SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-4117-1
IES UTILITIES INC.
(Exact name of registrant as specified in its charter)
Iowa 42-0331370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
IES Tower, Cedar Rapids, Iowa 52401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (319) 398-4411
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at April 30, 1995
Common Stock, $2.50 par value 13,370,788 shares
IES UTILITIES INC.
INDEX
Page No.
Part I. Financial Information.
Item 1. Consolidated Financial Statements.
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 3 - 4
Consolidated Statements of Income -
Three and Twelve Months Ended
March 31, 1995 and 1994 5
Consolidated Statements of Cash Flows -
Three and Twelve Months Ended
March 31, 1995 and 1994 6
Notes to Consolidated Financial Statements 7 - 14
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition. 15 - 30
Part II. Other Information. 31 - 33
Signatures. 34
PART 1. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
March 31,
1995 December 31,
ASSETS (Unaudited) 1994
(in thousands)
Property, plant and equipment, at original cost:
Utility -
Plant in service -
Electric $ 1,809,917 $ 1,798,059
Gas 158,512 158,115
Other 86,382 86,005
2,054,811 2,042,179
Less - Accumulated depreciation 903,302 880,888
1,151,509 1,161,291
Leased nuclear fuel, net of amortization 48,292 49,731
Construction work in progress 87,847 73,339
1,287,648 1,284,361
Other 2,145 1,824
1,289,793 1,286,185
Current assets:
Cash and temporary cash investments 2,490 2,135
Accounts receivable -
Customer, less reserve 577 12,051
Other 11,111 9,763
Income tax refunds receivable 2,635 3,450
Production fuel, at average cost 14,132 13,988
Materials and supplies, at average cost 26,421 26,699
Adjustment clause balances 0 1,433
Regulatory assets 20,702 20,145
Prepayments and other 22,250 29,546
100,318 119,210
Investments:
Nuclear decommissioning trust funds 36,783 33,779
Cash surrender value of life insurance policies 3,049 2,915
Other 1,317 1,085
41,149 37,779
Other assets:
Regulatory assets 194,199 192,955
Deferred charges and other 8,175 9,239
202,374 202,194
$ 1,633,634 $ 1,645,368
CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
1995 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1994
(in thousands)
Capitalization:
Common stock - par value $2.50 per share -
authorized 24,000,000 shares; 13,370,788
shares outstanding $ 33,427 $ 33,427
Paid-in surplus 279,042 279,042
Retained earnings ($18,209,000 restricted
as to payment of cash dividends) 190,090 197,158
Total common equity 502,559 509,627
Cumulative preferred stock - par value $50
per share - authorized 466,406 shares;
366,406 shares outstanding 18,320 18,320
Long-term debt 430,454 380,404
951,333 908,351
Current liabilities:
Notes payable to associated companies 15,544 18,495
Short-term borrowings 28,000 37,000
Capital lease obligations 16,175 14,385
Maturities and sinking funds 50,140 100,140
Accounts payable 61,403 70,354
Accrued interest 10,876 9,438
Accrued taxes 52,590 47,188
Accumulated refueling outage provision 6,668 15,196
Adjustment clause balances 2,802 0
Provision for rate refund liability 8,000 0
Environmental liabilities 5,303 5,428
Other 20,320 18,324
277,821 335,948
Long-term liabilities:
Capital lease obligations 32,117 35,346
Environmental liabilities 37,265 37,853
Other 47,188 46,724
116,570 119,923
Deferred credits:
Accumulated deferred income taxes 248,782 241,345
Accumulated deferred investment tax credits 39,128 39,801
287,910 281,146
Commitments and contingencies (Note 5)
$ 1,633,634 $ 1,645,368
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three For the Twelve
Months Ended Months Ended
March 31 March 31
1995 1994 1995 1994
(in thousands)
Operating revenues:
Electric $ 116,577 $ 123,918 $ 529,987 $ 547,812
Gas 53,175 65,134 127,074 155,117
Other 3,087 2,961 9,131 9,049
172,839 192,013 666,192 711,978
Operating expenses:
Fuel for production 19,443 22,344 83,051 85,506
Purchased power 16,314 13,602 71,506 84,944
Gas purchased for resale 38,133 49,116 84,356 110,010
Other operating expenses 34,411 30,982 135,711 126,409
Maintenance 11,679 10,895 50,326 46,735
Depreciation and amortization 20,589 19,160 76,744 71,045
Taxes other than income taxes 12,374 11,666 43,258 42,726
152,943 157,765 544,952 567,375
Operating income 19,896 34,248 121,240 144,603
Interest expense and other:
Interest expense 10,458 10,530 41,502 40,041
Allowance for funds used
during construction -1,115 -877 -4,148 -2,444
Miscellaneous, net 8 -268 -970 -678
9,351 9,385 36,384 36,919
Income before income taxes 10,545 24,863 84,856 107,684
Income taxes:
Current -1,985 9,673 26,717 28,380
Deferred 7,041 908 8,369 15,640
Amortization of investment
tax credits -672 -662 -2,657 -4,827
4,384 9,919 32,429 39,193
Net income 6,161 14,944 52,427 68,491
Preferred dividend requirements 229 229 914 914
Net income available for
common stock $ 5,932 $ 14,715 $ 51,513 $ 67,577
