
(in thousands, except ratio of earnings to fixed charges)
<S> <C> <C> <C> <C> <C> <C>
Net income $ 45,291 $ 67,970 $ 61,210 $ 59,278 $ 63,729 $ 61,113
Federal and state
income taxes 20,723 37,963 37,966 41,095 43,092 41,248
Net income before
income taxes 66,014 105,933 99,176 100,373 106,821 102,361
Interest on long-term debt 35,689 34,926 37,942 36,375 37,048 38,694
Other interest 3,939 5,243 3,630 8,085 6,666 8,214
Estimated interest
component of rents 4,567 3,729 3,970 4,637 4,091 4,228
Fixed charges as defined 44,195 43,898 45,542 49,097 47,805 51,136
Earnings as defined $ 110,209 $ 149,831 $ 144,718 $ 149,470 $ 154,626 $ 153,497
Ratio of earnings to fixed
charges (unaudited) 2.49 3.41 3.18 3.04 3.23 3.00
For the purposes of computation of these ratios (a) earnings have been
calculated by adding fixed charges and federal and state income taxes
to net income; (b) fixed charges consist of interest (including
amortization of debt expense, premium and discount) on long-term and
other debt and the estimated interest component of rents.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
EXHIBIT 27(a)
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet at June 30, 1997 and the Consolidated Statement
of Income and the Consolidated Statement of Cash Flows for the six months
ended June 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000789943
<NAME> IES INDUSTRIES INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,344,001
<OTHER-PROPERTY-AND-INVEST> 407,457
<TOTAL-CURRENT-ASSETS> 148,372
<TOTAL-DEFERRED-CHARGES> 14,609
<OTHER-ASSETS> 195,717
<TOTAL-ASSETS> 2,110,156
<COMMON> 415,603
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 208,119
<TOTAL-COMMON-STOCKHOLDERS-EQ> 623,722
0
18,320
<LONG-TERM-DEBT-NET> 719,654
<SHORT-TERM-NOTES> 5,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 145,000
<LONG-TERM-DEBT-CURRENT-PORT> 487
0
<CAPITAL-LEASE-OBLIGATIONS> 13,816
<LEASES-CURRENT> 13,923
<OTHER-ITEMS-CAPITAL-AND-LIAB> 570,234
<TOT-CAPITALIZATION-AND-LIAB> 2,110,156
<GROSS-OPERATING-REVENUE> 452,820
<INCOME-TAX-EXPENSE> 12,973<F1>
<OTHER-OPERATING-EXPENSES> 387,360
<TOTAL-OPERATING-EXPENSES> 387,360<F1>
<OPERATING-INCOME-LOSS> 65,460
<OTHER-INCOME-NET> (926)
<INCOME-BEFORE-INTEREST-EXPEN> 64,534
<TOTAL-INTEREST-EXPENSE> 30,439
<NET-INCOME> 20,665<F2>
457<F2>
<EARNINGS-AVAILABLE-FOR-COMM> 20,665
<COMMON-STOCK-DIVIDENDS> 31,792
<TOTAL-INTEREST-ON-BONDS> 37,780
<CASH-FLOW-OPERATIONS> 102,438
<EPS-PRIMARY> 0.68
<EPS-DILUTED> 0
<FN>
<F1>Income tax expense is not included in Operating Expense in the Consolidated
Statements of Income for IES Industries Inc. (Industries).
<F2> Since the preferred dividends are for a subsidiary of Industries, they are
considered a fixed charge on Industries' Consolidated Statement of Income.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
EXHIBIT 27(b)
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet at June 30, 1997 and the Consolidated Statement
of Income and the Consolidated Statement of Cash Flows for the six months
ended June 30, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0000052485
<NAME> IES UTILITIES INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,344,001
<OTHER-PROPERTY-AND-INVEST> 79,954
<TOTAL-CURRENT-ASSETS> 117,820
<TOTAL-DEFERRED-CHARGES> 10,273
<OTHER-ASSETS> 195,717
<TOTAL-ASSETS> 1,747,765
<COMMON> 33,427
<CAPITAL-SURPLUS-PAID-IN> 279,042
<RETAINED-EARNINGS> 221,622
<TOTAL-COMMON-STOCKHOLDERS-EQ> 534,091
0
18,320
<LONG-TERM-DEBT-NET> 517,265
<SHORT-TERM-NOTES> 5,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 145,000
<LONG-TERM-DEBT-CURRENT-PORT> 140
0
<CAPITAL-LEASE-OBLIGATIONS> 13,816
<LEASES-CURRENT> 13,923
<OTHER-ITEMS-CAPITAL-AND-LIAB> 500,210
<TOT-CAPITALIZATION-AND-LIAB> 1,747,765
<GROSS-OPERATING-REVENUE> 396,021
<INCOME-TAX-EXPENSE> 14,649<F1>
<OTHER-OPERATING-EXPENSES> 336,995
<TOTAL-OPERATING-EXPENSES> 336,995<F1>
<OPERATING-INCOME-LOSS> 59,026
<OTHER-INCOME-NET> (560)
<INCOME-BEFORE-INTEREST-EXPEN> 58,466
<TOTAL-INTEREST-EXPENSE> 25,075
<NET-INCOME> 18,742
457
<EARNINGS-AVAILABLE-FOR-COMM> 18,285
<COMMON-STOCK-DIVIDENDS> 28,000
<TOTAL-INTEREST-ON-BONDS> 37,780
<CASH-FLOW-OPERATIONS> 82,458
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Income tax expense is not included in Operating Expense in the Consolidated
Statements of Income for IES Utilities Inc.
</FN>
</TABLE>
