UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9187
IES INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
Iowa 42-1271452
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
IES Tower, Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (319) 398-4411
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at October 31, 1995
Common Stock, no par value 29,453,952 shares
IES INDUSTRIES INC.
INDEX
Page No.
Part I. Financial Information.
Item 1. Consolidated Financial Statements.
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 3 - 4
Consolidated Statements of Income -
Three, Nine and Twelve Months Ended
September 30, 1995 and 1994 5
Consolidated Statements of Cash Flows -
Three, Nine and Twelve Months Ended
September 30, 1995 and 1994 6
Notes to Consolidated Financial Statements 7 - 18
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition. 19 - 40
Part II. Other Information. 41 - 43
Signatures. 44
PART 1. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30,
1995 December 31,
ASSETS (Unaudited) 1994
(in thousands)
Property, plant and equipment, at original cost:
Utility -
Plant in service -
Electric $ 1,871,496 $ 1,798,059
Gas 162,991 158,115
Other 99,241 86,005
----------- -----------
2,133,728 2,042,179
Less - Accumulated depreciation 943,334 880,888
----------- -----------
1,190,394 1,161,291
Leased nuclear fuel, net of amortization 41,737 49,731
Construction work in progress 68,188 73,339
----------- -----------
1,300,319 1,284,361
Other, net of accumulated depreciation
and amortization of $51,583,000
and $35,767,000, respectively 166,544 154,657
----------- -----------
1,466,863 1,439,018
----------- -----------
Current assets:
Cash and temporary cash investments 4,427 4,993
Accounts receivable -
Customer, less reserve 22,216 26,098
Other 6,827 10,388
Income tax refunds receivable 1,778 6,434
Production fuel, at average cost 16,203 13,988
Materials and supplies, at average cost 27,619 30,216
Adjustment clause balances 0 1,433
Regulatory assets 23,168 20,145
Prepayments and other 21,193 24,692
----------- -----------
123,431 138,387
----------- -----------
Investments:
Nuclear decommissioning trust funds 43,531 33,779
Investment in foreign entities 23,051 0
Cash surrender value of life insurance policies 9,848 8,867
Investment in McLeod, Inc. 9,200 7,500
Other 5,265 4,747
----------- -----------
90,895 54,893
----------- -----------
Other assets:
Regulatory assets 199,485 192,955
Deferred charges and other 22,732 23,840
----------- -----------
222,217 216,795
----------- -----------
$ 1,903,406 $ 1,849,093
=========== ===========
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30,
1995 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1994
(in thousands)
Capitalization:
Common stock - no par value -
authorized 48,000,000 shares;
outstanding 29,345,573 and 28,777,046
shares, respectively $ 386,884 $ 373,490
Retained earnings 222,758 218,293
----------- -----------
Total common equity 609,642 591,783
Cumulative preferred stock of IES Utilities Inc. 18,320 18,320
Long-term debt 515,489 473,206
----------- -----------
1,143,451 1,083,309
----------- -----------
Current liabilities:
Short-term borrowings 49,000 37,000
Capital lease obligations 17,518 14,385
Maturities and sinking funds 65,441 100,422
Accounts payable 62,861 78,582
Dividends payable 16,156 15,839
Accrued interest 10,821 9,494
Accrued taxes 74,416 50,001
Accumulated refueling outage provision 5,242 15,196
Adjustment clause balances 470 0
Provision for rate refund liability 12,966 0
Environmental liabilities 5,408 5,428
Other 19,402 21,844
----------- -----------
339,701 348,191
----------- -----------
Long-term liabilities:
Capital lease obligations 24,219 35,346
Environmental liabilities 40,668 38,288
Other 58,289 58,793
----------- -----------
123,176 132,427
----------- -----------
Deferred credits:
Accumulated deferred income taxes 259,289 245,365
Accumulated deferred investment tax credits 37,789 39,801
----------- -----------
297,078 285,166
----------- -----------
Commitments and contingencies (Note 7)
$ 1,903,406 $ 1,849,093
=========== ===========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
For the Three For the Nine For the Twelve
Months Ended Months Ended Months Ended
September 30 September 30 September 30
1995 1994 1995 1994 1995 1994
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues:
Electric $ 183,876 $ 165,621 $ 433,502 $ 412,610 $ 558,219 $ 543,974
Gas 29,794 18,984 126,786 117,156 175,198 173,828
Other 24,797 22,740 74,019 60,318 96,629 77,972
--------- --------- --------- --------- --------- ---------
238,467 207,345 634,307 590,084 830,046 795,774
--------- --------- --------- --------- --------- ---------
Operating expenses:
Fuel for production 31,945 29,419 71,691 68,067 89,576 92,394
Purchased power 19,954 17,305 53,399 48,132 74,061 69,892
Gas purchased for resale 22,913 11,718 95,269 85,121 130,945 127,305
Other operating expenses 49,994 46,436 143,958 128,513 192,272 174,861
Maintenance 12,548 12,471 36,037 38,297 50,582 49,572
Depreciation and amortization 24,201 21,894 74,662 64,650 96,390 83,114
Taxes other than income taxes 13,202 11,402 40,009 36,474 49,836 46,288
--------- --------- --------- --------- --------- ---------
174,757 150,645 515,025 469,254 683,662 643,426
--------- --------- --------- --------- --------- ---------
Operating income 63,710 56,700 119,282 120,830 146,384 152,348
--------- --------- --------- --------- --------- ---------
Interest expense and other:
Interest expense 12,675 11,399 37,710 33,864 49,468 46,105
Allowance for funds used
during construction -762 -1,087 -2,662 -2,964 -3,608 -3,958
Preferred dividend requirements
of IES Utilities Inc. 229 229 686 686 914 914
Miscellaneous, net -1,266 -413 -1,776 -873 -3,991 2,324
--------- --------- --------- --------- --------- ---------
10,876 10,128 33,958 30,713 42,783 45,385
--------- --------- --------- --------- --------- ---------
Income before income taxes 52,834 46,572 85,324 90,117 103,601 106,963
--------- --------- --------- --------- --------- ---------
Income taxes:
Current 21,640 18,465 24,235 33,503 28,255 30,183
Deferred 741 761 12,733 4,599 14,842 13,236
Amortization of investment
tax credits -667 -663 -2,012 -1,996 -2,674 -4,772
--------- --------- --------- --------- --------- ---------
21,714 18,563 34,956 36,106 40,423 38,647
--------- --------- --------- --------- --------- ---------
Net income $ 31,120 $ 28,009 $ 50,368 $ 54,011 $ 63,178 $ 68,316
========= ========= ========= ========= ========= =========
Average number of common
shares outstanding 29,314 28,633 29,110 28,493 29,023 28,442
========= ========= ========= ========= ========= =========
Earnings per average
common share $ 1.06 $ 0.98 $ 1.73 $ 1.90 $ 2.18 $ 2.40
========= ========= ========= ========= ========= =========
Dividends declared per
common share $ 0.525 $ 0.525 $ 1.575 $ 1.575 $ 2.10 $ 2.10
========= ========= ========= ========= ========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
For the Three For the Nine For the Twelve
Months Ended Months Ended Months Ended
September 30 September 30 September 30
1995 1994 1995 1994 1995 1994
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 31,120 $ 28,009 $ 50,368 $ 54,011 $ 63,178 $ 68,316
Adjustments to reconcile net income to
net cash flows from operating activities -
Depreciation and amortization 24,201 21,894 74,662 64,650 96,390 83,114
Principal payments under capital
lease obligations 4,934 4,079 10,801 12,584 14,463 16,304