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three For the Twelve
Months Ended Months Ended
March 31 March 31
1995 1994 1995 1994
(in thousands)
Cash flows from operating activities:
Net income $ 6,161 $ 14,944 $ 52,427 $ 68,491
Adjustments to reconcile net income to net cash
flows from operating activities -
Depreciation and amortization 20,589 19,160 76,744 71,045
Principal payments under capital lease obligations 2,556 4,427 14,375 12,439
Deferred taxes and investment tax credits 6,369 246 5,712 10,813
Refueling outage provision -8,528 3,137 871 -4,747
Allowance for equity funds used during construction -282 -540 -2,040 -1,250
Other 1,075 661 3,717 1,838
Other changes in assets and liabilities -
Accounts receivable 126 3,652 6,869 4,234
Production fuel, materials and supplies -52 2,774 -2,678 2,464
Accounts payable -4,239 -5,299 21,504 -2,869
Accrued taxes 6,217 2,544 10,730 -6,748
Provision for rate refunds 8,000 415 -1,085 -1,536
Adjustment clause balances 4,235 4,724 -7,071 -405
Gas in storage 7,375 10,090 -796 -4,199
Other 6,417 -434 10,919 3,851
Net cash flows from operating activities 56,019 60,501 190,198 153,421
Cash flows from financing activities:
Dividends declared on common stock -13,000 -7,000 -58,000 -28,300
Dividends declared on preferred stock -229 -229 -914 -914
Dividends payable 0 -5,000 0 0
Proceeds from issuance of long-term debt 50,000 0 50,000 119,400
Reductions in long-term debt and preferred stock -50,000 0 -50,224 -79,624
Net change in short-term borrowings -11,951 -24,000 43,544 -25,960
Principal payments under capital lease obligations -3,662 -3,720 -16,246 -11,429
Sale of utility accounts receivable 10,000 0 10,800 17,700
Net cash flows from financing activities -18,842 -39,949 -21,040 -9,127
Cash flows from investing activities:
Construction and acquisition expenditures -28,216 -18,992 -157,327 -115,328
Nuclear decommissioning trust funds -1,383 -1,383 -5,532 -5,532
Deferred energy efficiency costs -3,537 -3,399 -16,295 -11,961
Other -3,686 -2,351 -254 -359
Net cash flows from investing activities -36,822 -26,125 -179,408 -133,180
Net increase (decrease) in cash and temporary cash investments 355 -5,573 -10,250 11,114
Cash and temporary cash investments at beginning of period 2,135 18,313 12,740 1,626
Cash and temporary cash investments at end of period $ 2,490 $ 12,740 $ 2,490 $ 12,740
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 8,254 $ 7,979 $ 40,281 $ 36,514
Income taxes $ 2,850 $ -39 $ 37,368 $ 36,308
Noncash investing and financing activities -
Capital lease obligations incurred $ 1,116 $ 196 $ 15,217 $ 4,308
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1995
(1) GENERAL:
The interim Consolidated Financial Statements have been
prepared by IES Utilities Inc. (Utilities) and its
consolidated subsidiaries (collectively the Company), without
audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Utilities is a wholly-owned
subsidiary of IES Industries Inc. (Industries). Utilities'
wholly-owned subsidiary is IES Ventures Inc. (Ventures), which
is a holding company for unregulated investments. Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the
information presented not misleading. In the opinion of the
Company, the Consolidated Financial Statements include all
adjustments, which are normal and recurring in nature,
necessary for the fair presentation of the results of
operations and financial position. Certain prior period
amounts have been reclassified on a basis consistent with the
1995 presentation.
It is suggested that these Consolidated Financial
Statements be read in conjunction with the Consolidated
Financial Statements and the notes thereto included in the
Company's Form 10-K for the year ended December 31, 1994. The
accounting and financial policies relative to the following
items have been described in those notes and have been omitted
herein because they have not changed materially through the
date of this report:
Summary of significant accounting policies
Acquisition of Iowa service territory of Union Electric Company (UE)
Leases
Utility accounts receivable (other than discussed in Note 3)
Income taxes
Benefit plans
Preferred and preference stock
Debt (other than discussed in Note 4)
Estimated fair value of financial instruments
Commitments and contingencies (other than discussed in Note 5)
Jointly-owned electric utility plant
Segments of business
(2) RATE MATTERS:
(a) 1994 Electric Rate Case -
In 1994, Utilities applied to the Iowa Utilities Board
(IUB) for an increase in retail electric rates of
approximately $26 million annually, or 5.2%. Utilities'
proposal included approximately $12 million in annual revenue
requirement related to increased recovery levels of
depreciation expense and nuclear decommissioning expense at
the Duane Arnold Energy Center (DAEC), Utilities' nuclear
generating facility. To the extent these proposals are
approved by the IUB, corresponding increases in expense would
be recorded and there would be no effect on net income.
