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; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9187 IES INDUSTRIES INC. (an Iowa corporation) 42-1271452
IES Tower, Cedar Rapids, Iowa 52401
319-398-4411
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
Common Stock, no par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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.
The aggregate market value of the voting stock of IES Industries Inc. held
by non-affiliates as of February 28, 1998, was approximately
$1,103,763,152 based upon the New York Stock Exchange Composite Tape
closing price as reported in The Wall Street Journal.
Indicate the number of shares outstanding of each of the registrants'
classes of Common Stock, as of February 28, 1998:
Common Stock, no par value - 30,671,499 shares
DOCUMENTS INCORPORATED BY REFERENCE:
None
IES INDUSTRIES 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 . . . . . . . . 5
Capital Expenditure and Investment and
Financing Plans . . . . . . . . . . . . . . . 5
Regulation . . . . . . . . . . . . . . . . . . 5
Employees . . . . . . . . . . . . . . . . . . 6
Environmental Matters . . . . . . . . . . . . 6
Competition . . . . . . . . . . . . . . . . . 6
Rate Matters . . . . . . . . . . . . . . . . . 6
Year 2000 . . . . . . . . . . . . . . . . . . 7
Electric Operations . . . . . . . . . . . . . 7
Gas Operations . . . . . . . . . . . . . . . . 12
Item 2. Properties . . . . . . . . . . . . . . . . . . 15
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 17
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . 18
Item 6. Selected Financial Data . . . . . . . . . . . . 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . 21
Selected Consolidated Quarterly Financial
Data (unaudited) . . . . . . . . . . . . . . . 34
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . 35
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements . . . . . . 36
Notes to Consolidated Financial Statements . . 42
Item 9. Changes and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . 62
PART III
Item 10. Directors and Executive Officers of
the Registrant . . . . . . . . . . . . . . . . 63
Item 11. Executive Compensation . . . . . . . . . . . . 66
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . 72
Item 13. Certain Relationships and Related Transactions 73
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . 73
Schedule II - Valuation and Qualifying Accounts
and Reserves . . . . . . . . . . . . . . . . . 81
Unaudited Pro Forma Combined Financial Information
of Interstate Energy Corporation . . . . . . . 82
Signatures . . . . . . . . . . . . . . . . . . 92
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 Industries Inc.
IES Industries Inc. is a holding company which is incorporated under
the laws of Iowa. IES Industries Inc.'s subsidiaries are IES Utilities
Inc. (Utilities) and IES Diversified Inc. (Diversified). Utilities is
primarily an electric and natural gas utility company operating in the
State of Iowa and serving approximately 339,000 electric and 178,000
natural gas retail customers as well as 30 electric resale customers in
more than 550 Iowa communities. Diversified is a holding company for non-
utility subsidiaries which are primarily engaged in the energy-related,
transportation and real estate development businesses. Diversified also
has an investment in an Iowa-based telecommunications company, among other
miscellaneous investments. IES Industries Inc. and, to the extent the
context requires, its consolidated subsidiaries are referred to in this
Form 10-K as "Industries."
Utilities
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. 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.
Diversified
Other than Utilities' nonregulated investments, the non-utility
operations of Industries are organized under Diversified. Diversified is
a holding company whose wholly-owned subsidiaries include IES
Transportation Inc. (IES Transportation), IES Energy Inc. (IES Energy),
IES Investments Inc. (IES Investments) and IES International Inc. (IES
International).
IES Transportation is a holding company whose wholly-owned
subsidiaries at December 31, 1997, included the Cedar Rapids and Iowa City
Railway Company (CRANDIC) and IES Transfer Services Inc. (Transfer).
CRANDIC is a short-line railway which renders freight service between
Cedar Rapids and Iowa City. Transfer's operations include transloading
and storage services. IES Transportation also has a 75% equity investment
in IEI Barge Services, Inc. (Barge) which provides barge terminal and
hauling service on the Mississippi River. In addition, IES Transportation
has investments in two Iowa railroad companies.
IES Energy is a holding company whose wholly-owned subsidiaries at
December 31, 1997, included Industrial Energy Applications, Inc. (IEA)
and Whiting Petroleum Corporation (Whiting). IEA offers commodities-based
and facilities-based energy services for customers, including supplying
natural gas and electricity, standby generation, cogeneration, steam
production and propane air systems. Whiting is organized to purchase,
develop and produce crude oil and natural gas.
IES Investments is a holding company whose primary wholly-owned
subsidiaries at December 31, 1997, included Iowa Land and Building Company
(Iowa Land), IES Investco Inc. (Investco) and Village Lakeshares, Inc.
(Lakeshares). Iowa Land is organized to pursue real estate and economic
development activities in Utilities' service territory. Investco is a
holding company for certain equity investments. Lakeshares is a holding
company for resort properties in Iowa. IES Investments also has direct
and indirect equity interests in various real estate ventures, primarily
concentrated in Cedar Rapids, and holds other passive investments.
At December 31, 1997, IES Investments held an investment in the stock
of McLeodUSA Inc. (McLeod), a telecommunications company, valued at $327
million (as compared to a cost basis of $29 million). Pursuant to the
applicable accounting rules, the carrying value of the investment is
adjusted to the estimated fair value each quarter based on the closing
price at the end of the quarter. The adjustment does not impact earnings
as the unrealized gain or loss, net of taxes, is recorded directly to the
common equity section of the balance sheet. In addition, any such gain or
loss is reflected in current earnings only at the time it is realized
through a sale. IES Investments has entered into an agreement with
McLeod which restricts the sale or disposal of its shares without the
consent of the McLeod Board of Directors until September 1998.
IES International is a holding company whose wholly-owned
subsidiaries are IES New Zealand Limited (IES New Zealand), Interstate
Energy Corporation Pte Ltd. (IECP) and IES Brazil Inc. IES New Zealand
has equity investments in two New Zealand electric distribution entities.
IECP has a 50% equity investment in two individual cogeneration facilities
in China: JIES Heat and Power Ltd. and TIES Heat and Power Ltd. None of
the investments under IES International are consolidated, therefore IES
International has no operating revenues. IES Brazil Inc. has been formed
for the purposes of potential future investments in Brazil. IES
Investments also has several investments in foreign entities, including a
loan to a New Zealand company and an investment in an international
venture capital fund. These investments are considered international
investments for management purposes.
Refer to Note 15 of the Notes to Consolidated Financial Statements
for a further discussion of Industries' segments of business.
PROPOSED MERGER OF INDUSTRIES. Industries is party to an Agreement
and Plan of Merger, dated as of November 10, 1995, as amended (Merger
Agreement), 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 anticipated construction and acquisition expenditures for
1998-2002 and assumptions in financing future capital requirements.
REGULATION. Because of its ownership of Utilities, IES Industries
Inc. is a "holding company" as defined by the Public Utility Holding
Company Act of 1935, as amended (1935 Act). However, Industries claims
exemption from regulation under the 1935 Act (except for Section 9(a)2
thereof, which requires that any acquisition of securities of a utility
company by Industries be approved by the Securities and Exchange Commission)
on the basis that IES Industries Inc. and Utilities are both organized in
the same state and Utilities conducts its business in that state.
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 Industries, 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, Industries had a total of 2,448
(2,045 at Utilities) 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). CRANDIC had 72 employees subject to four collective
bargaining agreements and Barge had 12 employees subject to one collective
bargaining agreement. Two of Utilities' agreements, covering less than 5%
of Utilities' workforce, will expire in 1998.
ENVIRONMENTAL MATTERS. Industries 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
Industries' 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. Industries 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 13 of the Notes to Consolidated Financial Statements
and the "Other Matters-Environmental" section of Item 7. "MD&A" for
further discussion of Industries' 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 Industries' 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
13(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 14 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 .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 13(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(j) 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 13(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 13(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 Industries' 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 13(i) of the
Notes to Consolidated Financial Statements for a discussion of the
decommissioning of the DAEC.
<TABLE>
<CAPTION>
IES Utilities Inc.
Electric Operating Information
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 Quantity Daily 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(j) of the Notes to
Consolidated Financial Statements for discussion of the Purchased Gas
Adjustment (PGA) clause.
Refer to Note 13(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 13(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>
IES Utilities Inc.
Gas Operating Information
<CAPTION>
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
IES Industries Inc. has no significant 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> <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.
Subsidiaries other than Utilities also own property which primarily
represents investments in transportation, energy-related,
telecommunications and real estate properties.
Industries' principal properties are suitable for their intended use.
Utilities' principal properties 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.
IES Industries Inc., 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. IES Industries Inc. and Diversified were
dismissed from the suit in a motion for summary judgment. In addition, a
grant of summary judgment has reduced Mr. Wiley's claims against the
remaining parties to breach of fiduciary duty. A separate motion for
summary judgment, which was filed seeking dismissal of the remaining
claims against the remaining parties, was overruled on September 20, 1996,
and the trial has been set for May 1998. All of the defendants are
vigorously contesting the claims.
The Corporation commenced a separate suit to determine the fair value
of Mr. Wiley's shares under Iowa Code section 490. A decision was issued
on August 31, 1994, by the Linn County District Court ruling that the
value of Mr. Wiley's shares was $377,600 based on a 40 cents per share
valuation. The Corporation contended that the value of Mr. Wiley's shares
was 2.5 cents per share. The Decision was appealed to the Iowa Supreme
Court by the Corporation on a number of issues, including the
Corporation's position that the trial court erred as a matter of law in
discounting the testimony of the Corporation's expert witness. The Iowa
Supreme Court assigned the case to the Iowa Court of Appeals. On February
2, 1996, the Iowa Court of Appeals reversed the District Court ruling
after determining the District Court erred in discounting the expert
testimony. The case was remanded back to the District Court for
consideration of the expert testimony, but with no additional evidence
taken. The District Court re-affirmed its original decision on August 28,
1996, and the Corporation has again appealed to the Iowa Supreme Court.
The case has been re-assigned to the Iowa Court of Appeals without oral
argument.
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),
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 IES Industries
Inc. 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 13 of
the Notes to Consolidated Financial Statements for a discussion of
Industries' 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
(a) Price Range of IES Industries Inc.'s Common Stock and Dividends
Declared
IES Industries Inc.'s Common Stock is listed on the New York Stock
Exchange (NYSE) under the symbol "IES." The table below sets forth, for
the calendar quarters indicated, the reported high and low sales prices of
IES Industries Inc.'s Common Stock as reported on the NYSE Composite Tape
based on published financial sources, and the dividends declared per share
on IES Industries Inc.'s Common Stock.
IES Industries Inc.'s
Common Stock
High Sale Low Sale Dividend (i)
1997
First Quarter $ 31 $ 28 3/4 $ .525
Second Quarter 30 3/8 28 1/8 .525
Third Quarter 32 1/2 29 1/2 .525
Fourth Quarter 38 3/16 30 13/16 .525
------- -------- ---------
Year $ 38 3/16 $ 28 1/8 $ 2.10
1996
First Quarter $ 29 5/8 $ 26 1/2 $ .525
Second Quarter 30 1/8 25 1/2 .525
Third Quarter 34 3/4 29 .525
Fourth Quarter 31 1/2 29 .525
------- -------- ---------
Year $ 34 3/4 $ 25 1/2 $ 2.10
The closing price of IES Industries Inc.'s common stock on December 31,
1997 was $36 13/16.