Deferred taxes and investment tax credits 74 98 10,721 2,603 12,168 8,464
Refueling outage provision 3,006 3,338 -9,954 9,389 -6,807 8,048
Amortization of deferred charges 1,837 277 3,987 821 4,301 1,092
Other 340 714 1,731 2,880 766 9,393
Other changes in assets and liabilities -
Accounts receivable -9,714 3,439 -3,557 15,598 -12,378 11,587
Production fuel, materials and supplies 963 -1,170 132 1,310 -2,362 -588
Accounts payable 4,092 3,388 -11,703 -2,635 12,803 -2,905
Accrued taxes 31,909 21,416 29,071 23,966 9,679 17,208
Provision for rate refunds 2,759 0 12,966 -8,670 12,966 -7,852
Adjustment clause balances -7 -3,575 1,903 -5,648 969 -291
Gas in storage -4,737 -6,627 5,403 2,082 4,457 25
Other -4,125 10,066 -1,049 9,020 -585 4,363
-------- -------- -------- -------- -------- --------
Net cash flows from operating
activities 86,652 85,346 175,482 181,961 210,008 216,278
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Dividends declared on common stock -15,404 -15,043 -45,903 -44,959 -61,012 -59,818
Proceeds from issuance of common stock 3,494 3,615 11,495 13,528 14,402 16,590
Purchase of treasury stock 0 0 0 -6,233 0 -6,233
Proceeds from issuance of long-term debt 28,200 10,000 57,504 44,640 73,004 148,140
Reductions in long-term debt -71 -8,769 -50,351 -9,723 -50,417 -29,457
Net change in short-term borrowings -38,000 -3,300 12,000 -24,000 49,000 -78,500
Principal payments under capital
lease obligations -3,314 -4,078 -9,529 -12,225 -13,608 -13,102
Sale of utility accounts receivable 9,000 0 11,000 -200 12,000 -200
Other 95 -155 317 90 369 484
-------- -------- -------- -------- -------- --------
Net cash flows from financing
activities -16,000 -17,730 -13,467 -39,082 23,738 -22,096
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Construction and acquisition
expenditures -
Utility -31,519 -33,369 -89,118 -81,704 -146,165 -119,933
Other -39,046 -19,255 -58,523 -41,673 -84,426 -52,724
Nuclear decommissioning trust funds -1,832 -1,383 -4,598 -4,149 -5,981 -5,532
Deferred energy efficiency costs -4,987 -4,340 -12,965 -11,511 -17,611 -15,221
Proceeds from disposition of assets 3,865 603 9,920 3,203 15,515 11,052
Other -2,105 263 -7,297 -1,792 -3,369 -2,461
-------- -------- -------- -------- -------- --------
Net cash flows from investing
activities -75,624 -57,481 -162,581 -137,626 -242,037 -184,819
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and
temporary cash investments -4,972 10,135 -566 5,253 -8,291 9,363
-------- -------- -------- -------- -------- --------
Cash and temporary cash investments
at beginning of period 9,399 2,583 4,993 7,465 12,718 3,355
-------- -------- -------- -------- -------- --------
Cash and temporary cash investments
at end of period $ 4,427 $ 12,718 $ 4,427 $ 12,718 $ 4,427 $ 12,718
======== ======== ======== ======== ======== ========
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 9,860 $ 9,026 $ 34,821 $ 31,436 $ 47,418 $ 41,551
======== ======== ======== ======== ======== ========
Income taxes $ 1,239 $ 6,153 $ 9,588 $ 21,949 $ 23,736 $ 32,218
======== ======== ======== ======== ======== ========
Noncash investing and financing
activities -
Capital lease obligations incurred $ 149 $ 10,828 $ 2,807 $ 11,252 $ 5,851 $ 11,460
======== ======== ======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1995
(1) GENERAL:
The interim Consolidated Financial Statements have been
prepared by IES Industries Inc. (Industries) and its
consolidated subsidiaries (collectively the Company), without
audit, pursuant to the rules and regulations of the United
States Securities and Exchange Commission. Industries'
wholly-owned subsidiaries are IES Utilities Inc. (Utilities)
and IES Diversified Inc. (Diversified). Certain information
and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant
to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information
presented not misleading. In the opinion of the Company, the
Consolidated Financial Statements include all adjustments,
which are normal and recurring in nature, necessary for the
fair presentation of the results of operations and financial
position. Certain prior period amounts have been reclassified
on a basis consistent with the 1995 presentation.
It is suggested that these Consolidated Financial
Statements be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in the
Company's Form 10-K for the year ended December 31, 1994. The
accounting and financial policies relative to the following
items have been described in those notes and have been omitted
herein because they have not changed materially through the
date of this report:
Summary of significant accounting policies
Acquisition of Iowa service territory of Union Electric Company (UE)
Leases
Utility accounts receivable (other than discussed in Note 3)
Income taxes
Benefit plans
Common stock (other than discussed in Note 5)
Preferred and preference stock
Debt (other than discussed in Note 6)
Estimated fair value of financial instruments
Commitments and contingencies (other than discussed in Note 7)
Jointly-owned electric utility plant
Segments of business
(2) RATE MATTERS:
(a) 1995 Gas Rate Case -
On August 4, 1995, Utilities applied to the Iowa
Utilities Board (IUB) for an annual increase in gas rates of
$8.8 million, or 6.2%. An interim increase of $8.6 million
was requested. The IUB approved an interim increase of $7.1
million annually, effective October 11, 1995, subject to
refund. Utilities expects that the final rate level will be
determined no later than the second quarter of 1996.
(b) 1994 Electric Rate Case -
In 1994, Utilities applied to the IUB for an increase in
retail electric rates of approximately $26 million annually,
or 5.2%. In May 1995, the IUB issued an order requiring an
annual reduction in retail electric revenues of $15.8 million.
While minor movement toward pricing consistency between the
different pricing zones will result, proposals to increase
recovery levels of nuclear depreciation expense and nuclear
decommissioning expense were rejected. The Board also ruled
against Utilities on issues of recovery for the full purchase
prices of Union Electric's Iowa service territory and smaller,
low-cost, used generating plants, even though customers are
currently benefiting from the acquisitions.
Utilities and several intervenors filed applications for
rehearing with the IUB requesting rehearing on various issues
in the order and Utilities was granted rehearing on two of the
smaller issues. The IUB denied rehearing on all other issues,
including the intervenors' issues. The IUB issued its Order
Granting Rehearing in Part and Denying Rehearing in Part on
June 30, 1995, which made minor adjustments to its original
decision resulting in a revised annual retail rate reduction
of approximately $14.4 million. No petitions were filed with
the Iowa district court by any of the parties to the case.
On August 16, 1995, Utilities received approval from the
IUB to implement final prices. Northern and Southeastern zone
price changes became effective on that date. Utilities has
recorded a pre-tax reserve for rate refund, including
interest, of $13.0 million at September 30, 1995. Utilities
expects to make the rate refund in the fourth quarter and
there will be no further effect on 1995 electric revenues and
net income when the refund is made.
There will not be any revenue requirement change in the
Southern zone as a result of the IUB order. A price design
change will be implemented in the Southern zone, effective
January 1, 1996, but there will be no refund obligation as the
result of this change.