The Office of Consumer Advocate (OCA) filed a petition in
connection with this proceeding to reduce the rates for retail
electric service by approximately $27 million or 5.5%. The
primary differences between the amount of the increase
requested by Utilities and the decrease proposed by the OCA
are: 1) a 13.9% return on common equity requested by Utilities
compared to 11.1% proposed by the OCA; 2) OCA's objection to
Utilities' proposal to increase collections for
decommissioning the DAEC; 3) OCA's objection to Utilities'
proposal to increase depreciation rates; 4) OCA's proposal to
reject most of Utilities' request to recover an acquisition
adjustment associated with its acquisition of the Iowa service
territory of UE; and 5) an adjustment to test year sales
levels proposed by the OCA. Intervenors, which primarily
represent individual or groups of customers, also submitted
filings in October 1994, generally objecting to particular
elements of the price increase and Utilities' price design
proposals.
In April 1995, the IUB held a public agenda meeting to
discuss the issues in the proceeding. While minor movement
toward pricing consistency would result, the proposals to
increase recovery levels of depreciation expense and nuclear
decommissioning expense were apparently rejected. The Board's
agenda discussion also ruled against Utilities on issues such
as recovery for the full purchase prices of the UE Iowa
service territory and smaller, low-cost, used generating
plants, even though customers are currently benefiting from
the acquisitions.
The IUB's discussion apparently would require an annual
reduction in electric revenues of $15 million to $20 million.
The IUB's final decision in the proceeding is not expected
until mid-May and the IUB indicated the agenda meeting
discussion was non-binding and may change. As a result of the
IUB's agenda meeting discussion, Utilities recorded a pretax
reserve for refund of $8 million in the first quarter of 1995,
including $3.5 million related to revenues collected in the
fourth quarter of 1994. Any refund ultimately required would
be calculated from October 22, 1994, the date of the OCA
revenue reduction filing.
(b) 1994 Energy Efficiency Cost Recovery Filing -
The IUB has adopted rules that mandate Utilities to spend
2% of electric and 1.5% of gas gross retail operating revenues
for energy efficiency programs. Under provisions of the IUB
rules, Utilities applied in August 1994 to the IUB for
recovery of approximately $23 million and $13 million for the
electric and gas programs, respectively, related to costs
incurred through 1993 for such programs. The $36 million
total for the electric and gas programs is comprised of
$21 million of direct expenditures and carrying costs
(recorded as a "Regulatory asset" in the Consolidated Balance
Sheets, including $4.5 million as current), $7 million for a
return on the expenditures over the recovery period and
$8 million for a reward based on a sharing of the benefits of
such programs.
In April 1995, the IUB issued its Final Decision and
Order concerning Utilities' energy efficiency expenditures,
which allows Utilities to recover its direct expenditures,
carrying costs, and a return on its expenditures, as well as a
reward of approximately $4 million for a total allowed
recovery of approximately $32 million. Recovery will be over
a four-year period and will begin in the second quarter of
1995.
In May 1995, the OCA and an intervenor filed applications
for rehearing with the IUB concerning the amount of the reward
granted by the IUB. Since the identical issue is pending
before the court in another utility's proceeding, the OCA, the
intervenor and Utilities have agreed to be bound by the
ultimate decision in the other utility's court proceeding.
Utilities believes that the chances of the reward amount being
materially reduced are remote.
(3) UTILITY ACCOUNTS RECEIVABLE:
Utilities has entered into an agreement, which expires in
1999, with a financial institution to sell, with limited
recourse, an undivided fractional interest of up to
$65 million in its pool of utility accounts receivable. At
March 31, 1995, $64 million was sold under the agreement.
(4) DEBT:
(a) Long-Term Debt -
In March 1995, Utilities repaid at maturity $50 million
of Series W, 9.75% First Mortgage Bonds and, in a separate
transaction, issued $50 million of Collateral Trust Bonds,
7.65%, due 2000.
(b) Short-Term Debt -
At March 31, 1995, the Company had bank lines of credit
aggregating $87.7 million, of which $28 million was being used
to support commercial paper (weighted average interest rate of
6.20%) and $7.7 million to support certain pollution control
obligations. Commitment fees are paid to maintain these lines
and there are no conditions which restrict the unused lines of
credit. In addition to the above, Utilities has an
uncommitted credit facility with a financial institution
whereby it can borrow up to $40 million. Rates are set at the
time of borrowing and no fees are paid to maintain this
facility. At March 31, 1995, there were no borrowings under
this facility. Utilities also has a letter of credit in the
amount of $3.4 million supporting two of its variable rate
pollution control obligations.
(5) CONTINGENCIES:
(a) Environmental Liabilities -
The Company has recorded environmental liabilities of
approximately $43 million, including $5.3 million as current
liabilities, in its Consolidated Balance Sheets at March 31,
1995. The significant items are discussed below.
Former Manufactured Gas Plant (FMGP) Sites
Utilities has been named as a Potentially Responsible
Party (PRP) by various federal and state environmental
agencies for 28 FMGP sites. Utilities believes that it is not
responsible for two of the above sites and there are three
other sites for which it may be designated as a PRP in the
future. Utilities is working pursuant to the requirements of
the various agencies to investigate, mitigate, prevent and
remediate, where necessary, damage to property, including
damage to natural resources, at and around the sites in order
to protect public health and the environment. Utilities has
completed the remediation of three sites and is in various
stages of the investigation and/or remediation processes for
22 sites. Utilities expects to begin the investigation
process in 1995 or 1996 for the other sites.