(i) IES Industries Inc. has paid regular quarterly dividends on its
common stock since April 1, 1950. Although Industries' practice
has been to pay dividends quarterly, the timing of payment and
amount of future dividends are necessarily dependent upon
earnings, financial requirements and other factors.
(b) Approximate Number of Equity Security Holders of IES Industries
Inc.
Approximate Number of Record
Title of Class Holders (as of December 31, 1997)
Common Stock, no par value 35,789
(c) Restriction on Payment of Dividends by IES Industries Inc.
Under provisions of the Merger Agreement, IES Industries Inc.'s
annual dividend payment cannot exceed $2.10 per share, the current annual
payment level, pending the Proposed Merger.
See Item 1, "Proposed Merger of Industries" for a further discussion
of Industries' pending merger.
Item 6. Selected Financial Data
The following selected financial data, in the opinion of Industries,
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.
<PAGE>
<TABLE>
IES Industries Inc.
Selected Financial Data
<CAPTION>
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Financial Information
(Dollars in thousands
except for per share data)
Income Statement Data:
Operating revenues $930,699 $973,912 $851,010 $785,864 $801,266
Operating expenses 763,562 807,346 697,676 637,931 649,997
Operating income 167,137 166,566 153,334 147,933 151,269
Net income 66,337 60,907 64,176 66,818 67,938
-------- --------- --------- --------- --------
Common Stock Data:
Weighted average common
shares outstanding ('000s) 30,380 29,861 29,202 28,560 27,764
Return on average common
equity (1) 9.2% 9.8% 10.7% 11.5% 12.9%
Per Share Data:
Earnings per average common
share (basic and diluted) $2.18 $2.04 $2.20 $2.34 $2.45
Dividends declared per common
share $2.10 $2.10 $2.10 $2.10 $2.10
Book value at year-end (1) $26.76 $20.84 $20.75 $20.56 $20.21
Market value at year-end $36.81 $29.88 $26.50 $25.25 $31.25
Other Selected Financial Data:
Construction and acquisition
expenditures $171,125 $238,378 $218,099 $206,548 $169,017
Total assets at year-end (1) $2,457,219 $2,125,562 $1,985,591 $1,849,093 $1,699,819
Long-term obligations, net $882,421 $744,298 $654,090 $623,359 $574,488
Times interest earned before
income taxes 2.66X 2.99X 3.12X 3.38X 3.38X
Capitalization Ratios:
Common stock (1) 49% 47% 49% 50% 51%
Preferred and preference
stock 1% 1% 2% 2% 2%
Long-term debt 50% 52% 49% 48% 47%
------- ------- ------- ------- ------
Total 100% 100% 100% 100% 100%
======= ======= ======= ======= ======
(1) In the third quarter of 1997, IES Industries Inc. began adjusting the carrying value of its investment in McLeodUSA
Inc. to its estimated fair value, pursuant to the applicable accounting rules. At December 31, 1997, the adjustment
reflected an unrealized gain of approximately $298 million with a net of tax increase to other common equity of $174
million.
</TABLE>
Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
PROPOSED MERGER
IES Industries Inc. (Industries), 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.
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 Industries,
Industries 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,
Industries (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 Industries. 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 Industries' 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
Industries 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. Industries 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 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.
Industries 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
Industries' net income increased $5.4 million and decreased $3.3
million in 1997 and 1996, respectively. Earnings per average common share
increased to $2.18 in 1997 from $2.04 in 1996. The increase in net income
for 1997 was primarily due to increased electric sales (excluding sales
for resale), a lower effective income tax rate, increased operating income
at Diversified, parent company of Industries' non-utility operations, and
the impact of $7.8 million of costs incurred in 1996 relating to the
successful defense of the hostile takeover attempt of Industries by
MidAmerican Energy Company (MAEC). The 1997 increase was partially offset
by higher interest expense, higher utility operating expenses and start-up
expenses in international and domestic growth areas. The 1996 decrease in
net income was primarily due to costs incurred defending against the
hostile takeover attempt by MAEC and preparing for the pending three-way
merger, increased operating expenses, higher interest expense and a higher
effective income tax rate. The 1996 decrease was partially offset by
increased electric, gas and steam sales at Utilities, the impact of a
natural gas pricing increase implemented in the fourth quarter of 1995 and
increased earnings at Whiting Petroleum Corporation (Whiting).
Electric Operations - Utility
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
and gas marketing 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(j) of the Notes to
Consolidated Financial Statements for discussion of the EAC.
Gas Operations - Utility
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 and gas marketing
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(j) of the Notes to Consolidated Financial Statements for discussion of
the PGA.
The gas revenues and cost of gas sold of Industrial Energy
Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, for
1996 and 1995 have been reclassed into "Gas marketing, oil and gas and
other revenues" and "Other operating and gas marketing expenses",
respectively, consistent with the 1997 presentation.
Gas Marketing, Oil and Gas and Other Revenues Industries' gas marketing,
oil and gas and other revenues were generated as follows (in millions):
1997 1996 1995
IEA (including gas marketing $18 $127 $60
Whiting (oil and gas revenues) 69 66 48
Utilities (steam revenues) 26 20 12
Other 30 26 33
---- ---- ----
$143 $239 $153
==== ==== ====
Gas marketing, oil and gas and other revenues decreased $96 million
and increased $86 million during 1997 and 1996, respectively, primarily
due to fluctuations in IEA's gas marketing revenues. The 1997 decrease in
IEA's gas marketing revenues was a result of IEA contributing
substantially all of its gas marketing business to a joint venture,
effective January 1, 1997, in exchange for a partial interest in the joint
venture. The investment in the joint venture is accounted for under the
equity accounting method and IEA's allocated portion of gas revenues and
gas expenses resulting from the joint venture are recorded in
"Miscellaneous, net" on Industries' Consolidated Statements of Income.
The 1996 increase in IEA's gas marketing revenues was primarily due to
increases in gas prices and gas volumes sold. Whiting's revenues increased
during 1996 due to increases in gas prices and gas volumes sold. Steam
revenues at Utilities increased during both years due to an increase in
volumes sold resulting from the addition of a new industrial customer and
increased demand from existing customers.
Operating Expenses: Industries' other operating and gas marketing
expenses were as follows (in millions):
1997 1996 1995
Utilities $161 $148 $144
IEA (including gas marketing
costs) 14 129 57
Whiting 28 30 25
Other 28 19 24
---- ---- ----
$231 $326 $250
==== ==== ====
Other operating and gas marketing expenses decreased $95 million and
increased $76 million in 1997 and 1996, respectively, primarily due to
fluctuations in IEA's gas marketing costs as discussed in the "Gas
marketing, oil and gas and other revenues" section. Utilities' other
operating expenses increased during 1997 primarily due to increased
amortization of previously deferred energy efficiency expenditures and
costs related to an early retirement program, partially offset by lower
employee labor and benefit costs. The 1997 decrease was also partially
offset by increased international and domestic business development
activities at Diversified. Utilities' other operating expenses increased
during 1996 primarily due to increased amortization of previously deferred
energy efficiency expenditures, increased labor and benefits costs and
costs relating to the Merger, partially offset by decreased operating
costs at the Duane Arnold Energy Center (DAEC), Utilities' nuclear
generating facility.
Maintenance expenses increased $8.2 million and $2.9 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 $6.7 million and $9.4 million
during 1997 and 1996, respectively, primarily due to increases in utility
plant in service and the acquisition of oil and gas operating properties.
The 1996 increase was also due to increases in amortization costs relating
to the future dismantlement and abandonment of Whiting's offshore oil and
gas properties. (See Note 13(f) of the Notes to Consolidated Financial
Statements for a further discussion of the dismantlement and abandonment
costs).
Interest Expense and Other Interest expense increased $9.6 million and
$4.1 million during 1997 and 1996, respectively, primarily due to
increases in the average amount of debt outstanding.
Miscellaneous, net reflects comparative increases or (decreases) in
income of $6.4 million and ($6.1) million during 1997 and 1996,
respectively. The change in both periods was primarily due to
approximately $7.8 million in costs incurred relating to the successful
defense of the hostile takeover attempt by MAEC in 1996.
Federal and State Income Taxes The effective income tax rates were
37.4%, 43.8% and 39.8% in 1997, 1996 and 1995, respectively. Refer to
Note 7 of the Notes to Consolidated Financial Statements for a discussion
of the changes.
LIQUIDITY AND CAPITAL RESOURCES
Industries' capital requirements are primarily attributable to
Utilities' construction and acquisition programs, its debt maturities and
the level of Diversified's business opportunities. Industries 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. Industries' liquidity and capital resources will be
affected by environmental and regulatory issues. Emerging competition in
the utility industry could also impact Industries' liquidity and capital
resources, as discussed previously in the "Utility Industry Outlook"
section.
Industries has interests in the international arena. At December
31, 1997, Industries had approximately $57 million of investments in
foreign entities. Industries continues to explore additional
international investment opportunities. Such investments may carry a
higher level of risk than Industries' traditional domestic utility
investments or Diversified's domestic investments. Such risks could
include foreign government actions, foreign economic and currency risks
and others.
Industries is engaged in pursuing various potential business
development opportunities, including international as well as domestic
investments, and is devoting resources to such efforts. Industries is
striving to select investments where the international and other risks are
both understood and manageable.
At December 31, 1997, Industries had an investment in the stock of
McLeodUSA Inc. (McLeod), a telecommunications company, valued at $327
million (as compared to a cost basis of $29 million). Pursuant to the
applicable accounting rules, the carrying value of the investment is
adjusted to the estimated fair value each quarter based on the closing
price at the end of the quarter. The adjustment does not impact earnings
as the unrealized gains or losses, net of taxes, are recorded directly to
the common equity section of the balance sheet. In addition, any such
gains or losses are reflected in current earnings only at the time they
are realized through a sale. Industries has entered into an agreement
with McLeod which restricts the sale or disposal of its shares without the
consent of the McLeod Board of Directors until September 1998.
Industries has financial guarantees amounting to approximately $19
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 Industries having to make any
material cash payments under these agreements is remote.
Cash flows generated from operating activities increased to $247
million in 1997 compared with $183 million in 1996 and $200 million in
1995 primarily due to expenditures during 1996 and 1995 related to
refueling outages at the DAEC, expenditures incurred defending against the
hostile takeover attempt by MAEC in 1996 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 Industries for
1997, 1996 and 1995 was 2.66, 2.99 and 3.12, 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 Industries'
creditworthiness. The debt ratings of Industries are as follows:
Standard &
Moody's Poor's
(As of 3/26/98) (As of 3/2/98)
Utilities
- Secured long-term debt A2 A+
- Corporate credit rating (a) N/A A+
- Unsecured long-term debt A3 A
Diversified
- Commercial paper P2 A2
(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.