(c) 1994 Energy Efficiency Cost Recovery Filing -
The IUB has adopted rules that mandate Utilities to spend
2% of electric and 1.5% of gas gross retail operating revenues
for energy efficiency programs. Under provisions of the IUB
rules, Utilities applied in August 1994 to the IUB for
recovery of approximately $23 million and $13 million for the
electric and gas programs, respectively, related to costs
incurred through 1993 for such programs. The $36 million
total for the electric and gas programs is comprised of
$21 million of direct expenditures and carrying costs
(recorded as a "Regulatory asset" in the Consolidated Balance
Sheets, including $5.4 million as current), $7 million for a
return on the expenditures over the recovery period and
$8 million for a reward based on a sharing of the benefits of
such programs.
In April 1995, the IUB issued its Final Decision and
Order concerning Utilities' energy efficiency expenditures,
which allows Utilities to recover its direct expenditures,
carrying costs, and a return on its expenditures, as well as a
reward of approximately $4 million for a total allowed
recovery of approximately $32 million. Recovery of energy
efficiency costs will be over a four-year period and began on
June 1, 1995.
In May 1995, the Office of Consumer Advocate (OCA) and an
intervenor filed applications for rehearing with the IUB
concerning the amount of the reward granted by the IUB. Since
the identical issue was pending before the court in another
utility's proceeding, the OCA, the intervenor and Utilities
agreed to be bound by the ultimate decision in the other
utility's court proceeding. That proceeding has been resolved
in favor of the other utility. Utilities does not, therefore,
have a refund obligation.
(3) UTILITY ACCOUNTS RECEIVABLE:
Utilities has entered into an agreement, which expires in
1999, with a financial institution to sell, with limited
recourse, an undivided fractional interest of up to
$65 million in its pool of utility accounts receivable. At
September 30, 1995, $65 million was sold under the agreement.
(4) INVESTMENT IN FOREIGN ENTITIES:
At September 30, 1995, the Company had $23.1 million of
investments in foreign entities on its Consolidated Balance
Sheet which included a) investments in two New Zealand
electric distribution entities b) a loan to a New Zealand
company, and c) an investment in an international venture
capital fund. The Company's equity ownership interests in the
electric distribution entities and international venture
capital fund are currently less than 10% and the Company is
accounting for these investments under the cost method.
(5) COMMON STOCK:
In March 1995, Industries issued 75,638 shares of its
common stock for the purchase of certain oil and gas
companies, which are now wholly-owned subsidiaries of Whiting
Petroleum Corporation (Whiting), a wholly-owned subsidiary of
Diversified.
(6) DEBT:
(a) Long-Term Debt -
In October 1995, Utilities repaid at maturity $50 million
of Series X, 9.42% First Mortgage Bonds, by issuing additional
commercial paper. Utilities expects to replace the commercial
paper with other long-term securities during the fourth
quarter of 1995. Effective with the maturity of the Series X
bonds, retained earnings are no longer restricted as to the
payment of cash dividends.
In March 1995, Utilities repaid at maturity $50 million
of Series W, 9.75% First Mortgage Bonds and, in a separate
transaction, issued $50 million of Collateral Trust Bonds,
7.65%, due 2000.
Diversified has a variable rate credit facility that
extends through November 9, 1997, with two one-year extensions
available to Diversified. The facility also serves as a stand-
by agreement for Diversified's commercial paper program. The
agreement provides for a combined maximum of $150 million of
borrowings under the agreement and commercial paper to be
outstanding at any one time. Interest rates and maturities
are set at the time of borrowing for direct borrowings under
the agreement and for issuances of commercial paper. The
interest rate options are based upon quoted market rates and
the maturities are less than one year. At September 30, 1995,
there were no borrowings outstanding under this facility.
Diversified had $88 million of commercial paper outstanding at
September 30, 1995, with interest rates ranging from 5.87% to
6.25% and maturity dates in the fourth quarter of 1995, which
was also supported by the facility. Diversified intends to
continue borrowing under the renewal options of the facility
and no conditions exist at September 30, 1995, that would
prevent such borrowings. Accordingly, this debt is classified
as long-term in the Consolidated Balance Sheets.
(b) Long-Term Debt of McLeod, Inc. -
At September 30, 1995, Diversified had a $9.2 million
investment in Class B Common Stock of McLeod, Inc. (McLeod),
which represents a voting interest of less than 20%. McLeod
provides local and long-distance telecommunication services to
business customers and other services related to fiber optics.
In 1994, Diversified entered into an agreement whereby it will
guarantee $6 million under a credit facility between McLeod
and its bankers. Diversified is paid an annual commitment fee
and receives options to purchase additional shares of Class B
Common Stock for as long as the guarantee remains outstanding.
At September 30, 1995, McLeod had no borrowings outstanding
under its facility.
(c) Short-Term Debt -
At September 30, 1995, the Company had bank lines of
credit aggregating $101.1 million (Industries - $1.5 million,
Utilities - $91.1 million, Diversified - $7.5 million and
Whiting - $1.0 million). Utilities was using $49 million to
support commercial paper (weighted average interest rate of
5.80%) and $11.1 million to support certain pollution control
obligations. In October 1995, Utilities increased its bank
lines of credit by $30 million in order to finance the
redemption of the Series X bonds. Commitment fees are paid to
maintain these lines and there are no conditions which
restrict the unused lines of credit. In addition to the
above, Utilities has an uncommitted credit facility with a
financial institution whereby it can borrow up to $40 million.
Rates are set at the time of borrowing and no fees are paid to
maintain this facility. At September 30, 1995, there were no
borrowings outstanding under this facility.
(7) CONTINGENCIES:
(a) Environmental Liabilities -
The Company has recorded environmental liabilities of
approximately $46 million, including $5.4 million as current
liabilities, in its Consolidated Balance Sheets at
September 30, 1995. The significant items are discussed
below.
Former Manufactured Gas Plant (FMGP) Sites
Utilities has been named as a Potentially Responsible
Party (PRP) by various federal and state environmental
agencies for 28 FMGP sites, but believes it is not responsible
for two of these sites. There are also six other sites for
which it may be designated as a PRP in the future. Utilities
is working pursuant to the requirements of the various
agencies to investigate, mitigate, prevent and remediate,
where necessary, damage to property, including damage to
natural resources, at and around the sites in order to protect
public health and the environment. Utilities believes it has
completed the remediation of five sites although it is in the
process of obtaining final approval from the applicable
environmental agencies on this issue for each site. Utilities
is in various stages of the investigation and/or remediation
processes for 19 sites and expects to begin the investigation
process in 1995 or 1996 for the other sites.
Utilities has recorded environmental liabilities related
to the FMGP sites of approximately $32 million (including
$4.5 million as current liabilities) at September 30, 1995.
These amounts are based upon Utilities' best current estimate
of the amount to be incurred for investigation and remediation
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 or has not started. 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. Utilities may be required to
monitor these sites for a number of years upon completion of
remediation, as is the case with several of the sites for
which remediation has been completed.
Utilities has begun pursuing coverage for investigation,
mitigation, prevention, remediation, and monitoring costs from
its insurance carriers and is investigating the potential for
third party cost sharing for FMGP investigation and clean-up
costs. The amount of shared costs, if any, cannot be
reasonably determined and, accordingly, no potential sharing
has been recorded at September 30, 1995. Regulatory assets of
approximately $32 million, which reflect the future recovery
that is being provided through Utilities' rates, have been
recorded in the Consolidated Balance Sheets. Considering the
current rate treatment allowed by the IUB, management believes
that the clean-up costs incurred by Utilities for these FMGP
sites will not have a material adverse effect on its financial
position or results of operations.