Utilities has recorded environmental liabilities related
to the FMGP sites of approximately $31 million (including
$4.5 million as current liabilities) at March 31, 1995. These
amounts are based upon Utilities' best current estimate of the
amount to be incurred for investigation and remediation costs
for those sites where the investigation process has been or is
substantially completed, and the minimum of the estimated cost
range for those sites where the investigation is in its
earlier stages or has not started. It is possible that future
cost estimates will be greater than the current estimates as
the investigation process proceeds and as additional facts
become known. Utilities may be required to monitor these
sites for a number of years upon completion of remediation, as
is the case with the three sites for which remediation has
been completed.
Utilities has begun pursuing coverage for investigation,
mitigation, prevention, remediation, and monitoring costs from
its insurance carriers and is investigating the potential for
third party cost sharing for FMGP investigation and clean-up
costs. The amount of shared costs, if any, cannot be
reasonably determined and, accordingly, no potential sharing
has been recorded at March 31, 1995. Regulatory assets of
approximately $31 million, which reflect the future recovery
that is being provided through Utilities' rates, have been
recorded in the Consolidated Balance Sheets. Considering the
rate treatment allowed by the IUB, management believes that
the clean-up costs incurred by Utilities for these FMGP sites
will not have a material adverse effect on its financial
position or results of operations.
(b) Clean Air Act -
The Clean Air Act Amendments of 1990 (Act) requires
emission reductions of sulfur dioxide and nitrogen oxides to
achieve reductions of atmospheric chemicals believed to cause
acid rain. The provisions of the Act will be implemented in
two phases with Phase I affecting two of Utilities' units
beginning in 1995 and Phase II affecting all units beginning
in the year 2000. Utilities is in the process of completing
the modifications necessary to meet the Phase I requirements
and has installed continuous emission monitors on all affected
units as required by the Act.
Utilities expects to meet the requirements of Phase II by
switching to lower sulfur fuels and through capital
expenditures primarily related to fuel burning equipment and
boiler modifications. Utilities estimates capital
expenditures at approximately $22.5 million, including
$4.4 million in 1995, in order to meet the requirements of the
Act.
(c) Federal Energy Regulatory Commission (FERC) Order
No. 636 -
The FERC issued Order No. 636 (Order 636) in 1992, which
substantially changed how Utilities manages its gas supply.
As a result of Order 636, Utilities has enhanced access to
competitively priced gas supply and more flexible
transportation services, however, Utilities is required to pay
certain transition costs incurred and billed by its pipeline
suppliers.
Utilities' three pipeline suppliers have made filings
with the FERC to collect their respective known transition
costs, and additional filings are expected. At March 31,
1995, Utilities has recorded a liability of $6.2 million for
those transition costs that have been incurred by the
pipelines to date, including $2.1 million expected to be
billed through March 1996. Utilities is currently recovering
the transition costs from its customers through its Purchased
Gas Adjustment Clauses as such costs are billed by the
pipelines. The ultimate level of costs to be billed to
Utilities depends on the pipelines' filings with the FERC and
other future events, including the market price of natural
gas, and could approximate $10 million more than the amount
recorded. However, Utilities believes any transition costs
billed by its pipeline suppliers would be recovered from its
customers, based upon regulatory treatment of these costs
currently and similar past costs by the IUB. Accordingly,
regulatory assets, in amounts corresponding to the recorded
liabilities, have been recorded to reflect the anticipated
recovery.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion analyzes significant changes in
the components of net income and financial condition from the
prior periods for IES Utilities Inc. (Utilities) and its
consolidated subsidiaries (collectively the Company).
Utilities' wholly-owned subsidiary is IES Ventures Inc., which
is a holding company for unregulated investments.
RESULTS OF OPERATIONS
The Company's net income available for common stock
decreased $8.8 million and $16.1 million during the three and
twelve month periods, respectively, ended March 31, 1995. The
lower earnings are largely due to the recording of a pretax
reserve for rate refund of $8.0 million by Utilities in the
first quarter of 1995 and milder than normal weather in
Utilities' service territory.
The Company's operating income decreased $14.4 million
and $23.4 million during the three and twelve month periods,
respectively. Reasons for the changes in the results of
operations are explained further in the following discussion.
ELECTRIC REVENUES
Electric revenues and Kwh sales for Utilities increased
or (decreased) for the periods ended March 31, 1995, as
compared with the prior periods, as follows:
Three Twelve
Months Months
($ in millions)
Electric revenues $ (7.3) $ (17.8)
Electric sales (excluding
off-system sales):
Residential and Rural (5.5%) (3.6%)
Commercial 0.2 2.2
Industrial 3.3 8.0
Total (1.1%) 2.7%
The Kwh sales for both periods were adversely affected by
milder than normal weather. The largest effect of weather was
on sales to residential and rural customers. Under normal
weather conditions, total sales (excluding off-system sales)
would have increased 1.6% and 3.6% for the three and twelve
month periods, respectively. The growth in industrial sales
continues to reflect the underlying strength of the economy as
several major industrial expansions in Utilities' service
territory were announced during the twelve months ended March
31, 1995.
Utilities' electric tariffs include energy adjustment
clauses (EAC) that are designed to currently recover the costs
of fuel and the energy portion of purchased power billings to
customers.