Industries had the following material long-term debt financing
activities in 1997 -
- In October 1997, Diversified entered into a 3-Year Credit Agreement
with various banking institutions which replaced its variable rate
credit facility. The agreement extends through October 2000, with one-
year extensions available upon agreement by the parties. Unused
borrowing availability under this agreement is also used to support
Diversified's commercial paper program. A combined maximum of $450
million of borrowings under this agreement and the commercial paper
program may be outstanding at any one time. Interest rates and
maturities are set at the time of borrowing. The rates are based upon
quoted market prices and the maturities are less than one year. At
December 31, 1997, Diversified had $182 million of borrowings
outstanding under this facility with interest rates ranging from 6.05%-
7.30%. Diversified intends to continue borrowing under the renewal
options of this facility and no conditions exist at December 31, 1997
that would prevent such borrowings. Accordingly, this debt is
classified as long-term. In addition, Diversified also entered into a
$150 million 364-Day Credit Agreement as discussed later.
- 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, $378 million of
Industries' 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.
In addition, Industries had 5,000,000 shares of Cumulative Preferred
Stock, no par value, authorized for issuance, none of which were
outstanding at December 31, 1997.
Industries' capitalization ratios at year-end were as follows:
1997 1996
Common equity 49% 47%
Preferred stock 1 1
Long-term debt 50 52
---- ----
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, Industries 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.
In October 1997, Diversified entered into a 364-Day Credit Agreement
with various banking institutions. The agreement extends through October
20, 1998, with 364 day extensions available upon agreement by the parties.
The unborrowed portion of this agreement is also used to support
Diversified's commercial paper program. A combined maximum of $150
million of borrowings under this agreement and the commercial paper
program may be outstanding at any one time. Interest rates and maturities
are set at the time of borrowing. The rates are based upon quoted market
prices and the maturities are less than one year. There were no
borrowings under this facility at December 31, 1997.
Given the above financing flexibility available to Industries,
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. Diversified's construction and acquisition program anticipates
expenditures of approximately $245 million for 1998, of which
approximately $239 million represents domestic and international energy-
related construction and acquisition expenditures. Industries is
currently finalizing its strategy related to the construction and
acquisition program for Diversifed for 1999 - 2002. Industries
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. Industries
anticipates funding a majority of Diversified's construction and
acquisition expenditures with external financings.
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 Industries' 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
Industries utilizes software, embedded systems and related
technologies throughout its businesses 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 Industries' 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 Industries' financial
and customer systems, has been completed. Industries 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 Industries' 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. Industries 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 Industries 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 Industries'
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
Industries has a policy that financial derivatives are to be used
only to mitigate business risk and not for speculative purposes.
Derivative financial instruments have been used by Industries on a very
limited basis. At December 31, 1997, Industries did not have any material
derivatives outstanding.
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, Industries 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
Industries 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 Industries 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 Industries 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, Industries
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, Industries cannot currently estimate the impact the
implementation of the treaty would have on its operations.
See Notes 13(f), 13(g) and 13(h) of the Notes to Consolidated
Financial Statements for a further discussion of Industries' environmental
issues.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited consolidated quarterly data, in the opinion
of Industries, 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 $ 257,687 $ 195,133 $ 233,822 $ 244,057
Operating income 36,146 29,552 67,895 33,544
Net income 12,315 8,350 31,746 13,926
Earnings per average
common share 0.41 0.28 1.04 0.45
1996
Operating revenues $ 243,197 $ 210,648 $ 233,907 $ 286,160
Operating income 37,268 27,343 56,347 45,608
Net income 14,095 8,056 20,889 17,867
Earnings per average
common share 0.48 0.27 0.70 0.59
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 36. 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 Industries Inc.:
We have audited the accompanying consolidated balance sheets and
statements of capitalization of IES Industries 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 Industries 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 is 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 INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1997 1996 1995
(in thousands, except per share
amounts)
Operating revenues:
Electric utility $604,270 $574,273 $560,471
Gas utility 183,517 160,864 137,292
Gas marketing, oil and gas and
other 142,912 238,775 153,247
-------- -------- --------
930,699 973,912 851,010
-------- -------- --------
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 and gas
marketing expenses 231,481 325,975 250,286
Maintenance 57,185 49,001 46,093
Depreciation and amortization 114,122 107,393 97,958
Taxes other than income taxes 51,701 48,171 49,011
-------- -------- --------
763,562 807,346 697,676
-------- -------- --------
Operating income 167,137 166,566 153,334
-------- -------- --------
Interest expense and other:
Interest expense 64,383 54,822 50,727
Allowance for funds used during
construction (2,309) (2,103) (3,424)
Preferred dividend requirements
of IES Utilities Inc. 914 914 914
Miscellaneous, net (1,850) 4,591 (1,548)
-------- -------- --------
61,138 58,224 46,669
-------- -------- --------
Income before income taxes 105,999 108,342 106,665
-------- -------- --------
Federal and state income taxes 39,662 47,435 42,489
-------- -------- --------
Net income $66,337 $60,907 $64,176
======== ======== ========
Average number of common shares
outstanding 30,380 29,861 29,202
======== ======== ========
Earnings per average common share
(basic and diluted) $2.18 $2.04 $2.20
====== ====== ======
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31
1997 1996 1995
(in thousands)
Balance at beginning of year $219,246 $221,077 $218,293
Net income 66,337 60,907 64,176
Cash dividends declared on
common stock, at a per
share rate of $2.10 for all
years (63,844) (62,738) (61,392)
-------- -------- --------
Balance at end of year $221,739 $219,246 $221,077
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
IES INDUSTRIES 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
$92,705 and $70,031, respectively 243,439 223,805
--------- ----------
1,609,512 1,582,020
--------- ----------
Current assets:
Cash and temporary cash investments 10,143 8,675
Accounts receivable -
Customer, less allowance for
doubtful accounts of $829
and $1,087, respectively 42,607 50,821
Other 9,688 12,040
Income tax refunds receivable 1,816 8,890
Production fuel, at average cost 10,579 13,323
Materials and supplies, at average cost 24,274 22,842
Adjustment clause balances 5,398 10,752
Regulatory assets 36,330 26,539
Prepayments and other 26,376 24,169
--------- --------
167,211 178,051
--------- ---------
Investments:
Investment in McLeodUSA Inc. 326,582 29,200
Nuclear decommissioning trust funds 77,882 59,325
Investment in foreign entities 57,072 44,946
Cash surrender value of life insurance
policies 12,683 11,217
Other 6,463 4,903
--------- ---------
480,682 149,591
--------- ---------
Other assets:
Regulatory assets 181,162 201,129
Deferred charges and other 18,652 14,771
--------- ---------
199,814 215,900
--------- ---------
$2,457,219 $2,125,562
========== ==========
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 $422,513 $407,635
Retained earnings 221,739 219,246
Unrealized security gains (net of
taxes) 173,901 -
Cumulative foreign currency
translation adjustments (20) -
-------- ----------
Total common equity 818,133 626,881
Cumulative preferred stock of IES
Utilities Inc. 18,320 18,320
Long-term debt (excluding current
portion) 845,189 701,100
--------- ---------
1,681,642 1,346,301
--------- ----------
Current liabilities:
Short-term borrowings - 135,000
Capital lease obligations 13,183 15,125
Maturities and sinking funds 501 8,473
Accounts payable 78,702 99,861
Dividends payable 16,686 16,431
Accrued interest 12,244 8,985
Accrued taxes 62,432 43,926
Accumulated refueling outage provision 10,606 1,316
Environmental liabilities 4,097 5,679
Other 23,541 22,087
-------- ---------
221,992 356,883
--------- ---------
Long-term liabilities:
Pension and other benefit obligations 51,865 39,643
Capital lease obligations 23,548 19,600
Environmental liabilities 46,989 47,502
Other 26,508 18,488
-------- --------
148,910 125,233
-------- --------
Deferred credits:
Accumulated deferred income taxes 372,837 262,675
Accumulated deferred investment tax
credits 31,838 34,470
-------- --------
404,675 297,145
--------- ---------
Commitments and contingencies (Note 13)
$2,457,219 $2,125,562
========== ==========
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31
1997 1996
(in thousands)
Common equity:
Common stock - no par value - authorized
48,000,000 shares; outstanding
30,577,191 and 30,077,212 shares,
respectively $422,513 $407,635
Retained earnings 221,739 219,246
Unrealized security gains (net of taxes) 173,901 -
Cumulative foreign currency translation
adjustments (20) -
-------- --------
818,133 626,881
--------- --------
Cumulative preferred stock of IES
Utilities Inc. 18,320 18,320
---------- ---------
Long-term debt:
IES Utilities Inc. -
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 -
--------- --------
Total IES Utilities Inc. 654,776 527,916
--------- ---------
IES Diversified Inc. -
Credit facility (6.05% - 7.30% at
December 31, 1997) 182,013 172,105
Other subsidiaries' debt maturing
through 2013 11,689 11,994
--------- ---------
848,478 712,015
Unamortized debt premium and
(discount), net (2,788) (2,442)
---------- ----------
845,690 709,573
Less - Amount due within one
year 501 8,473
---------- -----------
845,189 701,100
--------- ---------
$1,681,642 $1,346,301
========== ==========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1997 1996 1995
(in thousands)
Cash flows from operating
activities:
Net income $66,337 $60,907 $64,176
Adjustments to reconcile net
income to net cash flows
from operating activities -
Depreciation and amortization 114,122 107,393 97,958
Amortization of principal
under capital lease
obligations 14,774 16,491 15,714
Deferred taxes and investment
tax credits (11,814) 9,189 7,757
Refueling outage provision 9,290 (6,374) (7,506)
Amortization of other assets 15,372 9,828 7,391
Other 1,745 856 712
Other changes in assets and
liabilities -
Accounts receivable 10,566 (22,154) (15,221)
Sale of utility accounts
receivable - 7,000 4,000
Production fuel, materials and
supplies 2,156 650 4,050
Accounts payable (21,707) 20,934 2,902
Accrued taxes 25,580 (17,965) 9,434
Adjustment clause balances 5,354 (13,900) 4,581
Gas in storage (3,137) (1,154) 3,245
Other 18,270 11,658 638
-------- -------- --------
Net cash flows from
operating activities 246,908 183,359 199,831
-------- -------- --------
Cash flows from financing
activities:
Dividends declared on common
stock (63,844) (62,738) (61,392)
Proceeds from issuance of common
stock 12,841 14,164 15,616
Purchase of treasury stock (83) (269) -
Net change in IES Diversified
Inc. credit facility 9,908 47,860 43,745
Proceeds from issuance of other
long-term debt 190,000 60,000 100,007
Reductions in other long-term
debt (63,444) (15,454) (100,424)
Net change in short-term
borrowings (135,000) 34,000 64,000
Principal payments under capital
lease obligations (12,964) (19,108) (14,463)
Other (2,116) (458) (1,438)
-------- -------- --------
Net cash flows from financing
activities (64,702) 57,997 45,651
-------- -------- ---------
Cash flows from investing
activities:
Construction and acquisition
expenditures -
Utility (108,640) (142,259) (125,558)
Other (62,485) (96,119) (92,541)
Oil and gas properties held for
resale - 9,843 (9,843)
Deferred energy efficiency
expenditures (8,450) (16,857) (18,029)
Nuclear decommissioning trust
funds (6,008) (6,008) (6,100)
Proceeds from disposition of
assets 6,289 8,295 14,271
Other (1,444) 3,482 (5,733)
-------- -------- --------
Net cash flows from investing
activities (180,738) (239,623) (243,533)
-------- -------- --------
Net increase in cash and temporary
cash investments 1,468 1,733 1,949
Cash and temporary cash investments
at beginning of year 8,675 6,942 4,993
-------- -------- --------
Cash and temporary cash investments
at end of year $10,143 $8,675 $6,942
======== ======== ========
Supplemental cash flow information:
Cash paid during the year for -
Interest $57,207 $53,046 $50,877
======== ======== ========
Income taxes $28,400 $54,881 $26,478
======== ======== ========
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 INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) General -
The Consolidated Financial Statements include the accounts of IES
Industries Inc. and its consolidated subsidiaries (Industries). IES
Industries Inc. is an investor-owned holding company whose primary
operating company, IES Utilities Inc. (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. Industries' principal
markets are located in the state of Iowa. IES Industries Inc. also has
various non-utility subsidiaries which are primarily engaged in the
energy-related, transportation and real estate development businesses, as
well as an investment in an Iowa-based telecommunications company, among
other miscellaneous investments.