Oil and Gas Properties Dismantlement and Abandonment
Costs
Whiting is responsible for certain dismantlement and
abandonment costs related to various off-shore oil and gas
properties, the most significant of which is located off the
coast of California. Whiting accrues these costs as reserves
are extracted and such costs are included in "Depreciation and
amortization" in the Consolidated Statements of Income. A
corresponding environmental liability, $1.4 million at
September 30, 1995, has been recognized in the Consolidated
Balance Sheets for the cumulative amount expensed.
(b) Clean Air Act -
The Clean Air Act Amendments of 1990 (Act) requires
emission reductions of sulfur dioxide and nitrogen oxides to
achieve reductions of atmospheric chemicals believed to cause
acid rain. The provisions of the Act will be implemented in
two phases with Phase I affecting two of Utilities' units
beginning in 1995 and Phase II affecting all units beginning
in the year 2000. Utilities has completed the modifications
necessary to meet the Phase I requirements and has installed
continuous emission monitors on all affected units as required
by the Act.
Utilities expects to meet the requirements of Phase II by
switching to lower sulfur fuels and through capital
expenditures primarily related to fuel burning equipment and
boiler modifications. Utilities estimates capital
expenditures of approximately $22.5 million, including
$4.4 million in 1995, in order to meet the requirements of the
Act.
(c) Federal Energy Regulatory Commission (FERC) Order
No. 636 -
The FERC issued Order No. 636 (Order 636) in 1992, which
substantially changed how Utilities manages its gas supply.
As a result of Order 636, Utilities has enhanced access to
competitively priced gas supply and more flexible
transportation services, however, Utilities is required to pay
certain transition costs incurred and billed by its pipeline
suppliers.
Utilities' three pipeline suppliers have made filings
with the FERC to collect their respective known transition
costs, and additional filings are expected. At September 30,
1995, Utilities has recorded a liability of $4.9 million for
those transition costs that have been incurred by the
pipelines to date, including $1.9 million expected to be
billed through September 1996. Utilities is currently
recovering the transition costs from its customers through its
Purchased Gas Adjustment Clauses as such costs are billed by
the pipelines. The ultimate level of costs to be billed to
Utilities depends on the pipelines' filings with the FERC and
other future events, including the market price of natural
gas, and could approximate $8 million more than the amount
recorded. However, Utilities believes any transition costs
billed by its pipeline suppliers would be recovered from its
customers, based upon regulatory treatment of these costs to
date by the IUB. Accordingly, regulatory assets, in amounts
corresponding to the recorded liabilities, have been recorded
to reflect the anticipated recovery.
(d) 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 Duane Arnold Energy Center (DAEC),
Utilities' nuclear generating facility, 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 Mutual Limited (NML) and
Nuclear Electric Insurance Limited (NEIL). These companies
provide $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 the cost of replacement power during certain
outages. Owners of nuclear generating stations insured
through NML and NEIL are subject to retroactive premium
adjustments if losses exceed accumulated reserve funds. NML
and 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
replacement power coverages. However, Utilities could be
assessed annually a maximum of $3.1 million under NML, $8.5
million for NEIL property and $0.7 million for NEIL
replacement power if losses exceed the accumulated reserves
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion analyzes significant changes in
the components of net income and financial condition from the
prior periods for IES Industries Inc. (Industries) and its
consolidated subsidiaries (collectively the Company).
Industries' wholly-owned subsidiaries are IES Utilities Inc.
(Utilities) and IES Diversified Inc. (Diversified).
RESULTS OF OPERATIONS
The Company's net income increased or (decreased)
$3.1 million, ($3.6) million and ($5.1) million during the
three, nine and twelve month periods, respectively, ended
September 30, 1995. Earnings per average common share
increased or (decreased) $0.08, ($0.17) and ($0.22) for the
respective periods. The warmer than normal weather during the
summer of 1995 significantly impacted the 1995 results of
operations. The 1995 earnings were also significantly
affected by the impact of the Iowa Utilities Board's (IUB)
price reduction order in Utilities' recent electric rate case.
The Company estimates the effects of the rate order reduced
the earnings per share for the three, nine and twelve month
periods by $0.13, $0.28 and $0.28, respectively. The positive
impact of the warmer than normal weather was greater than the
negative impact of the price reduction for the quarter and
partially offset the impact of the price reduction for the
nine and twelve month periods. See Note 2(b) of the Notes to
Consolidated Financial Statements for a further discussion of
the electric rate case.
The Company's operating income increased or (decreased)
$7.0 million, ($1.5) million and ($6.0) million during the
three, nine and twelve month periods, respectively. Reasons
for the changes in the results of operations are explained
further in the following discussion.
ELECTRIC REVENUES
Electric revenues and Kwh sales (before off-system sales)
for Utilities increased for the periods ended September 30,
1995, as compared with the prior periods, as follows:
Three Nine Twelve
Months Months Months
($ in millions)
Electric revenues $ 18.3 $ 20.9 $ 14.2
Electric sales (excluding
off-system sales):
Residential and Rural 26.2% 9.1% 5.8%
Commercial 10.0 4.2 3.4
Industrial 2.5 5.8 5.4
Total 9.9% 5.2% 4.3%
Warmer than normal weather during the summer of 1995
significantly increased sales during the second and third
quarters. Utilities set new usage records several times,
culminated by a new energy peak usage record of 1,824
megawatts on July 12, 1995. Sales during the nine and twelve
month periods also benefited from the effects of Utilities'
annual true-up adjustment to unbilled sales which was recorded
during the second quarter of 1995. Excluding the effects of
weather and the unbilled sales adjustment, total sales
(excluding off-system sales) during the three, nine and twelve
month periods increased 2.5%, 2.3% and 2.5%, respectively.
The growth in industrial sales continues to reflect the
underlying strength of the economy as industrial expansions in
Utilities' service territory continue.
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 to
customers.
Electric revenues include a pre-tax reserve for rate
refund ($8.0 million, $1.7 million and $2.4 million recorded
in the first, second and third quarters of 1995, respectively)
recorded by Utilities as a result of the IUB order.
Approximately $3.5 million of the reserve recorded in the
first quarter relates to revenues collected in the fourth
quarter of 1994. The new electric prices went into effect
August 16, 1995. See Note 2(b) of the Notes to Consolidated
Financial Statements for a further discussion of the electric
rate case.
The revenue increases during all three periods were
primarily due to the increased sales (excluding off-system
sales) and higher fuel costs collected through the EAC. The
unbilled revenue adjustment recorded during the second quarter
of 1995 also contributed to the nine and twelve month
increases. These items were partially offset by the effect of
the price reduction and lower off-system sales.
GAS REVENUES
Gas revenues increased or (decreased) for the periods
ended September 30, 1995, as compared with the prior periods,
as follows:
Three Nine Twelve
Months Months Months
($ in millions)
Gas revenues:
Utilities $ 2.0 $ (11.3) $ (22.5)
Industrial Energy
Applications, Inc. (IEA) 8.8 20.9 23.9
$ 10.8 $ 9.6 $ 1.4
Utilities' gas sales in therms increased or (decreased)
for the periods ended September 30, 1995, as compared with the
prior periods, as follows:
Three Nine Twelve
Months Months Months
Residential 13.9% (4.4%) (8.7%)
Commercial 7.7 (4.2) (8.3)
Industrial (25.1) (27.2) (18.3)
Sales to consumers 1.1 (7.2) (9.9)
Transported volumes 22.3 28.9 29.9
Total 11.4% 1.4% (1.4%)
Under normal weather conditions, sales to consumers would
have decreased (0.5%), (3.6%) and (4.5%) during the three,
nine and twelve month periods, respectively.