The revenue decrease for both periods includes a pretax
reserve for rate refund of $8.0 million that was recorded by
Utilities in the first quarter of 1995 as a result of the
Company's interpretation of how the Iowa Utilities Board (IUB)
may decide Utilities' pending electric price case. See Note
2(a) of the Notes to Consolidated Financial Statements for a
further discussion.
The effect of the mix of sales between lower margin
industrial customers and higher margin residential and rural
customers, lower off-system sales and lower fuel costs
collected through the EAC also contributed to the decreased
revenues for the twelve month period. Such items were
partially offset by the increased total sales, excluding off-
system sales.
GAS REVENUES
Utilities' gas revenues decreased $12.0 million and
$28.0 million during the three and twelve month periods,
respectively. Utilities' gas sales in therms increased or
(decreased) for the periods ended March 31, 1995, as compared
with the prior periods, as follows:
Three Twelve
Months Months
Residential (9.1%) (10.8%)
Commercial (7.6) (9.1)
Industrial (24.1) (14.9)
Sales to consumers (9.9) (10.9)
Transported volumes 45.7 33.0
Total (3.0%) (2.5%)
The sales volumes for both periods were adversely
affected by milder than normal weather. Under normal weather
conditions, gas sales (including transported volumes) would
have increased 5.8% and 4.9% during the three and twelve month
periods, respectively.
Utilities' gas tariffs include purchased gas adjustment
clauses (PGA) that are designed to currently recover the cost
of gas sold. Utilities' gas revenues decreased in both
periods primarily because of lower gas costs recovered
through the PGA and, to a lesser extent, the effect of the
lower sales. The decreased gas cost recoveries are due to
lower gas prices as well as a shift in the sales mix between
industrial sales and transported volumes; Utilities does not
purchase the gas for the transported volumes.
OPERATING EXPENSES
Fuel for production decreased $2.9 million and
$2.5 million during the three and twelve month periods,
respectively. The three month decrease is primarily due to a
decrease in the amount of Kwh generation as the Duane Arnold
Energy Center (DAEC), Utilities' nuclear generating facility,
was down during March 1995 for a scheduled refueling outage.
There was no such refueling outage in 1994. Lower fuel cost
recoveries through the EAC, which are included in fuel for
production, also contributed to the decrease. The twelve
month decrease is due to lower fuel cost recoveries through
the EAC, a lower average fuel cost during the period and
decreased generation at the DAEC. Increased generation at
Utilities' fossil-fueled generating stations partially offset
these items for both periods.
Purchased power increased $2.7 million during the three
month period and decreased $13.4 million during the twelve
month period. The three month increase is due to increased
energy purchases, resulting from the decrease in generation,
which were partially offset by lower capacity costs. The
twelve month decrease is primarily due to lower energy
purchases and lower capacity costs.
Gas purchased for resale decreased $11.0 million and
$25.7 million during the three and twelve month periods,
respectively, primarily due to lower sales to consumers at
Utilities and lower natural gas prices.
Other operating expenses increased $3.4 million and
$9.3 million during the three and twelve month periods,
respectively. Increases in labor and benefits costs, nuclear
operating costs, former manufactured gas plant (FMGP) clean-up
costs and information technology costs at Utilities
contributed to the increases.
Maintenance expenses increased $0.8 million and
$3.6 million during the three and twelve month periods,
respectively. The twelve month increase was due to increased
labor costs and higher maintenance costs at the DAEC.
Depreciation and amortization increased during both
periods primarily because of increases in utility plant in
service. Depreciation and amortization expenses for all
periods reflect an annual amount of $5.5 million for the DAEC
decommissioning provision, which is collected through rates.
The staff of the Securities and Exchange Commission (SEC)
has questioned certain of the current accounting practices of
the electric utility industry regarding the recognition,
measurement and classification of decommissioning costs for
nuclear generating stations in the financial statements of
electric utilities. In response to these questions, the
Financial Accounting Standards Board (FASB) has agreed to
review the accounting for removal costs, including
decommissioning. If current electric utility industry
accounting practices for such decommissioning are changed:
(1) annual provisions for decommissioning could increase, (2)
the estimated cost for decommissioning could be recorded as a
liability rather than as accumulated depreciation, and (3)
trust fund income from the external decommissioning trusts
could be reported as investment income rather than as a
reduction to decommissioning expense. If such changes are
required, Utilities believes that there would not be an
adverse effect on its financial position or results of
operations based on current rate making practices; the Company
cannot predict future rate making practices.
INTEREST EXPENSE AND OTHER
Interest expense was constant for the three month period
and increased $1.5 million during the twelve month period.
The twelve month increase was primarily because of an increase
in the average amount of debt outstanding.
Income taxes decreased $5.5 million and $6.8 million
during the three and twelve month periods, respectively. A
decrease in taxable income contributed to the decreases for
both periods. The twelve month decrease is partially offset
by the effect of property related temporary differences for
which deferred taxes had not been provided that are now
becoming payable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily
attributable to Utilities' construction programs, debt
maturities and sinking fund requirements. The Company's
pretax ratio of earnings to fixed charges was 3.04 and 3.69
for the twelve months ended March 31, 1995 and March 31, 1994,
respectively. Cash flows from operating activities for the
twelve months ending March 31, 1995, were $190 million. These
funds were primarily used for construction and acquisition
expenditures and to pay dividends.