All subsidiaries for which Industries owns directly or indirectly
more than 50% of the voting stock are included as consolidated
subsidiaries. IES Industries Inc.'s subsidiaries are Utilities and IES
Diversified Inc. (Diversified). All significant intercompany balances and
transactions, other than energy-related transactions affecting Utilities,
have been eliminated from the Consolidated Financial Statements. Such
energy-related transactions are made at prices that approximate market
value and the associated costs are recoverable from Utilities' customers
through the rate making process.
Unconsolidated investments for which Industries 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 Industries' 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 -
Because of its ownership of Utilities, IES Industries Inc. is a
holding company under the Public Utility Holding Company Act of 1935, but
claims an exemption from all provisions thereof except Section 9(a)(2),
which applies to the purchase of stock of other utility companies.
Utilities is subject to regulation by the Iowa Utilities Board (IUB) and
the Federal Energy Regulatory Commission (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
13(f)) 42.9 46.3
Employee pension and benefit costs
(Note 8) 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 -
Industries 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) Oil and Gas Properties -
Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary
under Diversified, uses the full cost method of accounting for its oil and
gas properties. Accordingly, all costs of acquisition, exploration and
development of properties are capitalized. Amortization of proved oil and
gas properties is calculated using the units of production method. At
December 31, 1997, capitalized costs less related accumulated amortization
did not exceed the sum of 1) the present value of future net revenue from
estimated production of proved oil and gas reserves (calculated using
prices at December 31, 1997); plus 2) the cost of properties not being
amortized, if any; plus 3) the lower of cost or estimated fair value of
unproved properties included in the costs being amortized, if any; less 4)
income tax effects related to differences in the book and tax basis of oil
and gas properties.
(i) Operating Revenues -
Industries accrues revenues for services rendered but unbilled at
month-end in order to more properly match revenues with expenses.
(j) 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.
(k) 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
PRO FORMA COMBINED
WPLH 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 Proposed 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 Industries, Industries 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.
The following amounts of energy efficiency costs are included in
regulatory assets on the 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.
Industries' operating lease rental expenses for 1997, 1996 and 1995
were $9.2 million, $8.3 million and $10.4 million, respectively.
Industries' future minimum lease payments by year are as follows:
Capital Operating
Year Lease Leases
(in thousands)
1998 $ 13,472 $ 6,958
1999 13,431 5,141
2000 8,646 3,160
2001 3,232 1,768
2002 1,582 38
Thereafter 52 618
------ ------
40,415 $ 17,683
======
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) INVESTMENTS:
(a) McLeodUSA Inc. (McLeod) -
At December 31, 1997, Industries had the following investment in
McLeod, a telecommunications company (all figures are in millions):
Fair
Shares Cost Market Value
Class A Common Stock 9.0 $ 29.0 $ 287.3
Unexercised Vested
Options 1.3 - 41.6
Cost to Exercise
Vested Options N/A N/A (2.3)
----- ----- -----
10.3 $ 29.0 $ 326.6
===== ===== =====
During the second quarter of 1997, Industries converted its
investment in Class B Common Stock into shares of Class A Common Stock and
contributed 300,000 shares of its McLeod Class A shares to the IES
Industries Charitable Foundation.
Pursuant to the applicable accounting rules, the carrying value of
the investment is adjusted to the estimated fair value each quarter based
on the closing price at the end of the quarter. The adjustment does not
impact earnings as the unrealized gains or losses, net of taxes, are
recorded directly to the common equity section of the balance sheet. In
addition, any such gains or losses are reflected in current earnings only
at the time they are realized through a sale. Industries has entered
into an agreement with McLeod which restricts the sale or disposal of its
shares without the consent of the McLeod Board of Directors until
September 1998.
(b) Foreign Entities -
At December 31, 1997, Industries had $57.1 million of investments in
foreign entities on its Consolidated Balance Sheet that included 1)
investments in two New Zealand electric distribution entities, 2) a loan
to a New Zealand company, 3) investments in two cogeneration facilities in
China, and 4) an investment in an international venture capital fund.
Industries accounts for the China investments under the equity method and
the other investments under the cost method. The geographic concentration
of Industries' investments in foreign entities at December 31, 1997,
included investments of approximately $34.1 million in New Zealand, $22.5
million in China and $0.5 million in other countries.
(7) 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 $ 51.5 $ 38.2 $ 34.7
Deferred tax expense (9.2) 11.8 10.5
Amortization and
adjustment of
investment tax credits (2.6) (2.6) (2.7)
----- ----- -----
$ 39.7 $ 47.4 $ 42.5
===== ===== =====
The 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 benefits 5.5 6.6 5.5
Effect of rate making on property
related differences 3.3 2.8 2.6
Amortization of investment tax
credits (2.5) (2.4) (2.5)
Adjustment of prior period taxes (1.6) 1.4 (0.4)
Donation of McLeodUSA Inc. common
stock (2.2) - -
Other items, net (0.1) 0.4 (0.4)
----- ----- -----
Overall effective income tax rate 37.4% 43.8% 39.8%
===== ===== =====
The 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 $ 292 $ 293
McLeod investment related 124 -
Investment tax credit related (23) (24)
Decommissioning related (16) (15)
Other (4) 9
----- -----
$ 373 $ 263
===== =====
(8) BENEFIT PLANS:
(a) Pension Plans -
Industries 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 $13.1 million.
Industries' 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. Industries 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 $ 5,870 $ 5,997 $ 5,215
Interest cost on projected
benefit obligation 14,543 12,711 11,811
Assumed return on plans'
assets (15,538) (14,976) (12,567)
Early retirement benefits 3,814 4,713 -
Net amortization 1,528 906 268
------ ------ ------
Pension cost 10,217 9,351 4,727
Adjustment to funding level (10,217) (9,351) (4,727)
------ ------ ------
Total pension costs paid to
the Trustee $ - $ - $ -
Actual return on plans'
assets $ 34,238 $ 26,297 $ 36,614
====== ====== ======
During 1997 and 1996, Industries incurred charges of $3.8 million and
$4.7 million, respectively, related to early retirement programs. Of such
costs, $3.8 million and $0.2 million, respectively, were charged to
expense and the remaining amount in 1996 was deferred for future recovery
through the regulatory process.
A reconciliation of the funded status of the plans to the amounts
recognized in the Consolidated Balance Sheets at December 31, is presented
below:
1997 1996
(in thousands)
Fair market value of plans' assets $ 233,104 $ 212,394
------- -------
Actuarial present value of benefits
rendered to date -
Accumulated benefits based on
compensation to date,
including vested benefits of
$155,984,000 and
$130,334,000, respectively 168,615 142,515
Additional benefits based on
estimated future salary levels 44,253 42,940
------- -------
Projected benefit obligation 212,868 185,455
------- -------
Plans' assets in excess of projected
benefit obligation 20,236 26,939
Remaining unrecognized net asset
existing at January 1, 1997,
being amortized over 20 years (2,688) (3,179)
Unrecognized prior service cost 20,738 15,523
Unrecognized net gain (63,958) (54,442)
------- -------
Accrued pension cost recognized in the
Consolidated Balance Sheets $ (25,672) $ (15,159)
======= =======
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%
======= =======
Industries also sponsors defined contribution pension plans (401(k)
plans) covering substantially all employees. Industries' contributions to
the plans, which are based on the participants' level of contribution,
were $1.3 million, $1.7 million and $1.5 million in 1997, 1996 and 1995,
respectively.
(b) Other Postemployment Benefit Plans -
Industries 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 are being amortized as they are
collected through rates over a three-year period. Utilities' deferred
costs 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 $ 1,627 $ 1,888 $ 1,387
Interest cost on accumulated
postretirement
benefit obligation 3,639 3,726 3,175
Assumed return on plans' assets (689) (388) (56)
Net amortization of transition
obligation and other 1,904 1,970 1,813
Amortized postretirement benefit
costs 1,506 1,863 2,220
Regulatory recognition of
incurred cost 744 49 1,162
------ ------ ------
Net postretirement benefit costs $ 8,731 $ 9,108 $ 9,701
====== ====== ======
Actual return on plans' assets $ 2,601 $ 945 $ 273
====== ====== ======
A reconciliation of the funded status of the plans to the amounts
recognized in the 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 22,594 19,056
Active employees eligible 5,261 4,866
Retirees 25,160 25,992
------ ------
Total accumulated postretirement
benefit obligation 53,015 49,914
------ ------
Accumulated postretirement benefit
obligation in excess of plans'
assets (33,081) (37,602)
Unrecognized transition obligation 29,082 31,020
Unrecognized net gain (4,171) (2,505)
Unrecognized prior service cost (394) (427)
------ ------
Accrued postretirement benefit
cost in the
Consolidated Balance Sheets $ (8,564) $ (9,514)
====== ======
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 by $1.1 million (21%) and
the accumulated postretirement benefit obligation at December 31, 1997, by
$9.0 million (17%).
(9) COMMON, PREFERRED AND PREFERENCE STOCK:
(a) Common Stock -
The following table presents information relating to the changes in
common stock.
Common Stock
Number of
Shares
Outstanding Amount
(in thousands)
Balance, December 31, 1994 28,777,046 $ 373,490
Shares issued in connection with
acquisition of
oil and gas companies 75,638 1,925
Stock plan issuances* 655,731 15,854
---------- -------
Balance, December 31, 1995 29,508,415 391,269
---------- -------
Purchases of treasury stock (9,448) (269)
Stock plan issuances* 578,245 16,635
---------- -------
Balance, December 31, 1996 30,077,212 407,635
---------- -------
Purchases of treasury stock (2,875) (83)
Stock plan issuances* 502,854 14,961
---------- -------
Balance, December 31, 1997 30,577,191 $ 422,513
========== =======
Shares reserved for issuance pursuant
to the Company's stock plans at
December 31, 1997* 1,132,890
==========
* Dividend Reinvestment and Stock Purchase Plan,
Employee Stock Purchase Plan, Employee Savings Plan,
Long-Term Incentive Plan, IES Bonus Stock Ownership
Plan and Whiting Stock Option Plans
During 1997, Industries reacquired 2,875 shares of its common stock
on the open market, at an average price of $28.90 per share, which were
subsequently issued to various Company Directors and employees. During
1996, Industries reacquired 9,448 shares of its common stock on the open
market, at an average price of $28.44 per share, which were subsequently
issued to various Company Directors and employees. At December 31, 1997,
no shares remained held as treasury stock.