Utilities' gas tariffs include purchased gas adjustment
clauses (PGA) that are designed to currently recover the cost
of gas sold. The change in Utilities' gas revenues each
period is primarily due to the level of gas costs recovered
through the PGA. The decreased gas cost recoveries during the
nine and twelve month periods are due to lower gas prices as
well as a shift in the sales mix between industrial sales and
transported volumes; Utilities does not purchase the gas for
the transported volumes. The increase in IEA's gas revenues
for all periods is primarily due to increased gas volumes,
partially offset by lower gas costs during the nine and twelve
month periods.
On August 4, 1995, Utilities applied to the IUB for an
annual increase in gas rates of $8.8 million, or 6.2%. An
annual interim increase of approximately $7.1 million went
into effect on October 11, 1995. See Note 2(a) of the Notes
to Consolidated Financial Statements for a further discussion.
OTHER REVENUES
Other revenues increased $2.1 million, $13.7 million and
$18.7 million during the three, nine and twelve month periods,
respectively, primarily because of increased revenues at
Whiting Petroleum Company (Whiting). Whiting's operations
have expanded significantly the last several years as a result
of acquisitions of oil and gas properties. These increases
were partially offset as the result of the sale of several of
Diversified's subsidiaries during the last twelve months. The
ongoing impact of these sales on the Company's results of
operations and financial position is insignificant.
OPERATING EXPENSES
Fuel for production increased or (decreased)
$2.5 million, $3.6 million and ($2.8) million during the
three, nine and twelve month periods, respectively. The three
and nine month increases are due to higher fuel cost
recoveries through the EAC, which are included in fuel for
production, and a higher average fuel cost. The nine month
increase was partially offset by a decrease in the amount of
Kwh generation. The Duane Arnold Energy Center (DAEC),
Utilities' nuclear generating facility, was down from late
February 1995 through late April 1995 for a scheduled
refueling outage. There was no such refueling outage in 1994.
The twelve month decrease is primarily due to lower fuel cost
recoveries through the EAC and a decrease in the amount of Kwh
generation, partially offset by a higher average fuel cost.
Purchased power increased $2.6 million, $5.3 million and
$4.2 million during the three, nine and twelve month periods,
respectively. The increase for all three periods is due to
increased energy purchases, resulting from the increased sales
and the decrease in generation, which were partially offset by
lower capacity costs.
Gas purchased for resale increased $11.2 million, $10.1
million and $3.6 million during the three, nine and twelve
month periods, respectively. Increased gas sales at IEA
contributed significantly to the increase for all three
periods. The nine and twelve month increases were partially
offset by lower sales to consumers at Utilities and lower
natural gas prices.
Other operating expenses increased $3.6 million, $15.4
million and $17.4 million during the three, nine and twelve
month periods, respectively. Increases in labor and benefits
costs, costs relating to a project to review and redesign
Utilities' business processes and increased operating
activities at Whiting and IEA contributed to the increases for
all three periods. Higher former manufactured gas plant
(FMGP) clean-up costs and information technology costs at
Utilities also contributed to the increases for the nine and
twelve month periods. The increases for all three periods
were partially offset by lower insurance costs at Utilities
and decreased costs resulting from the sale of the Diversified
subsidiaries.
Maintenance expenses increased or (decreased)
$0.1 million, ($2.3) million and $1.0 million during the
three, nine and twelve month periods, respectively. The nine
month decrease is due to lower non-labor costs at the DAEC,
partially offset by higher labor costs. The twelve month
increase is primarily due to increased labor costs, partially
offset by lower non-labor costs at Utilities' generating
stations.
Depreciation and amortization increased $2.3 million,
$10.0 million and $13.3 million during the three, nine and
twelve month periods primarily because of increases in utility
plant in service and the acquisition of oil and gas operating
properties. Such increases were partially offset by lower
depreciation rates implemented at Utilities during the third
quarter of 1995 as a result of the IUB price reduction order.
Depreciation and amortization expenses for all periods include
a provision for decommissioning the DAEC, which is collected
through rates. The annual recovery level was increased to
$6.0 million as a result of Utilities' recent electric rate
case. Previously, the annual amount allowed to be collected
through rates was $5.5 million.
The staff of the United States Securities and Exchange
Commission (SEC) has questioned certain of the current
accounting practices of the electric utility industry
regarding the recognition, measurement and classification of
decommissioning costs for nuclear generating stations in the
financial statements of electric utilities. In response to
these questions, the Financial Accounting Standards Board
(FASB) has agreed to review the accounting for removal costs,
including decommissioning. If current electric utility
industry accounting practices for such decommissioning are
changed: (1) annual provisions for decommissioning could
increase, (2) the estimated cost for decommissioning could be
recorded as a liability rather than as accumulated
depreciation, and (3) trust fund income from the external
decommissioning trusts could be reported as investment income
rather than as a reduction to decommissioning expense. If
such changes are required, Utilities believes that there would
not be an adverse effect on its financial position or results
of operations based on current rate making practices; the
Company cannot predict future rate making practices.
Taxes other than income taxes increased $1.8 million,
$3.5 million and $3.5 million during the three, nine and
twelve month periods, respectively. Increases during all
periods are primarily the result of higher property taxes at
Utilities due to increases in assessed property values.
INTEREST EXPENSE AND OTHER
Interest expense increased $1.3 million, $3.8 million and
$3.4 million during the three, nine and twelve month periods,
respectively. The increases for all three periods are
primarily due to an increase in the average amount of short-
term debt outstanding and interest related to Utilities' rate
reserve.
Miscellaneous, net reflects a $6.3 million increase in
income during the twelve month period. The current twelve
month period includes gains on the sale of several investments
by Diversified's subsidiaries. Certain property write-downs
at Diversified recorded in the prior twelve month period also
contributed to the increase. These items were partially
offset by an increase in the fees related to the sale of
utility accounts receivable as the amount of receivables sold
during the current twelve month period has increased.
Income taxes increased or (decreased) $3.2 million,
($1.2) million and $1.8 million during the three, nine and
twelve month periods, respectively. For each period, income
tax expense increased because of a higher effective tax rate
resulting from: 1) effect of property related temporary
differences for which deferred income taxes have not been
provided under current rate making principles, which are now
becoming payable and are being recovered from ratepayers, and
2) effect of prior period audit adjustments recorded during
the current period. A decrease in pre-tax income more than
offset these effects during the nine month period and
partially offset the twelve month increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily
attributable to Utilities' construction programs, its debt
maturities and sinking fund requirements and the level of
Diversified's business opportunities. The Company's pre-tax
ratio of earnings to fixed charges was 3.11 and 3.34 for the
twelve months ended September 30, 1995 and September 30, 1994,
respectively. Cash flows from operating activities for the
twelve months ending September 30, 1995, were $210 million.
The Company anticipates that future capital requirements
will be met by cash generated from operations and external
financing. The level of cash generated from operations is
partially dependent upon economic conditions, legislative
activities, environmental matters and timely rate relief for
Utilities. (See Notes 2 and 7 of the Notes to Consolidated
Financial Statements).
