UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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; Address; IRS Employer
File Number and Telephone Number Identification No.
0-4117-1 IES UTILITIES INC. (an Iowa corporation) 42-0331370
IES Tower, Cedar Rapids, Iowa 52401
319-398-4411
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
7-7/8% Quarterly Debt Capital Securities New York Stock Exchange
(Subordinated Deferrable Interest Debentures)
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
4.80% Cumulative Preferred Stock, Par Value $50 per share
Indicate by check mark whether the registrant (1) has 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 registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrants' knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. X
The aggregate market value of the voting stock of IES Utilities Inc. held
by non-affiliates, as of January 31, 1998 was $0.
Indicate the number of shares outstanding of each of the registrants'
classes of Common Stock, as of January 31, 1998: Common Stock, $2.50 par
value - 13,370,788 shares (all of which were owned as of January 31, 1998
by IES Industries Inc.)
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
IES UTILITIES INC.
Form 10-K for the Year Ended December 31, 1997
TABLE OF CONTENTS
PART I Page No.
Item 1. Business . . . . . . . . . . . . . . . . . . . . . 3
Proposed Merger of Industries . . . . . . . . . . 4
Capital Expenditure and Investment and Financing
Plans . . . . . . . . . . . . . . . . . . . . . 4
Regulation . . . . . . . . . . . . . . . . . . . 4
Employees . . . . . . . . . . . . . . . . . . . . 5
Environmental Matters . . . . . . . . . . . . . . 5
Competition . . . . . . . . . . . . . . . . . . . 5
Rate Matters . . . . . . . . . . . . . . . . . . 5
Year 2000 . . . . . . . . . . . . . . . . . . . . 5
Electric Operations . . . . . . . . . . . . . . . 5
Gas Operations . . . . . . . . . . . . . . . . . 10
Item 2. Properties . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 15
Item 6. Selected Financial Data . . . . . . . . . . . . . . 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 17
Selected Consolidated Quarterly Financial Data
(unaudited) . . . . . . . . . . . . . . . . . . . 28
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................... . . . . 29
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements . . . . . . . . 30
Notes to Consolidated Financial Statements . . . 36
Item 9. Changes and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . 53
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation . . . . . . . . . . . . . . 56
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . 62
Item 13. Certain Relationships and Related Transactions . . 63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . 63
Schedule II - Valuation and Qualifying Accounts
and Reserves . . . . . . . . . . . . . . . 70
Signatures . . . . . . . . . . . . . . . . . . . 71
<PAGE>
FORWARD-LOOKING STATEMENTS
Refer to the "Forward-Looking Statements" section in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(MD&A) for information and disclaimers regarding forward-looking
statements contained in this Annual Report on Form 10-K.
PART I
Item 1. Business
IES Utilities Inc. (Utilities) is a subsidiary of IES Industries Inc.
(Industries). Utilities is primarily a public utility operating company
engaged in providing electric energy, natural gas and, to a limited
extent, steam used for industrial and heating purposes, in the State of
Iowa. Utilities serves approximately 339,000 electric and 178,000 natural
gas retail customers as well as 30 resale customers in more than 550 Iowa
communities. In 1997, 1996 and 1995, Utilities had no single customer for
which electric and/or gas sales accounted for 10% or more of Utilities'
consolidated revenues.
Utilities' only wholly-owned subsidiary as of December 31, 1997, was
IES Ventures Inc. (Ventures), which is a holding company for nonregulated
investments. Ventures' wholly-owned subsidiary at December 31, 1997, was
IES Midland Development Inc. (Midland), which owns and operates a landfill
in Ottumwa, Iowa.
Utilities' sales of electricity (in Kwh), excluding sales for resale,
increased 4.3%, 1.7% and 6.4%, during the years 1997, 1996 and 1995,
respectively. Under historically normal weather conditions, total sales
(excluding sales for resale) would have increased 3.6%, 3.4% and 4.7%
during these same years. Total gas delivered by Utilities, including
transported volumes, increased or (decreased) (6.1%), 5.9% and 4.8% during
the years 1997, 1996 and 1995, respectively. Under historically normal
weather conditions, Utilities' gas sales and transported volumes would
have increased or (decreased) (2.4%), 1.9% and 3.5% during these same
years.
There are seasonal variations in Utilities' electric and gas
businesses, which are principally related to the use of energy for air
conditioning and heating. In 1997, 39.3% of Utilities' electric revenues
were earned in June through September, reflecting the use of electricity
for cooling, and 71.7% of Utilities' gas revenues were earned in the
months of January through March, November and December, reflecting the use
of gas for heating.
The approximate percentages of Utilities' revenue and operating
income derived from the sale of electricity and gas during the years 1997,
1996 and 1995 were as follows:
1997 1996 1995
Revenues:
Electric 74% 76% 79%
Gas 23% 21% 19
Operating income:
Electric 90% 86% 92%
Gas 8% 11% 7%
The relationships between the electric and gas percentages presented
above are influenced by changes in energy sales, timing of regulatory
price proceedings and changes in the costs of fuel or purchased gas billed
to customers through related adjustment clauses.
For additional information concerning electric and gas operations,
see Item 7. "MD&A" and the "Electric Operations" and "Gas Operations"
sections in Item 1. Refer to Note 13 of the Notes to Consolidated
Financial Statements for a further discussion of Utilities' segments of
business.
PROPOSED MERGER OF INDUSTRIES. Utilities' parent corporation,
Industries, is party to an Agreement and Plan of Merger, dated as of
November 10, 1995, as amended, by and among, Industries, WPL Holdings,
Inc. (WPLH), Interstate Power Company (IPC) and certain related parties.
Refer to the "Proposed Merger" section in Item 7. "MD&A" and Note 2 of the
Notes to Consolidated Financial Statements for a discussion of the
transaction (collectively, the Merger) contemplated by the above
referenced Agreement and Plan of Merger.
CAPITAL EXPENDITURE AND INVESTMENT AND FINANCING PLANS. Refer to
the "Liquidity and Capital Resources" section in Item 7. "MD&A." for a
discussion of Utilities' anticipated utility construction and acquisition
expenditures for 1998-2002 and Utilities' assumptions in financing future
capital requirements.
REGULATION. Utilities operates pursuant to the laws of the State of
Iowa and is thereby subject to the jurisdiction of the Iowa Utilities
Board (IUB). The IUB has authority to regulate rates and standards of
service, to prescribe accounting requirements and to approve the location
and construction of electric generating facilities having a capacity in
excess of 25,000 Kw. The IUB is comprised of three Commissioners
appointed by the Governor of Iowa and ratified by the State Senate.
Requests for price relief are based on historical test periods, adjusted
for certain known and measurable changes. The IUB must decide on requests
for price relief within 10 months of the date of the application for which
relief is filed or the interim prices granted become permanent. Interim
prices, if allowed, are permitted to become effective, subject to refund,
no later than 90 days after the price increase application is filed.
In Iowa, non-exclusive franchises, which cover the use of streets and
alleys for public utility facilities in incorporated communities, are
granted for a maximum of twenty-five years by a majority vote of local
qualified residents. In addition, the IUB defines the boundaries of
mutually exclusive service territories for all electric utilities. The
IUB has jurisdiction and grants franchises for the use of public highway
rights-of-way for electric and gas facilities outside corporate limits.
Utilities is subject to the jurisdiction of the Federal Energy
Regulatory Commission (FERC) with respect to wholesale electric sales, its
accounting practices and the issuance of securities. Revenues derived
from Utilities' sales for resale amounted to 4.3%, 6.5% and 6.3% of
electric revenues for 1997, 1996 and 1995, respectively. Utilities'
consolidated subsidiaries are not subject to regulation by the IUB or the
FERC.
Utilities is subject to the jurisdiction of the Nuclear Regulatory
Commission (NRC), with respect to the Duane Arnold Energy Center (DAEC),
and to the jurisdiction of the United States Department of Energy (DOE)
with respect to the disposal of nuclear fuel and other radioactive wastes
from the DAEC.
With respect to environmental matters impacting Utilities, the United
States Environmental Protection Agency administers certain federal
statutes and has delegated the administration of other environmental
initiatives to the applicable state environmental agencies. In addition,
the state agencies have jurisdiction over air and water quality standards
associated with fossil fuel fired electric generation and the level and
flow of water, safety and other matters pertaining to hydroelectric
generation.
See the "Environmental Matters", "Competition", "Electric Operations"
and "Gas Operations" sections of Item 1 for a discussion of various other
regulatory issues.
EMPLOYEES. At December 31, 1997, Utilities had a total of 2,045
regular full-time employees. At December 31, 1997, Utilities had 1,089
employees subject to six collective bargaining agreements (788 of these
employees were subject to one of these agreements). Two of the
agreements, covering less than 5% of Utilities' workforce, will expire in
1998.
ENVIRONMENTAL MATTERS. Utilities is regulated in environmental
protection matters by a number of federal, state and local agencies. Such
regulations are the result of a number of environmental protection laws
passed by the U. S. Congress, state legislatures and local governments and
enforced by federal, state and county agencies. The laws impacting
Utilities' operations include the Clean Water Act; Clean Air Act, as
amended by the Clean Air Act Amendments of 1990; National Environmental
Policy Act; Resource Conservation and Recovery Act; Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (CERCLA),
as amended by the Superfund Amendments and Reauthorization Act of 1986;
Occupational Safety and Health Act; National Energy Policy Act of 1992 and
a number of others. Utilities regularly secures and renews federal, state
and local permits to comply with the environmental protection laws and
regulations. Costs associated with such compliances have increased in
recent years and are expected to increase moderately in the future.
Refer to Note 11 of the Notes to Consolidated Financial Statements
and the "Other Matters-Environmental" section of Item 7. "MD&A" for
further discussion of Utilities' environmental matters.
COMPETITION. See the "Utility Industry Outlook" section in Item 7.
"MD&A" for a discussion of competitive issues impacting Utilities.
RATE MATTERS. Refer to Note 3 of the Notes to Consolidated Financial
Statements for a discussion of Utilities' rate matters, including its
price freeze announcements.
YEAR 2000. Refer to the "Other Matters-Year 2000" section of Item 7.
"MD&A" for a discussion of the impact the date change in the Year 2000
will have on Utilities' software, embedded systems and related
technologies.
ELECTRIC OPERATIONS -
General Utilities' net peak load (60 minutes integrated) of 1,853,938
kilowatts occurred on July 25, 1997, and represented a new energy peak
demand record. At the time of the peak load, 68 interruptible customers
were interrupted representing approximately 223,000 kilowatts of a
possible 369,413 kilowatts available for interruption. Utilities'
additional reserve obligation at the time of the peak was 269,091
kilowatts and the net capability of Utilities' generating stations was
1,891,990 kilowatts, with an additional 232,000 kilowatts being available
under purchase contracts, thereby providing an aggregate capability of
2,123,990 kilowatts.
Utilities projects an electric sales growth rate of approximately 2
to 3 percent per year over the next five years, which will be met by a mix
of its existing generation, capacity purchases and new construction. The
construction activities will be undertaken in a fashion that best meets
the needs of individual customers and the system as a whole. See Note
11(b) of the Notes to Consolidated Financial Statements for a discussion
of Utilities' firm contracts for the purchase of capacity.
Utilities' electric facilities are interconnected with certain Iowa
and neighboring utilities. Also, Utilities is a member of the
Mid-Continent Area Power Pool (MAPP). This pool is comprised of 20
utilities which are Transmission Owning Members (TOMs) and 51 energy-
related companies providing services in the upper midwest region of the
United States, and operates pursuant to an agreement which provides for
the interchange of electric energy, the sharing of responsibilities for
production capacity and reserve and the supply of electric energy.
Utilities is a party to the Twin Cities-Iowa-St. Louis 345 Kv
Interconnection Coordinating Agreement (the Coordinating Agreement) with
four other midwestern utilities, two of which operate in the State of
Iowa. The Coordinating Agreement provides for the interconnection of the
respective systems of the companies through a 345 Kv transmission line and
for the interchange of power on various bases. The rates under the
Coordinating Agreement are primarily determined by agreement between the
delivering and receiving companies.
Utilities maintains and operates transmission and substation
facilities connecting with its high voltage transmission systems pursuant
to a non-cancelable operating agreement (the Operating Agreement) with
Central Iowa Power Cooperative (CIPCO). The Operating Agreement, which
will terminate on December 31, 2035, provides for the joint use of certain
transmission facilities of Utilities and CIPCO.
Subsequent to the consummation of the Merger, Utilities expects to
realize reduced electric production costs through the joint dispatch of
systems and increased marketing opportunities in the wholesale and
interchange markets through electric interconnections with other
utilities.
For information relating to agreements between Utilities and its
partners for the joint ownership of the DAEC, the Ottumwa Generating
Station (OGS) and Neal Unit No. 3, see Item 2. "Properties" and Note 12 of
the Notes to Consolidated Financial Statements.
Fuel Supply The following table details the sources of the electricity
sold by Utilities during 1997 and expected sources for the following three
years:
Actual /---------Expected -------------/
1997 1998 1999 2000
Steam 48% 53% 53% 52%
Nuclear 26 24 24 27
Purchases 25 22 22 20
Other 1 1 1 1
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
The 1997 steam percentage was lower than anticipated because of
several maintenance outages at various fossil-fueled generating facilities
and attempts to conserve coal due to rail transportation problems.
Utilities is currently on an eighteen-month cycle for nuclear refueling
outages and the above percentages assume outages will occur during both
1998 and 1999.
Utilities' primary fuel source is coal and the generation mix is
influenced directly by refueling outages at the DAEC. The average cost of
fuel used for generation by Utilities for the years 1997, 1996 and 1995 is
presented below:
1997 1996 1995
Average cost of fuel:
Nuclear, per million Btu's $ .64 $ .73 $ .76
Coal, per million Btu's .96 .95 .97
Average for all fuels, per
million Btu's .94 .94 .95
The decrease in nuclear fuel costs during 1996 and 1997 is primarily
due to a new contract for enrichment services and enriched uranium with
the United States Enrichment Corporation (USEC).
To ensure an adequate supply of coal, Utilities has entered into
several contracts for the purchase and transportation of coal with
expiration dates ranging up to four years. (See Note 11(b) of the Notes
to Consolidated Financial Statements for the minimum commitments under
these contracts during 1998-2002.) Utilities estimates that its existing
coal-fired generating units will require approximately 12 million tons of
coal to operate during the period 1998-2000. Utilities estimates that it
has the capability to purchase approximately half of its 1998-2000 coal
requirements under its current contracts and will meet the remainder of
its requirements from either future contracts or purchases in the spot
market. Many of the current contracts also have provisions allowing
Utilities to purchase additional tons of coal. Utilities believes that an
ample supply of coal is available in the spot market to meet its needs.
Some of Utilities' contracted coal supply is provided by surface
mining operations which are regulated by the Federal Strip Mine Act. Most
of the surface mining coal contracts contain clauses which pass
reclamation and royalty costs through to the respective utility; such
costs billed to Utilities are recoverable through its Energy Adjustment
Clauses (EAC). See Note 1(i) of the Notes to Consolidated Financial
Statements for discussion of the EAC.
A contract for enrichment services and enriched uranium product was
signed with the USEC in 1995, which has reduced Utilities' enrichment and
uranium costs. This contract will be effective through 2001 and may
extend beyond 2001 if certain conditions occur. Fabrication of the
nuclear fuel is being performed by General Electric Company for fuel
through the 2008 refueling of the DAEC. Utilities believes that an ample
supply of uranium and enrichment services will be available in the future
and intends to purchase such uranium and enrichment services as necessary
on the spot market and/or via medium length (less than five years)
contracts to supplement its current contracts and meet its generation
requirements. See Note 11(f) of the Notes to Consolidated Financial
Statements for a discussion of Utilities' assessment under the National
Energy Policy Act of 1992 for the "Uranium Enrichment Decontamination and
Decommissioning Fund," which is based upon prior nuclear fuel purchases.
Refer to the "Other Matters-Environmental" section of Item 7. "MD&A"
for a discussion of nuclear waste disposal issues.
Nuclear As an owner and the operator of a nuclear generating unit at the
DAEC, Utilities is subject to the jurisdiction of the NRC. The NRC has
broad supervisory and regulatory jurisdiction over the construction and
operation of nuclear reactors, particularly with regard to public health,
safety and environmental considerations. Utilities' current NRC license
for DAEC expires in 2014.
The operation and design of nuclear power plants is under constant
review by the NRC. Utilities has complied with and is currently complying
with all NRC requests for data relating to these reviews. As a result of
such reviews, further changes in operations or modifications of equipment
may be required, the cost of which cannot currently be estimated.
Utilities' anticipated nuclear-related construction expenditures for 1998-
2002 are approximately $46 million.
The DAEC received the highest score possible (1 on a 3-point scale)
in the areas of plant operations, engineering and plant support and a
"good" rating (2) in the area of maintenance during the NRC's last
Systematic Assessment of Licensee Performance (SALP) report in 1997.
Under the Price-Anderson Amendments Act of 1988 (1988 Act), Utilities
currently has the benefit of $8.9 billion of public liability coverage
which would compensate the public in the event of an accident at a
commercial nuclear power plant. The 1988 Act permits such coverage to
rise with increased availability of nuclear insurance and the changing
number of operating nuclear plants subject to retroactive premium
assessments. The 1988 Act provides for inflation indexing (Consumer Price
Index every fifth year) of the retroactive premium assessments.
As an outgrowth of the Three Mile Island Nuclear Power Plant (TMI)
experience, nuclear plant owners have initiated a cooperative insurance
program designed to help cover business interruption expenses for
participating utilities arising from a possible nuclear plant event.
Utilities is a participant in this program. This type of insurance is an
industry response intended to lessen the cost burden on customers in the
event of a lengthy plant shutdown.
To provide this coverage, a nuclear utility mutual insurance company
known as Nuclear Electric Insurance Limited (NEIL) was formed. Under
Utilities' additional expense policy, following a 23 week waiting period
from the time of an accident, coverage of up to 100% of estimated
replacement power costs for an ensuing one-year period is provided and up
to 80% of that amount would be provided for a second and third year. The
annual premium cost to Utilities is estimated to be less than the cost of
replacement power for one-week. The NEIL primary property policy also
provides coverage for additional expenses for the six-week period prior to
the additional expense policy coverage.
Utilities currently carries primary property insurance coverage on
the DAEC facility of $500 million with NEIL. Following the TMI incident,
it became apparent to nuclear plant owners that the commercially available
property insurance was inadequate considering the cost of decontamination.
Consequently, Utilities obtained excess property insurance through NEIL,
providing an additional $1.4 billion of coverage after losses exceed $500
million. These policies bring the total property coverage to
$1.9 billion.
For information concerning the potential assessment of retroactive
premiums relating to the above-described public liability insurance,
additional expense, primary and excess property insurance coverages, refer
to Note 11(e) of the Notes to Consolidated Financial Statements. The NRC
established requirements with respect to guaranteeing the ability of
owners to make such retroactive payments on the public liability policy.
Of the various alternatives available, Utilities elected to submit
certified financial statements showing that sufficient cash flow could be
generated and would be available for payment of the required assessments
within a three-month period. The maximum of the annual retroactive
premiums was approximately $7 million at December 31, 1997.
In the unlikely event of a catastrophic loss at the DAEC, the amount
of insurance available may not be adequate to cover property damage,
decontamination and premature decommissioning. Uninsured losses, to the
extent not recovered through rates, would be borne by Utilities and could
have a material adverse effect on Utilities' financial position and
results of operations.
Refer to the "Other Matters-Environmental" section of Item 7. "MD&A"
for a discussion of nuclear waste disposal issues and Note 11(i) of the
Notes to Consolidated Financial Statements for a discussion of the
decommissioning of the DAEC.
<TABLE>
IES Utilities Inc.