(b) 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.
There are 5,000,000 shares of Industries Cumulative Preferred Stock
(no par value) and 700,000 shares of Utilities Cumulative Preference Stock
($100 par value) authorized for issuance, of which none were outstanding
at December 31, 1997.
(10) 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.
In October 1997, Diversified entered into a 3-Year Credit Agreement
with various banking institutions which replaced its variable rate credit
facility. The new agreement will provide Diversified the ability to
finance additional business development opportunities, as needed. The
agreement extends through October 20, 2000, with one-year extensions
available upon agreement by the parties. The agreement will terminate on
September 1, 1998, however, if the proposed merger discussed in Note 2 is
not consummated on or prior to May 10, 1998. The unborrowed portion of
this agreement is also used to support Diversified's commercial paper
program. A combined maximum of $450 million of borrowings under this
agreement and the commercial paper program may be outstanding at any one
time. Interest rates and maturities are set at the time of borrowing for
direct borrowings under this 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 December 31, 1997, there were no borrowings outstanding under the
variable rate credit facility. Diversified had $182.0 million of
commercial paper outstanding at December 31, 1997, with interest rates
ranging from 6.05% to 7.30% and maturity dates in the first quarter of
1998. Diversified intends to continue borrowing under the renewal options
of this facility and the new agreement and no conditions exist at December
31, 1997, that would prevent such borrowings. Accordingly, this debt is
classified as long-term in the Consolidated Balance Sheets.
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 $0.5 million, $60.5
million, $233.7 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 -
In October 1997, Diversified also entered into a 364-Day Credit
Agreement with various banking institutions. This agreement will also
provide Diversified the ability to finance additional business development
opportunities, as needed. The agreement extends through October 20, 1998,
with 364 day extensions available upon agreement by the parties. The
agreement will terminate on September 1, 1998, however, if the proposed
merger discussed in Note 2 is not consummated on or prior to May 10, 1998.
The unborrowed portion of this agreement is also used to support
Diversified's commercial paper program. A combined maximum of $150
million of borrowings under this agreement and the commercial paper
program may be outstanding at any one time. Interest rates and maturities
are set at the time of borrowing for direct borrowings under this
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 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, Industries 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 (all issued by Utilities) 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%
(11) ESTIMATED 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 maturity of such 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.
Investment in McLeodUSA Inc. - Pursuant to the provisions of SFAS No.
115, the carrying value of the McLeod investment was adjusted to estimated
fair value in 1997 for the first time given that such shares are now
qualified for sale within a one year period.
Investments carried at cost - Fair value of the New Zealand
investments is based on quoted market prices; while the market is not of a
breadth and scope comparable to a U.S. market as required for SFAS 115
accounting purposes, Industries does believe it produces a reasonable
representation of the fair market value of the investment. Fair value of
the other investments is based on quoted market prices where available,
and cost when not available as Industries believes the carrying value
approximates fair value for such investments.
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
of Utilities 18 13 18 12
Long-term debt, including
current portion 848 871 712 722
Investment in McLeodUSA
Inc. (Note 6(a)) 327 327 29 267
Investments carried at
cost -
Investments in New
Zealand (Note 6(b)) 34 33 31 45
Other 2 3 3 4
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 Industries' shareowners.
(12) DERIVATIVE FINANCIAL INSTRUMENTS:
Industries has a policy that financial derivatives are to be used
only to mitigate business risks and not for speculative purposes.
Derivatives have been used by Industries on a very limited basis.
(a) Interest Rate Swap Agreement -
In February 1996, Diversified entered into an interest rate swap
agreement on a variable rate borrowing of $100 million converting this
debt into a fixed-rate borrowing at a rate of 4.7 percent. The swap
period was for two years with an additional one-year option available to
the counterparty and the agreement included quarterly settlement dates.
The counterparty did not extend the swap period. Diversified realized
approximately $1.0 million and $0.7 million in interest expense savings in
1997 and 1996, respectively, under the agreement.
(b) Gas Futures Contracts -
Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary
under Diversified, has entered into natural gas contracts on the New York
Mercantile Exchange (NYMEX). The notional amount at December 31, 1997 was
not material.
(13) COMMITMENTS AND CONTINGENCIES:
(a) Construction and Acquisition Program -
Industries' construction and acquisition program anticipates
expenditures of approximately $369 million for 1998, which includes $124
million at Utilities and $245 million at Diversified. Commitments have
been made in connection with a portion of 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 -
Industries entered into an agreement, expiring in 2004, with
Electronic Data Systems Corporation (EDS) for information technology
services. Industries' anticipated operating and capital expenditures
under the agreement for 1998 are estimated to total approximately $15.6
million. Future costs under the agreement are variable and are dependent
upon Industries' level of usage of technological services from EDS.
(d) Financial Guarantees -
Industries has financial guarantees amounting to $18.6 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.
Industries believes that the likelihood of material cash payments by
Industries 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 Industries and could
have a material adverse effect on Industries' financial position and
results of operations.
(f) Environmental Liabilities -
Industries has recorded environmental liabilities of approximately
$51 million in its Consolidated Balance Sheets at December 31, 1997.
Industries' 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, Industries 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.
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 platforms (and related
onshore plants and equipment), the most significant of which is located
off the coast of California. Industries estimates the total costs for
these properties to be approximately $14 million and the expenditures are
not expected to be incurred for approximately five years. Whiting accrues
these costs as reserves are extracted and such costs are included in
"Depreciation and amortization" in the Consolidated Statements of Income,
resulting in a liability of $8.6 million at December 31, 1997, in the
Consolidated Balance Sheets.
(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. Industries
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. Industries 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 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 second quarter of 1998. Utilities may be subject to a
penalty for not having obtained the permit previously; however, Industries
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 Industries' 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 $2.7 million in 1997, are recorded as interest income
and a corresponding interest expense payable to the funds is recorded.
The earnings accumulate in the external trust fund balances and in
accumulated depreciation on utility plant. See the section "Other
Matters-Accounting for Obligations Associated with the Retirement of Long-
Lived Assets" in Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of
potential changes in current electric utility industry accounting
practices for nuclear power plant decommissioning.
(j) Legal Proceedings -
Industries is involved in legal and administrative proceedings before
various courts and agencies with respect to matters arising in the
ordinary course of business. Although unable to predict the outcome of
these matters, Industries believes that appropriate liabilities have been
established and final disposition of these actions will not have a
material adverse effect on its financial position or results of
operations.
(14) JOINTLY-OWNED ELECTRIC UTILITY PLANT:
Under joint ownership agreements with other Iowa utilities, Utilities
has undivided ownership interests in jointly-owned electric generating
stations and related transmission facilities. Each of the respective
owners is responsible for the financing of its portion of the construction
costs. Kilowatt-hour generation and operating expenses are divided on the
same basis as ownership with each owner reflecting its respective costs in
its Statements of Income. Information relative to Utilities' ownership
interest in these facilities at December 31, 1997 is as follows:
Ottumwa Neal
DAEC Unit 1 Unit 3
(Nuclear) (Coal) (Coal)
($ 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
(15) SEGMENTS OF BUSINESS:
The principal business segments of Industries are Utilities'
generation, transmission, distribution and sale of electric energy and
purchase, distribution, transportation and sale of natural gas. Certain
financial information relating to Industries' 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
Investment in McLeodUSA,
Inc. 326,582 29,200 9,200
Other corporate assets 477,038 452,312 388,680
--------- --------- ---------
Total consolidated
assets $ 2,457,219 $ 2,125,562 $ 1,985,591
========= ========= =========
The gas revenues and cost of gas sold of Industrial Energy
Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, for
1996 and 1995 have been reclassed into "Gas marketing, oil and gas and
other revenues" and "Other operating and gas marketing expenses",
respectively, consistent with the 1997 presentation.
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
Industries Inc. (Industries) as of March 1, 1998 is set forth below.
Directors of IES Industries Inc.
C.R.S. Anderson Principal Occupation: Director of 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 IES Utilities Inc.
(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.
FUNCTIONING OF THE BOARD OF DIRECTORS AND COMMITTEES
The Board has an Executive Committee, an Audit Committee, a
Nominating Committee and a Compensation Committee.
The current members of the Executive Committee are Lee Liu, Chairman;
C.R.S. Anderson; David Q. Reed and Henry Royer. The current members
served on this Committee during 1997. The Committee met six times during
1997. It is empowered with all of the authority vested in the Board,
subject to certain limitations, and may act when the Board is not in
session.
Current members of the Audit Committee are C.R.S. Anderson, Chairman;
J. Wayne Bevis; Jack R. Newman; Robert D. Ray and Robert W. Schlutz. The
current members served on this Committee during 1997. The Committee met
twice during 1997. The principal functions of the Committee are to review
internal audit activities, including reviews of the internal control
procedures; to oversee the corporate compliance process; to recommend to
the Board an independent public accounting firm to be auditors; and to
approve the audit arrangements and audit results. Both the internal and
independent auditors have direct and independent access to the Audit
Committee.
Current members of the Nominating Committee are David Q. Reed,
Chairman; Lee Liu; Robert D. Ray; Robert W. Schlutz and Anthony R. Weiler.
The current members served on this Committee during 1997. The Committee
met once during 1997. Its principal function is to review and recommend
to the Board nominees to serve on the Board and its committees. While
there are no formal procedures, the Committee considers nominees brought
to its attention by other members of the Board, members of management and
Shareholders.
Current members of the Compensation Committee are Henry Royer,
Chairman; J. Wayne Bevis; Jack R. Newman and Anthony R. Weiler. The
current members served on this Committee during 1997. The Committee met
five times during 1997. The principal functions of the Committee are to
review and make recommendations to the Board on the salaries and other
compensation and benefits of the elected officers of Industries and its
subsidiaries, and to review and administer incentive compensation or
similar plans for officers and other key employees of Industries and its
subsidiaries.
The Board met seven times in 1997. The various committees of the
Board met an aggregate of fourteen times in 1997. All of the directors
attended 80% or more of these meetings.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Industries' directors, its executive officers, and certain other
officers are required to report their ownership of Industries' common
stock and any changes in that ownership to the Securities and Exchange
Commission and the New York Stock Exchange. From October of 1994 to
October of 1997, Mr. Schlutz did not file on a timely basis 11 reports for
a total of 195 shares of Industries' Common Stock acquired in 11
transactions through a brokerage dividend reinvestment plan. These shares
were reported in February 1998. All other required filings in 1997 were
properly made in a timely fashion. In making the above statements,
Industries has relied on the representations of the persons involved and
on copies of their reports filed with the Securities and Exchange
Commission.
Executive Officers of IES Industries 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)
James E. Hoffman, 44, Executive Vice President. First elected
officer in 1996. (ii)
Thomas M. Walker, 50, Executive Vice President & Chief Financial
Officer. First elected officer in 1996. (iii)
Dean E. Ekstrom, 50, Vice President, Administration. First elected
officer in 1991.