Access to the long-term and short-term capital and credit
markets is necessary for obtaining funds externally. The
Company's debt ratings are as follows:
Moody's Standard & Poor's
Utilities - Long-term debt A2 A
- Short-term debt P1 A1
Diversified - Short-term debt P2 A2
The Company's liquidity and capital resources will be
affected by environmental and legislative issues, including
the ultimate disposition of remediation issues surrounding the
Company's environmental liabilities, the Clean Air Act as
amended and FERC Order 636, as discussed in Note 7 of the
Notes to Consolidated Financial Statements. Consistent with
rate making principles of the IUB, management believes that
the costs incurred for the above matters will not have a
material adverse effect on the financial position or results
of operations of the Company.
The IUB has adopted rules which require Utilities to
spend 2% of electric and 1.5% of gas gross retail operating
revenues annually for energy efficiency programs. Energy
efficiency costs in excess of the amount in the most recent
electric and gas rate cases are being recorded as regulatory
assets by Utilities. At September 30, 1995, Utilities had
$46 million of such costs recorded as regulatory assets. On
June 1, 1995, Utilities began its recovery of those costs
incurred through 1993. See Note 2(c) of the Notes to
Consolidated Financial Statements for a further discussion.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program
anticipates expenditures of approximately $202 million for
1995, of which approximately $163 million represents
expenditures at Utilities and approximately $39 million
represents expenditures at Diversified. Of the $163 million
of Utilities' expenditures, 32% represents expenditures for
electric transmission and distribution facilities, 23%
represents fossil-fueled generation expenditures, 15%
represents expenditures for steam distribution plant and 9%
represents nuclear generation expenditures. The remaining 21%
represents miscellaneous electric, gas and general
expenditures. Diversified's anticipated expenditures include
approximately $26 million at Whiting. In addition to the
$163 million, Utilities anticipated expenditures of
$13 million in connection with mandated energy efficiency
programs. Substantial commitments have been made in
connection with all such expenditures.
The Company had construction and acquisition expenditures
of approximately $148 million for the nine months ended
September 30, 1995, including approximately $89 million
utility related and approximately $59 million non-utility
related. Utilities has revised its construction and
acquisition program, decreasing its anticipated 1995
expenditures of $163 million by approximately $20 million.
However, Diversified's 1995 expenditures are likely to be
slightly more than twice as high as the initial $39 million
estimate due to additional investment opportunities in foreign
entities and oil and gas properties.
The Company's levels of construction and acquisition
expenditures are projected to be $230 million in 1996,
$209 million in 1997, $235 million in 1998 and $227 million in
1999. It is estimated that approximately 70% of construction
and acquisition expenditures will be provided by cash from
operating activities (after payment of dividends) for the five-
year period 1995-1999.
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.
LONG-TERM FINANCING
Other than Utilities' periodic sinking fund requirements,
which Utilities intends to meet by pledging additional
property, the following long-term debt will mature prior to
December 31, 1999 (excluding the Series X which was repaid at
maturity in October 1995):
(in millions)
Issue:
Utilities $ 73.6
Diversified's variable rate credit facility 88.0
Other subsidiaries' debt 11.5
$ 173.1
The Company intends to refinance the majority of the debt
maturities with long-term securities.
In October 1995, Utilities repaid at maturity $50 million
of Series X, 9.42% First Mortgage Bonds, by issuing additional
commercial paper. Utilities expects to replace the commercial
paper with other long-term securities during the fourth
quarter of 1995. Effective with the maturity of the Series X
bonds, retained earnings are no longer restricted as to the
payment of cash dividends.
In March 1995, Utilities repaid at maturity $50 million
of Series W, 9.75% First Mortgage Bonds and, in a separate
transaction, issued $50 million of Collateral Trust Bonds,
7.65%, due 2000.
Utilities has entered into an Indenture of Mortgage and
Deed of Trust dated September 1, 1993 (New Mortgage). The New
Mortgage provides for, among other things, the issuance of
Collateral Trust Bonds upon the basis of First Mortgage Bonds
being issued by Utilities. The lien of the New Mortgage is
subordinate to the lien of Utilities' first mortgages until
such time as all bonds issued under the first mortgages have
been retired and such mortgages satisfied. Accordingly, to the
extent that Utilities issues Collateral Trust Bonds on the
basis of First Mortgage Bonds, it must comply with the
requirements for the issuance of First Mortgage Bonds under
Utilities' first mortgages. Under the terms of the New
Mortgage, Utilities has covenanted not to issue any additional
First Mortgage Bonds under its first mortgages except to
provide the basis for issuance of Collateral Trust Bonds.
The Indentures pursuant to which Utilities issues First
Mortgage Bonds constitute direct first mortgage liens upon
substantially all tangible public utility property and contain
covenants which restrict the amount of additional bonds which
may be issued. At September 30, 1995, such restrictions would
have allowed Utilities to issue at least $258 million of
additional First Mortgage Bonds. Utilities has received
authority from the FERC to issue $250 million of long-term
debt, of which $50 million was used in March 1995 to issue
Collateral Trust Bonds. Utilities has filed a registration
statement with the SEC with respect to $250 million of long-
term debt; the registration statement has not yet become
effective.
Diversified has a variable rate credit facility that
extends through November 9, 1997, with two one-year extensions
available to Diversified. The facility also serves as a stand-
by agreement for Diversified's commercial paper program. The
agreement provides for a combined maximum of $150 million of
borrowings under the agreement and commercial paper to be
outstanding at any one time. Interest rates and maturities
are set at the time of borrowing for direct borrowings under
the agreement and for issuances of commercial paper. The
interest rate options are based upon quoted market rates and
the maturities are less than one year. At September 30, 1995,
there were no borrowings outstanding under this facility.
Diversified had $88 million of commercial paper outstanding at
September 30, 1995, with interest rates ranging from 5.87% to
6.25% and maturity dates in the fourth quarter of 1995, which
was also supported by the facility. Diversified intends to
continue borrowing under the renewal options of the facility
and no conditions exist at September 30, 1995, that would
prevent such borrowings. Accordingly, this debt is classified
as long-term in the Consolidated Balance Sheets.
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 September 30, 1995, Utilities could have issued an
additional 700,000 shares of Cumulative Preference Stock and
100,000 additional shares of Cumulative Preferred Stock. In
addition, Industries had 5,000,000 shares of Cumulative
Preferred Stock, no par value, authorized for issuance, none
of which were outstanding at September 30, 1995.
The Company's capitalization ratios at September 30, were
as follows:
1995 1994
Long-term debt 48% 48%
Preferred stock 2 2
Common equity 50 50
100% 100%
The 1995 and 1994 ratios include
$65 million and $50 million, respectively, of
long-term debt due in less than one year because
it was the Company's intention to refinance the
debt with long-term securities.
SHORT-TERM FINANCING
For interim financing, Utilities is authorized by the
FERC to issue, through 1996, up to $200 million of short-term
notes. In addition to providing for ongoing working capital
needs, this availability of short-term financing provides
Utilities flexibility in the issuance of long-term securities.
At September 30, 1995, Utilities had outstanding short-term
borrowings of $58.8 million, including $9.8 million of notes
payable to associated companies.
Utilities has an agreement, which expires in 1999, with a
financial institution to sell, with limited recourse, an
undivided fractional interest of up to $65 million in its pool
of utility accounts receivable. At September 30, 1995,
Utilities had sold $65 million under the agreement.