Electric Operating
Information
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues ('000s):
Residential $227,496 $213,838 $217,351 $200,686 $206,562
Commercial 162,626 153,163 150,722 146,119 145,898
Industrial 177,890 160,477 148,529 143,965 137,595
------- ------- ------- ------- -------
Total from ultimate
customers 568,012 527,478 516,602 490,770 490,055
Sales for resale 25,719 37,384 35,356 37,271 49,654
Other 10,539 9,411 8,513 9,286 10,812
------- ------- ------- ------- -------
Total $604,270 $574,273 $560,471 $537,327 $550,521
======= ======= ======= ======= =======
Electric Sales ('000s MWH):
Residential 2,682 2,642 2,690 2,494 2,528
Commercial 2,378 2,315 2,296 2,148 2,079
Industrial 4,743 4,436 4,248 4,015 3,674
------- ------- ------- ------- -------
Total from ultimate
customers 9,803 9,393 9,234 8,657 8,281
Sales for resale 794 1,746 1,586 1,705 2,629
Other 43 46 50 67 64
------- ------- ------- ------- -------
Total 10,640 11,185 10,870 10,429 10,974
======= ======= ======= ======= =======
Customers (End of Period):
Residential 288,387 286,315 284,154 281,653 279,187
Commercial 48,962 48,593 48,196 47,595 46,957
Industrial 711 703 695 706 677
Other 442 437 444 451 444
------- ------- ------- ------- -------
Total 338,502 336,048 333,489 330,405 327,265
======= ======= ======= ======= =======
Other Selected Electric
Data:
System capacity at time of
peak demand (MW):
Company-owned 1,892 1,864 1,873 1,741 1,734
Firm purchases and
sales (net) 232 232 207 280 248
-------- ------- ------- ------- -------
Total 2,124 2,096 2,080 2,021 1,982
======== ======= ======= ======= =======
Maximum peak hour demand
(MW) 1,854 1,833 1,824 1,780 1,716
Sources of electric
energy ('000s MWH):
Steam 5,499 4,936 5,759 5,509 5,349
Nuclear 2,904 2,753 2,611 2,876 2,265
Hydroelectric 8 7 8 8 7
Purchases 2,789 4,177 3,013 2,647 3,949
Other 156 37 16 14 8
------- ------- ------- ------- -------
Total 11,356 11,910 11,407 11,054 11,578
======= ======= ======= ======= =======
Cooling degree days 858 766 1,093 846 765
Revenue per KWH from
ultimate customers (in
cents) 5.79 5.62 5.59 5.67 5.92
</TABLE>
GAS OPERATIONS. With the advent of FERC Order 636 (Order 636),
issued in 1992, the nature of Utilities' gas supply portfolio has changed.
Order 636, among other things, eliminated the interstate pipelines'
obligation to serve and now requires Utilities to purchase virtually 100%
of its gas supply requirements from non-pipeline suppliers. Utilities has
enhanced access to competitively-priced gas supply and more flexible
transportation services as a result of Order 636.
Contracts with the pipelines subsequent to Order 636 are comprised
primarily of firm transportation, firm storage and no-notice service.
Firm transportation contracts grant Utilities access to firm pipeline
capacity which is used to transport gas supplies from non-pipeline
suppliers on peak day. Firm storage service allows Utilities to purchase
gas during off-peak periods and place this gas in an account with the
pipelines. When the gas is needed for peak day deliveries, Utilities
requests and the pipelines deliver the gas back on a firm basis. No-
notice service grants Utilities the right to take more or less gas than is
actually scheduled up to the level of no-notice service. No-notice
service takes the form of transportation balancing or storage service
depending on the pipeline.
Utilities' portfolio of firm transportation, firm storage and no-
notice service from pipelines is as follows:
Firm Firm
Transportation Storage No-Notice
Northern Natural Gas Co.
(Northern):
Volume (Dekatherm/day) 143,996 60,706 10,000
Expiration date 10/31/99 10/31/99 10/31/99
Natural Gas Pipeline Co. of
America (Natural):
Volume (Dekatherm/day) 28,605 34,014 996
Expiration date 11/30/2000 11/30/98 11/30/98
ANR Pipeline (ANR):
Volume (Dekatherm/day) 60,737 19,180 5,000
Expiration date 10/31/2003 10/31/2003 10/31/2003
Gas supply is purchased from a variety of non-pipeline suppliers
located in the United States and Canada having access to virtually all
major natural gas producing regions. For 1997, Utilities' maximum daily
load occurred on January 27, 1997 with total system flow of approximately
282,760 dekatherms, including transported volumes, and a total contract
availability of approximately 276,025 dekatherms. Total system flow
included 37,357 dekatherms of end-user owned carriage gas volumes.
Utilities has firm gas supply agreements with various non-pipeline
suppliers. These gas supply agreements have maximum and minimum
obligations and will be delivered through gas transmission pipelines as
follows:
Maximum Minimum
Daily Daily
Quantity Quantity
(Dth/day) (Dth/day)
Northern 96,486 73,545
Natural 38,575 25,575
ANR 25,000 20,000
These gas supply contracts have expiration dates ranging from a few
months to almost four years. Rates charged by Utilities' suppliers are
subject to regulation by the FERC. Utilities' tariffs provide for
subsequent adjustments to its natural gas rates for changes in the cost of
natural gas purchased for resale. See Note 1(i) of the Notes to
Consolidated Financial Statements for discussion of the Purchased Gas
Adjustment (PGA) clause.
Refer to Note 11(b) of the Notes to Consolidated Financial Statements
for a discussion of Utilities' minimum gas supply, transportation and
storage commitments for 1998-2002 and Note 11(f) of the Notes to
Consolidated Financial Statements for a discussion of Manufactured Gas
Plant (MGP) sites for which Utilities may be liable and a lawsuit filed by
Utilities seeking reimbursement from certain of its insurance carriers for
its MGP-related costs.
<TABLE>
<CAPTION>
IES Utilities Inc.
Gas Operating Information
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Operating Revenues ('000s):
Residential $110,663 $97,708 $84,562 $82,795 $90,462
Commercial 54,383 46,966 40,390 40,912 45,528
Industrial 13,961 12,256 8,790 12,515 15,593
Transportation and other 4,510 3,934 3,550 2,811 2,735
------- ------- ------- ------- -------
Total $183,517 $160,864 $137,292 $139,033 $154,318
======= ======= ======= ======= =======
Gas Sales ('000s Dekatherms):
Residential 16,317 17,680 16,302 15,766 16,971
Commercial 9,602 10,323 9,534 9,298 10,133
Industrial 3,318 3,796 3,098 4,010 4,618
Transportation and other 10,321 10,341 10,871 8,901 7,284
------- ------- ------- ------- -------
Total 39,558 42,140 39,805 37,975 39,006
======= ======= ======= ======= =======
Customers at End of Period
(Excluding Transportation and
Other):
Residential 155,859 154,457 152,873 151,367 152,472
Commercial 21,431 21,364 21,193 21,053 17,757
Industrial 399 417 404 409 490
------- ------- ------- ------- -------
Total 177,689 176,238 174,470 172,829 170,719
======= ======= ======= ======= =======
Other Selected Gas Data:
Heating degree days 6,685 7,204 6,686 6,380 6,816
Revenue per dekatherm sold
(excluding transportation
and other) $6.12 $4.94 $4.62 $4.69 $4.78
Purchased gas cost per
dekatherm sold
(excluding transportation
and other) $4.33 $3.27 $3.15 $3.28 $3.44
</TABLE>
Item 2. Properties
Utilities' principal electric generating stations at December 31,
1997, were as follows:
<TABLE>
<CAPTION>
Name and Location Major Fuel Minimum Net Kilowatts Accredited
of Station Type Generating Capability
<S> <C> <C>
Duane Arnold Energy Center, Palo, Iowa Nuclear 364,000 (1)
Ottumwa Generating Station, Ottumwa, Iowa Coal 343,440 (2)
Prairie Creek Station, Cedar Rapids, Iowa Coal 207,750
Sutherland Station, Marshalltown, Iowa Coal 143,000
Sixth Street Station, Cedar Rapids, Iowa Coal 65,000
Burlington Generating Station, Burlington, Iowa Coal 211,800
George Neal Unit 3, Sioux City, Iowa Coal 144,200 (3)
---------
Total Coal 1,115,190
Peaking Turbines, Marshalltown, Iowa Oil 159,600
Centerville Combustion Turbines, Centerville, Iowa Oil 49,400
Diesel Stations, all in Iowa Oil 8,300
---------
Total Oil 217,300
Grinnell Station, Grinnell, Iowa Gas 46,400
Agency Street Combustion Turbines,
West Burlington, Iowa Gas 58,400
Burlington Combustion Turbines, Burlington, Iowa Gas 57,000
Red Cedar Combustion Turbine, Cedar Rapids, Iowa Gas 18,800
---------
Total Gas 180,600
---------
Total generating capability 1,877,090
=========
(1) Represents Utilities' 70% ownership interest in this 520,000 Kw
generating station. The plant is operated by Utilities.
(2) Represents Utilities' 48% ownership interest in this 715,500 Kw
generating station. The plant is operated by Utilities.
(3) Represents Utilities' 28% ownership interest in this 515,000 Kw
generating station which is operated by an unaffiliated utility.
</TABLE>
At December 31, 1997, the transmission lines of Utilities, operating
from 34,000 to 345,000 volts, approximated 4,440 circuit miles
(substantially all located in Iowa). Utilities owned 111 transmission
substations (substantially all located in Iowa) with a total installed
capacity of 8,832 MVa and 468 distribution substations (all located in
Iowa) with a total installed capacity of 2,666 MVa.
Utilities' principal properties are suitable for their intended use
and are held subject to liens of indentures relating to its bonds.
Item 3. 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
Manufactured Gas Plant (MGP) sites, and indemnification for all sums that
it has or may become obligated to pay for the investigation, mitigation,
prevention, remediation and monitoring of environmental impacts to
property, including natural resources like groundwater, at and around the
MGP sites. Settlement discussions are proceeding between Utilities and its
insurance carriers regarding the recovery of these MGP-related costs.
Settlement has been reached with sixteen carriers thus far. Any amounts
received from insurance carriers are being deferred pending a
determination of the regulatory treatment of such recoveries.
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 alleged that Utilities was
discriminating against it by refusing to enter into contracts with it for
remote displacement service and by favoring Industrial Energy
Applications, Inc. (IEA), a subsidiary of Industries, in such matters. On
October 17, 1996, Utilities filed a Response which denied the allegations,
and alleged, inter alia, that Lambda was unlawfully attempting to provide
retail electrical services in Utilities' exclusive service territory. On
August 25, 1997, the IUB issued its Final Decision and Order rejecting
Lambda's complaint. On October 10, 1997, the IUB issued its rehearing
order which again rejected Lambda's complaint.
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 Industries 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.
Reference is made to Note 3 of the Notes to Consolidated Financial
Statements for a discussion of Utilities' rate proceedings and Note 11 of
the Notes to Consolidated Financial Statements for a discussion of
Utilities' environmental matters and other legal and administrative
proceedings arising in the ordinary course of business. Also see the
"Other Matters" section of Item 7. "MD&A".
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
All outstanding common stock of Utilities is held by Industries and
is not traded. During 1997, 1996 and 1995, Utilities paid dividends on
its common stock of $56 million, $44 million and $43 million,
respectively, to Industries. Utilities has the right under the terms of
the Subordinated Deferrable Interest Debentures, so long as an Event of
Default has not occurred and is not continuing, to extend the interest
payment period at any time and from time to time on the Subordinated
Deferrable Interest Debentures to a period not exceeding 20 consecutive
quarters. If Utilities exercises its right to extend the interest payment
period, Utilities may not, during any such extended interest payment
period, declare or pay dividends on, or redeem, purchase or acquire, or
make any liquidation payment with respect to, any of its capital stock or
make any guarantee payment with respect to the foregoing. Utilities does
not intend to exercise its right to extend the interest payment period.
Item 6. Selected Financial Data
The following selected financial data, in the opinion of Utilities,
includes adjustments, which are normal and recurring in nature, necessary
for the fair presentation of the results of operations and financial
position. See Item 7. "MD&A" for a discussion of transactions that
affect the comparability of the results for the years 1995 through 1997.
The 1996 results were affected by costs incurred relating to the
successful defense of the hostile takeover attempt of Industries by
MidAmerican Energy Company. The 1995 results were affected by the impact
of the IUB price reduction order in Utilities' last electric rate case and
significantly warmer than normal weather.
The Selected Financial Data should be read in conjunction with the
Consolidated Financial Statements, the Notes to Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition
and Results of Operations contained elsewhere in this report.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
Year Ended December 31
1997 1996 1995 1994 1993
($ in thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues $813,978 $754,979 $709,826 $685,366 $713,750
Operating income 153,770 155,675 143,696 135,591 143,329
Net income 58,793 63,729 59,278 61,210 67,970
Net income available for common stock 57,879 62,815 58,364 60,296 67,056
Cash dividends declared on common stock 56,000 44,000 43,000 52,000 31,300
Total assets 1,786,827 1,778,610 1,708,635 1,645,368 1,546,978
Long-term obligations 688,719 560,199 517,538 530,275 531,979
Times interest earned before income
taxes 2.91 3.44 3.26 3.39 3.64
Capitalization ratios:
Common equity 45% 50% 51% 50% 50%
Preferred and preference stock 1 2 2 2 2
Long-term debt 54 48 47 48 48
----- ----- ----- ----- -----
100% 100% 100% 100% 100%
===== ===== ===== ===== =====
</TABLE>
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
PROPOSED MERGER
IES Industries Inc. (Industries), the parent company of IES Utilities
Inc. (Utilities), WPL Holdings, Inc. (WPLH) and Interstate Power Company
(IPC) are in the process of completing a three-way merger (Merger) forming
Interstate Energy Corporation (Merged Company). In connection with the
Merger, Industries will be merged with and into WPLH forming the Merged
Company and IPC will become a subsidiary of the Merged Company. In
addition, following the Merger, the holding companies for the nonregulated
businesses of the former WPLH and Industries (Heartland Development
Corporation (HDC) and IES Diversified Inc. (Diversified), respectively)
will be merged into each other. The resulting company from this merger is
referred to as New Diversified. As a result of the Merger, the first tier
subsidiaries of the Merged Company will include: Wisconsin Power & Light
Company (WP&L), Utilities, IPC, New Diversified and Alliant Services
Company (the subsidiary formed to provide administrative services as
required under the Public Utility Holding Company Act of 1935). Among
various other regulatory constraints, the Merged Company will operate as a
registered public utility holding company subject to the limitations
imposed by the Public Utility Holding Company Act of 1935. For additional
information regarding the terms of the Merger, see Note 2 of the Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K to
the Securities and Exchange Commission (SEC).
The merger partners currently anticipate cost savings resulting from
the Merger of approximately $749 million over a ten-year period, net of
transaction costs and costs to achieve the savings of approximately $78
million. Approximately $22 million of these costs had been incurred
through December 31, 1997. Upon consummation of the Merger, the merger
partners estimate the Merged Company will expense approximately $40
million of additional merger-related costs (e.g., required payments to or
for financial advisors, employee retirements and separations, attorneys,
accountants, etc.). The estimate of potential cost savings constitutes a
forward-looking statement and actual results may differ materially from
this estimate. The estimate is necessarily based upon various assumptions
that involve judgments with respect to, among other things, future
national and regional economic and competitive conditions, technological
developments, inflation rates, regulatory treatments, weather conditions,
financial market conditions, future business decisions and other
uncertainties. No assurance can be given that the entire amount of
estimated cost savings will actually be realized. In addition, the
allocation between WPLH, Industries and IPC and their customers of the
estimated cost savings of approximately $749 million over ten years
resulting from the Merger, net of costs incurred to achieve such savings,
will be subject to regulatory review and approval.
As part of the approval process for the Merger, Utilities has agreed
to various rate freezes not to exceed four years commencing on the
effective date of the Merger (see Note 3 of the Notes to Consolidated
Financial Statements for a further discussion).
Assuming capture of the anticipated merger-related synergies and no
significant legislative or regulatory changes affecting Utilities,
Utilities does not expect the merger-related electric and natural gas
price freezes to have a material adverse effect on its financial position
or results of operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K (including
MD&A) that are not of historical fact are forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. From time to time,
Utilities (including its consolidated subsidiaries) may make other
forward-looking statements within the meaning of the federal securities
laws that involve judgments, assumptions and other uncertainties beyond
the control of Utilities. 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 Utilities' 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
Utilities 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 Utilities'
service territory, federal and state regulatory or government actions, the
operations of Utilities' nuclear facility, the ability of the Merged
Company to successfully integrate the operations of WPLH, Industries and
IPC and changes in the rate of inflation.
UTILITY INDUSTRY OUTLOOK
Utilities competes in an ever-changing utility industry. Set forth
below is an overview of this evolving marketplace.
Electric energy generation, transmission, and distribution are in a
period of fundamental change in the manner in which customers obtain, and
energy suppliers provide, energy services. As legislative, regulatory,
economic and technological changes occur, electric utilities are faced
with increasing pressure to become more competitive. Such competitive
pressures could result in loss of customers and an incurrence of stranded
costs (i.e., assets and other costs rendered unrecoverable as the result
of competitive pricing). To the extent stranded costs cannot be recovered
from customers, they would be borne by security holders.
Utilities realized all of its electric and gas utility revenues in
1997 in Iowa. Approximately 96% of the electric revenues were regulated
by the Iowa Utilities Board (IUB) while the other 4% were regulated by the
Federal Energy Regulatory Commission (FERC).
Federal Regulation
Utilities is subject to regulation by the FERC. The National Energy
Policy Act of 1992 addresses several matters designed to promote
competition in the electric wholesale power generation market. In 1996,
the FERC issued final rules (FERC Orders 888 and 889) requiring electric
utilities to open their transmission lines to other wholesale buyers and
sellers of electricity. In March 1997, FERC issued its orders on
rehearing for Orders 888 and 889 (Orders 888-A and 889-A). In response
to FERC Orders 888 and 888-A, Utilities has on file with the FERC pro
forma open access transmission tariffs. In response to FERC Orders 889
and 889-A, Utilities is participating in a regional Open Access Same-Time
Information System. Utilities cannot predict the long-term consequences
of these rules on its results of operations or financial condition.
FERC Order 888 permits utilities to seek recovery of legitimate,
prudent and verifiable stranded costs associated with providing open
access and transmission services. FERC does not have jurisdiction over
retail distribution and, consequently, the final FERC rules do not provide
for the recovery of stranded costs resulting from retail competition. The
various states retain jurisdiction over the question of whether to permit
retail competition, the terms of such retail competition, and the recovery
of any portion of stranded costs that are ultimately determined to have
resulted from retail competition.
State Regulation
Utilities is subject to regulation by the IUB. The IUB initiated a
Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of
"Emerging Competition in the Electric Utility Industry" to address all
forms of competition in the electric utility industry and to gather
information and perspectives on electric competition from all persons or
entities with an interest or stake in the issues. The IUB staff's report
in this docket was accepted by the IUB, finding, in part, that there is no
compelling reason to move quickly into restructuring the electric utility
industry in Iowa, based upon the existing level of relative prices.
However, the IUB is continuing the analysis and debate on restructuring
and retail competition in Iowa.
On August 18, 1997, the IUB issued an order that promulgated draft
principles for an Independent System Operator (ISO) and invited public
comment. On September 10, 1997, the IUB issued an order adopting an
"Action Plan to Develop a Competitive Model for the Electric Industry in
Iowa." The IUB states in this action plan that while "the IUB has not
determined retail competition in the electric industry is in the best
interests of Iowa's consumers...", the State of Iowa is likely to be
affected by federal or neighboring states' actions so there is a need for
the IUB to design a model that suits Iowa's needs. The priority concerns
in the plan are public interest issues (an Iowa-specific pilot project,
customer information and assessment, environmental impacts, public
benefits and transition costs/benefits) and transmission-related issues
(transmission and distribution system reliability and transmission system
operations). There is no timetable in the action plan. On October 2,
1997, the IUB staff sent to the advisory group (of which Utilities is a
member) for written comment a set of proposed guidelines for an Iowa-
specific electric pilot project that would allow retail access to a
"subset of all customer classes." Utilities has indicated to the IUB its
interest in pursuing such a pilot program. The IUB has also issued an
order covering unbundling of natural gas rates for all Iowa customers to
be effective in 1999.