Stephen W. Southwick, 51, Vice President, General Counsel &
Secretary. First elected officer in 1982.
John E. Ebright, 54, Controller & Chief Accounting Officer. First
elected officer in 1996. (iv)
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, James E. Hoffman, Thomas
M. Walker and John E. Ebright, has been employed by Industries 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 Industries effective November 6,
1996. Mr. Root was first elected as an officer in 1979.
(ii) James E. Hoffman was elected Executive Vice President of
Industries effective November 6, 1996. Prior to his appointment
as Executive Vice President, Customer Service & Energy Delivery
of Utilities in 1995, he was employed by MCI Communications as
Chief Information Officer from 1990 to 1995.
(iii) Thomas M. Walker was elected Executive Vice President &
Chief Financial Officer of Industries effective December 16,
1996. Prior to joining Industries 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.
(iv) John E. Ebright was elected Controller & Chief Accounting
Officer of Industries effective July 8, 1996. Prior to joining
Industries 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 for all services rendered during
1997, 1996, and 1995 to the Chief Executive Officer and the four other
most highly compensated executive officers of Industries or its
subsidiaries at December 31, 1997.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Other Restricted
Name and Principal Annual Stock All Other
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 1996 380,000 175,000 2,578 253,475 13,956
and Chief Executive 1995 340,000 142,800 1,588 176,645 13,507
Officer
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 1996 226,467 58,050 - 101,879 823
President 1995 89,583 206,500 51,523 143,125 324
Thomas M. Walker 1997 230,000 62,100 38,138 - 2,367
Executive Vice 1996 9,583 - - 30,000 119
President and 1995
Chief Financial Officer
John F. Franz, Jr. 1997 175,862 34,965 3,288 32,642 5,360
Vice President, 1996 155,083 40,000 1,028 39,930 5,338
Nuclear - Utilities 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 - Utilities 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 Industries 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 Plans: 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
Beneficial Owners
Set forth below is certain information with respect to beneficial
ownership of Common Stock by each person know by Industries, as of March
1, 1998, to own 5% or more of the outstanding Common Stock of Industries.
Amount and Nature of Percent of
Name of Beneficial Owner Beneficial Ownership(1) Class(1)
WPL Holdings, Inc........... 5,861,115 16.0%
Interstate Power Company.... 5,861,115 16.0%
(1) By reason of the Stock Option Agreements, executed concurrently with
the Merger Agreement, each of WPLH and IPC may be deemed to have sole
voting and dispositive power with respect to the shares listed above which
are subject to their respective options from Industries and, accordingly,
each of WPLH and IPC may be deemed to beneficially own all of such shares
(assuming exercise of its option and the nontriggering of the other
party's right to exercise its option for Common Stock). However, each of
WPLH and IPC expressly disclaim any beneficial ownership of such shares
because such options are exercisable only in certain circumstances.
Management
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 of Percent of
Name of Beneficial Owner Beneficial Ownership(1) Class(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 36
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995 37
Consolidated Statements of Retained Earnings
for the years ended December 31, 1997, 1996 and 1995 37
Consolidated Balance Sheets
at December 31, 1997 and 1996 38 - 39
Consolidated Statements of Capitalization
at December 31, 1997 and 1996 40
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 41
Notes to Consolidated Financial Statements 42 - 62
(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 81
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 Industries Inc. (Industries),
Amended and Restated as of May 4, 1993 (Filed as Exhibit 3(a) to
Industries' Form 10-K for the year 1993).
3(b) Bylaws of Industries, as amended February 4, 1997. (Filed as
Exhibit 3(c) 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 Reference Exhibit
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).
4(i) Commercial Paper Dealer Agreement, dated as of November 9, 1994,
between IES Diversified Inc. and Citicorp Securities, Inc.
(Filed as Exhibit 4(c) to Industries' Form 10-Q for the quarter
ended March 31, 1997 (File No. 1-9187)).
4(j) First Amendment, dated as of March 24, 1997, to the Commercial
Paper Dealer Agreement, dated as of November 9, 1994, between
IES Diversified Inc. and Citicorp Securities, Inc. (Filed as
Exhibit 4(d) to Industries' Form 10-Q for the quarter ended
March 31, 1997 (File No. 1-9187)).
4(k) 3-Year Credit Agreement dated as of October 20, 1997 among IES
Diversified Inc. as Borrower, certain banks, First Chicago
Capital Markets, Inc. as Syndication Agent and Citibank, N.A. as
Agent. (Filed as Exhibit 4(f) to Industries' Form 10-Q for the
quarter ended September 30, 1997 (File No. 1-9187)).
4(l) 364-Day Credit Agreement dated as of October 20, 1997 among IES
Diversified Inc. as Borrower, certain banks, First Chicago
Capital Markets, Inc. as Syndication Agent and Citibank, N.A. as
Agent. (Filed as Exhibit 4(g) to Industries' Form 10-Q for the
quarter ended September 30, 1997 (File No. 1-9187)).
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(x))
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 Industries Inc. Grantor Trust for Director Retirement Plan.
(Filed as Exhibit 10(c) to Industries' Form 10-Q for the quarter
ended September 30, 1997 (File No. 1-9187)).
10(u) IES Industries Inc. Grantor Trust for Deferred Compensation
Agreements. (Filed as Exhibit 10(d) to Industries' Form 10-Q
for the quarter ended September 30, 1997 (File No. 1-9187)).
10(v) IES Industries Inc. Grantor Trust for Supplemental Retirement
Agreements. (Filed as Exhibit 10(e) to Industries' Form 10-Q
for the quarter ended September 30, 1997 (File No. 1-9187)).
10(w) 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(x) 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(y) IES Industries Inc. Shareholders' Rights Plan. (Filed as
Exhibit I-2 to Industries' Registration Statement on Form 8-A
filed November 13, 1991).
10(z) Lease and Security Agreement, dated October 1, 1993, between IES
Diversified Inc., as lessee, and Sumitomo Bank Leasing and
Finance, Inc., as lessor. (Filed as Exhibit 10(z) to
Industries' Form 10-K for the year 1993).
10(aa) 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(ab) 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(ac) 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).
*21 Subsidiaries of the Registrant
*23 Consent of Independent Public Accountants
*27 Financial Data Schedule
Note: Pursuant to (b)(4)(iii)(A) of Item 601 of Regulation S-K,
Industries 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 Industries but hereby
agrees to furnish to the Commission on request any such
instruments.
(a) 4. Unaudited Pro Forma Combined Financial Information of Interstate
Energy Corporation:
Unaudited Pro Forma Combined Balance Sheet at December 31, 1997
83 - 84
Unaudited Pro Forma Combined Statements of Income for the
years ended December 31, 1997, 1996 and 1995 85 - 87
Notes to Unaudited Pro Forma Combined Financial Statements
88 - 91
(b) Reports on Form 8-K for IES Industries Inc. -
Financial
Items Reported Statements Date of Report
5* None October 30, 1997
* Reporting that the Board of Directors authorized management to
pursue and propose additional foreign investments, not to exceed
$300,000,000, in Brazil, which is undergoing a privatization of its
electric companies.
<PAGE>
IES INDUSTRIES 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:
IES Utilities Inc.:
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
====== ======
Non-utility Subsidiaries:
Accumulated Provision for Uncollectible
Accounts:
Year ended December 31, 1997 $ 774 $ 199
====== ======
Year ended December 31, 1996 $ 685 $ 774
====== ======
Year ended December 31, 1995 $ 372 $ 685
====== ======
Note: The above provisions relate to various customer, notes and other
receivable balances included in several line items on Industries'
Consolidated Balance Sheets.
OTHER RESERVES:
IES Utilities Inc.:
Accumulated Provision for Rate Refunds
Year ended December 31, 1997 $ - $ -
====== ======
Year ended December 31, 1996 $ 106 $ -
====== ======
Year ended December 31, 1995 $ - $ 106
====== ======
IES Utilities Inc.:
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>
INTERSTATE ENERGY CORPORATION
(doing business as Alliant Corporation)
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements for Interstate
Energy Corporation (Merged Company) combine the historical consolidated
balance sheets and statements of income of IES Industries Inc. (IES),
Interstate Power Company (IPC) and WPL Holdings, Inc. (WPLH) as adjusted
by various pro forma adjustments identified in Note 1. All material
adjustments known at this time which impact the reporting periods shown
have been included. The combination of WPLH, IES and IPC is referred to
herein as the "Merger."
These pro forma combined financial statements set forth the restated
combined financial data that will be presented for future comparative
financial data for the Merged Company. The pro forma balance sheet that
will be filed with the Securities and Exchange Commission following
consummation of the Merger will also include an additional pro forma
adjustment for certain merger-related costs to be recorded upon completion
of the Merger.
These statements are prepared on the basis of accounting for the Merger as
a pooling of interests and are based on the assumptions set forth in the
notes thereto. The historical data for WPLH have been adjusted to reflect
the restatement of such data to account for certain discontinued
operations as discussed in Note 6.
The following information is not necessarily indicative of the financial
position or operating results that would have occurred had the Merger been
consummated on the date, or at the beginning of the periods, for which the
Merger is being given effect nor is it necessarily indicative of future
operating results or financial position.