At September 30, 1995, the Company had bank lines of
credit aggregating $101.1 million (Industries - $1.5 million,
Utilities - $91.1 million, Diversified - $7.5 million and
Whiting - $1.0 million). Utilities was using $49 million of
its lines to support commercial paper (weighted average
interest rate of 5.80%) and $11.1 million to support certain
pollution control obligations. In October 1995, Utilities
increased its bank lines of credit by $30 million in order to
finance the redemption of the Series X bonds. Commitment fees
are paid to maintain these lines and there are no conditions
which restrict the unused lines of credit. In addition to the
above, Utilities has an uncommitted credit facility with a
financial institution whereby it can borrow up to $40 million.
Rates are set at the time of borrowing and no fees are paid to
maintain this facility. At September 30, 1995, there were no
borrowings outstanding under this facility.
ENVIRONMENTAL MATTERS
Utilities has been named as a Potentially Responsible
Party (PRP) by various federal and state environmental
agencies for 28 FMGP sites, but believes it is not responsible
for two of these sites. There are also six other sites for
which it may be designated as a PRP in the future. Utilities
is working pursuant to the requirements of the various
agencies to investigate, mitigate, prevent and remediate,
where necessary, damage to property, including damage to
natural resources, at and around the sites in order to protect
public health and the environment. Utilities believes it has
completed the remediation of five sites although it is in the
process of obtaining final approval from the applicable
environmental agencies on this issue for each site. Utilities
is in various stages of the investigation and/or remediation
processes for 19 sites and expects to begin the investigation
process in 1995 or 1996 for the other sites.
Utilities has recorded environmental liabilities related
to the FMGP sites of approximately $32 million (including
$4.5 million as current liabilities) at September 30, 1995.
These amounts are based upon Utilities' best current estimate
of the amount to be incurred for investigation and remediation
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 or has not started. 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. Utilities may be required to
monitor these sites for a number of years upon completion of
remediation, as is the case with several of the sites for
which remediation has been completed.
Utilities has begun pursuing coverage for investigation,
mitigation, prevention, remediation and monitoring costs from
its insurance carriers and is investigating the potential for
third party cost sharing for FMGP investigation and clean-up
costs. The amount of shared costs, if any, cannot be
reasonably determined and, accordingly, no potential sharing
has been recorded at September 30, 1995. Regulatory assets of
approximately $32 million, which reflect the future recovery
that is being provided through Utilities' rates, have been
recorded in the Consolidated Balance Sheets. Considering the
current rate treatment allowed by the IUB, management believes
that the clean-up costs incurred by Utilities for these FMGP
sites will not have a material adverse effect on its financial
position or results of operations.
The Clean Air Act Amendments of 1990 (Act) requires
emission reductions of sulfur dioxide and nitrogen oxides to
achieve reductions of atmospheric chemicals believed to cause
acid rain. The provisions of the Act will be implemented in
two phases with Phase I affecting two of Utilities' units
beginning in 1995 and Phase II affecting all units beginning
in the year 2000. Utilities has completed the modifications
necessary to meet the Phase I requirements and has installed
continuous emission monitors on all affected units as required
by the Act.
Utilities expects to meet the requirements of Phase II by
switching to lower sulfur fuels and through capital
expenditures primarily related to fuel burning equipment and
boiler modifications. Utilities estimates capital expenditures
of approximately $22.5 million, including $4.4 million in
1995, in order to meet the requirements of the Act.
In January 1995, Utilities received an Administrative
Compliance Order (ACO) from the United States Environmental
Protection Agency (EPA) alleging noncompliance with, and
requiring Utilities to satisfy, certain monitoring, reporting,
and recordkeeping requirements of the Acid Rain Program at its
Phase II units. Utilities and the EPA resolved the
allegations in a Consent Agreement and Consent Order, dated
August 23, 1995, which required Utilities to pay a penalty of
$25,630 and to perform a Supplemental Environmental Project,
surrendering 589 sulfur dioxide allowances, valued at $76,570.
(This Supplemental Environmental Project was undertaken in
connection with the settlement of an enforcement action taken
by the EPA for violations of Section 412 of the CAA, 42 U.S.C.
7651k.)
The National Energy Policy Act of 1992 requires owners of
nuclear power plants to pay a special assessment into a
"Uranium Enrichment Decontamination and Decommissioning Fund."
The assessment is based upon prior nuclear fuel purchases and,
for the DAEC, averages $1.4 million annually through 2007, of
which Utilities' 70% share is $1.0 million. Utilities is
recovering the costs associated with this assessment through
its electric fuel adjustment clauses over the period the costs
are assessed. Utilities' 70% share of the future assessment,
$11.7 million payable through 2007, has been recorded as a
liability in the Consolidated Balance Sheets, including
$0.8 million included in "Current liabilities - Environmental
liabilities," with a related regulatory asset for the
unrecovered amount.
The Nuclear Waste Policy Act of 1982 assigned
responsibility to the U.S. Department of Energy (DOE) to
establish a facility for the ultimate disposition of high
level waste and spent nuclear fuel and authorized the DOE to
enter into contracts with parties for the disposal of such
material beginning in January 1998. Utilities entered into
such a contract and has made the agreed payments to DOE. The
DOE, however, has experienced significant delays in its
efforts and material acceptance is now expected to occur no
earlier than 2010. Utilities has been storing spent nuclear
fuel on-site since plant operations began in 1974 and has
current on-site capability to store spent fuel until 2002.
Utilities is aggressively reviewing options for additional
spent nuclear fuel storage capability, including expanding on-
site storage and pursuing other off-site storage. Utilities
is also supporting legislation currently before the U.S.
Congress to resolve the lack of progress by the DOE.
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 has joined the Midwest Interstate
Low-Level Radioactive Waste Compact Commission (Compact),
which is planning a storage facility to be located in Ohio to
store waste generated by the Compact's six member states. At
September 30, 1995, Utilities has prepaid costs of
approximately $1 million to the Compact for the building of
such a facility. Currently, Utilities is storing its low-
level radioactive waste generated at the DAEC on-site until
new disposal arrangements are finalized among the Compact
members. A Compact disposal facility is anticipated to be in
operation in approximately ten years after approval of new
enabling legislation by the member states. Such legislation
is expected to be considered by the member states in 1996. On-
site storage capability currently exists for low-level
radioactive waste expected to be generated until the Compact
facility is able to accept waste materials. In addition, the
Barnwell, South Carolina disposal facility has temporarily
reopened and Utilities intends to ship to Barnwell the
majority of the low-level radioactive waste it has accumulated
on-site, as well as waste it produces in the future as long as
the Barnwell site remains open, thereby minimizing the amount
of waste stored on-site.
The possibility that exposure to electric and magnetic
fields (EMF) emanating from power lines, household appliances
and other electric sources may result in adverse health
effects has been the subject of increased public,
governmental, industry and media attention. A considerable
amount of scientific research has been conducted on this topic
without definitive results. Research is continuing in order
to resolve scientific uncertainties.
Whiting is responsible for certain dismantlement and
abandonment costs related to various off-shore oil and gas
properties, the most significant of which is located off the
coast of California. Whiting accrues these costs as reserves
are extracted and such costs are included in "Depreciation and
amortization" in the Consolidated Statements of Income. A
corresponding environmental liability, $1.4 million at
September 30, 1995, has been recognized in the Consolidated
Balance Sheets for the cumulative amount expensed.