On September 26, 1996, the Public Service Commission of Wisconsin
(PSCW) issued an order which establishes the minimum standards for a
Wisconsin ISO. The standards will be applied by the PSCW in Advance Plan
proceedings, merger review cases, transmission construction cases and
other proceedings as appropriate. The order provides that the standards
will be reviewed and revised as necessary in light of ongoing regional and
national events, such as FERC requirements or policy, regional
institutions, or relevant actions of neighboring states. In approving
the merger involving WPLH, Industries and IPC, the PSCW gave the
merger partners a choice of either filing their own ISO proposal,
giving notice of their intent to join a regional ISO or spinning off
existing transmission assets and operations into a separate independent
transmission company. Utilities, IPC and WP&L developed an ISO proposal
of their own. However, the PSCW did not believe it met the PSCW's ISO
guidelines. Utilities, IPC and WP&L subsequently asked the PSCW to permit
them to join the Midwest ISO, a regional ISO that has been filed with
FERC. The member companies of the ISO would retain ownership of the
facilities, but the ISO would assume control of the facilities, set rates
for access and assure fair treatment for all companies seeking access.
Various other proposals for ISOs, which are being monitored by the merger
partners, have been proposed by other entities.
Summary
Utilities complies with the provisions of Statement of Financial
Accounting Standards No. 71 (SFAS 71) "Accounting for the Effects of
Certain Types of Regulation." SFAS 71 provides that rate-regulated public
utilities record certain costs and credits allowed in the ratemaking
process in different periods than for nonregulated entities. These are
deferred as regulatory assets or regulatory liabilities and are recognized
in the consolidated statements of income at the time they are reflected in
rates. If a portion of the Utilities' operations becomes no longer subject
to the provisions of SFAS 71 as a result of competitive restructurings or
otherwise, a write-down of related regulatory assets and possibly other
charges would be required, unless some form of transition cost recovery is
established by the appropriate regulatory body that would meet the
requirements under generally accepted accounting principles for continued
accounting as regulatory assets during such recovery period. In addition,
Utilities would be required to determine any impairment of other assets
and write-down any impaired assets to their fair value. Utilities
believes it meets the requirements of SFAS 71.
Utilities cannot currently predict the long-term consequences of the
competitive and restructuring issues described above on its results of
operations or financial condition. The major objective is to allow
Utilities to better prepare for a competitive, deregulated utility
industry. The strategy for dealing with these emerging issues includes
seeking growth opportunities, continuing to offer quality customer
service, ongoing cost reductions and productivity enhancements.
RESULTS OF OPERATIONS
Overview
Utilities' net income available for common stock decreased $4.9
million and increased $4.5 million in 1997 and 1996, respectively. The
decrease in income for 1997 was primarily due to increased operating
expenses and higher interest expense. These items were partially offset
by increased electric sales (excluding off-system sales) resulting from
continuing growth in Utilities' service territory and the impact of $6.8
million (represents Utilities' allocated portion of the total costs) of
costs incurred in 1996 relating to the successful defense of the hostile
takeover attempt of Industries by MidAmerican Energy Company (MAEC). The
1996 increase in income was due to increased electric, gas and steam sales
and the impact of a natural gas pricing increase implemented in the fourth
quarter of 1995. The 1996 increase was partially offset by increased
operating expenses and the costs incurred defending against the hostile
takeover attempt by MAEC.
Electric Operations
Electric margins and Mwh sales for Utilities were as follows:
<TABLE>
<CAPTION>
Revenues and Costs Mwhs Sold
(In thousands) (In thousands)
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Residential $ 227,496 $ 213,838 $ 217,351 2,682 2,642 2,690
Commercial 162,626 153,163 150,722 2,378 2,315 2,296
Industrial 177,890 160,477 148,529 4,743 4,436 4,248
------- ------- ------- ------- ------- -------
Total from ultimate
customers 568,012 527,478 516,602 9,803 9,393 9,234
Sales for resale 25,719 37,384 35,356 794 1,746 1,586
Other 10,539 9,411 8,513 43 46 50
------- ------- ------- ------- ------- -------
Total 604,270 574,273 560,471 10,640 11,185 10,870
======= ======= =======
Fuel for production
(excluding steam) 92,891 74,608 90,558
Purchased power 74,098 88,350 66,874
------- ------- -------
Margin $ 437,281 $ 411,315 $ 403,039
======= ======= =======
</TABLE>
The electric margins increased $26.0 million and $8.3 million during
1997 and 1996, respectively, primarily due to higher Kwh sales (excluding
sales for resale) and lower purchased power capacity costs. The sales
increases during both periods were primarily due to continuing sales
growth in Utilities' service territory. Cooler weather conditions during
the summer of 1996 also impacted margins and the residential sales
comparisons. Revenues and margins also increased $10.6 million during
1997 and $2.0 million during 1996 due to the increased recovery of
concurrent and previously deferred energy efficiency expenditures for
state-mandated energy efficiency programs pursuant to an IUB order (the
majority of these recoveries are amortized to expense in other operating
expenses). The decrease in sales for resale during 1997 was primarily due
to the implementation of FERC Orders 888 and 888-A.
Under historically normal weather conditions, total sales (excluding
sales for resale) during 1997 and 1996, respectively, would have increased
3.6% and 3.4%, as compared to actual increases of 4.3% and 1.7%,
respectively.
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 announcements 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. See Note 1(i) of the Notes to
Consolidated Financial Statements for discussion of the EAC.
Gas Operations
Gas margins and Dth sales for Utilities were as follows:
<TABLE>
<CAPTION>
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1995 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Residential $ 110,663 $ 97,708 $ 84,562 16,317 17,680 16,302
Commercial 54,383 46,966 40,390 9,602 10,323 9,534
Industrial 13,961 12,256 8,790 3,318 3,796 3,098
Transportation
and other 4,510 3,934 3,550 10,321 10,341 10,871
------- ------- ------- ------- ------- -------
Total 183,517 160,864 137,292 39,558 42,140 39,805
======= ======= =======
Gas purchased for
resale 126,631 103,877 91,198
------- ------- -------
Margin $ 56,886 $ 56,987 $ 46,094
======= ======= =======
</TABLE>
Total gas margin increased or (decreased) ($0.1) million and $10.9
during 1997 and 1996, respectively. The 1997 sales decrease was
substantially offset by higher revenues from the recovery of concurrent
and previously deferred energy efficiency expenditures for state mandated
energy efficiency programs pursuant to an IUB order (the majority of these
recoveries are amortized to expense in other operating expenses). The
sales decrease was largely due to milder weather conditions as well as
lower grain drying related sales in 1997. The 1996 increase was primarily
due to an increase in gas prices implemented in the fourth quarter of
1995, increased sales due to favorable weather conditions and higher
revenues from the recovery of energy efficiency programs.
Under historically normal weather conditions, Utilities' gas sales
and transported volumes would have increased or (decreased) (2.4%) and
1.9% in 1997 and 1996, as compared to the actual increases or (decreases)
of (6.1%) and 5.9%, respectively.
Utilities' gas tariffs include purchased gas adjustment clauses (PGA)
that are designed to currently recover the cost of gas sold. See Note
1(i) of the Notes to Consolidated Financial Statements for discussion of
the PGA.
Other Revenues Other revenues increased $6.3 million and $7.8 million
during 1997 and 1996, respectively, primarily due to higher steam sales
due to the addition of new industrial customers and increased demand from
existing customers.
Operating Expenses Other operating expenses increased $13.4 million and
$4.2 million in 1997 and 1996, respectively. The 1997 increase was
primarily due to increased amortization of previously deferred energy
efficiency expenditures and costs related to an early retirement program.
These increases were partially offset by lower employee labor and benefit
costs. The 1996 increase was primarily due to increased amortization of
previously deferred energy efficiency expenditures, increased labor and
benefits costs and costs relating to the Merger. The 1996 increase was
partially offset by decreased operating costs at the Duane Arnold Energy
Center (DAEC), Utilities' nuclear generating facility.
Maintenance expenses increased $8.0 million and $2.3 million in 1997
and 1996, respectively. The 1997 increase was primarily due to increased
maintenance expenses at the DAEC, higher transmission and distribution
maintenance expenditures, and increased maintenance activities at
Utilities' fossil-fueled generating stations. The 1996 increase was
primarily due to increased maintenance activities at the fossil-fueled
generating stations, partially offset by lower DAEC maintenance expenses.
Depreciation and amortization increased $4.8 million and $5.6 million
during 1997 and 1996, respectively, primarily due to increases in utility
plant in service.
Interest Expense and Other Interest expense increased or (decreased)
$9.1 million and ($0.7) million during 1997 and 1996, respectively. The
1997 increase was primarily due to increases in the average amount of debt
outstanding and changes in interest accruals related to income tax
audits.
Miscellaneous, net reflects comparative increases or (decreases) in
income of $5.0 million and ($5.0) million during 1997 and 1996,
respectively. The change in both periods was primarily due to
approximately $6.8 million in costs incurred relating to the successful
defense of the hostile takeover attempt by MAEC incurred during 1996.
Federal and State Income Taxes The effective income tax rates were
41.8%, 40.3% and 40.9% in 1997, 1996 and 1995, respectively. Refer to
Note 6 of the Notes to Consolidated Financial Statements for a discussion
of the changes.
LIQUIDITY AND CAPITAL RESOURCES
Utilities' capital requirements are primarily attributable to its
construction and acquisition programs and its debt maturities. Utilities
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
utility costs. Utilities' liquidity and capital resources will be
affected by environmental and regulatory issues. Emerging competition in
the utility industry could also impact Utilities' liquidity and capital
resources, as discussed previously in the "Utility Industry Outlook"
section.
Utilities has financial guarantees amounting to approximately $18
million outstanding at December 31, 1997, which are not reflected in its
Consolidated Financial Statements. Such guarantees were generally issued
to support third-party borrowing arrangements and similar transactions.
Management believes the possibility of Utilities having to make any
material cash payments under these agreements is remote.
Cash flows generated from operating activities increased to $192
million in 1997 compared with $166 million in 1996 and $165 million in
1995 primarily due to expenditures during 1996 and 1995 related to
refueling outages at the DAEC and other changes in working capital. Cash
flows from financing activities were significantly lower in 1997 as
compared with 1996 and 1995 due to a net reduction in the amount of long-
term and short-term debt issuances. Cash flows used for investing
activities were significantly lower in 1997 as compared with 1996 and 1995
due to a reduction in the amount of construction and acquisition
expenditures. Times interest earned before income taxes for Utilities for
1997, 1996 and 1995 was 2.91, 3.44 and 3.26, respectively.
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets,
and costs of external financing, are dependent on Utilities'
creditworthiness. The debt ratings of Utilities are as follows:
Moody's Standard &
(As of Poor's
3/26/98) (As of
3/2/98)
- Secured long-term debt A2 A+
- Corporate credit rating (a) N/A A+
- Unsecured long-term debt A3 A
(a) The "Corporate credit rating" is the overall rating of the parent
and is used by Standard & Poor's but not by Moody's.
Subsequent to the consummation of the Merger, Utilities expects to
participate in a utility money pool which will be funded, as needed, by
the Merged Company through the issuance of commercial paper. This utility
money pool is expected to replace the commercial paper program currently
in place at Utilities.
Utilities had the following material long-term debt financing
activities in 1997 -
- In August 1997, Utilities issued $135 million of 6.625% Senior
Debentures, due 2009. The proceeds from these debentures were used to
reduce Utilities' short-term borrowings.
- Utilities repaid at maturity $8 million of 6.125% 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.
Other than Utilities' periodic sinking fund requirements, which
Utilities intends to meet by pledging additional property, $185.1 million
of long-term debt will mature prior to December 31, 2002. Depending upon
market conditions, it is currently anticipated that a majority of the
maturing debt will be refinanced with the issuance of long-term
securities.
Utilities currently has no authority from FERC or the SEC to issue
additional long-term debt. Utilities is evaluating its future financing
needs and will make the necessary regulatory filings as needed. Under the
most restrictive terms of its indentures, Utilities could have issued at
least $234 million of long-term debt at December 31, 1997.
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 December 31, 1997,
Utilities could have issued an additional 700,000 shares of Cumulative
Preference Stock and no additional shares of Cumulative Preferred Stock.
Utilities' capitalization ratios at year-end were as follows:
1997 1996
Common equity 45% 50%
Preferred stock 1 2
Long-term debt 54 48
---- ----
100% 100%
==== ====
For interim financing, Utilities is authorized by the FERC to issue
up to $200 million of short-term debt. Utilities had no short-term debt
outstanding at December 31, 1997. 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. The level
of short-term borrowing fluctuates based on seasonal corporate needs, the
timing of long-term financing, and capital market conditions. To maintain
flexibility in its capital structure and to take advantage of favorable
short-term rates, Utilities also uses proceeds from the sales of accounts
receivable and unbilled revenues to finance a portion of its long-term
cash needs. Utilities anticipates that short-term debt will continue to
be available at reasonable costs due to current ratings by independent
utility analysts and rating services.
Utilities had $41 million in bank lines of credit at December 31,
1997 available to support its borrowings ($11 million of which was
utilized). Commitment fees are paid to maintain these lines and there are
no conditions which restrict the unused lines of credit. From time to
time, Utilities may borrow from banks and other financial institutions in
lieu of commercial paper, and has agreements with several financial
institutions for such borrowings. There are no commitment fees associated
with these agreements and there were no borrowings outstanding under these
agreements at December 31, 1997.
Given the above financing flexibility available to Utilities,
management believes it has the necessary financing capabilities in place
to adequately finance its capital requirements for the foreseeable future.
Capital Requirements
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 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.
Utilities' construction and acquisition program anticipates
expenditures of approximately $124 million for 1998, of which 46%
represents expenditures for electric transmission and distribution
facilities, 17% represents electric generation expenditures, 12%
represents information technology expenditures and 7% represents gas
utility expenditures. The remaining 18% represents miscellaneous
electric, steam and general expenditures. Utilities' levels of utility
construction and acquisition expenditures are projected to be $129 million
in 1999, $103 million in 2000, $98 million in 2001 and $99 million in
2002. Utilities anticipates funding the large majority of its utility
construction and acquisition expenditures during 1998-2002 through
internally generated funds, supplemented by external financings as needed.
DAEC, a 520-megawatt boiling water reactor plant, is operated by
Utilities and Utilities has a 70% ownership interest in the plant. The
DAEC operating license expires in 2014. Pursuant to the most recent
electric rate case order, the IUB allows Utilities to recover $6.0 million
annually for the cost to decommission the DAEC. The current recovery
figures are based on an assumed cost to decommission the DAEC of $252.8
million, which is Utilities' 70% portion in 1993 dollars, based on the
Nuclear Regulatory Commission (NRC) minimum formula (which exceeds the
amount in the current site-specific study completed in 1994). At December
31, 1997, Utilities had $77.9 million invested in external decommissioning
trust funds and also had an internal decommissioning reserve of $21.7
million recorded as accumulated depreciation.
Refer to the "Other Matters-Environmental" section for a discussion
of various issues that may impact Utilities' future capital requirements.
Rates and Regulatory Matters
Refer to Note 3 of the Notes to Consolidated Financial Statements for
a discussion of Utilities' Rates and Regulatory Matters.
OTHER MATTERS
Year 2000
Utilities utilizes software, embedded systems and related
technologies throughout its business that will be affected by the date
change in the Year 2000. An internal task force has been assembled to
review and develop the full scope, work plan and cost estimates to ensure
that Utilities' systems continue to meet its internal and customer needs.
Phase I of the project, which encompassed a review of the necessary
software modifications that will need to be made to Utilities' financial
and customer systems, has been completed. Utilities currently estimates
that the remaining costs to be incurred on this phase of the project will
be approximately $2 million to $3 million in the aggregate.
The task force has also begun Phase II of the project which is an
extensive review of Utilities' embedded systems for Year 2000 conversion
issues. The task force has inventoried critical embedded operating
systems and is working with the system vendors to ascertain Year 2000
compliance of the systems. The task force is also developing detailed
plans for testing and remediating critical systems (i.e., systems whose
failure could affect employee safety or business operations).
As part of an awareness effort, Utilities has also notified its
utility customers of its Year 2000 project efforts. Key suppliers are
also being contacted to confirm their Year 2000 readiness plans. Efforts
are also underway to develop contingency plans for critical embedded
operating systems. Utilities is currently unable to estimate the costs to
be incurred on this phase of the project but does believe that the costs
will be significant. An estimate of the expenses to be incurred on this
phase of the project is expected to be available by the third quarter of
1998.
The goal of Utilities is to have all the material Year 2000
conversions made sufficiently in advance of December 31, 1999 to allow for
unanticipated issues. At this time, management is unable to determine
if the Year 2000 issue will have a material adverse effect on Utilities'
financial position or results of operations.
Labor Issues
Utilities has six collective bargaining agreements, covering
approximately 53% of its workforce. Two of the agreements, covering less
than 5% of Utilities' workforce, will expire in 1998.
Financial Instruments
Utilities had no derivative financial instruments outstanding at
December 31, 1997.
Accounting Pronouncements
Statement of Financial Accounting Standards 130 (SFAS 130), Reporting
Comprehensive Income, was issued by the Financial Accounting Standards
Board (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
reporting a total for comprehensive income which includes: (a) unrealized
holding gains / losses on securities classified as available-for-sale
under SFAS 115, (b) foreign currency translation adjustments accounted for
under SFAS 52, and (c) minimum pension liability adjustments made pursuant
to SFAS 87. SFAS 130 is effective for periods beginning after December
15, 1997.
Statement of Financial Accounting Standards 131 (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 in a manner consistent with how
management disaggregates and evaluates the company, 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.
Accounting for Obligations Associated with the Retirement of Long-Lived
Assets
The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry, including Utilities, regarding
the recognition, measurement and classification of decommissioning costs
for nuclear generating stations in financial statements of electric
utilities. In response to these questions, the FASB is reviewing the
accounting for closure and removal costs, including decommissioning of
nuclear power plants. If current electric utility industry accounting
practices for nuclear power plant decommissioning are changed, the annual
provision for decommissioning could increase relative to 1997, and the
estimated cost for decommissioning could be recorded as a liability
(rather than as accumulated depreciation), with recognition of an increase
in the cost of the related nuclear power plant. Assuming no significant
regulatory shift, Utilities does not believe that such changes, if
required, would have an adverse effect on its financial position or
results of operations due to its ability to recover decommissioning costs
through rates.
Inflation
Utilities does not expect the effects of inflation at current levels
to have a significant effect on its financial position or results of
operations.
Environmental
The pollution abatement program of Utilities is subject to continuing
review and is revised from time to time due to changes in environmental
regulations, changes in construction plans and escalation of construction
costs. While Utilities cannot precisely forecast the effect of future
environmental regulations on its operations, it has taken steps to
anticipate the future while also meeting the requirements of current
environmental regulations.
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 six-state Midwest Interstate Low-Level Radioactive Waste
Compact (Compact) which is responsible for development of any new disposal
capability within the Compact member states. In June 1997, the Compact
commissioners voted to discontinue work on a proposed waste disposal
facility in the State of Ohio because the expected cost of such a facility
was comparably higher than other options currently available. Dwindling
waste volumes and continued access to existing disposal facilities were
also reasons cited for the decision. A disposal facility located near
Barnwell, South Carolina continues to accept the low-level waste and
Utilities currently ships the waste it produces to such site, thereby
minimizing the amount of low-level waste stored on-site. In addition,
given technological advances, waste compaction and the reduction in the
amount of waste generated, DAEC has on-site storage capability sufficient
to store low-level waste expected to be generated over at least the next
ten years, with continuing access to the Barnwell disposal facility
extending that on-site storage capability indefinitely.