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 1997
(In thousands)
<CAPTION>
Pro Forma
ASSETS WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
UTILITY PLANT
Electric $1,790,641 $2,072,866 $869,715 $ - $4,733,222
Gas 237,856 187,098 70,201 - 495,155
Other 220,679 145,716 - - 366,395
--------- --------- --------- -------- ---------
Total 2,249,176 2,405,680 939,916 - 5,594,772
Less: Accumulated provision
for depreciation 1,065,726 1,115,261 450,595 - 2,631,582
Construction work in progress 42,312 38,923 5,276 - 86,511
Nuclear fuel--net 19,046 36,731 - - 55,777
--------- --------- --------- -------- ---------
Net utility plant 1,244,808 1,366,073 494,597 - 3,105,478
OTHER PROPERTY, PLANT
AND EQUIPMENT
---NET AND OTHER INVESTMENTS 139,548 319,657 4,746 (125) 463,826
CURRENT ASSETS
Cash and cash equivalents 13,987 10,143 2,897 302 27,329
Accounts receivable ---net 78,082 52,295 27,061 12,489 169,927
Fossil fuel inventories, at
average cost 18,857 10,579 11,220 - 40,656
Materials and supplies, at
average cost 19,274 24,274 6,297 - 49,845
Prepayments and other 42,808 69,920 15,035 (3,278) 124,485
--------- --------- --------- -------- ---------
Total current assets 173,008 167,211 62,510 9,513 412,242
EXTERNAL DECOMMISSIONING
FUND 112,356 77,882 - - 190,238
INVESTMENT IN MCLEODUSA
INC. - 326,582 1,440 - 328,022
DEFERRED CHARGES AND
OTHER 192,087 199,814 75,456 (15,442) 451,915
--------- --------- -------- -------- ---------
TOTAL ASSETS $1,861,807 $2,457,219 $638,749 ($6,054) $4,951,721
========= ========= ======== ======== =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued)
December 31, 1997
(In thousands)
<CAPTION>
Pro Forma
CAPITALIZATION AND LIABILITIES WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
CAPITALIZATION
Common Stock Equity:
Common stock $308 $ - $34,163 ($33,706) $765
Other stockholders' equity 607,275 818,133 181,457 38,404 1,645,269
--------- --------- --------- --------- ---------
Total common stock equity 607,583 818,133 215,620 4,698 1,646,034
Preferred stock not mandatorily
redeemable 59,963 18,320 10,819 - 89,102
Preferred stock mandatory
sinking fund - - 24,267 - 24,267
Long-term debt---net 457,520 845,189 165,194 - 1,467,903
--------- --------- --------- -------- ---------
Total capitalization 1,125,066 1,681,642 415,900 4,698 3,227,306
CURRENT LIABILITIES
Current maturities, sinking funds,
and capital lease obligations 11,528 13,684 6,314 - 31,526
Commercial paper, notes payable
and other 123,095 - 33,500 - 156,595
Variable rate demand bonds 56,975 - - - 56,975
Accounts payable and accruals 91,175 78,702 13,208 9,549 192,634
Taxes accrued 412 62,432 16,014 65 78,923
Other accrued liabilities 55,987 67,174 12,445 (2,468) 133,138
--------- --------- --------- --------- ---------
Total current liabilities 339,172 221,992 81,481 7,146 649,791
OTHER LIABILITIES
Deferred income taxes 253,519 372,837 104,670 - 731,026
Deferred investment tax credits 35,039 31,838 15,985 - 82,862
Accrued environmental remediation
costs 9,238 46,989 5,794 - 62,021
Capital lease obligations - 23,548 86 - 23,634
Other liabilities and deferred
credits 99,773 78,373 14,833 (17,898) 175,081
--------- --------- --------- --------- ---------
Total other liabilities 397,569 553,585 141,368 (17,898) 1,074,624
--------- --------- --------- --------- ---------
TOTAL CAPITALIZATION AND
LIABILITIES $1,861,807 $2,457,219 $638,749 ($6,054) $4,951,721
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $634,143 $604,270 $277,340 $ - $1,515,753
Gas utility 155,883 183,517 54,507 - 393,907
Other 129,229 142,912 - 118,826 390,967
--------- --------- --------- --------- ---------
Total operating revenues 919,255 930,699 331,847 118,826 2,300,627
Operating Expenses
Electric and steam production
fuels 116,812 108,344 55,402 - 280,558
Purchased power 125,438 74,098 56,770 - 256,306
Cost of gas sold 99,267 126,631 33,324 - 259,222
Other operation 254,796 231,481 64,685 119,306 670,268
Maintenance 48,058 57,185 17,782 96 123,121
Depreciation and amortization 111,289 114,122 31,676 245 257,332
Taxes other than income taxes 34,988 51,701 16,708 - 103,397
-------- --------- --------- --------- ---------
Total operating expenses 790,648 763,562 276,347 119,647 1,950,204
-------- --------- --------- --------- ---------
Operating Income 128,607 167,137 55,500 (821) 350,423
Other Income (Expense)
Allowance for funds used
during construction 2,775 2,309 190 - 5,274
Other income and deductions, net 4,432 1,850 6,772 856 13,910
------- ------- ------- ------- --------
Total other income (expense) 7,207 4,159 6,962 856 19,184
Interest Charges 42,535 64,383 15,610 35 122,563
------- ------- ------- ------- --------
Income from Continuing Operations
before Income Taxes and
Preferred Dividends 93,279 106,913 46,852 - 247,044
Income Taxes 28,715 39,662 17,684 - 86,061
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,469 - 6,693
------- ------- ------- ------- --------
Income from Continuing
Operations $61,254 $66,337 $26,699 $ - $154,290
======= ======= ======= ======= ========
Average Common Shares
Outstanding 30,782 30,380 9,725 5,323 76,210
Earnings per Share of Common
Stock from Continuing
Operations (Basic and diluted) $1.99 $2.18 $2.74 N/A $2.02
====== ====== ====== ====== ========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $589,482 $574,273 $276,620 $ - $1,440,375
Gas utility 165,627 273,979 49,464 (113,115) 375,955
Other 177,735 125,660 - 113,115 416,510
--------- --------- --------- -------- ---------
Total operating revenues 932,844 973,912 326,084 - 2,232,840
Operating Expenses
Electric and steam production fuels 114,470 84,579 57,560 - 256,609
Purchased power 81,108 88,350 61,556 - 231,014
Cost of gas sold 104,830 217,351 31,617 (113,474) 240,324
Other operation 317,608 212,501 51,707 113,474 695,290
Maintenance 46,492 49,001 16,164 - 111,657
Depreciation and amortization 90,683 107,393 31,087 - 229,163
Taxes other than income taxes 34,603 48,171 16,064 - 98,838
--------- --------- --------- -------- ---------
Total operating expenses 789,794 807,346 265,755 - 1,862,895
--------- --------- --------- -------- ---------
Operating Income 143,050 166,566 60,329 - 369,945
Other Income (Expense)
Allowance for funds used
during construction 3,208 2,103 263 - 5,574
Other income and deductions, net 14,098 (4,591) 2,336 - 11,843
--------- --------- --------- -------- ---------
Total other income (expense) 17,306 (2,488) 2,599 - 17,417
Interest Charges 42,027 54,822 16,472 - 113,321
--------- --------- --------- -------- ---------
Income from Continuing Operations
before Income Taxes and
Preferred Dividends 118,329 109,256 46,456 - 274,041
Income Taxes 41,814 47,435 18,133 - 107,382
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,463 - 6,687
--------- --------- --------- -------- ---------
Income from Continuing
Operations (Notes 3 and 6) $73,205 $60,907 $25,860 $ - $159,972
========= ========= ========= ======== =========
Average Common Shares
Outstanding 30,790 29,861 9,594 5,236 75,481
Earnings per Share of Common
Stock from Continuing
Operations (Basic and diluted) $2.38 $2.04 $2.69 N/A $2.12
======= ======= ======= ====== =======
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial
Statements.
<PAGE>
<TABLE>
INTERSTATE ENERGY CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(In thousands, except per share amounts)
<CAPTION>
Pro Forma
WPLH Adjustments Pro Forma
(As Reported) IES IPC (See Note 1) Combined
<S> <C> <C> <C> <C> <C>
Operating Revenues
Electric utility $546,324 $560,471 $274,873 $ - $1,381,668
Gas utility 139,165 190,339 43,669 (53,047) 320,126
Other 121,766 100,200 - 53,047 275,013
--------- --------- --------- --------- ---------
Total operating revenues 807,255 851,010 318,542 - 1,976,807
Operating Expenses
Electric and steam production
fuels 116,488 96,256 62,164 - 274,908
Purchased power 44,940 66,874 57,566 - 169,380
Cost of gas sold 84,002 141,716 25,888 (50,519) 201,087
Other operation 252,722 199,768 44,581 50,519 547,590
Maintenance 42,043 46,093 14,881 - 103,017
Depreciation and amortization 86,319 97,958 29,560 - 213,837
Taxes other than income taxes 34,188 49,011 15,990 - 99,189
--------- --------- --------- --------- ---------
Total operating expenses 660,702 697,676 250,630 - 1,609,008
--------- --------- --------- --------- ---------
Operating Income 146,553 153,334 67,912 - 367,799
Other Income (Expense)
Allowance for funds used
during construction 2,088 3,424 341 - 5,853
Other income and deductions, net 5,954 1,548 (4,008) - 3,494
--------- --------- --------- --------- ---------
Total other income (expense) 8,042 4,972 (3,667) - 9,347
Interest Charges 43,559 50,727 17,136 - 111,422
--------- --------- --------- --------- ---------
Income from Continuing Operations
before Income Taxes and
Preferred Dividends 111,036 107,579 47,109 - 265,724
Income Taxes 36,108 42,489 19,453 - 98,050
Preferred Dividends of
Subsidiaries (Note 2) 3,310 914 2,458 - 6,682
--------- --------- --------- --------- ---------
Income from Continuing
Operations (Note 6) $71,618 $64,176 $25,198 $ - $160,992
========= ========= ========= ========= =========
Average Common Shares
Outstanding 30,774 29,202 9,564 5,140 74,680
Earnings per Share of Common
Stock from Continuing
Operations (Basic and diluted) $2.33 $2.20 $2.63 N/A $2.16
========= ========= ========= ========= =========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Financial
Statements
<PAGE>
INTERSTATE ENERGY CORPORATION
NOTES TO UNAUDITED PRO FORMA
COMBINED FINANCIAL STATEMENTS
1. Pro Forma Adjustments
<TABLE>
<CAPTION>
Merged
Consolidation Eliminations Company IPC IES
of for Common Stock Unbilled Pension Total
December 31, 1997 BALANCE IEA-HES LLC IEA-HES LLC Adjustment Revenue Liability Pro Forma
SHEET (Note 1(a)) (Note 1(b)) (Note 1(c)) (Note 1(d) (Note 1(e)) Adjustments
<S> <C> <C> <C> <C> <C> <C>
ASSETS
OTHER PROPERTY, PLANT AND
EQUIP -- NET AND OTHER
INVESTMENTS $3,458 ($3,583) $ - $ - $ - ($125)
CURRENT ASSETS
Cash and cash equivalents 3,308 (3,006) - - - 302
Accounts receivable -- net 8,932 (1,965) - 5,522 - 12,489
Prepayments and other 2 - - (3,280) - (3,278)
------- -------- -------- -------- -------- ---------
Total current Assets 12,242 (4,971) - 2,242 - 9,513
DEFERRED CHARGES AND OTHER - - - 2,456 (17,898) (15,442)
------- -------- -------- -------- -------- ---------
TOTAL ASSETS $15,700 ($8,554) - $4,698 ($17,898) ($6,054)
======= ========= ======== ======== ======== =========
CAPITALIZATION AND
LIABILITIES
CAPITALIZATION
Common Stock Equity:
Common stock $ - $ - ($33,706) $ - $ - ($33,706)
Other stockholders' equity 3,583 (3,583) 33,706 4,698 - 38,404
-------- ------- -------- --------- -------- --------
Total common stock equity 3,583 (3,583) - 4,698 - 4,698
CURRENT LIABILITIES
Accounts payable and
accruals 11,514 (1,965) - - - 9,549
Taxes accrued 65 - - - - 65
Other accrued liabilities 538 (3,006) - - - (2,468)
-------- -------- -------- --------- --------- ---------
Total current liabilities 12,117 (4,971) - - - 7,146
OTHER LIABILITIES
Other liabilities and
deferred credits - - - - (17,898) (17,898)
------- -------- -------- -------- -------- ---------
Total other liabilities - - - - (17,898) (17,898)
------- -------- -------- -------- -------- ---------
TOTAL CAPITALIZATION AND
LIAB. $15,700 ($8,554) $ - $4,698 ($17,898) ($6,054)
======= ======== ======== ======== ======== =========
<CAPTION>
Merged
Consolidation Eliminations Company
of for Common Stock Total
IEA-HES LLC IEA-HES LLC Adjustment Pro Forma
1997 INCOME STATEMENT (Note 1(a)) (Note 1(b)) (Note 1(c)) Adjustments
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas Utility $ - $ - $ - $ -
Other 118,826 - - 118,826
-------- --------- --------- -------
Total operating
revenues 118,826 - - 118,826
OPERATING EXPENSES:
Cost of gas sold - - - -
Other operation 119,306 - - 119,306
Maintenance 96 - - 96
Depreciation and
amortization 245 - - 245
-------- --------- ---------- --------
Total operating
expenses 119,647 - - 119,647
OPERATING INCOME
OTHER INCOME (EXPENSE) (821) - - (821)
Other income and
deductions, net 61 795 - 856
--------- --------- --------- --------
Total other income
(expense) 61 795 - 856
INTEREST CHARGES 35 - - 35
--------- --------- --------- --------
INCOME FROM CONTINUING
OPER. ($795) $795 $ - $ -
========= ========= ========= ========
AVERAGE COMMON SHARES - - 5,323 5,323
<CAPTION>
Merged
Company
Common Stock IEA Total
Adjustment Gas Activity Pro Forma
1996 INCOME STATEMENT (Note 1(c)) (Note 1(f)) Adjustments
<S> <C> <C> <C>
OPERATING REVENUES:
Gas Utility $ - ($113,115) ($113,115)
Other - 113,115 113,115
------- -------- --------
Total operating revenues - - -
OPERATING EXPENSES:
Cost of gas sold - (113,474) (113,474)
Other operation - 113,474 113,474
------- -------- --------
Total operating expenses - - -
------- -------- --------
INCOME FROM CONTINUING
OPERATIONS $ - $ - $ -
======= ======== ========
AVERAGE COMMON SHARES 5,236 - 5,236
<CAPTION>
Merged
Company
Common Stock IEA Total
Adjustment Gas Activity Pro Forma
1995 INCOME STATEMENT (Note 1(c)) (Note 1(f)) Adjustments
<S> <C> <C> <C>
OPERATING REVENUES:
Gas utility $ - ($53,047) ($53,047)
Other - 53,047 53,047
-------- -------- --------
Total operating revenues - - -
OPERATING EXPENSES:
Cost of gas sold - (50,519) (50,519)
Other operation - 50,519 50,519
-------- -------- --------
Total operating expenses - - -
-------- -------- --------
INCOME FROM CONTINUING
OPERATIONS $ - $ - $ -
======== ======== ========
AVERAGE COMMON SHARES 5,140 - 5,140
</TABLE>
(a) Consolidation of IEA-HES L.L.C.