OTHER MATTERS
The National Energy Policy Act of 1992 addresses several
matters designed to promote competition in the electric
wholesale power generation market, including mandated open
access to the electric transmission system. On March 29,
1995, the FERC issued a Notice of Proposed Rulemaking pursuant
to which FERC proposes to promote competition in the electric
utility industry by requiring that each transmission owning
utility must 1) implement non-discriminatory tariffs allowing
open access to that utility's transmission facilities by
wholesale buyers and sellers of electricity and 2) charge
itself the same price for transmission and ancillary services
as it charges third parties under the tariffs. Utilities
filed conforming pro-forma open access transmission tariffs
with the FERC on July 24, 1995. The tariffs were accepted by
the FERC and became effective October 1, 1995. The geographic
position of Utilities' transmission system could provide
revenue opportunities in the open access environment. FERC
would allow for recovery of certain stranded costs (i.e.
assets the costs of which could be rendered otherwise
unrecoverable as the result of open access) in connection with
wholesale transmission. IEA received approval in the same
FERC proceeding to market electric power at market based
rates. The Company cannot predict the final regulations that
may be adopted.
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." A one-day roundtable
discussion was held to address all forms of competition in the
electric utility industry and to assist the IUB in gathering
information and perspectives on electric competition from all
persons or entities with an interest or stake in the issues.
Such discussions are not expected to produce any specific
action by the IUB in the near future. The IUB has scheduled
additional discussions for December 1995.
The Company cannot predict the long-term consequences of
these competitive issues on its results of operations or
financial condition. The Company's strategy for dealing with
these emerging issues includes seeking growth opportunities,
continuing to offer quality customer service, ongoing cost
reductions and productivity enhancements. The Company has
initiated a major project to review and redesign its business
processes with the primary goals being reduced operating
costs, increased efficiency and enhanced customer service.
In March 1995, the FASB issued SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of. This statement, among other things,
defines the criteria for valuing regulatory assets. The
Company does not expect the amount of regulatory assets
recorded in the Consolidated Balance Sheets to be affected.
The Company expects to adopt this standard on January 1, 1996,
and does not expect that adoption will have any current impact
on the financial position or results of operations of the
Company.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
Industries, Diversified, IES Energy Inc. (a wholly-owned
subsidiary of Diversified), MicroFuel Corporation (the
Corporation) now known as Ely, Inc. in which IES Energy has a
69.40% equity ownership, and other parties have been sued in
Linn County District Court in Cedar Rapids, Iowa, by Allen C.
Wiley. Mr. Wiley claims money damages on various tort and
contract theories arising out of the 1992 sale of the assets
of the Corporation, of which Mr. Wiley was a director and
shareholder. All of the defendants in Mr. Wiley's suit
answered the complaint and denied liability. All of the
defendants believe that the claims are without merit and are
vigorously contesting them. On April 13, 1995, Industries and
Diversified were dismissed from this action when their motions
for summary judgment were granted. The trial for the
remaining defendants has been continued to an unspecified
date, pending a decision in the appeal related to a separate
suit discussed below.
The Corporation commenced a separate suit to determine
the fair value of Mr. Wiley's shares under Iowa Code section
490. A decision was issued on August 31, 1994, by the Linn
County District Court ruling that the value of Mr. Wiley's
shares was $377,600 based on a 40 cent per share valuation.
The Corporation contended that the value of Mr. Wiley's shares
was 2.5 cents per share. The Decision has been appealed to
the Iowa Supreme Court by the Corporation on a number of
issues, including the Corporation's position that the trial
court erred as a matter of law in discounting the testimony of
the Corporation's expert witness. A decision on the appeal is
not expected before the first quarter of 1996.
Reference is made to Notes 2 and 7 of the Notes to
Consolidated Financial Statements for a discussion of rate
matters and environmental matters, respectively, and Item 2.
Management's Discussion and Analysis of the Results of
Operations and Financial Condition - Environmental Matters.
Item 2. Changes in the Rights of the Company's Security Holders.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Results of Votes of Security Holders.
None.
Item 5. Other Information.
The Company has eliminated the officer position of Senior Vice
President, Finance. Therefore, Dr. Robert J. Latham is no
longer with the Company.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
4(a) Sixty-first Supplemental Indenture, dated as of
March 1, 1995, supplementing Utilities' Indenture of
Mortgage and Deed of Trust, dated August 1, 1940.
(Filed as Exhibit 4(a) to Utilities' Form 10-Q for
the quarter ended March 31, 1995 (File No. 0-4117-
1)).
4(b) Third Supplemental Indenture, dated as of March 1,
1995, supplementing Utilities' Indenture of Mortgage
and Deed of Trust, dated September 1, 1993. (Filed
as Exhibit 4(b) to Utilities' Form 10-Q for the
quarter ended March 31, 1995 (File No. 0-4117-1)).
10(a) Agreement and Plan of Merger among IES
Industries Inc., WOK Acquisition Company, Okie
Energy Company, Keener Energy Company, Thomas M.
Atkinson and Joan B. Atkinson, dated as of March 15,
1995 (Filed as Exhibit 10(a) to the Company's Form
10-Q for the quarter ended March 31, 1995).
*27 Financial Data Schedule.
* Exhibits designated by an asterisk are filed herewith.
(b) Reports on Form 8-K -
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
IES INDUSTRIES INC.
(Registrant)
Date November 9, 1995 By /s/ Blake O. Fisher, Jr.
(Signature)
Blake O. Fisher, Jr.
Executive Vice President &
Chief Financial Officer
By /s/ Richard A. Gabbianelli
(Signature)
Richard A. Gabbianelli
Controller & Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet at September 30, 1995 and the Consolidated Statement
of Income and the Consolidated Statement of Cash Flows for the nine months
ended September 30, 1995 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,300,319
<OTHER-PROPERTY-AND-INVEST> 257,439
<TOTAL-CURRENT-ASSETS> 123,431
<TOTAL-DEFERRED-CHARGES> 22,732
<OTHER-ASSETS> 199,485
<TOTAL-ASSETS> 1,903,406
<COMMON> 386,884
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 222,758
<TOTAL-COMMON-STOCKHOLDERS-EQ> 609,642
0
18,320
<LONG-TERM-DEBT-NET> 515,489
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 49,000
<LONG-TERM-DEBT-CURRENT-PORT> 65,441
0
<CAPITAL-LEASE-OBLIGATIONS> 24,219
<LEASES-CURRENT> 17,518
<OTHER-ITEMS-CAPITAL-AND-LIAB> 603,777
<TOT-CAPITALIZATION-AND-LIAB> 1,903,406
<GROSS-OPERATING-REVENUE> 634,307
<INCOME-TAX-EXPENSE> 34,956<F1>
<OTHER-OPERATING-EXPENSES> 515,025
<TOTAL-OPERATING-EXPENSES> 515,025<F1>
<OPERATING-INCOME-LOSS> 119,282
<OTHER-INCOME-NET> 4,438
<INCOME-BEFORE-INTEREST-EXPEN> 123,720
<TOTAL-INTEREST-EXPENSE> 37,710
<NET-INCOME> 50,368<F2>
686<F2>
<EARNINGS-AVAILABLE-FOR-COMM> 50,368
<COMMON-STOCK-DIVIDENDS> 45,903
<TOTAL-INTEREST-ON-BONDS> 36,101
<CASH-FLOW-OPERATIONS> 175,482
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 0
<FN>
<F1>Income tax expense is not included in Operating Expense in the Consolidated
Statements of Income for IES Industries Inc. (Industries).
<F2> Since the preferred dividends are for a subsidiary of Industries, they are
considered a fixed charge on Industries' Consolidated Statement of Income.
</FN>
</TABLE>