A global treaty has been negotiated that could require reductions of
greenhouse gas emissions from utility plants. Negotiators left
significant implementation and compliance questions open to resolution at
meetings to be held starting in November 1998. At this time, Utilities is
unable to predict whether Congress will ratify the treaty. Given the
uncertainty of the treaty ratification and the ultimate terms of the final
regulations, Utilities cannot currently estimate the impact the
implementation of the treaty would have on its operations.
See Notes 11(f), 11(g) and 11(h) of the Notes to Consolidated
Financial Statements for a further discussion of Utilities' environmental
issues.
Selected Consolidated Quarterly Financial Data (unaudited)
The following unaudited consolidated quarterly data, in the opinion
of Utilities, includes adjustments, which are normal and recurring in
nature, necessary for the fair presentation of the results of operations
and financial position. The quarterly amounts were affected by, among
other items, Utilities' rate activities, seasonal weather conditions,
changes in sales and operating expenses and costs incurred relating to the
successful defense of the hostile takeover attempt of Industries by
MidAmerican Energy Company in third quarter of 1996. Refer to the
"Results of Operations" section for a discussion of these items. The
fourth quarter of 1996 net income benefited from lower than anticipated
costs for a refueling outage at Utilities' nuclear power plant.
Quarter Ended
March 31 June 30 September 30 December 31
(in thousands)
1997
Operating revenues $ 226,398 $ 169,623 $ 205,711 $ 212,246
Operating income 32,654 26,574 63,987 30,555
Net income 11,851 6,891 28,636 11,415
Net income available
for common stock 11,622 6,662 28,407 11,188
1996
Operating revenues $ 198,768 $ 164,240 $ 190,170 $ 201,801
Operating income 34,440 23,503 53,811 43,921
Net income 14,128 7,230 20,013 22,358
Net income available
for common stock 13,899 7,001 19,784 22,131
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplementary Data
The financial statements required by Item 8. begin on page 30. The
supplementary data required by Item 8. are set forth under the caption
"Selected Consolidated Quarterly Financial Data (unaudited)" in Item 7.
"MD&A".
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
IES Utilities Inc.:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of IES Utilities Inc. (an Iowa corporation)
and subsidiary companies as of December 31, 1997 and 1996, and the related
consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements and the financial statement schedule referred to
below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of IES Utilities Inc. and
subsidiary companies as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule
listed in Item 14(a)2 is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial
statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 30, 1998
<PAGE>
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1997 1996 1995
(in thousands)
Operating revenues:
Electric $604,270 $574,273 $560,471
Gas 183,517 160,864 137,292
Other 26,191 19,842 12,063
------- ------- -------
813,978 754,979 709,826
------- ------- -------
Operating expenses:
Fuel for production 108,344 84,579 96,256
Purchased power 74,098 88,350 66,874
Gas purchased for resale 126,631 103,877 91,198
Other operating expenses 161,418 148,051 143,819
Maintenance 53,833 45,869 43,586
Depreciation and
amortization 89,754 84,975 79,384
Taxes other than
income taxes 46,130 43,603 45,013
------- ------- -------
660,208 599,304 566,130
------- ------- -------
Operating income 153,770 155,675 143,696
------- ------- -------
Interest expense and
other:
Interest expense 52,791 43,714 44,460
Allowance for funds used
during construction (2,309) (2,103) (3,424)
Miscellaneous, net 2,279 7,243 2,287
------- ------- -------
52,761 48,854 43,323
------- ------- -------
Income before income
taxes 101,009 106,821 100,373
------- ------- -------
Federal and state income
taxes 42,216 43,092 41,095
------- ------- -------
Net income 58,793 63,729 59,278
Preferred dividend
requirements 914 914 914
------- ------- -------
Net income available for
common stock $57,879 $62,815 $58,364
======= ======= =======
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31
1997 1996 1995
(in thousands)
Balance at beginning
of year $231,337 $212,522 $197,158
Net income 58,793 63,729 59,278
Cash dividends declared -
Common stock (56,000) (44,000) (43,000)
Preferred stock, at
stated rates (914) (914) (914)
------- ------- -------
Balance at end of year $233,216 $231,337 $212,522
======= ======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS
December 31
ASSETS (in thousands) 1997 1996
Property, plant and equipment:
Utility -
Plant in service -
Electric $2,072,866 $2,007,839
Gas 187,098 175,472
Other 145,716 126,850
--------- ---------
2,405,680 2,310,161
Less - Accumulated depreciation 1,115,261 1,030,390
--------- ----------
1,290,419 1,279,771
Leased nuclear fuel, net of
amortization 36,731 34,725
Construction work in progress 38,923 43,719
--------- ----------
1,366,073 1,358,215
Other, net of accumulated
depreciation and
amortization of $1,709 and
$1,438, respectively 5,762 5,872
--------- ---------
1,371,835 1,364,087
--------- ----------
Current assets:
Cash and temporary cash
investments 230 11,608
Accounts receivable -
Customer, less allowance for
doubtful accounts
of $630 and $546,
respectively 29,259 22,461
Other 10,142 11,270
Income tax refunds receivable 1,639 2,664
Production fuel, at average cost 10,579 13,323
Materials and supplies, at
average cost 22,976 21,716
Adjustment clause balances 5,398 10,752
Regulatory assets 36,330 26,539
Prepayments and other 21,835 18,705
--------- ---------
138,388 139,038
---------- ----------
Investments:
Nuclear decommissioning trust
funds 77,882 59,325
Cash surrender value of life
insurance policies 5,088 4,281
Other 79 313
--------- ----------
83,049 63,919
--------- ----------
Other assets:
Regulatory assets 181,162 201,129
Deferred charges and other 12,393 10,437
---------- ---------
193,555 211,566
---------- ---------
$1,786,827 $1,778,610
========== =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
December 31
CAPITALIZATION AND LIABILITIES (in
thousands) 1997 1996
Capitalization (See Consolidated
Statements of Capitalization):
Common stock $33,427 $33,427
Paid-in surplus 279,042 279,042
Retained earnings 233,216 231,337
-------- --------
Total common equity 545,685 543,806
Cumulative preferred stock 18,320 18,320
Long-term debt (excluding current
portion) 651,848 517,334
--------- ---------
1,215,853 1,079,460
--------- ---------
Current liabilities:
Short-term borrowings - 135,000
Capital lease obligations 13,183 15,125
Maturities and sinking funds 140 8,140
Accounts payable 65,171 76,287
Accrued interest 12,230 8,839
Accrued taxes 58,996 40,953
Accumulated refueling outage
provision 10,606 1,316
Environmental liabilities 4,054 5,517
Other 17,259 17,114
-------- --------
181,639 308,291
-------- --------
Long-term liabilities:
Pension and other benefit
obligations 35,232 25,826
Capital lease obligations 23,548 19,600
Environmental liabilities 38,256 40,299
Other 21,632 14,030
-------- --------
118,668 99,755
-------- --------
Deferred credits:
Accumulated deferred income taxes 238,829 256,634
Accumulated deferred investment
tax credits 31,838 34,470
-------- --------
270,667 291,104
--------- --------
Commitments and contingencies
(Note 11)
$1,786,827 $1,778,610
========== ==========
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31
1997 1996
(in thousands)
Common equity:
Common stock - par value $2.50 per
share - authorized
24,000,000 shares; outstanding
13,370,788 shares $33,427 $33,427
Paid-in surplus 279,042 279,042
Retained earnings 233,216 231,337
-------- --------
545,685 543,806
-------- --------
Cumulative preferred stock 18,320 18,320
-------- --------
Long-term debt:
Collateral Trust Bonds -
7.65% series, due 2000 50,000 50,000
7.25% series, due 2006 60,000 60,000
6-7/8% series, due 2007 55,000 -
6% series, due 2008 50,000 50,000
7% series, due 2023 50,000 50,000
5.5% series, due 2023 19,400 19,400
-------- --------
284,400 229,400
First Mortgage Bonds -
Series L, 7-7/8%, retired in 1997 - 15,000
Series M, 7-5/8%, retired in 1997 - 30,000
Series Y, 8-5/8%, due 2001 60,000 60,000
Series Z, 7.60%, due 1999 50,000 50,000
6-1/8% series, retired in 1997 - 8,000
9-1/8% series, due 2001 21,000 21,000
7-3/8% series, retired in 1997 - 10,000
7-1/4% series, due 2007 30,000 30,000
-------- --------
161,000 224,000
Pollution control obligations -
5.75%, due serially 1998 to 2003 3,276 3,416
5.95%, due serially 2000 to 2007,
secured by First Mortgage Bonds 10,000 10,000
Variable rate (3.85%-3.90% at
December 31, 1997), due 2000 to
2010 11,100 11,100
-------- --------
24,376 24,516
Subordinated Deferrable Interest
Debentures, 7-7/8%, due 2025 50,000 50,000
Senior Debentures, 6-5/8%, due 2009 135,000 -
Unamortized debt premium and
(discount), net (2,788) (2,442)
-------- --------
651,988 525,474
Less - Amount due within one year 140 8,140
--------- ---------
651,848 517,334
--------- ---------
$1,215,853 $1,079,460
========== =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1997 1996 1995
(in thousands)
Cash flows from operating
activities:
Net income $58,793 $63,729 $59,278
Adjustments to reconcile net
income to net cash flows
from operating activities -
Depreciation and amortization 89,754 84,975 79,384
Amortization of principal under
capital lease obligations 14,774 16,491 15,714
Deferred taxes and investment
tax credits (16,059) 7,763 7,628
Refueling outage provision 9,290 (6,374) (7,506)
Amortization of other assets 15,202 9,776 7,391
Other (263) 279 184
Other changes in assets and
liabilities -
Accounts receivable (5,670) (13,200) (9,717)
Sale of utility accounts
receivable - 7,000 4,000
Production fuel, materials and
supplies 2,328 651 1,658
Accounts payable (11,664) 12,885 (4,395)
Accrued taxes 19,068 (11,234) 5,785
Adjustment clause balances 5,354 (13,900) 4,581
Gas in storage (3,740) (551) 2,429
Other 15,241 7,216 (979)
------- ------- -------
Net cash flows from operating
activities 192,408 165,506 165,435
------- ------- -------
Cash flows from financing
activities:
Dividends declared on common stock (56,000) (44,000) (43,000)
Dividends declared on preferred
stock (914) (914) (914)
Proceeds from issuance of
long-term debt 190,000 60,000 100,000
Reductions in long-term debt (63,140) (15,140) (100,140)
Net change in short-term
borrowings (135,000) 25,112 54,393
Principal payments under capital
lease obligations (12,964) (19,108) (14,463)
Other (871) (420) (1,831)
------- ------- -------
Net cash flows from financing
activities (78,889) 5,530 (5,955)
------- ------- -------
Cash flows from investing
activities:
Construction and acquisition
expenditures -
Utility (108,797) (142,381) (126,104)
Other (169) (1,267) (3,340)
Deferred energy efficiency
expenditures (8,450) (16,857) (18,029)
Nuclear decommissioning trust
funds (6,008) (6,008) (6,100)
Other (1,473) 4,351 (5,308)
------- ------- -------
Net cash flows from investing
activities (124,897) (162,162) (158,881)
------- ------- -------
Net increase (decrease) in cash and
temporary cash investments (11,378) 8,874 599
Cash and temporary cash investments
at beginning of year 11,608 2,734 2,135
------- ------- -------
Cash and temporary cash investments
at end of year $230 $11,608 $2,734
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for -
Interest $45,483 $42,072 $44,569
======= ======= =======
Income taxes $41,422 $45,383 $29,083
======= ======= =======
Noncash investing and financing
activities -
Capital lease obligations
incurred $16,781 $14,281 $2,918
======= ======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) General -
IES Utilities Inc. (Utilities) is a subsidiary of IES Industries Inc.
(Industries). The Consolidated Financial Statements include the accounts
of Utilities (including its consolidated subsidiaries). Utilities is
engaged principally in the generation, transmission, distribution and sale
of electric energy, the purchase, distribution, transportation and sale of
natural gas and to provide steam for industrial and heating purposes.
Utilities' principal markets are located in the state of Iowa.
All subsidiaries for which Utilities owns directly or indirectly more
than 50% of the voting stock are included as consolidated subsidiaries.
Utilities' only wholly-owned subsidiary at December 31, 1997 was IES
Ventures Inc. (Ventures). Ventures' wholly-owned subsidiary at December
31, 1997 was IES Midland Development Inc. All significant intercompany
balances and transactions have been eliminated from the Consolidated
Financial Statements.
Unconsolidated investments for which Utilities has at least a 20%
voting interest are generally accounted for under the equity method of
accounting. These investments are stated at acquisition cost, increased
or decreased for Utilities' equity in net income or loss, which is
included in "Miscellaneous, net" in the Consolidated Statements of Income
and decreased for any dividends received. Investments that do not meet
the criteria for consolidation or the equity method of accounting are
accounted for under the cost method.
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.
Certain prior period amounts have been reclassified on a basis
consistent with the 1997 presentation.
(b) Regulation -
Utilities is subject to regulation by the Iowa Utilities Board (IUB)
and the Federal Energy Regulatory Commission (FERC). Utilities'
consolidated subsidiaries are not subject to regulation by the IUB or the
FERC.
Refer to Note 2 for a discussion of the proposed merger involving
Industries.
(c) Regulatory Assets -
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). The regulatory assets represent probable future
revenue to Utilities associated with certain incurred costs as these costs
are recovered through the rate making process. At December 31, regulatory
assets as reflected in the Consolidated Balance Sheets were comprised of
the following items:
1997 1996
(in millions)
Deferred income taxes (Note 1(d)) $ 80.3 $ 84.7
Energy efficiency program costs (Note
3(b)) 59.4 61.1
Environmental liabilities (Note 11(f)) 42.9 46.3
Employee pension and benefit costs
(Note 7) 27.4 22.9
Other 7.5 12.7
---- ----
217.5 227.7
Classified as "Current assets -
regulatory assets" 36.3 26.6
---- ----
Classified as "Other assets -
regulatory assets" $ 181.2 $ 201.1
==== ====
Refer to the individual notes referenced above for a further
discussion of certain items reflected in regulatory assets.
If a portion of Utilities' operations becomes no longer subject to
the provisions of SFAS 71, as a result of competitive restructuring 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 that would meet the requirements under
generally accepted accounting principles for continued accounting as
regulatory assets during such recovery period. In addition, Utilities
would be required to determine any impairment to other assets and write-
down such assets to their fair value.
(d) Income Taxes -
Utilities follows the liability method of accounting for deferred
income taxes, which requires the establishment of deferred tax assets and
liabilities, as appropriate, for all temporary differences between the tax
basis of assets and liabilities and the amounts reported in the financial
statements. Deferred taxes are recorded using currently enacted tax
rates.
Except as noted below, income tax expense includes provisions for
deferred taxes to reflect the tax effects of temporary differences between
the time when certain costs are recorded in the accounts and when they are
deducted for tax return purposes. As temporary differences reverse, the
related accumulated deferred income taxes are reversed to income.
Investment tax credits for Utilities have been deferred and are
subsequently credited to income over the average lives of the related
property.
Consistent with rate making practices for Utilities, deferred tax
expense is not recorded for certain temporary differences (primarily
related to utility property, plant and equipment). As the deferred taxes
become payable, over periods exceeding 30 years for some generating plant
differences, they are recovered through rates. Accordingly, Utilities has
recorded deferred tax liabilities and regulatory assets, as identified in
Note 1(c).
(e) Temporary Cash Investments -
Temporary cash investments are stated at cost, which approximates
market value, and are considered cash equivalents for the Consolidated
Statements of Cash Flows. These investments consist of short-term liquid
investments that have maturities of less than 90 days from the date of
acquisition.
(f) Depreciation of Utility Property, Plant and Equipment -
Utilities uses the remaining life method of depreciation. The
remaining life of the Duane Arnold Energy Center (DAEC), Utilities'
nuclear generating facility, is based on the Nuclear Regulatory Commission
(NRC) license life of 2014. The average rates of depreciation for electric
and gas properties of Utilities, consistent with current rate making
practices, were as follows:
1997 1996 1995
Electric 3.5% 3.5% 3.4%
Gas 3.5% 3.5% 3.5%
(g) Property, Plant and Equipment -
Utility plant (other than acquisition adjustments of $28.1 million,
net of accumulated amortization, recorded at cost) is recorded at original
cost, which includes overhead and administrative costs and an allowance
for funds used during construction (AFC). The AFC, which represents the
cost during the construction period of funds used for construction
purposes, is capitalized by Utilities as a component of the cost of
utility plant. The amount of AFC applicable to debt funds and to other
(equity) funds, a non-cash item, is computed in accordance with the
prescribed FERC formula. The aggregate gross rates used by Utilities for
1997, 1996 and 1995 were 6.7%, 5.5% and 6.5%, respectively. These
capitalized costs are recovered by Utilities in rates as the cost of the
utility plant is depreciated.
Other property, plant and equipment is recorded at original cost.
Upon retirement or sale of other property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any
gain or loss is included in "Miscellaneous, net" in the Consolidated
Statements of Income. Normal repairs, maintenance and minor items of
utility plant and other property, plant and equipment are expensed.
Ordinary retirements of utility plant, including removal costs less
salvage value, are charged to accumulated depreciation upon removal from
utility plant accounts, and no gain or loss is recognized.
(h) Operating Revenues -
Utilities accrues revenues for services rendered but unbilled at
month-end in order to more properly match revenues with expenses.
(i) Adjustment Clauses -
Utilities' tariffs provide for subsequent adjustments to its electric
and natural gas rates for changes in the cost of fuel and purchased energy
and in the cost of natural gas purchased for resale. Changes in the
under/over collection of these costs are reflected in "Fuel for
production" and "Gas purchased for resale" in the Consolidated Statements
of Income. The cumulative effects are reflected in the Consolidated
Balance Sheets as a current asset or current liability, pending automatic
reflection in future billings to customers.
(j) Accumulated Refueling Outage Provision -
The IUB allows Utilities to collect, as part of its base revenues,
funds to offset other operating and maintenance expenditures incurred
during refueling outages at the DAEC. As these revenues are collected, an
equivalent amount is charged to other operating and maintenance expenses
with a corresponding credit to a reserve. During a refueling outage, the
reserve is reversed to offset the refueling outage expenditures.
(2) PROPOSED MERGER OF INDUSTRIES:
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), providing for: a) IPC becoming a
subsidiary of WPLH, and b) the merger of Industries with and into WPLH,
which merger will result in the combination of Industries and WPLH as a
single holding company (collectively, the Proposed Merger) and Industries
will cease to exist. The new holding company will be named Interstate
Energy Corporation (Merged Company). The Proposed Merger, which will be
accounted for as a pooling of interests and is intended to be tax-free for
federal income tax purposes, has been approved by the respective Boards of
Directors, shareowners, state regulatory agencies and most of the federal
regulatory agencies. It is still subject to approval by the Securities and
Exchange Commission (SEC). The companies expect to receive SEC approval in
the second quarter of 1998.
The summary below contains selected unaudited pro forma financial
data for the year ended December 31, 1997. The pro forma combined
earnings per share reflect the issuance of shares associated with the
exchange ratios discussed below.
<TABLE>
<CAPTION>
PRO FORMA
WPLH PRO FORMA COMBINED
(as reported) Industries IPC Adjustments (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues $919.3 $930.7 $331.8 $118.8 $2,300.6
Income from continuing
operations $61.3 $66.3 $26.7 --- $154.3
Earnings per share from
continuing operations
(basic and diluted) $1.99 $2.18 $2.74 --- $2.02
Assets at December 31, 1997 $1,861.8 $2,457.2 $638.7 ($6.0) $4,951.7
Long-term obligations, net at
December 31, 1997 $526.0 $882.4 $195.9 --- $1,604.3
</TABLE>
Under the terms of the Merger Agreement, the outstanding shares of
WPLH's common stock will remain unchanged and outstanding as shares of the
Merged Company's common stock, each outstanding share of Industries'
common stock will be converted to 1.14 shares of the Merged Company's
common stock, and each share of IPC common stock will be converted to 1.11
shares of the Merged Company's common stock. It is anticipated that the
Merged Company will retain WPLH's common share dividend payment level as
of the effective time of the merger. On January 16, 1998, the Board of
Directors of WPLH declared a quarterly dividend of $0.50 per share. This
represents an annual rate of $2.00 per share.