The Company anticipates that future capital requirements
will be met by cash generated from operations and external
financing. The level of cash generated from operations is
partially dependent upon economic conditions, legislative
activities, environmental matters and timely rate relief for
Utilities. (See Notes 2 and 5 of the Notes to Consolidated
Financial Statements).
Access to the long-term and short-term capital and credit
markets is necessary for obtaining funds externally.
Utilities' debt ratings are as follows:
Moody's Standard & Poor's
Long-term debt A1 A
Short-term debt P1 A1
As a result of the IUB's recent public agenda meeting to
discuss Utilities' electric price case, Utilities could
realize an annual revenue reduction of approximately
$15 million to $20 million. (See Note 2(a) of the Notes to
Consolidated Financial Statements for a further discussion).
In reaction to the IUB's agenda meeting, Moody's has placed
Utilities long-term debt rating on credit watch pending a
final decision by the IUB. Standard & Poor's has not reacted
to the IUB's agenda meeting.
The Company's liquidity and capital resources will be
affected by environmental and legislative issues, including
the ultimate disposition of remediation issues surrounding the
Company's environmental liabilities, the Clean Air Act as
amended and FERC Order 636, as discussed in Note 5 of the
Notes to Consolidated Financial Statements. Consistent with
rate making principles of the IUB, management believes that
the costs incurred for the above matters will not have a
material adverse effect on the financial position or results
of operations of the Company.
The IUB has adopted rules which require Utilities to
spend 2% of electric and 1.5% of gas gross retail operating
revenues annually for energy efficiency programs. Energy
efficiency costs in excess of the amount in the most recent
electric and gas rate cases are being recorded as regulatory
assets by Utilities. At March 31, 1995, Utilities had
$38 million of such costs recorded as regulatory assets.
Utilities will begin its recovery of a portion of these costs
in the second quarter of 1995. See Note 2(b) of the Notes to
Consolidated Financial Statements for a further discussion.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program
anticipates expenditures of approximately $163 million for
1995, of which approximately 32% represents expenditures for
electric transmission and distribution facilities, 23%
represents fossil-fueled generation expenditures, 15%
represents expenditures for steam distribution plant and 9%
represents nuclear generation expenditures. The remaining 21%
represents miscellaneous electric, gas and general
expenditures. In addition to the $163 million, Utilities
anticipates expenditures of $13 million in connection with
mandated energy efficiency programs. Substantial commitments
have been made in connection with all such expenditures. The
Company had construction and acquisition expenditures of
approximately $28 million for the three months ended March 31,
1995.
The Company's levels of construction and acquisition
expenditures are projected to be $167 million in 1996,
$146 million in 1997, $170 million in 1998 and $182 million in
1999. It is estimated that approximately 80% of construction
expenditures will be provided by cash from operating
activities (after payment of dividends) for the five-year
period 1995-1999.
Capital expenditure and investment and financing plans
are subject to continual review and change. The capital
expenditure and investment programs may be revised
significantly as a result of many considerations including
changes in economic conditions, variations in actual sales and
load growth compared to forecasts, requirements of
environmental, nuclear and other regulatory authorities,
acquisition opportunities, the availability of alternate
energy and purchased power sources, the ability to obtain
adequate and timely rate relief, escalations in construction
costs and conservation and energy efficiency programs.
LONG-TERM FINANCING
Other than Utilities' periodic sinking fund requirements,
which Utilities intends to meet by pledging additional
property, approximately $124 million of long-term debt will
mature prior to December 31, 1999. The Company intends to
refinance the majority of the debt maturities with long-term
securities.
In March 1995, Utilities repaid at maturity $50 million
of Series W, 9.75% First Mortgage Bonds and, in a separate
transaction, issued $50 million of Collateral Trust Bonds,
7.65%, due 2000.
Utilities has entered into an Indenture of Mortgage and
Deed of Trust dated September 1, 1993 (New Mortgage). The New
Mortgage provides for, among other things, the issuance of
Collateral Trust Bonds upon the basis of First Mortgage Bonds
being issued by Utilities. The lien of the New Mortgage is
subordinate to the lien of Utilities' first mortgages until
such time as all bonds issued under the first mortgages have
been retired and such mortgages satisfied. Accordingly, to the
extent that Utilities issues Collateral Trust Bonds on the
basis of First Mortgage Bonds, it must comply with the
requirements for the issuance of First Mortgage Bonds under
Utilities' first mortgages. Under the terms of the New
Mortgage, Utilities has covenanted not to issue any additional
First Mortgage Bonds under its first mortgages except to
provide the basis for issuance of Collateral Trust Bonds.
The Indentures pursuant to which Utilities issues First
Mortgage Bonds constitute direct first mortgage liens upon
substantially all tangible public utility property and contain
covenants which restrict the amount of additional bonds which
may be issued. At March 31, 1995, such restrictions would
have allowed Utilities to issue $323 million of additional
First Mortgage Bonds. Utilities has received authority from
the FERC to issue $250 million of long-term debt, of which
$50 million was used in March 1995 to issue Collateral Trust
Bonds. Utilities expects to replace First Mortgage Bonds
Series X that matures in September 1995 with other long-term
securities.
The Articles of Incorporation of Utilities authorize and
limit the aggregate amount of additional shares of Cumulative
Preferred Stock and Cumulative Preference Stock that may be
issued. At March 31, 1995, Utilities could have issued an
additional 700,000 shares of Cumulative Preference Stock but
no additional shares of Cumulative Preferred Stock.