In January 1997, IES and WPLH formed a gas marketing joint venture named
IEA-HES L.L.C. Pursuant to the applicable accounting rules, IES and WPLH
each accounted for this joint venture in 1997 under the equity method of
accounting with their investment recorded on the balance sheet in "Other
Property, Plant and Equipment -- Net and Other Investments" and their
allocated portion of earnings on the income statement in "Other Income and
Deductions, Net". This pro forma adjustment reflects the financial
results of IEA-HES L.L.C. as a consolidated subsidiary.
(b) Eliminations for IEA-HES L.L.C.
This pro forma adjustment reflects the elimination of intercompany
balances of IEA-HES L.L.C. and also eliminates the equity investments of
IES and WPLH and their allocated portion of revenues and expenses.
(c) Merged Company Common Stock Adjustment
The pro forma combined financial statements reflect the conversion of each
share of IES Common Stock (no par value) outstanding into 1.14 shares of
Merged Company Common Stock ($.01 par value) and the conversion of each
share of IPC Common Stock ($3.50 par value) into 1.11 shares of Merged
Company Common Stock ($.01 par value), and the continuation of each share
of WPLH Common Stock ($.01 par value) outstanding as one share of Merged
Company Common Stock, as provided in the Merger Agreement. The pro forma
adjustment to common stock equity restates the common stock account to
equal par value for all shares to be issued ($.01 par value per share of
Merged Company Common Stock) and reclassifies the excess to other
stockholders' equity. The average number of shares of common stock used
for calculating per share amounts is based on the exchange ratios shown
below.
<TABLE>
<CAPTION>
As Pro As Pro As
Exchange reported forma reported forma reported Pro forma
Ratio 12/31/97 12/31/97 12/31/96 12/31/96 12/31/95 12/31/95
<S> <C> <C> <C> <C> <C> <C> <C>
WPLH N/A 30,782 30,782 30,790 30,790 30,774 30,774
IES 1.14 30,380 34,633 29,861 34,042 29,202 33,290
IPC 1.11 9,725 10,795 9,594 10,649 9,564 10,616
</TABLE>
The number of shares of common stock at December 31, 1997 used for
calculating the par value of common stock is based on the exchange ratios
shown below.
Exchange As reported Pro forma
Ratio 12/31/97 12/31/97
WPLH N/A 30,789 30,789
IES 1.14 30,577 34,858
IPC 1.11 9,761 10,835
(d) IPC Unbilled Revenues
The financial results of IPC do not include accrued revenues for services
rendered but unbilled at month-end. The pro forma adjustment reflects the
impact of adopting unbilled revenues, including the tax impact of the
adoption. The change is being implemented to conform to the method
currently utilized by WPLH and IES.
(e) IES Pension Liability
The accrued pension liability (and offsetting regulatory asset), included
in the financial results of IES, was calculated using a five-year smoothed
method of recognizing deferred asset gains. The pro forma adjustment
reflects a change to the straight market value method which recognizes
deferred asset gains sooner. The change is being implemented to conform
to the method currently utilized by WPLH and IPC.
(f) IEA Gas Activity
The gas revenues and cost of gas sold of Industrial Energy Applications,
Inc. (IEA), a subsidiary of IES, for 1996 and 1995 have been reclassed
into "Other" revenues and "Other operation" expenses, respectively,
consistent with the 1997 presentation.
2. Preferred Stock Dividends of IPC
The Preferred Stock Dividends of IPC have been reclassified in the
unaudited pro forma combined statements as "Preferred Dividends of
Subsidiaries" and deducted in the determination of income from continuing
operations which reflects the holding company structure of the Merged
Company.
3. Nonrecurring Material Items Included in Historical Financial Results
IES's income from continuing operations for the year ended December 31,
1996 included costs incurred relating to its successful defense of a
hostile takeover attempt mounted by MidAmerican Energy Company. The
after-tax impact on income from continuing operations was a decrease of
$4.6 million.
Nonrecurring items affecting WPLH's performance for the year ended
December 31, 1996 included the impact of the sale of a combustion turbine
and the sale of WPLH's assisted-living real estate investments. The
after-tax impact of these items on continuing operations was an increase
of $5.9 million.
4. Estimated Costs and Cost Savings of Proposed Merger
The allocation between WPLH, IES and IPC and their customers of the
estimated cost savings of approximately $749 million over ten years
resulting from the merger, net of the costs incurred to achieve such
savings, will be subject to regulatory review and approval. Costs arising
from the Merger are currently estimated to be approximately $78 million.
Approximately $22 million of these costs had been incurred through
December 31, 1997 and are reflected in results of operations. 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 treatment, weather conditions, financial market conditions,
future business decisions and other uncertainties. No assurance can be
given that the estimated cost savings will actually be realized. None of
the estimated cost savings, or costs to be incurred subsequent to December
31, 1997 to achieve such savings, have been reflected in the unaudited pro
forma combined financial statements.
5. Intercompany Transactions
Intercompany transactions (including purchased and exchange power
transactions) between WPLH, IES and IPC during the periods presented were
included in the determination of regulated rates and/or were not material.
Accordingly, no pro forma adjustments were made to eliminate such
transactions.
6. Discontinued Operations
The financial statements of WPLH reflect the discontinuance of operations
of its utility energy and marketing consulting business in 1995. The
discontinuance of this business resulted in a pre-tax loss in the fourth
quarter of 1995 of $7.7 million. The after-tax loss on disposition was
$11.0 million reflecting the associated tax expense on disposition due to
the non-deductibility of the carrying value of goodwill at sale. During
1996, WPLH recognized an additional loss of $1.3 million, net of
applicable income tax benefit, associated with the final disposition of
the business. Operating revenues, operating expenses, other income and
expense and income taxes for the discontinued operations for the time
periods presented have been excluded from income from continuing
operations. Interest expense has been adjusted for the amounts associated
with direct obligations of the discontinued operations.
<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 3rd day of April 1998.
IES INDUSTRIES 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 3rd day of
April 1998.
/s/ Lee Liu Chairman of the Board & Chief Executive
Lee Liu Officer (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
John E. Ebright (Principal 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
EXHIBIT 21
IES INDUSTRIES INC.
SUBSIDIARIES OF THE REGISTRANT
The following are deemed to be significant subsidiaries of Industries --
Name of Subsidiary State of Incorporation
IES Utilities Inc. Iowa
IES Diversified Inc. Iowa
Exhibit 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into IES Industries Inc.'s (the
"Company") previously filed Form S-8 Registration Statement
(File No. 33-57088) for the Company's Employee Stock Purchase Plan, Form
S-8 Registration Statement (File No. 33-32468) for the Company's Employee
Savings Plan and Form S-3 Registration Statement (File No. 33-56981) for
the Company's Dividend Reinvestment and Stock Purchase Plan.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 6, 1998
<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> 724,121
<TOTAL-CURRENT-ASSETS> 167,211
<TOTAL-DEFERRED-CHARGES> 18,652
<OTHER-ASSETS> 181,162
<TOTAL-ASSETS> 2,457,219
<COMMON> 422,513
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 395,620<F1>
<TOTAL-COMMON-STOCKHOLDERS-EQ> 818,133
0
18,320
<LONG-TERM-DEBT-NET> 845,189
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 501
0
<CAPITAL-LEASE-OBLIGATIONS> 23,548
<LEASES-CURRENT> 13,183
<OTHER-ITEMS-CAPITAL-AND-LIAB> 738,345
<TOT-CAPITALIZATION-AND-LIAB> 2,457,219
<GROSS-OPERATING-REVENUE> 930,699
<INCOME-TAX-EXPENSE> 39,662<F2>
<OTHER-OPERATING-EXPENSES> 763,562
<TOTAL-OPERATING-EXPENSES> 763,562<F2>
<OPERATING-INCOME-LOSS> 167,137
<OTHER-INCOME-NET> 4,159
<INCOME-BEFORE-INTEREST-EXPEN> 171,296
<TOTAL-INTEREST-EXPENSE> 64,383
<NET-INCOME> 66,337<F3>
914<F3>
<EARNINGS-AVAILABLE-FOR-COMM> 66,337
<COMMON-STOCK-DIVIDENDS> 63,844
<TOTAL-INTEREST-ON-BONDS> 46,683
<CASH-FLOW-OPERATIONS> 246,908
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 0
<FN>
<F1>Includes $173,901 of unrealized security gains (net of taxes) and ($20) of
cumulative foreign currency translation adjustments.
<F2>Income tax expense is not included in Operating Expense in the Consolidated
Statements of Income for IES Industries Inc. (Industries).
<F3>Since the preferred dividends are for a subsidiary of Industries, they are
considered a fixed charge on Industries' Consolidated Statement of Income.
</FN>
</TABLE>