WPLH is a holding company headquartered in Madison, Wisconsin, and is
the parent company of Wisconsin Power and Light Company (WP&L) and
Heartland Development Corporation (HDC). WP&L supplies electric and gas
service to approximately 393,000 and 155,000 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 166,000 and 50,000 customers, respectively, in
northeast Iowa, northwest Illinois and southern Minnesota.
The Merged Company will be the parent company of Utilities, WP&L and
IPC and will be registered under the Public Utility Holding Company Act of
1935, as amended (1935 Act). The Merger Agreement provides that these
operating utility companies will continue to operate as separate entities
for a minimum of three years after the effective date of the Proposed
Merger. In addition, the non-utility operations of Industries and WPLH
will be combined shortly after the effective date of the Proposed Merger
under one entity to manage the diversified operations of the Merged
Company. The corporate headquarters of the Merged Company will be in
Madison, Wisconsin.
(3) RATE MATTERS:
(a) Electric Price Announcements -
In September 1997, Utilities agreed with the IUB to provide Iowa
customers a four-year retail electric and gas price freeze commencing on
the effective date of the Proposed Merger. The agreement excluded price
changes due to government-mandated programs, such as energy efficiency
cost recovery, or unforeseen dramatic changes in operations. In addition,
the price freeze does not preclude a review by either the IUB or Office of
Consumer Advocate (OCA) into whether Utilities is exceeding a reasonable
return on common equity. In November 1997, as part of its approval of the
Proposed Merger, FERC accepted a proposal by Utilities, WP&L, and IPC,
which provides for a four-year freeze on wholesale electric prices
beginning with the effective date of the Proposed Merger. Assuming
capture of the anticipated merger-related synergies and no significant
legislative or regulatory changes affecting Utilities, Utilities does not
expect the merger-related electric and gas price freezes to have a
material adverse effect on its financial position or results of
operations.
(b) Energy Efficiency Cost Recovery -
Under provisions of the IUB rules, Utilities is currently recovering
the costs it has incurred for its energy efficiency programs. There have
been several cost recovery filings made and approved by the IUB over the
course of the last few years. Generally, the costs incurred through July
1997 are being recovered over various four-year periods. The IUB commenced
a rulemaking in January 1997 to implement statutory changes allowing
concurrent recovery and a final order in this proceeding was issued in
April 1997. The new rules allowed Utilities to begin concurrent recovery
of its prospective expenditures on August 1, 1997. The implementation of
these changes will gradually eliminate the regulatory asset that was
created under the prior rate making mechanism as these costs are
recovered.
Utilities has the following amounts of energy efficiency costs
included in regulatory assets on its Consolidated Balance Sheets (in
thousands):
Four-Year
Recovery December 31, December 31,
Beginning 1997 1996
Costs incurred through 1993 6/95 $7,779 $12,834
Costs incurred in 1994-1995 8/97 30,924 33,161
Costs incurred from 1/1/96
- 7/31/97 8/97 19,847 15,087
Under collection of
concurrent recovery N/A 850 -
------- -------
$59,400 $61,082
======= =======
(4) LEASES:
Utilities has a capital lease covering its 70% undivided interest in
nuclear fuel purchased for the DAEC. Future purchases of fuel may also be
added to the fuel lease. This lease provides for annual one-year
extensions and Utilities intends to continue exercising such extensions.
Interest costs under the lease are based on commercial paper costs
incurred by the lessor. Utilities is responsible for the payment of
taxes, maintenance, operating cost, risk of loss and insurance relating to
the leased fuel.
The lessor has a $45 million credit agreement with a bank supporting
the nuclear fuel lease. The agreement continues on a year-to-year basis,
unless either party provides at least a three-year notice of termination;
no such notice of termination has been provided by either party.
Annual nuclear fuel lease expenses include the cost of fuel, based on
the quantity of heat produced for the generation of electric energy, plus
the lessor's interest costs related to fuel in the reactor and
administrative expenses. These expenses (included in "Fuel for
production" in the Consolidated Statements of Income) for 1997, 1996 and
1995 were $16.6 million, $18.2 million and $18.0 million, respectively.
Utilities' operating lease rental expenses for 1997, 1996 and 1995
were $7.9 million, $7.1 million and $9.0 million, respectively.
Utilities' future minimum lease payments by year are as follows:
Capital Operating
Year Lease Leases
(in thousands)
1998 $ 13,472 $ 5,765
1999 13,431 4,036
2000 8,646 2,289
2001 3,232 1,718
2002 1,582 33
Thereafter 52 445
------- -------
40,415 $ 14,286
=======
Less: Amount representing
interest 3,684
Present value of net minimum -------
capital lease payments $ 36,731
=======
(5) UTILITY ACCOUNTS RECEIVABLE:
Customer accounts receivable, including unbilled revenues, arise
primarily from the sale of electricity and natural gas. At December 31,
1997, Utilities was serving a diversified base of residential, commercial
and industrial customers consisting of approximately 339,000 electric and
178,000 gas customers and did not have any significant concentrations of
credit risk.
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. Expenses related to the sale of receivables are paid to the
financial organization under this contract and approximated a 5.96% annual
rate during 1997. During 1997 and 1996, the monthly proceeds from the
sale of accounts receivable averaged $65.0 million and $62.9 million,
respectively. At December 31, 1997, $65.0 million of accounts receivable
had been 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.
(6) INCOME TAXES:
The components of federal and state income taxes for the years ended
December 31, were as follows:
1997 1996 1995
(in millions)
Current tax expense $ 58.3 $ 35.3 $ 33.5
Deferred tax expense (13.5) 10.4 10.3
Amortization and adjustment
of investment tax
credits (2.6) (2.6) (2.7)
---- ---- ----
$ 42.2 $ 43.1 $ 41.1
==== ==== ====
Utilities' overall effective income tax rates shown below for the
years ended December 31, were computed by dividing total income tax
expense by income before income taxes.
1997 1996 1995
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal
benefit 7.0 6.9 5.9
Effect of rate making on property
related differences 3.5 2.9 2.8
Amortization of investment tax
credits (2.6) (2.5) (2.7)
Adjustment of prior period taxes (1.4) (3.3) (0.1)
Other items, net 0.3 1.3 -
---- ---- ----
Overall effective income tax rate 41.8% 40.3% 40.9%
==== ==== ====
Utilities' accumulated deferred income taxes as set forth below in
the Consolidated Balance Sheets at December 31, arise from the following
temporary differences:
1997 1996
(in millions)
Property related $ 270 $ 275
Investment tax credit related (23) (24)
Decommissioning related (16) (15)
Other 8 21
----- -----
$ 239 $ 257
===== =====
(7) BENEFIT PLANS:
(a) Pension Plans -
Utilities has two non-contributory pension plans that, collectively,
cover substantially all of its employees. Plan benefits are generally
based on years of service and compensation during the employees' latter
years of employment. The projected unit credit actuarial cost method was
used to compute pension cost and the accumulated and projected benefit
obligations. Payments made from the pension funds to retired employees
and beneficiaries during 1997 totaled $12.7 million for Utilities.
Utilities' policy is to fund the pension cost at an amount that is at
least equal to the minimum funding requirements mandated by the Employee
Retirement Income Security Act (ERISA) and that does not exceed the
maximum tax deductible amount for the year. Utilities has an investment
policy governing asset allocation guidelines for its pension plans. The
target ranges are as follows: 1) 37%-43% in large and mid-sized domestic
company equity securities, 2) 7%-13% in foreign equity securities, 3) 7%-
13% in small domestic company equity securities, 4) 0-5% in real estate,
and 5) the remainder in fixed income securities. As of December 31, 1997,
the plans' investment mix was consistent with the policy guidelines.
Pursuant to the provisions of SFAS 71, certain adjustments to
Utilities' pension provision are necessary to reflect the accounting for
pension costs allowed in its most recent rate cases.
The components of the pension provision for the years ended December
31, were as follows:
1997 1996 1995
(in thousands)
Service cost $ 5,432 $ 5,439 $ 4,721
Interest cost on projected
benefit obligation 14,075 12,435 11,577
Assumed return on plans'
assets (15,057) (14,653) (12,340)
Early retirement benefits 3,814 4,498 -
Net amortization 1,486 885 260
------- ------- -------
Pension cost 9,750 8,604 4,218
Adjustment to funding
level (9,750) (8,604) (4,218)
------- ------- -------
Total pension costs paid
to the Trustee $ - $ - $ -
======= ======= =======
Actual return on plans'
assets $ 33,191 $ 25,727 $ 35,947
======= ======= =======
During 1997 and 1996, Utilities incurred charges of $3.8 million
and $4.5 million, respectively, related to early retirement programs. The
1996 costs were deferred for future recovery through the regulatory
process.
A reconciliation of the funded status of the plans to the amounts
recognized in Utilities' Consolidated Balance Sheets at December 31, is
presented below:
1997 1996
(in thousands)
Fair market value of plans' assets $ 225,691 $ 205,699
--------- ---------
Actuarial present value of benefits
rendered to date -
Accumulated benefits based on
compensation to date,
including vested benefits of
$151,148,000 and
$125,983,000, respectively 163,354 137,772
Additional benefits based on
estimated future salary levels 42,730 41,589
------- -------
Projected benefit obligation 206,084 179,361
------- -------
Plans' assets in excess of projected
benefit obligation 19,607 26,338
Remaining unrecognized net asset
existing at January 1, 1987, being
amortized over 20 years (2,642) (3,124)
Unrecognized prior service cost 20,130 15,195
Unrecognized net gain (59,552) (50,818)
------- -------
Accrued pension cost recognized in the
Consolidated Balance Sheets $ (22,457) $ (12,409)
======= =======
Assumed rate of return, all plans 9.00% 9.00%
======= =======
Weighted average discount rate of
projected benefit
obligation, all plans 7.25% 7.50%
======= =======
Assumed rate of increase in future
compensation
levels for the plans 4.75% 4.75%
======= =======
Utilities' employees also participate in defined contribution pension
plans (401(k) plans) covering substantially all employees. Utilities'
contributions to the plans, which are based on the participants' level of
contribution, were $1.2 million, $1.5 million and $1.4 million in 1997,
1996 and 1995, respectively.
(b) Other Postemployment Benefit Plans -
Utilities provides certain benefits to retirees (primarily health
care benefits). The IUB adopted rules stating that postretirement
benefits other than pensions will be included in Utilities' rates pursuant
to the provisions of SFAS 106. The rules permit Utilities to amortize the
transition obligation as of January 1, 1993, over 20 years and require
that all amounts collected are to be funded into an external trust to pay
benefits as they become due. The gas and electric portions of these costs
are being recovered through rates beginning in 1993 and 1995,
respectively, including amounts that were deferred by Utilities, pursuant
to IUB rules, between when SFAS 106 was adopted and when recovery through
rates began. The amounts deferred were being amortized as they were
collected through rates over a three-year period and were fully amortized
at December 31, 1997.
Pursuant to the provisions of SFAS 71, certain adjustments to
Utilities' other postretirement benefit provisions are necessary to
reflect the accounting for other postretirement benefit costs allowed in
its most recent rate cases.
The components of postretirement benefit costs for the years ended
December 31, were as follows:
1997 1996 1995
(in thousands)
Service cost $ 1,459 $ 1,714 $ 1,227
Interest cost on accumulated
postretirement
benefit obligation 3,496 3,577 3,049
Assumed return on plans' assets (689) (388) (56)
Net amortization of transition
obligation and other 1,929 1,987 1,822
Amortized postretirement benefit
costs 1,506 1,863 2,220
Costs billed to affiliate - - (265)
Regulatory recognition of
incurred cost 744 49 1,162
------- ------- -------
Net postretirement benefit costs $ 8,445 $ 8,802 $ 9,159
======= ======= =======
Actual return on plans' assets $ 2,601 $ 945 $ 273
======= ======= =======
A reconciliation of the funded status of the plans to the amounts
recognized in Utilities' Consolidated Balance Sheets at December 31, is
presented below:
1997 1996
(in thousands)
Fair market value of plans' assets $ 19,934 $ 12,312
-------- ---------
Accumulated postretirement benefit
obligation -
Active employees not yet
eligible 21,227 17,990
Active employees eligible 5,051 4,675
Retirees 24,487 25,300
Total accumulated postretirement ------- -------
benefit obligation 50,765 47,965
------- -------
Accumulated postretirement benefit
obligation in excess of plans'
assets (30,831) (35,653)
Unrecognized transition obligation 29,082 31,020
Unrecognized net gain (4,294) (2,571)
------- -------
Accrued postretirement benefit cost
in the Consolidated Balance
Sheets $ (6,043) $ (7,204)
======= =======
Assumed rate of return 9.00% 9.00%
======= =======
Weighted average discount rate of
accumulated postretirement
benefit obligation 7.25% 7.50%
======= =======
Medical trend on paid charges:
Initial trend rate 8.00% 9.00%
======= =======
Ultimate trend rate 6.50% 6.50%
======= =======
The assumed medical trend rates are critical assumptions in
determining the service and interest cost and accumulated postretirement
benefit obligation related to postretirement benefit costs. A 1% change in
the medical trend rates, holding all other assumptions constant, would
have changed the 1997 service and interest cost for Utilities by $1.0
million (21%) and the accumulated postretirement benefit obligation for
Utilities at December 31, 1997, by $8.6 million (17%).
(8) PREFERRED AND PREFERENCE STOCK:
Utilities has 466,406 shares of Cumulative Preferred Stock, $50 par
value, authorized for issuance at December 31, 1997, of which the 6.10%,
4.80% and 4.30% Series had 100,000, 146,406 and 120,000 shares,
respectively, outstanding at both December 31, 1997 and 1996. These
shares are redeemable at the option of Utilities upon 30 days notice at
$51.00, $50.25 and $51.00 per share, respectively, plus accrued dividends.
In addition, there are 700,000 shares of Utilities Cumulative Preference
Stock ($100 par value) authorized for issuance, of which none were
outstanding at December 31, 1997.
(9) DEBT:
(a) Long-Term Debt -
In August 1997, Utilities issued $135 million of 6.625% Senior
Debentures, due 2009. The proceeds from these debentures were used to
reduce Utilities' short-term borrowings.
Utilities repaid at maturity $8 million of 6.125% 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.
Utilities' Indentures and Deeds of Trust securing its First Mortgage
Bonds constitute direct first mortgage liens upon substantially all
tangible public utility property. Utilities' Indenture and Deed of Trust
securing its Collateral Trust Bonds constitutes a second lien on
substantially all tangible public utility property while First Mortgage
Bonds remain outstanding.
Debt maturities (excluding sinking fund requirements, which Utilities
intends to meet by pledging additional property under the terms of its
Indentures and Deeds of Trust) for 1998-2002 are $0.1 million, $50.1
million, $51.7 million, $82.1 million and $1.1 million, respectively.
Depending on market conditions, it is currently anticipated that a
majority of the maturing debt will be refinanced with the issuance of long-
term securities.
(b) Short-Term Debt -
At December 31, 1997, Utilities had bank lines of credit aggregating
$41.1 million. Utilities was using $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. From time to time, Utilities may borrow from banks and other
financial institutions in lieu of commercial paper, and has agreements
with several financial institutions for such borrowings. There are no
commitment fees associated with these agreements and there were no
borrowings outstanding under these agreements at December 31, 1997.
Information regarding short-term debt is as follows (dollars in
thousands):
1997 1996 1995
As of end of year -
Commercial paper outstanding $ - $ 110,000 $ 101,000
Notes payable outstanding - 25,000 -
Weighted average interest
rate on commercial paper N/A 5.70% 5.81%
Weighted average interest
rate on notes payable N/A 6.28% N/A
For the year ended -
Maximum month-end amount
of short-term debt $158,000 $ 145,000 $ 132,000
Average daily amount
outstanding 88,419 120,112 79,159
Weighted average interest
rate 5.58% 5.52% 5.97%
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Current Assets and Current Liabilities - The carrying amount
approximates fair value because of the short maturities of these financial
instruments.
Nuclear Decommissioning Trust Funds - The carrying amount represents
the fair value of these trust funds, as reported by the trustee. The
balance of the "Nuclear decommissioning trust funds" as shown in the
Consolidated Balance Sheets included $19.3 million and $9.4 million of
unrealized gains at December 31, 1997 and December 31, 1996, respectively,
on the investments held in the trust funds. The accumulated reserve for
decommissioning costs was adjusted by a corresponding amount.
Cumulative Preferred Stock of Utilities - Based upon the market yield
of similar securities and quoted market prices.
Long-Term Debt - Based upon the market yield of similar securities
and quoted market prices.
The following table presents the carrying amount and estimated fair
value of certain financial instruments as of December 31 (in millions):
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
Nuclear decommissioning
trust funds $ 78 $ 78 $ 59 $ 59
Cumulative preferred
stock 18 13 18 12
Long-term debt, including
current portion 655 678 528 538
Since Utilities is subject to regulation, any gains or losses related
to the difference between the carrying amount and the fair value of its
financial instruments may not be realized by Utilities' shareowner.
(11) COMMITMENTS AND CONTINGENCIES:
(a) Construction and Acquisition Program -
Utilities' construction and acquisition program anticipates
expenditures of approximately $124 million for 1998. Substantial
commitments have been made in connection with these expenditures.
(b) Purchased Power, Coal and Natural Gas Contracts -
Utilities has entered into purchased power capacity and coal
contracts and its minimum commitments are as follows (dollars in millions
and tons in thousands):
Purchased Power Coal
Dollars Mw's Dollars Tons
1998 $ 4.3 82 - 184 $ 62.6 4,176
1999 3.3 1 - 101 15.5 874
2000 0.3 1 13.6 762
2001 0.3 1 13.6 751
2002 0.3 1 - -
Utilities has several purchased power contracts for the annual six-
month summer season and thus the minimum and maximum of the noted range
represent the power purchased during the winter and summer seasons,
respectively. Utilities expects to supplement its coal contracts with
spot market purchases to fulfill its future fossil fuel needs.
Utilities also has various natural gas supply, transportation and
storage contracts outstanding. The gas supply commitments are all index
based and the minimum dekatherm commitments, in thousands, for 1998-2002
are 20,250, 8,341, 5,742, 3,574 and 3,574, respectively. The minimum
transportation and storage commitments for 1998-2002, in thousands, are
$29,604, $27,111, $14,650, $10,550 and $10,550, respectively. Utilities
expects to supplement its natural gas supply with spot market purchases as
needed.
(c) Information Technology Services -
Utilities entered into an agreement, expiring in 2004, with
Electronic Data Systems Corporation (EDS) for information technology
services. Utilities' anticipated operating and capital expenditures under
the agreement for 1998 are estimated to total approximately $15.2 million.
Future costs under the agreement are variable and are dependent upon
Utilities' level of usage of technological services from EDS.
(d) Financial Guarantees -
Utilities has financial guarantees amounting to $18.4 million
outstanding at December 31, 1997, which are not reflected in the
consolidated financial statements. Such guarantees were generally issued
to support third-party borrowing arrangements and similar transactions.
Utilities believes that the likelihood of material cash payments by
Utilities under these agreements is remote.
(e) Nuclear Insurance Programs -
Public liability for nuclear accidents is governed by the Price
Anderson Act of 1988 which sets a statutory limit of $8.9 billion for
liability to the public for a single nuclear power plant incident and
requires nuclear power plant operators to provide financial protection for
this amount. As required, Utilities provides this financial protection
for a nuclear incident at the DAEC through a combination of liability
insurance ($200 million) and industry-wide retrospective payment plans
($8.7 billion). Under the industry-wide plan, each operating licensed
nuclear reactor in the United States is subject to an assessment in the
event of a nuclear incident at any nuclear plant in the United States.