The Company's capitalization ratios at March 31, were as
follows:
1995 1994
Long-term debt 48% 48%
Preferred stock 2 2
Common equity 50 50
100% 100%
The 1995 and 1994 ratios include
$50 million of long-term debt due in less than
one year because it was the Company's intention
to refinance the debt with long-term securities.
SHORT-TERM FINANCING
For interim financing, Utilities is authorized by the
FERC to issue, through 1996, up to $200 million of short-term
notes. In addition to providing for ongoing working capital
needs, this availability of short-term financing provides
Utilities flexibility in the issuance of long-term securities.
At March 31, 1995, Utilities had outstanding short-term
borrowings of $43.5 million, including $15.5 million of notes
payable to associated companies.
Utilities has an agreement, which expires in 1999, with a
financial institution to sell, with limited recourse, an
undivided fractional interest of up to $65 million in its pool
of utility accounts receivable. At March 31, 1995, Utilities
had sold $64 million under the agreement.
At March 31, 1995, the Company had bank lines of credit
aggregating $87.7 million, of which $28 million was being used
to support commercial paper (weighted average interest rate of
6.20%) and $7.7 million to support certain pollution control
obligations. Commitment fees are paid to maintain these lines
and there are no conditions which restrict the unused lines of
credit. In addition to the above, Utilities has an
uncommitted credit facility with a financial institution
whereby it can borrow up to $40 million. Rates are set at the
time of borrowing and no fees are paid to maintain this
facility. At March 31, 1995, there were no borrowings under
this facility. Utilities also has a letter of credit in the
amount of $3.4 million supporting two of its variable rate
pollution control obligations.
ENVIRONMENTAL MATTERS
Utilities has been named as a Potentially Responsible
Party (PRP) by various federal and state environmental
agencies for 28 FMGP sites. Utilities believes that it is not
responsible for two of the above sites and there are three
other sites for which it may be designated as a PRP in the
future. Utilities is working pursuant to the requirements of
the various agencies to investigate, mitigate, prevent and
remediate, where necessary, damage to property, including
damage to natural resources, at and around the sites in order
to protect public health and the environment. Utilities has
completed the remediation of three sites and is in various
stages of the investigation and/or remediation processes for
22 sites. Utilities expects to begin the investigation
process in 1995 or 1996 for the other sites.
Utilities has recorded environmental liabilities related
to the FMGP sites of approximately $31 million (including
$4.5 million as current liabilities) at March 31, 1995. These
amounts are based upon Utilities' best current estimate of the
amount to be incurred for investigation and remediation costs
for those sites where the investigation process has been or is
substantially completed, and the minimum of the estimated cost
range for those sites where the investigation is in its
earlier stages or has not started. It is possible that future
cost estimates will be greater than the current estimates as
the investigation process proceeds and as additional facts
become known. Utilities may be required to monitor these
sites for a number of years upon completion of remediation, as
is the case with the three sites for which remediation has
been completed.
Utilities has begun pursuing coverage for investigation,
mitigation, prevention, remediation and monitoring costs from
its insurance carriers and is investigating the potential for
third party cost sharing for FMGP investigation and clean-up
costs. The amount of shared costs, if any, cannot be
reasonably determined and, accordingly, no potential sharing
has been recorded at March 31, 1995. Regulatory assets of
approximately $31 million, which reflect the future recovery
that is being provided through Utilities' rates, have been
recorded in the Consolidated Balance Sheets. Considering the
rate treatment allowed by the IUB, management believes that
the clean-up costs incurred by Utilities for these FMGP sites
will not have a material adverse effect on its financial
position or results of operations.
The Clean Air Act Amendments of 1990 (Act) requires
emission reductions of sulfur dioxide and nitrogen oxides to
achieve reductions of atmospheric chemicals believed to cause
acid rain. The provisions of the Act will be implemented in
two phases with Phase I affecting two of Utilities' units
beginning in 1995 and Phase II affecting all units beginning
in the year 2000. Utilities is in the process of completing
the modifications necessary to meet the Phase I requirements
and has installed continuous emission monitors on all affected
units as required by the Act.
Utilities expects to meet the requirements of Phase II by
switching to lower sulfur fuels and through capital
expenditures primarily related to fuel burning equipment and
boiler modifications. Utilities estimates capital
expenditures at approximately $22.5 million, including $4.4
million in 1995, in order to meet the requirements of the Act.
The National Energy Policy Act of 1992 requires owners of
nuclear power plants to pay a special assessment into a
"Uranium Enrichment Decontamination and Decommissioning Fund."
The assessment is based upon prior nuclear fuel purchases and,
for the DAEC, averages $1.4 million annually through 2007, of
which Utilities' 70% share is $1.0 million. Utilities is
recovering the costs associated with this assessment through
its electric fuel adjustment clauses over the period the costs
are assessed. Utilities' 70% share of the future assessment,
$12.0 million payable through 2007, has been recorded as a
liability in the Consolidated Balance Sheets, including
$0.8 million included in "Current liabilities - Environmental
liabilities," with a related regulatory asset for the
unrecovered amount.