Based on its ownership of the DAEC, Utilities could be assessed a maximum
of $79.3 million per nuclear incident, with a maximum of $10 million per
incident per year (of which Utilities' 70% ownership portion would be
approximately $55 million and $7 million, respectively) if losses relating
to the incident exceeded $200 million. These limits are subject to
adjustments for changes in the number of participants and inflation in
future years.
Utilities is a member of Nuclear Electric Insurance Limited (NEIL).
NEIL provides $1.9 billion of insurance coverage on certain property
losses at DAEC for property damage, decontamination and premature
decommissioning. The proceeds from such insurance, however, must first be
used for reactor stabilization and site decontamination before they can be
used for plant repair and premature decommissioning. NEIL also provides
separate coverage for additional expense incurred during certain outages.
Owners of nuclear generating stations insured through NEIL are subject to
retroactive premium adjustments if losses exceed accumulated reserve
funds. NEIL's accumulated reserve funds are currently sufficient to more
than cover its exposure in the event of a single incident under the
primary and excess property damage or additional expense coverages.
However, Utilities could be assessed annually a maximum of $2.9 million
for NEIL primary property, $4.3 million for NEIL excess property and $0.9
million for NEIL additional expenses if losses exceed the accumulated
reserve funds. Utilities is not aware of any losses that it believes are
likely to result in an assessment.
In the unlikely event of a catastrophic loss at DAEC, the amount of
insurance available may not be adequate to cover property damage,
decontamination and premature decommissioning. Uninsured losses, to the
extent not recovered through rates, would be borne by Utilities and could
have a material adverse effect on Utilities' financial position and
results of operations.
(f) Environmental Liabilities -
Utilities has recorded environmental liabilities of approximately $42
million in its Consolidated Balance Sheets at December 31, 1997.
Utilities' significant environmental liabilities are discussed below.
Manufactured Gas Plant (MGP) Sites
Utilities has current or previous ownership interest in properties
previously associated with the production of gas at 34 MGP sites for which
they may be liable for investigation, remediation and monitoring costs
relating to the sites. Utilities is working pursuant to the requirements
of various federal and state agencies to investigate, mitigate, prevent
and remediate, where necessary, the environmental impacts to property,
including natural resources, at and around the sites in order to protect
public health and the environment. Utilities believes that it has
completed the remediaton at various sites, although it is still in the
process of obtaining final approval from the applicable environmental
agencies for these sites.
Utilities has recorded an environmental liability of $33.2 million at
December 31, 1997, related to the MGP sites; such amounts are based on the
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. Utilities currently estimates the range of additional
costs to be incurred for the investigation, remediation and monitoring of
the sites to be approximately $23 million to $51 million. 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.
While the IUB does not allow for the deferral of MGP-related costs,
it has permitted Utilities to recover its prudently incurred costs. As a
result, a regulatory asset of $33.2 million has been recorded by Utilities
at December 31, 1997 which reflects the probable future rate recovery.
Considering the current rate treatment, and assuming no material change
therein, Utilities believes that the clean-up costs incurred for these MGP
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 its MGP-related costs.
Settlement discussions are proceeding with its insurance carriers
regarding the recovery of these costs. Settlement has been reached with
sixteen carriers. Utilities is continuing its pursuit of additional
recoveries. Amounts received from insurance carriers are being deferred
by Utilities pending a determination of the regulatory treatment of such
recoveries. Utilities is unable to predict the amount of any additional
insurance recoveries it may realize.
National Energy Policy Act of 1992
The National Energy Policy Act of 1992 require 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. 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 at December 31, 1997, was $8.9 million and has been
recorded as a liability with a related regulatory asset for the
unrecovered amount.
(g) Air Quality Issues -
The Clean Air Act Amendments of 1990 (Act) require emission
reductions of sulfur dioxide (SO2), nitrogen oxides (NOx) and other air
pollutants to achieve reductions of atmospheric chemicals believed to
cause acid rain. Utilities has met the provisions of Phase I of the Act
and is in the process of meeting the requirements of Phase II of the Act
(effective in the year 2000). The Act also governs SO2 allowances, which
are defined as an authorization for an owner to emit one ton of SO2 into
the atmosphere. Utilities is reviewing its options to ensure it will have
sufficient allowances to offset its emissions in the future. Utilities
believes that the potential costs of complying with these provisions of
Title IV of the Act will not have a material adverse impact 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 ozone transport, mercury and particulate
control as well as modifications to the polychlorinated biphenyl (PCB)
rules. In July 1997, the EPA issued final rules that would tighten the
National Ambient Air Quality Standards (NAAQS) for ozone and particulate
matter emissions. Utilities is currently reviewing the rules to determine
what impact they may have on its 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 suggested that the Cedar Rapids area could be
classified as "nonattainment" for the NAAQS standards established for SO2.
The worst-case modeling suggested that two of Utilities' generating
facilities contributed to the modeled exceedences. As a result of
exceedences at a monitor near one of Utilities' generating facilities, the
EPA issued a letter to the Iowa Governor's office directing the state to
develop a plan of action. In this regard, Utilities entered into a
consent order with the Iowa Department of Natural Resources (IDNR) in the
third quarter of 1997 on this issue. Utilities agreed to limit the SO2
emissions from the two noted generating facilities and to install a new
stack (potential aggregate capital cost of up to $2.5 million over the
next two years) at one of the facilities. The IDNR approved the consent
order in the fourth quarter of 1997 and it is expected to be approved by
the EPA in the first or second quarter of 1998.
Pursuant to a routine internal review of documents, Utilities
determined that certain changes undertaken during previous years at one of
its generating facilities 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
permit in the first or second quarter of 1998. Utilities 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
operation.
Pursuant to a separate routine internal review of plant operations,
Utilities determined that certain permit limits were exceeded in 1997 at
one of its generating facilities in Cedar Rapids. Utilities has initiated
discussions with its regulators on the matter and has proposed a
compliance plan which contemplates operational changes. In addition,
Utilities will be submitting a PSD permit application in the second
quarter of 1998. Utilities may be subject to a penalty for exceeding
permit limits established for this facility; however, management believes
that any likely actions resulting from this matter will not have a
material adverse effect on Utilities' financial position or results of
operations.
(h) Spent Nuclear Fuel -
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
contract and has made the agreed payments to the Nuclear Waste Fund (NWF)
held by the U.S. Treasury. Utilities has since been notified by the DOE
that it was not able to begin acceptance of spent nuclear fuel by January
31, 1998. Furthermore, DOE has experienced significant delays in its
efforts and material acceptance is now expected to occur no earlier than
2010 with the possibility of further delay being likely. 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 for 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 at DAEC since plant operations began. DAEC has
current on-site capability to store spent fuel until 2001. Utilities is
currently reviewing its options to expand on-site storage capability. To
provide assurance that both the operating and post-shutdown storage needs
are satisfied, a combination of expanding the capacity of the existing
fuel pool and construction of a dry cask modular facility are being
contemplated. Legislation is being considered on the federal level to
provide for the establishment of an interim storage facility as early as
2002.
(i) Decommissioning of the DAEC -
Pursuant to the most recent electric rate case order, the IUB allows
Utilities to recover $6.0 million annually for the cost to decommission
the DAEC. Decommissioning expense is included in "Depreciation and
amortization" in the Consolidated Statements of Income and the cumulative
amount is included in "Accumulated depreciation" in the Consolidated
Balance Sheets to the extent recovered through rates. The current
recovery figures are based on the following assumptions: 1) cost to
decommission the DAEC of $252.8 million, which is Utilities' 70% portion
in 1993 dollars, based on the NRC minimum formula (which exceeds the
amount in the current site-specific study completed in 1994); 2) inflation
of 4.91% annually through 1997; 3) the prompt dismantling and removal
method of decommissioning, which is assumed to begin in the year 2014; 4)
monthly funding of all future collections into external trust funds and
funded on a tax-qualified basis to the extent possible; and 5) an average
after-tax return of 6.82% for all external investments. All of these
assumptions are subject to change in future regulatory proceedings. At
December 31, 1997, Utilities had $77.9 million invested in external
decommissioning trust funds as indicated in the Consolidated Balance
Sheets, and also had an internal decommissioning reserve of $21.7 million
recorded as accumulated depreciation. Earnings on the external trust
funds, which were $2.7 million in 1997, are recorded as interest income
and a corresponding interest expense payable to the funds is recorded.
The earnings accumulate in the external trust fund balances and in
accumulated depreciation on utility plant. See the section "Other Matters-
Accounting for Obligations Associated with the Retirement of Long-Lived
Assets" in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of potential changes
in current electric utility industry accounting practices for nuclear
power plant decommissioning.
(j) Legal Proceedings -
Utilities is involved in legal and administrative proceedings before
various courts and agencies with respect to matters arising in the
ordinary course of business. Although unable to predict the outcome of
these matters, Utilities believes that appropriate liabilities have been
established and final disposition of these actions will not have a
material adverse effect on its financial position or results of
operations.
(12) JOINTLY-OWNED ELECTRIC UTILITY PLANT:
Under joint ownership agreements with other Iowa utilities, Utilities
has undivided ownership interests in jointly-owned electric generating
stations and related transmission facilities. Each of the respective
owners is responsible for the financing of its portion of the construction
costs. Kilowatt-hour generation and operating expenses are divided on the
same basis as ownership with each owner reflecting its respective costs in
its Statements of Income. Information relative to Utilities' ownership
interest in these facilities at December 31, 1997 is as follows:
Ottumwa Neal
DAEC Unit 1 Unit 3
(Nuclear) (Coal) (Coal)
($ in millions)
Utility plant in service $ 500.6 $ 191.6 $ 60.8
===== ===== =====
Accumulated depreciation $ 230.8 $ 96.6 $ 30.6
===== ===== =====
Construction work in
progress $ 2.8 $ - $ 0.1
===== ===== =====
Plant capacity - Mw 520 716 515
===== ===== =====
Percent ownership 70% 48% 28%
===== ===== =====
In-service date 1974 1981 1975
===== ===== =====
(13) SEGMENTS OF BUSINESS:
The principal business segments of Utilities are the generation,
transmission, distribution and sale of electric energy and the purchase,
distribution, transportation and sale of natural gas. Certain financial
information relating to Utilities' significant segments of business is
presented below:
Year Ended December 31
1997 1996 1995
(in thousands)
Operating results:
Revenues -
Electric $ 604,270 $ 574,273 $ 560,471
Gas 183,517 160,864 137,292
Operating income -
Electric 138,151 133,768 131,505
Gas 12,961 17,526 9,509
Other information:
Depreciation and
amortization -
Electric 81,129 77,578 72,487
Gas 7,018 6,200 6,176
Construction and
acquisition
expenditures -
Electric 89,400 115,929 108,902
Gas 15,293 12,981 9,368
Assets -
Identifiable assets -
Electric 1,441,940 1,438,370 1,395,666
Gas 211,659 205,680 192,045
--------- --------- ---------
1,653,599 1,644,050 1,587,711
Other corporate assets 133,228 134,560 120,924
--------- --------- ---------
Total consolidated
assets $1,786,827 $1,778,610 $ 1,708,635
========= ========= =========
Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the directors and executive officers of IES
Utilities Inc. (Utilities) is set forth below.
Directors of IES Utilities Inc.
C.R.S. Anderson Principal Occupation: Director of IES Industries Inc.
(Industries).
Age: 70
Served as director of Industries since 1991 and was first
elected to the Iowa Southern Utilities Company board in
1978.
Other Information: Mr. Anderson is the retired Chairman of the Board of
Industries after serving in that position following the merger of IE
Industries Inc. (IEI) and Iowa Southern Inc. (ISI). Prior to the merger
of IEI and ISI, Mr. Anderson was Chairman and President of Iowa Southern
Inc., and had served in various positions at Iowa Southern Utilities
Company since 1956. He is a past chairman of the Missouri Valley Electric
Association and the Iowa Association of Business and Industry; and a
former director of IMG Bond Accumulation Fund, IMG Stock Accumulation
Fund, Midwest Gas Association and the Iowa Business Development Credit
Corporation.
J. Wayne Bevis Principal Occupation: Retired as Vice Chairman of Pella
Corporation (a window and door manufacturing company),
Pella, Iowa on December 31, 1997.
Age: 63
Served as director of Industries since 1991 and was first
elected to the IE Industries Inc. and Iowa Electric Light
and Power Company (IELP) boards in 1987.
Other Information: He had served in various positions at Pella
Corporation since 1973 and had been a director of Pella Corporation since
1975.
Lee Liu Principal Occupation: Chairman of the Board and Chief
Executive Officer of Industries and Utilities.
Age: 64
Served as director of Industries since 1991 and was first
elected to the Iowa Electric Light and Power Company board
in 1981.
Other Information: Mr. Liu has held a number of professional, management
and executive positions after joining Iowa Electric Light and Power
Company (IELP) (later known as Utilities) in 1957. He is a director of
HON Industries Inc., an office equipment manufacturer in Muscatine, Iowa;
McLeodUSA Inc., a telecommunications company in Cedar Rapids, Iowa;
Principal Financial Group, an insurance company in Des Moines, Iowa; and
Eastman Chemical Company, a diversified chemical company in Kingsport,
Tennessee. He also serves as a trustee for Mercy Medical Center, a
hospital in Cedar Rapids, Iowa and is a member of University of Iowa
College of Business Board of Visitors.
Jack R. Newman Principal Occupation: Partner of Morgan, Lewis & Bockius,
an international law firm based in Washington, D.C.
Age: 64
Served as director of Industries and Utilities since 1994.
Other Information: Mr. Newman has been engaged in private practice since
1967 and has been a partner of Morgan, Lewis & Bockius since December 1,
1994. Prior to joining Morgan, Lewis & Bockius, he was a partner in the
law firms Newman & Holtzinger and Newman, Bouknight & Edgar. He has
served as nuclear legal counsel to Utilities since 1968. He advises a
number of utility companies on nuclear power matters, including many
European and Asian companies. Mr. Newman is a member of the Bar of the
State of New York, the Bar Association of the District of Columbia, the
Association of the Bar of the City of New York, the Federal Bar
Association and the Lawyers Committee of the Edison Electric Institute.
Robert D. Ray Principal Occupation: Retired President and Chief
Executive Officer of IASD Health Services Inc. (formerly
Blue Cross and Blue Shield of Iowa, Western Iowa and
South Dakota), an insurance firm in Des Moines, Iowa.
Age: 69
Served as director of Industries since 1991 and was first
elected to the IE Industries Inc. and IELP boards in 1987.
Other Information: Mr. Ray served as Governor of the State of Iowa for
fourteen years, and was the United States Delegate to the United Nations
in 1984. He is a director of the Maytag Company, an appliance
manufacturer in Newton, Iowa. He also serves as Chairman of the National
Leadership Commission on Health Care Reform and the National Advisory
Committee on Rural Health Care. Mr. Ray is Chairman of the Board of
Governors, Drake University, Des Moines, Iowa, and a member of the Iowa
Business Council. Mr. Ray served as Interim Mayor of Des Moines, Iowa in
1997.
David Q. Reed Principal Occupation: Independent practitioner of law in
Kansas City, Missouri.
Age: 66
Served as director of Industries since 1991 and was first
elected to the Iowa Electric Light and Power Company
board in 1967.
Other Information: Mr. Reed has been engaged in the private practice of
law since 1960. He is a member of the American Bar Association, the
Association of Trial Lawyers of America, the Missouri Association of Trial
Lawyers, the Missouri Bar and the Kansas City Metropolitan Bar
Association.
Henry Royer Principal Occupation: Resigned as President and Chief
Executive Officer of River City Bank in Sacramento,
California on December 31, 1997.
Age: 66
Served as director of Industries since 1991 and was first
elected to the Iowa Electric Light and Power Company
board in 1984.
Other Information: Mr. Royer is a director of CRST, Inc., a trucking
company in Cedar Rapids, Iowa, a trustee of Berthel Investment Trust and
has served on numerous Cedar Rapids community organization boards.
Robert W. Schlutz Principal Occupation: President of Schlutz
Enterprises, a diversified farming and retailing
business in Columbus Junction, Iowa.
Age: 62
Served as director of Industries since 1991 and was
first elected to the Iowa Southern Inc. board in 1989.
Other Information: Mr. Schlutz is a director of PM Agri-Nutritional Group
Inc., an animal health business in St. Louis, Missouri, and the Iowa
Foundation for Agricultural Advancement. Mr. Schlutz is President of the
Iowa State Fair Board and member of various community organizations. He
also served on the National Advisory Council for the Kentucky Fried
Chicken Corporation. He is a past Chairman of the Environmental
Protection Commission for the State of Iowa.
Anthony R. Weiler Principal Occupation: Senior Vice President,
Merchandising, for Heilig-Meyers Company, a national
furniture retailer in Richmond, Virginia.
Age: 61
Served as director of Industries since 1991 and was
first elected to the Iowa Southern Utilities Company
board in 1979.
Other Information: Mr. Weiler was previously Chairman and Chief Executive
Officer of Chittenden & Eastman Company, a national manufacturer of
mattresses in Burlington, Iowa. He was employed by Chittenden & Eastman
in various management positions from 1960 to 1995. Mr. Weiler is Chairman
of the National Home Furnishings Association and a director of the Retail
Home Furnishings Foundation. He is a trustee of NHFA Insurance and a past
director of the Burlington Area Development Corporation, the Burlington
Area Chamber of Commerce and various community organizations.
Executive Officers of IES Utilities Inc.
(figures following the names represent the officer's age as of December
31, 1997)
Lee Liu, 64, Chairman of the Board & Chief Executive Officer. First
elected officer in 1975.
Larry D. Root, 61, President & Chief Operating Officer. Re-elected
officer in 1996. (i)
Thomas M. Walker, 50, Executive Vice President & Chief Financial
Officer. First elected officer in 1996. (ii)
John F. Franz, Jr., 58, Vice President, Nuclear. First elected officer
in 1992.
Harold W. Rehrauer, 60, Vice President, Field Operations. First elected
officer in 1987.
Stephen W. Southwick, 51, Vice President, General Counsel & Secretary.
First elected officer in 1982.
Philip D. Ward, 57, Vice President, Generation. First elected officer
in 1990.
John E. Ebright, 54, Controller & Chief Accounting Officer. First
elected officer in 1996. (iii)
Dennis B. Vass, 48, Treasurer. First elected officer in 1995.
Officers are elected annually by the Board of Directors and each of the
officers named above, except Larry D. Root, Thomas M. Walker and John E.
Ebright, has been employed by Utilities as an officer or in other
responsible positions at such company for at least five years. There are
no family relationships among these officers or among the officers and
directors. There are no arrangements or understandings with respect to
election of any person as an officer.
(i) Larry D. Root, who retired in 1995, was re-elected as President
& Chief Operating Officer of Utilities effective November 6,
1996. Mr. Root was first elected as an officer in 1979.
(ii) Thomas M. Walker was elected Executive Vice President & Chief
Financial Officer of Utilities effective December 16, 1996.
Prior to joining Utilities in December 1996, he was employed
from 1990 - 1995 by Information Resources, Inc. as Executive
Vice President, Chief Financial and Administrative Officer and
Member of the Board of Directors.
(iii) John E. Ebright was elected Controller & Chief Accounting
Officer of Utilities effective July 8, 1996. Prior to joining
Utilities in July 1996, he was employed by MidCon Corp., a
subsidiary of Occidental Petroleum Corporation, as Vice
President and Controller from 1987 to 1996.
Item 11. Executive Compensation
Executive Officers' Compensation Table
The following Executive Officers' Compensation Table sets forth the
total compensation paid by Industries and its subsidiaries for all
services rendered during 1997, 1996, and 1995 to the Chief Executive
Officer and the four other most highly compensated executive officers of
Utilities or its subsidiaries at December 31, 1997 and to James E. Hoffman
who would have been among the four most highly compensated executive
officers if he had been employed by Utilities on December 31, 1997. Mr.
Hoffman currently serves as Executive Vice President of Industries.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Other Restricted
Annual Stock All Other
Name and Principal Position Year Salary Bonus 1 Compensation 2 Awards 3 Compensation 4
<S> <C> <C> <C> <C> <C> <C>
Lee Liu 1997 $400,000 $189,000 $5,956 $176,391 $13,277
Chairman of the Board and 1996 380,000 175,000 2,578 253,475 13,956
Chief Executive Officer 1995 340,000 142,800 1,588 176,645 13,507
Larry D. Root 1997 336,000 - 1,164 - -
President and Chief 1996 50,909 - 813 - 252,000
Operating Officer 1995 220,822 62,606 566 - 208,038
James E. Hoffman 1997 232,200 62,694 - 35,462 847
Executive Vice President - 1996 226,467 58,050 - 101,879 823
Industries 1995 89,583 206,500 51,523 143,125 324
Thomas M. Walker 1997 230,000 62,100 38,138 - 2,367
Executive Vice President 1996 9,583 - - 30,000 119
and Chief Financial Officer 1995
John F. Franz, Jr. 1997 175,862 34,965 3,288 32,642 5,360
Vice President, Nuclear 1996 155,083 40,000 1,028 39,930 5,338
1995 144,050 25,213 418 41,993 4,893
Harold W. Rehrauer 1997 144,000 28,067 2,781 26,191 5,522
Vice President, Field 1996 129,667 23,625 1,056 34,222 4,374
Operations 1995 119,000 19,992 677 24,732 4,030
___________________
1 The bonuses represent plan year awards from the Management Incentive
Compensation Plan. The amount reported as bonus for Mr. Hoffman in 1995
also includes a one-time payment of $185,000 when he commenced employment.
2 Other Annual Compensation for 1997 consists of: Earnings from the Key
Employee Deferred Compensation Plan in excess of 120% of the applicable
federal long-term rate provided under Section 1274(d) of the Internal
Revenue Code: Mr. Liu - $5,956, Mr. Root - $1,164, Mr. Franz - $3,288 and
Mr. Rehrauer - $2,781; Relocation expense reimbursement: Mr. Walker -
$38,138. Also included in 1995 are relocation expense reimbursements for
Mr. Hoffman of $51,523.
3 Awards of restricted stock of Industries have been made since June 1,
1988, with one-third of each year's award being restricted for one year,
one-third being restricted for two years, and one-third being restricted
for three years. The shares of restricted stock reflected in this table
subject to such three-year vesting schedule are as follows: Mr. Liu -
5,004 shares awarded for 1997, 8,703 shares awarded for 1996 and 6,171
shares awarded for 1995; Mr. Hoffman - 1,006 shares awarded for 1997,
3,498 shares awarded for 1996 and 5,000 shares awarded for 1995; Mr.
Walker - 1,000 shares awarded for 1996; Mr. Franz - 926 shares awarded
for 1997, 1,371 shares awarded for 1996 and 1,467 shares awarded for 1995
and Mr. Rehrauer - 743 shares awarded for 1997, 1,175 shares awarded for
1996 and 864 shares awarded for 1995. Restricted stock is considered
outstanding upon award date and dividends are paid to the eligible officers
on these shares while restricted. The amounts shown in the table above
represent the value of the awards based upon closing price of Industries'
Common Stock on the award date. The award date is usually in the calendar
year following the plan year. At December 31, 1997, the following listed
officers had restricted stock for which restrictions had not lapsed as
follows (values based on December 31, 1997 closing price for Industries'
Common Stock): Mr. Liu - 20,592 shares valued at $758,043; Mr. Hoffman -
7,838 shares valued at $288,536; Mr. Walker - 667 shares valued at $24,554;
Mr. Franz - 13,735 shares valued at $505,620; Mr. Rehrauer - 2,882 shares
valued at $106,094. No stock options or stock appreciation rights have
been awarded to Mr. Liu , Mr. Root, Mr. Hoffman, Mr. Walker, Mr. Franz or
Mr. Rehrauer.
4 All Other Compensation for 1997 consists of: matching contributions to
401(k) plan, Mr. Liu - $3,800, Mr. Franz - $2,677, Mr. Rehrauer - $2,212;
Life insurance coverage in excess of $50,000: Mr. Liu - $9,477, Mr.
Hoffman - $847, Mr. Walker - $2,367, Mr. Franz - $2,683 and Mr. Rehrauer -
$3,310. The 1996 amount for Mr. Root includes consulting fees of
$249,989. The 1995 amount for Mr. Root includes severance costs of
$200,660.
</TABLE>
Compensation of Directors
In 1997, non-employee directors of Utilities received fees of
$12,000 per year, 300 shares of common stock of Industries plus $700 per
Board meeting or Committee meeting attended. If a Committee meeting is
the same day as a meeting of the Board of Directors as a whole or if a
Committee meeting is held by telephone conference, each participating non-
employee director receives $350, one-half the regular Committee meeting
fee. In addition, non-employee directors serving as chairman of a
Committee receive an annual fee of $1,500 for serving in such capacity.
Directors who are officers do not receive any fees for attendance at Board
meetings or meetings of Committees of which they are members.
Under the Director Retirement Plan, a retirement or death benefit is
provided to directors, including directors who are employees, in an amount
equal to 80% of the annual director's fee. Such amount is payable
annually, based upon length of service, to directors who have served at
least four years, for a maximum period of eight years.
Compensation Committee Interlocks and Insider Participation: See Item
13. "Certain Relationships and Related Transactions" regarding services
provided by Mr. Newman's legal firm, Morgan, Lewis & Bockius.
A business travel accident insurance policy is provided to the Board
of Directors at an annual cost of $10 per director. No director received
any payments under such policy in 1997.
PLANS
Pension Plan: Industries, Utilities and the Cedar Rapids and Iowa City
Railway Company have non-contributory retirement plans covering employees
who have at least one year of accredited service. Directors who are not
officers do not participate in the plan. Maximum annual benefits payable
at age 65 to participants who retire at age 65, calculated on the basis of
straight life annuity, are illustrated in the following table:
PENSION PLAN TABLE
Average of Highest Annual Estimated Maximum Annual Retirement Benefits
Salary (Remuneration) Based on Service Years of Service
for 3 Consecutive
Years of the last 10 15 20 25 30 35
125,000 26,869 35,828 44,784 53,741 62,697
150,000 32,683 43,576 54,471 65,366 76,259
175,000 35,913 48,282 60,650 73,019 85,388
200,000 40,038 54,282 68,525 82,769 97,013
225,000 44,163 60,282 76,400 92,519 108,638
250,000 44,818 61,235 77,652 94,068 110,485
300,000 44,818 61,235 77,652 94,068 110,485
400,000 44,818 61,235 77,652 94,068 110,485
450,000 44,818 61,235 77,652 94,068 110,485
500,000 44,818 61,235 77,652 94,068 110,485
For 1997, $125,000 was the maximum benefits allowable under the
retirement plans prescribed by Section 415 of the Internal Revenue Code.
With respect to the officers named in the Executive Officer's
Compensation Table, the remuneration for retirement plan purposes would be
substantially the same as that shown as "Salary." As of December 31, 1997,
the officers had accredited years of service for the retirement plan as
follows: Lee Liu, 40 years; Larry D. Root, 27 years; James E. Hoffman, 2
years; Thomas M. Walker, 1 year; John F. Franz, Jr., 6 years; Harold W.
Rehrauer, 25 years.
Supplemental Retirement Plan: Industries has a non-qualified
Supplemental Retirement Plan (SRP) for eligible officers of Industries and
Utilities, including Messrs. Liu, Hoffman, Walker, Franz and Rehrauer.
The plan provides for payment of supplemental retirement benefits equal to
69% of the officer's base salary in effect at the date of retirement,
reduced by benefits receivable under the qualified retirement plan, for a
period not to exceed 18 years following the date of retirement. In the
event of the death of the officer following retirement, similar payments
reduced by the joint and survivor annuity of the qualified retirement plan
will be made to his or her designated beneficiary (surviving spouse or
dependent children), if any, for a period not to exceed 12 years from the
date of the officer's retirement. Thus, if an officer died 12 years after
retirement, no payment to the beneficiary would be made. Death benefits
are provided on the same basis to a designated beneficiary for a period
not to exceed 12 years from the date of death should the officer die prior
to retirement. The Supplemental Retirement Plan further provides that if,
at the time of the death of an officer, the officer is entitled to
receive, is receiving, or has received supplemental retirement benefits by
virtue of having taken retirement, a death benefit shall be paid to the
officer's designated beneficiary or to the officer's estate in an amount
equal to 100% of the officer's annual salary in effect at the date of
retirement. Under certain circumstances, an officer who takes early
retirement will be entitled to reduced benefits under the Supplemental
Retirement Plan. The Supplemental Retirement Plan also provides for
benefits in the event an officer becomes disabled under the terms of the
qualified retirement plan. Life insurance policies on the participants
have been purchased sufficient in amount to finance actuarially all future
liabilities under the Supplemental Retirement Plan. The Supplemental
Retirement Plan has been designed so that if the assumptions made as to
mortality, experience, policy dividends, tax credits and other factors are
realized, all life insurance premium payments will be recovered over the
life of the Supplemental Retirement Plan.
The following table shows the estimated annual benefits payable under
the Supplemental Retirement Plan equal to 69% of the officer's base salary
in effect at the date of retirement:
Supplemental Retirement Plan Payments
69% SRP Benefit
Years of Service
Annual Salary 15 20 25 30 35
125,000 59,381 50,422 41,466 32,509 23,553
150,000 70,817 59,924 49,029 38,134 27,241
175,000 84,837 72,468 60,100 47,731 35,362
200,000 97,962 83,718 69,475 55,231 40,987
225,000 111,087 94,968 78,850 62,731 46,612
250,000 127,682 111,265 94,848 78,432 62,015
300,000 162,182 145,765 129,348 112,932 96,515
400,000 231,182 214,765 198,348 181,932 165,515
450,000 265,682 249,265 232,848 216,432 200,015
500,000 300,182 283,765 267,348 250,932 234,515
Mr. Liu has elected to continue under the supplemental retirement
agreement previously provided to him which provides for payment of
benefits equal to 75% of his base salary, for a period not to exceed 15
years following the date of retirement, and payment to the surviving
spouse or dependent children for a period not to exceed 15 years following
the date of retirement.
The following table shows the estimated annual benefits payable under
the Supplemental Retirement Plan equal to 75% of the officer's base salary
in effect at the date of retirement:
Supplemental Retirement Plan Payments
75% SRP Benefit
Years of Service
Annual Salary 15 20 25 30 35
125,000 66,881 57,922 48,966 40,009 31,053
150,000 79,817 68,924 58,029 47,134 36,241
175,000 95,337 82,968 70,600 58,231 45,862
200,000 109,962 95,718 81,475 67,231 52,987
225,000 124,587 108,468 92,350 76,231 60,112
250,000 142,682 126,265 109,848 93,432 77,015
300,000 180,182 163,765 147,348 130,932 114,515
400,000 255,182 238,765 222,348 205,932 189,515
450,000 292,682 276,265 259,848 243,432 227,015
500,000 330,182 313,765 297,348 280,932 264,515
Executive Guaranty Plan: The Board has approved an Executive
Guaranty Plan (the Guarantee Plan) for officers of Industries and its
principal subsidiary, Utilities. The purpose of the Guaranty Plan is to
promote flexibility in financial planning of participating officers and to
provide an inducement to new officers in order to retain and attract the
best possible executive management team. Under the Guaranty Plan, loans
are guaranteed within defined limits, based on salary level and years of
service made to participating officers for various specified purposes,
including real estate acquisitions and purchases of Industries' Common
Stock. As of December 31, 1997, there were no guarantees outstanding.
Executive Change of Control Agreements: Fourteen executives,
including Messrs. Liu, Hoffman, Walker, Franz and Rehrauer have severance
agreements with Industries. The severance agreements run for terms of one
year (three years in the case of Mr. Liu), subject to automatic renewal
unless either party gives notice of non-renewal to the other party at least
60 days prior to the annual renewal date. Each agreement provides for
salary continuation and certain other benefits in the event the covered
executive is terminated within a three-year period following a change of
control. For these purposes, a change of control is as described in
Restated Articles of Incorporation of Industries and, in addition, will be
deemed to have occurred, if following a merger, consolidation or
reorganization, the owners of the capital stock entitled to vote in the
election of directors prior to the transaction own less than 75% of the
resulting entity's voting stock or during any period of two consecutive
years, individuals who, at the beginning of such period constitute the
Board of Directors of the parent company, cease for any reason to
constitute at least a majority of the Board of Directors of any successor
organization. Accordingly, the merger involving Industries, WPL Holdings,
Inc. and Interstate Power Company (the "Proposed Merger") will constitute
a change of control for purposes of each of the severance agreements.
Specifically, the agreements provide that following termination of a
covered executive's employment except for just cause, death, retirement,
disability or voluntary resignation (other than resignation for "good
cause"), the executive's salary will be continued, at a level equal to
his/her salary just prior to termination for a period ranging from
eighteen to thirty-six months (depending upon the executive involved
and, in certain cases, his/her length of service). Additionally,
certain benefits will be continued during the applicable severance period,
including life and health insurance, and the executive will continue to
receive annual incentive award payments equal to the average annual
incentive awards paid to executives of the same or comparable designation
during the three years prior to the change of control. In the event the
executive dies during the severance period, the salary and benefit
payments described above shall be payable during the remainder of the term
to the executive's surviving spouse or his/her estate. The executive will
also become immediately vested and entitled to receive awards of
restricted stock or other rights granted to the executive under the Long-
Term Incentive Plan. With respect to a covered executive who is age 56 or
older at the time of the change of control or under age 56 and has ten or
more full years of service at the time of the Change of Control, the
severance agreement further provides that the change of control will cause
the executive to become fully vested in his/her Supplemental Retirement
Plan benefit, and that if the executive is terminated within three years
following the change of control, he/she will be able to commence his/her
Supplemental Retirement Plan benefit payments on the earlier of the date
he/she attains age 65 or the date salary continuation payments cease under
his/her severance agreements. Certain amendments were made to the
existing severance agreements in 1996. The amendments to the severance
agreement for Mr. Liu provide, among other things, that during the
applicable severance period Mr. Liu will be entitled to receive payments
equal to the average value of both the long-term and the annual incentive
awards received by executives of the same or comparable designation during
the three years prior to the change of control. In addition, the
amendments for all covered executives provide reimbursement, in an amount
not to exceed 15% of the executive's base salary, for outplacement
services and legal fees incurred by the executive in connection with his/her
termination, and also provide severance benefits in the event of certain
employment terminations within 180 days prior to a change of control.
The provisions of the severance agreement covering Mr. Liu have been
incorporated into the employment agreement to be executed between Mr. Liu
and Interstate Energy Corporation in connection with the Proposed Merger
("Merger Employment Agreement"). After the effective time of the Proposed
Merger, Mr. Liu's Merger Employment Agreement will supersede his existing
severance agreement.
These agreements are intended to employ key executives who can
approach major business decisions objectively and without concern for
their personal situations.
EMPLOYMENT AGREEMENT
IE Industries Inc. and Iowa Electric Light and Power Company, the
predecessor companies of Industries and Utilities, entered into an
employment agreement ("Employment Agreement") with Lee Liu, which became
effective July 1, 1991. The Employment Agreement provides that Mr. Liu
shall be employed as President, Chief Executive Officer and Chairman of
the Executive Committee of Industries and as Chief Executive Officer and
Chairman of Utilities from July 1, 1991 until April 1995, which period
shall be automatically extended unless at least six months prior to any
expiration thereof either Industries or Utilities or Mr. Liu shall give
notice that they do not wish to extend such time (the "Period of
Employment"). To date, neither party has given such notice. The
Employment Agreement also provides that he shall become Chairman of the
Board at such time as C.R.S. Anderson ceases to serve in such position.
This occurred on July 1, 1993. The Employment Agreement provides that Mr.
Liu shall provide consulting services for three years (the "Period of
Consulting") after the conclusion of the Period of Employment.
During the Period of Employment, Mr. Liu will be paid a base annual
salary of at least $275,000, and will be entitled to participate in all
incentive compensation plans applicable to the positions he holds and all
retirement and employee welfare benefit plans. During the Period of
Employment, Mr. Liu's incentive compensation shall be at least equal to
that paid to the Chairman of the Board of Industries.
If Mr. Liu's employment is terminated without his consent during the
Period of Employment for other than an unremedied material breach or just
cause or by his resignation if such resignation occurs after Industries
fails to cause him to be employed in or elected to the positions specified
in the Employment Agreement or after a material diminution in his duties,
responsibilities or status, then Mr. Liu shall be entitled to an amount
equal to the sum of his base annual salary as of the date of termination
plus his average incentive compensation during the three years immediately
preceding the date of termination multiplied by the number of years (and
fractions thereof) then remaining in the Period of Employment. Mr. Liu
also would be entitled to continued insurance coverages and an amount
equal to the then present value of the actuarially determined difference
between the aggregate retirement benefits actually to be received by him
as of the date of termination and those that would have been received by
him had he continued to be employed at the base salary in effect at
termination through the expiration of the Period of Employment. All his
shares of restricted stock would also vest at that time.
During the Period of Consulting, Mr. Liu will make himself available
for up to 30 days per year, report to the Chief Executive Officers of
Industries and will earn an annual consulting fee equal to 13.33% of his
highest annual base salary during his Period of Employment. If Mr. Liu's
consulting services are terminated for reasons other than material breach
or just cause, he will be entitled to a lump sum payment equal to the
amount of the consulting fee he would otherwise have earned during the
Period of Consulting.
The Merger Employment Agreement which Mr. Liu will enter into with
Interstate Energy in connection with the Proposed Merger will supersede
the Employment Agreement described above.
Industries entered into an Employment Agreement (Agreement) with
Larry D. Root on November 6, 1996. The Agreement provides that Mr. Root
shall be employed as President of Industries and Utilities from November
7, 1996 to the earlier of the effective date of the Proposed Merger or
May 5, 1998. During the period of employment, Mr. Root will be paid a base
salary of $28,000 per month.
Item 12. Security Ownership of Certain Beneficial Owners and Management
All outstanding common stock of Utilities is held by its parent.
Set forth below is certain information with respect to beneficial
ownership of the Common Stock of Industries as of March 1, 1998, by each
current director, certain executive officers and by all current directors
and executive officers of Industries and Utilities as a group.
Amount and Nature Percent of
Name of Beneficial Owner of Beneficial Class (1)
Ownership (1)
C.R.S. Anderson . . . . . . . . . . . . 20,300 *
J. Wayne Bevis . . . . . . . . . . . . 1,800 *
John F. Franz, Jr. . . . . . . . . . . 17,068 *
James E. Hoffman . . . . . . . . . . . 10,265 *
Lee Liu . . . . . . . . . . . . . . . . 43,515 *
Jack R. Newman . . . . . . . . . . . . 1,300 *
Robert D. Ray . . . . . . . . . . . . . 2,800 *
David Q. Reed . . . . . . . . . . . . . 5,302 *
Harold W. Rehrauer . . . . . . . . . . 9,953 *
Larry D. Root . . . . . . . . . . . . . 17,733 *
Henry Royer . . . . . . . . . . . . . . 8,887 *
Robert W. Schlutz . . . . . . . . . . . 3,135 *
Thomas M. Walker . . . . . . . . . . . 1,000 *
Anthony R. Weiler . . . . . . . . . . . 4,037 *
All Executive Officers and Directors
of Industries and Utilities as a
group (19 persons) . . . . . . . . . . 170,272 *
_____________________________________
* Less than one percent of the total outstanding shares of Industries'
Common Stock.
(1) Includes ownership of shares by family members even though
beneficial ownership of such shares may be disclaimed.