The Nuclear Waste Policy Act of 1982 assigned
responsibility to the U.S. Department of Energy (DOE) to
establish a facility for the ultimate disposition of high
level waste and spent nuclear fuel and authorized the DOE to
enter into contracts with parties for the disposal of such
material beginning in January 1998. Utilities entered into
such a contract and has made the agreed payments to DOE. The
DOE, however, has experienced significant delays in its
efforts and material acceptance is now expected to occur no
earlier than 2010. Utilities has been storing spent nuclear
fuel on-site since plant operations began in 1974 and has
current on-site capability to store spent fuel until 2002.
Utilities is aggressively reviewing options for additional
spent nuclear fuel storage capability, including expanding on-
site storage, pursuing other off-site storage and supporting
legislation to resolve the lack of progress by the DOE.
The Low-Level Radioactive Waste Policy Amendments Act of
1985 mandated that each state must take responsibility for the
storage of low-level radioactive waste produced within its
borders. The State of Iowa has joined the Midwest Interstate
Low-Level Radioactive Waste Compact Commission (Compact),
which is planning a storage facility to be located in Ohio to
store waste generated by the Compact's six member states. At
March 31, 1995, Utilities has prepaid costs of approximately
$1 million to the Compact for the building of such a
facility. Currently, Utilities is storing its low-level
radioactive waste generated at the DAEC on-site until new
disposal arrangements are finalized among the Compact members.
A Compact disposal facility is anticipated to be in operation
in approximately ten years. On-site storage capability
currently exists for low-level radioactive waste expected to
be generated until the Compact facility is able to accept
waste materials.
The possibility that exposure to electric and magnetic
fields (EMF) emanating from power lines, household appliances
and other electric sources may result in adverse health
effects has been the subject of increased public,
governmental, industry and media attention. A considerable
amount of scientific research has been conducted on this topic
without definitive results. Research is continuing in order
to resolve scientific uncertainties.
OTHER MATTERS
The National Energy Policy Act of 1992 addresses several
matters designed to promote competition in the electric
wholesale power generation market, including mandated open
access to the electric transmission system and greater
encouragement of independent power production and
cogeneration. On March 29, 1995, the Federal Energy
Regulatory Commission (FERC) issued a Notice of Proposed
Rulemaking that makes specific recommendations related to non-
discriminatory pricing for open access transmission services
and would allow for recovery of certain stranded costs. These
are two of the most critical issues relating to the electric
utility industry's transition toward fully competitive
markets. The Company cannot predict the final regulations
that may be adopted.
The IUB recently initiated a Notice of Inquiry (Docket
No. NOI-95-1) on the subject of "Emerging Competition in the
Electric Utility Industry." A one-day roundtable discussion
was held to address all forms of competition in the electric
utility industry and to assist the IUB in gathering
information and perspectives on electric competition from all
persons or entities with an interest or stake in the issues.
Such discussions are not expected to produce any specific
action by the IUB at this time.
The Company cannot predict the long-term consequences of
these competitive issues on its results of operations or
financial condition. The Company's strategy for dealing with
these emerging issues includes seeking growth opportunities,
continuing to offer quality customer service, on-going cost
reductions and productivity enhancements. The Company
recently initiated a major project to review and redesign its
business processes with the primary goals being reduced
operating costs, increased efficiency and enhanced customer
service.
In March 1995, the FASB issued SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of. This Statement defines the criteria for
valuing regulatory assets. The Company does not expect the
amount of regulatory assets recorded in the Consolidated
Balance Sheets to be affected. The Company expects to adopt
this standard on January 1, 1996 and does not expect that
adoption will have a material impact on the financial position
or results of operations of the Company.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Notes 2 and 5 of the Notes to
Consolidated Financial Statements for a discussion of rate
matters and environmental matters, respectively.
Item 2. Changes in the Rights of the Company's Security
Holders.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Results of Votes of Security Holders.
None.
Item 5. Other Information.
The Company has calculated the ratio of earnings to fixed
charges pursuant to Item 503 of Regulation S-K of the
Securities and Exchange Commission as follows:
For the twelve months ended:
March 31, 1995 2.87
December 31, 1994 3.18
December 31, 1993 3.41
December 31, 1992 2.49
December 31, 1991 2.64
December 31, 1990 2.65
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
*4(a) Sixty-first Supplemental
Indenture, dated as of March 1, 1995,
supplementing Utilities' Indenture of Mortgage
and Deed of Trust, dated August 1, 1940.
*4(b) Third Supplemental Indenture,
dated as of March 1, 1995, supplementing
Utilities' Indenture of Mortgage and Deed of
Trust, dated September 1, 1993.
*12 Ratio of Earning to Fixed Charges.
*27 Financial Data Schedule.
* Exhibits designated by an asterisk are filed herewith.
(b) Reports on Form 8-K -
Items Financial Date of
Reported Statements Report
5, 7 None April 27, 1995
7 Note 1 March 15, 1995
Note 1: The Form 8-K provided the audited financial
statements of the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
IES UTILITIES INC.
(Registrant)
Date May 12, 1995 By /s/ Dr. Robert J. Latham
(Signature)
Dr. Robert J. Latham
Senior Vice President, Finance
By /s/ Richard A. Gabbianelli
(Signature)
Richard A. Gabbianelli
Controller & Chief Accounting Officer