Item 13. Certain Relationships and Related Transactions
Director Jack R. Newman serves as legal counsel to Utilities on
nuclear issues. Mr. Newman's firm, Morgan, Lewis & Bockius has also
provided legal services to Industries and Utilities related to the Proposed
Merger.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements (Included in Part II of this report) -
Page
Description Number
Report of Independent Public Accountants 30
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995 31
Consolidated Statements of Retained Earnings
for the years ended December 31, 1997, 1996 and 1995 31
Consolidated Balance Sheets
at December 31, 1997 and 1996 32 - 33
Consolidated Statements of Capitalization
at December 31, 1997 and 1996 34
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 35
Notes to Consolidated Financial Statements 36 - 53
(a) 2. Financial Statement Schedules (Included in Part IV of this
report) -
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended December 31, 1997, 1996 and
1995 70
Other schedules are omitted as not required under Rules of
Regulation S-X
(a) 3. Exhibits Required by Securities and Exchange Commission
Regulation S-K -
The Exhibits designated by an asterisk are filed herewith and all other
Exhibits as stated to be filed are incorporated herein by reference.
Exhibit
2(a) Agreement and Plan of Merger, dated as of November 10, 1995, as
amended, by and among WPL Holdings, Inc., IES Industries Inc.,
Interstate Power Company, WPLH Acquisition Co. and Interstate
Power Company (Filed as Exhibit 2.1 to Industries' Joint Proxy
Statement, dated July 11, 1996).
2(b) Amendment No. 2 to Agreement and Plan of Merger, as amended,
dated August 16, 1996, by and among IES Industries Inc., WPL
Holdings, Inc., Interstate Power Company, WPLH Acquisition Co.
and Interstate Power Company (Filed as Annex 1 to the Supplement
to the Joint Proxy Statement of WPL Holdings, Inc., IES
Industries Inc. and Interstate Power Company, dated August 21,
1996).
2(c) Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among WPL
Holdings, Inc. and IES Industries Inc. (Filed as Exhibit 2.2 to
Industries' Current Report on Form 8-K, dated November 10,
1995).
2(d) Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among WPL
Holdings, Inc. and Interstate Power Company. (Filed as Exhibit
2.3 to Industries' Current Report on Form 8-K, dated November
10, 1995).
2(e) Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among IES
Industries Inc. and WPL Holdings, Inc. (Filed as Exhibit 2.4 to
Industries' Current Report on Form 8-K, dated November 10,
1995).
2(f) Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among IES
Industries Inc. and Interstate Power Company. (Filed as Exhibit
2.5 to Industries' Current Report on Form 8-K, dated November
10, 1995).
2(g) Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among
Interstate Power Company and WPL Holdings, Inc. (Filed as
Exhibit 2.6 to Industries' Current Report on Form 8-K, dated
November 10, 1995).
2(h) Option Grantor/Option Holder Stock Option and Trigger Payment
Agreement, dated as of November 10, 1995, by and among
Interstate Power Company and IES Industries Inc. (Filed as
Exhibit 2.7 to Industries' Current Report on Form 8-K, dated
November 10, 1995).
3(a) Articles of Incorporation of IES Utilities Inc. (Utilities),
Amended and Restated as of January 6, 1994 (Filed as Exhibit
4(b) to Utilities Current Report on Form 8-K, dated January 7,
1994).
3(b) Bylaws of Utilities, as amended February 4, 1997. (Filed as
Exhibit 3(d) to Industries' Form 10-K for the year 1997 (File
No. 1-9187)).
4(a) Indenture of Mortgage and Deed of Trust, dated as of
September 1, 1993, between Utilities (formerly Iowa Electric
Light and Power Company (IE)) and The First National Bank of
Chicago, as Trustee (Mortgage) (Filed as Exhibit 4(c) to IE's
Form 10-Q for the quarter ended September 30, 1993).
4(b) Supplemental Indentures to the Mortgage:
IE/Utilities/Industries
Number Dated as of File Reference Exhibit
First October 1, 1993 Form 10-Q, 11/12/93 4(d)
Second November 1, 1993 Form 10-Q, 11/12/93 4(e)
Third March 1, 1995 Form 10-Q, 5/12/95 4(b)
Fourth September 1, 1996 Form 8-K, 9/19/96 4(c)(i)
Fifth April 1, 1997 Form 10-Q, 5/14/97 4(a)
4(c) Indenture of Mortgage and Deed of Trust, dated as of August 1,
1940, between Utilities (formerly IE) and The First National
Bank of Chicago, Trustee (1940 Indenture) (Filed as Exhibit 2(a)
to IE's Registration Statement, File No. 2-25347).
4(d) Supplemental Indentures to the 1940 Indenture:
Number Dated as of IE/Utilities File Exhibit
Reference
First March 1, 1941 2-25347 2(a)
Second July 15, 1942 2-25347 2(a)
Third August 2, 1943 2-25347 2(a)
Fourth August 10, 1944 2-25347 2(a)
Fifth November 10, 1944 2-25347 2(a)
Sixth August 8, 1945 2-25347 2(a)
Seventh July 1, 1946 2-25347 2(a)
Eighth July 1, 1947 2-25347 2(a)
Ninth December 15, 1948 2-25347 2(a)
Tenth November 1, 1949 2-25347 2(a)
Eleventh November 10, 1950 2-25347 2(a)
Twelfth October 1, 1951 2-25347 2(a)
Thirteenth March 1, 1952 2-25347 2(a)
Fourteenth November 5, 1952 2-25347 2(a)
Fifteenth February 1, 1953 2-25347 2(a)
Sixteenth May 1, 1953 2-25347 2(a)
Seventeenth November 3, 1953 2-25347 2(a)
Eighteenth November 8, 1954 2-25347 2(a)
Nineteenth January 1, 1955 2-25347 2(a)
Twentieth November 1, 1955 2-25347 2(a)
Twenty-first November 9, 1956 2-25347 2(a)
Twenty-second November 6, 1957 2-25347 2(a)
Twenty-third November 4, 1958 2-25347 2(a)
Twenty-fourth November 3, 1959 2-25347 2(a)
Twenty-fifth November 1, 1960 2-25347 2(a)
Twenty-sixth January 1, 1961 2-25347 2(a)
Twenty-seventh November 7, 1961 2-25347 2(a)
Twenty-eighth November 6, 1962 2-25347 2(a)
Twenty-ninth November 5, 1963 2-25347 2(a)
Thirtieth November 4, 1964 2-25347 2(a)
Thirty-first November 2, 1965 2-25347 2(a)
Thirty-second September 1, 1966 Form 10-K, 1966 4.10
Thirty-third November 30, 1966 Form 10-K, 1966 4.10
Thirty-fourth November 7, 1967 Form 10-K, 1967 4.10
Thirty-fifth November 5, 1968 Form 10-K, 1968 4.10
Thirty-sixth November 1, 1969 Form 10-K, 1969 4.10
Thirty-seventh December 1, 1970 Form 8-K, 12/70 1
Thirty-eighth November 2, 1971 2-43131 2(g)
Thirty-ninth May 1, 1972 Form 8-K, 5/72 1
Fortieth November 7, 1972 2-56078 2(i)
Forty-first November 7, 1973 2-56078 2(j)
Forty-second September 10, 1974 2-56078 2(k)
Forty-third November 5, 1975 2-56078 2(l)
Forty-fourth July 1, 1976 Form 8-K, 7/76 1
Forty-fifth November 1, 1976 Form 8-K, 12/76 1
Forty-sixth December 1, 1977 2-60040 2(o)
Forty-seventh November 1, 1978 Form 10-Q, 6/30/79 1
Forty-eighth December 1, 1979 Form S-16, 2-65996 2(q)
Forty-ninth November 1, 1981 Form 10-Q, 3/31/82 2
Fiftieth December 1, 1980 Form 10-K, 1981 4(s)
Fifty-first December 1, 1982 Form 10-K, 1982 4(t)
Fifty-second December 1, 1983 Form 10-K, 1983 4(u)
Fifty-third December 1, 1984 Form 10-K, 1984 4(v)
Fifty-fourth March 1, 1985 Form 10-K, 1984 4(w)
Fifty-fifth March 1, 1988 Form 10-Q, 5/12/88 4(b)
Fifty-sixth October 1, 1988 Form 10-Q, 11/10/88 4(c)
Fifty-seventh May 1, 1991 Form 10-Q, 8/13/91 4(d)
Fifty-eighth March 1, 1992 Form 10-K, 1991 4(c)
Fifty-ninth October 1, 1993 Form 10-Q, 11/12/93 4(a)
Sixtieth November 1, 1993 Form 10-Q, 11/12/93 4(b)
Sixty-first March 1, 1995 Form 10-Q, 5/12/95 4(a)
Sixty-second September 1, 1996 Form 8-K, 9/19/96 4(f)
Sixty-third April 1, 1997 Form 10-Q, 5/14/97 4(b)
4(e) Indenture or Deed of Trust dated as of February 1, 1923, between
Utilities (successor to Iowa Southern Utilities Company (IS) as
result of merger of IS and IE) and The Northern Trust Company
(The First National Bank of Chicago, successor) and Harold H.
Rockwell (Richard D. Manella, successor), as Trustees (1923
Indenture) (Filed as Exhibit B-1 to File No. 2-1719).
4(f) Supplemental Indentures to the 1923 Indenture:
Dated as of File Exhibit
Reference
May 1, 1940 2-4921 B-1-k
May 2, 1940 2-4921 B-1-l
October 1, 1945 2-8053 7(m)
October 2, 1945 2-8053 7(n)
January 1, 1948 2-8053 7(o)
September 1, 1950 33-3995 4(e)
February 1, 1953 2-10543 4(b)
October 2, 1953 2-10543 4(q)
August 1, 1957 2-13496 2(b)
September 1, 1962 2-20667 2(b)
June 1, 1967 2-26478 2(b)
February 1, 1973 2-46530 2(b)
February 1, 1975 2-53860 2(aa)
July 1, 1975 2-54285 2(bb)
September 2, 1975 2-57510 2(bb)
March 10, 1976 2-57510 2(cc)
February 1, 1977 2-60276 2(ee)
January 1, 1978 0-849 2
March 1, 1979 0-849 2
March 1, 1980 0-849 2
May 31, 1986 33-3995 4(g)
July 1, 1991 0-849 4(h)
September 1, 1992 0-849 4(m)
December 1, 1994 0-4117-1 4(f)
4(g) Indenture (For Unsecured Subordinated Debt Securities), dated as
of December 1, 1995, between Utilities and The First National
Bank of Chicago, as Trustee (Subordinated Indenture) (Filed as
Exhibit 4(i) to Utilities' Amendment No. 1 to Registration
Statement, File No. 33-62259).
4(h) 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) Operating and Transmission Agreement between Central Iowa Power
Cooperative and IE (Filed as Exhibit 10(q) to IE's Form 10-K for
the year 1990).
10(b) Duane Arnold Energy Center Ownership Participation Agreement
dated June 1, 1970 between Central Iowa Power Cooperative, Corn
Belt Power Cooperative and IE. (Filed as Exhibit 5(kk) to IE's
Registration Statement, File No. 2-38674).
10(c) Duane Arnold Energy Center Operating Agreement dated June 1,
1970 between Central Iowa Power Cooperative, Corn Belt Power
Cooperative and IE. (Filed as Exhibit 5(ll) to IE's
Registration Statement, File No. 2-38674).
10(d) Duane Arnold Energy Center Agreement for Transmission,
Transformation, Switching, and Related Facilities dated June 1,
1970 between Central Iowa Power Cooperative, Corn Belt Power
Cooperative and IE. (Filed as Exhibit 5(mm) to IE's
Registration Statement, File No. 2-38674).
10(e) Basic Generating Agreement dated April 16, 1975 between Iowa
Public Service Company, Iowa Power and Light Company, Iowa-
Illinois Gas and Electric Company and IS for the joint ownership
of Ottumwa Generating Station-Unit 1 (OGS-1). (Filed as Exhibit
1 to IE's Form 10-K for the year 1977).
10(f) Addendum Agreement to the Basic Generating Agreement for OGS-1
dated December 7, 1977 between Iowa Public Service Company,
Iowa-Illinois Gas and Electric Company, Iowa Power and Light
Company, IS and IE for the purchase of 15% ownership in OGS-1.
(Filed as Exhibit 3 to IE's Form 10-K for the year 1977).
10(g) Second Amended and Restated Credit Agreement dated as of
September 17, 1987 between Arnold Fuel, Inc. and the First
National Bank of Chicago and the Amended and Restated Consent
and Agreement dated as of September 17, 1987 by IE. (Filed as
Exhibit 10(j) to IE's Form 10-K for the year 1987).
Management Contracts and/or Compensatory Plans (Exhibits 10(h) through
10(u))
10(h) Supplemental Retirement Plan. (Filed as Exhibit 10(l) to
Industries' Form 10-K for the year 1987).
10(i) Management Incentive Compensation Plan. (Filed as Exhibit 10(m)
to Industries' Form 10-K for the year 1987).
10(j) Key Employee Deferred Compensation Plan. (Filed as Exhibit
10(n) to Industries' Form 10-K for the year 1987).
10(k) Long-Term Incentive Plan. (Filed as Exhibit A to Industries'
Proxy Statement dated March 20, 1995).
10(l) Executive Guaranty Plan. (Filed as Exhibit 10(p) to Industries'
Form 10-K for the year 1987).
10(m) Executive Change of Control Severance Agreement - CEO (Filed as
Exhibit 10(a) to Industries' Form 10-Q for the quarter ended
September 30, 1996 (File No. 1-9187)).
10(n) Executive Change of Control Severance Agreement - Vice
Presidents (Filed as Exhibit 10(b) to Industries' Form 10-Q for
the quarter ended September 30, 1996 (File No. 1-9187)).
10(o) Executive Change of Control Severance Agreement - Other Officers
(Filed as Exhibit 10(c) to Industries' Form 10-Q for the quarter
ended September 30, 1996 (File No. 1-9187)).
10(p) Amendments to Key Employee Deferred Compensation Agreement for
Directors. (Filed as Exhibit 10(u) to Industries' Form 10-Q for
the quarter ended March 31, 1990).
10(q) Amendments to Key Employee Deferred Compensation Agreement for
Key Employees. (Filed as Exhibit 10(v) to Industries' Form 10-Q
for the quarter ended March 31, 1990).
10(r) Amendments to Management Incentive Compensation Plan. (Filed as
Exhibit 10(y) to Industries' Form 10-Q for the quarter ended
March 31, 1990).
10(s) Director Retirement Plan. (Filed as Exhibit 10(b) to
Industries' Form 10-Q for the quarter ended June 30, 1997 (File
No. 1-9187)).
10(t) IES Utilities Inc. Grantor Trust for Deferred Compensation
Agreements. (Filed as Exhibit 10(f) to Industries' Form 10-Q
for the quarter ended September 30, 1997 (File No. 1-9187)).
10(u) IES Utilities Inc. Grantor Trust for Supplemental Retirement
Agreements. (Filed as Exhibit 10(g) to Industries' Form 10-Q
for the quarter ended September 30, 1997 (File No. 1-9187)).
10(v) 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(w) Guaranty (IES Utilities Trust No. 1994-A) from IES Utilities
Inc., dated as of June 29, 1994. (Filed as Exhibit 10(b) to
Utilities' Form 10-Q for the quarter ended June 30, 1994 (File
No. 0-4117-1)).
10(x) Copy of Coal Supply Agreement, dated July 27, 1977, between IS
and Sunoco Energy Development Co. (former parent of Cordero
Mining Co.), and letter memorandum thereto, dated October 29,
1984, relating to the purchase of coal supplies for the fuel
requirements at the Ottumwa Generating Station. (Filed as
Exhibit 10-A-4 to File No. 33-3995).
* 27 Financial Data Schedule
Note: Pursuant to (b)(4)(iii)(A) of Item 601 of Regulation S-K,
Utilities has not filed as an exhibit to this Form 10-K certain
instruments with respect to long-term debt that has not been
registered if the total amount of securities authorized thereunder
does not exceed 10% of total assets of Utilities but hereby
agrees to furnish to the Commission on request any such
instruments.
(b) Reports on Form 8-K for IES Utilities Inc. -
None.
<PAGE>
IES UTILITIES INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Column A Column B Column E
Balance Balance
Description January 1 December 31
(in thousands)
VALUATION AND QUALIFYING ACCOUNTS WHICH ARE DEDUCTED IN THE BALANCE SHEET
FROM THE ASSETS TO WHICH THEY APPLY:
Accumulated Provision for
Uncollectible Accounts:
Year ended December 31, 1997 $ 757 $ 854
========= =========
Year ended December 31, 1996 $ 676 $ 757
========= =========
Year ended December 31, 1995 $ 650 $ 676
========= =========
Note: The above provisions relate to various customer, notes and other
receivable balances included in several line items on the Company's
Consolidated Balance Sheets.
OTHER RESERVES:
Accumulated Provision for Rate Refunds
Year ended December 31, 1997 $ - $ -
========= =========
Year ended December 31, 1996 $ 106 $ -
========= =========
Year ended December 31, 1995 $ - $ 106
========= =========
Accumulated Provision for Merchandise Warranty, Property
Insurance, Injuries and Damages, Workmen's Compensation
and Other Miscellaneous Claims
Year ended December 31, 1997 $ 2,694 $ 3,508
======== ========
Year ended December 31, 1996 $ 2,876 $ 2,694
======== ========
Year ended December 31, 1995 $ 2,516 $ 2,876
======== ========
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the
30th day of March 1998.
IES UTILITIES INC.
By: /s/ Lee Liu
Lee Liu
Chairman of the Board & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on the 30th day of
March 1998.
/s/ Lee Liu Chairman of the Board & Chief Executive Officer
Lee Liu (Principal Executive Officer)
/s/ Thomas M. Walker Executive Vice President & Chief Financial
Thomas M. Walker Officer (Principal Financial Officer)
/s/ John E. Ebright Controller & Chief Accounting Officer (Principal
John E. Ebright Accounting Officer)
Director Director
C.R.S. Anderson J. Wayne Bevis
/s/ Jack R. Newman Director /s/ Robert D. Ray Director
Jack R. Newman Robert D. Ray
/s/ David Q. Reed Director Director
David Q. Reed Henry Royer
/s/ Robert W. Schlutz Director /s/ Anthony R. Weiler Director
Robert W. Schlutz Anthony R. Weiler
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME AND THE CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,366,073
<OTHER-PROPERTY-AND-INVEST> 88,811
<TOTAL-CURRENT-ASSETS> 138,388
<TOTAL-DEFERRED-CHARGES> 12,393
<OTHER-ASSETS> 181,162
<TOTAL-ASSETS> 1,786,827
<COMMON> 33,427
<CAPITAL-SURPLUS-PAID-IN> 279,042
<RETAINED-EARNINGS> 233,216
<TOTAL-COMMON-STOCKHOLDERS-EQ> 545,685
0
18,320
<LONG-TERM-DEBT-NET> 651,848
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 140
0
<CAPITAL-LEASE-OBLIGATIONS> 23,548
<LEASES-CURRENT> 13,183
<OTHER-ITEMS-CAPITAL-AND-LIAB> 534,103
<TOT-CAPITALIZATION-AND-LIAB> 1,786,827
<GROSS-OPERATING-REVENUE> 813,978
<INCOME-TAX-EXPENSE> 42,216<F1>
<OTHER-OPERATING-EXPENSES> 660,208
<TOTAL-OPERATING-EXPENSES> 660,208<F1>
<OPERATING-INCOME-LOSS> 153,770
<OTHER-INCOME-NET> 30
<INCOME-BEFORE-INTEREST-EXPEN> 153,800
<TOTAL-INTEREST-EXPENSE> 52,791
<NET-INCOME> 58,793
914
<EARNINGS-AVAILABLE-FOR-COMM> 57,879
<COMMON-STOCK-DIVIDENDS> 56,000
<TOTAL-INTEREST-ON-BONDS> 46,683
<CASH-FLOW-OPERATIONS> 192,408
<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>
