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 June 30, 1994
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.)
IE 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 July 31, 1994
Common Stock, $2.50 par value 13,370,788 shares
IES UTILITIES INC.
INDEX
Page No.
Part I. Financial Information.
Item 1. Financial Statements.
Balance Sheets -
June 30, 1994 and December 31, 1993 3 - 4
Statements of Income -
Three, Six and Twelve Months Ended
June 30, 1994 and 1993 5
Statements of Cash Flows -
Three, Six and Twelve Months Ended
June 30, 1994 and 1993 6
Notes to Financial Statements 7 - 16
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition. 17 - 27
Part II. Other Information. 28 - 30
Signatures. 31
PART 1. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
BALANCE SHEETS
June 30,
1994 December 31,
ASSETS (Unaudited) 1993
(in thousands)
Utility plant, at original cost:
Plant in service -
Electric $ 1,732,430 $ 1,707,278
Gas 152,933 147,956
Other 76,889 75,845
1,962,252 1,931,079
Less - Accumulated depreciation 850,897 813,312
1,111,355 1,117,767
Leased nuclear fuel, net of amortization 43,600 51,681
Construction work in progress 57,110 41,937
1,212,065 1,211,385
Current assets:
Cash and temporary cash investments 691 18,313
Accounts receivable -
Customer, less reserve 11,992 22,679
Other 8,503 10,330
Income tax refunds receivable 11,963 8,767
Production fuel, at average cost 11,583 14,338
Materials and supplies, at average cost 26,479 26,861
Regulatory assets 15,194 13,319
Prepayments and other 21,559 31,502
107,964 146,109
Other assets:
Regulatory assets 169,046 143,080
Nuclear decommissioning trust funds 31,373 28,059
Other investments 3,624 2,821
Deferred charges and other 15,418 15,524
219,461 189,484
$ 1,539,490 $ 1,546,978
BALANCE SHEETS (CONTINUED)
June 30,
1994 December 31,
CAPITALIZATION AND LIABILITIES (Unaudited) 1993
(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) 190,603 188,862
Total common equity 503,072 501,331
Cumulative preferred stock - par value $50 per
share - authorized 466,406 shares; 366,406 shares
outstanding 18,320 18,320
Long-term debt 430,225 480,074
951,617 999,725
Current liabilities:
Notes payable to associated companies 14,266
Short-term borrowings 3,000 24,000
Capital lease obligations 13,508 15,345
Sinking funds and maturities 50,224 224
Accounts payable 36,653 47,179
Dividends payable 229 5,229
Accrued interest 9,464 9,438
Accrued taxes 43,422 39,763
Accumulated refueling outage provision 8,711 2,660
Adjustment clause balances 3,076 5,149
Provision for rate refund liability 31 8,670
Other 20,964 22,369
203,548 180,026
Long-term liabilities:
Capital lease obligations 30,092 36,336
Liability under National Energy Policy Act of 1992 12,065 11,984
Environmental liabilities 19,519 9,130
Other 34,579 29,866
96,255 87,316
Deferred credits:
Accumulated deferred income taxes 246,946 237,464
Accumulated deferred investment tax credits 41,124 42,447
288,070 279,911
Commitments and contingencies (Note 7)
$ 1,539,490 $ 1,546,978
The accompanying Notes to Financial Statememts are an integral part of
these statements.
STATEMENTS OF INCOME (UNAUDITED)
For the Three For the Six For the Twelve
Months Ended Months Ended Months Ended
June 30 June 30 June 30
1994 1993 1994 1993 1994 1993
(in thousands)
Operating revenues:
Electric $ 123,071 $ 122,306 $ 246,989 $ 248,933 $ 548,578 $ 485,558
Gas 23,164 24,806 88,297 89,141 153,474 159,451
Steam 1,784 1,807 4,746 4,630 9,026 8,621
148,019 148,919 340,032 342,704 711,078 653,630
Operating expenses:
Fuel for production 16,304 18,727 38,649 43,268 83,082 78,271
Purchased power 17,225 17,171 30,827 39,280 84,997 73,195
Gas purchased for resale 14,882 16,555 63,998 64,784 108,336 115,113
Other operating expenses 30,971 31,890 61,952 59,671 125,491 119,164
Maintenance 13,300 12,016 24,195 22,394 48,020 44,234
Depreciation and amortization 19,160 17,796 38,320 35,318 72,409 67,338
Property taxes 10,011 8,900 20,188 17,799 38,815 33,387
Federal and state income taxes:
Current 5,117 6,243 15,247 15,024 28,584 37,193
Deferred 2,586 897 3,683 1,667 17,926 (4,117)
Amortization of investment
tax credits (662) (696) (1,323) (1,391) (4,792) (2,780)
Miscellaneous taxes 1,389 1,341 2,878 2,693 5,070 4,973
130,283 130,840 298,614 300,507 607,938 565,971
Operating income 17,736 18,079 41,418 42,197 103,140 87,659
Other income and deductions:
Allowance for equity funds
used during construction 612 125 1,153 240 1,737 1,308
Miscellaneous, net 751 1,400 1,664 1,957 1,955 3,446
1,363 1,525 2,817 2,197 3,692 4,754
Interest:
Long-term debt 9,487 8,429 18,977 17,538 36,365 35,754
Other 745 1,053 1,783 2,601 4,425 4,837
Allowance for debt funds
used during construction (388) (369) (724) (659) (1,212) (1,356)
9,844 9,113 20,036 19,480 39,578 39,235
Net income 9,255 10,491 24,199 24,914 67,254 53,178
Preferred and preference
dividend requirements 229 229 457 457 914 1,183
Net income available for
common stock $ 9,026 $ 10,262 $ 23,742 $ 24,457 $ 66,340 $ 51,995
The accompanying Notes to Financial Statements are an integral
part of these statements.
STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three For the Six For the Twelve
Months Ended Months Ended Months Ended
June 30 June 30 June 30
1994 1993 1994 1993 1994 1993
(in thousands)
Cash flows from operating activities:
Net income $ 9,255 $ 10,491 $ 24,199 $ 24,914 $ 67,254 $ 53,178
Adjustments to reconcile net income to
net cash flows from operating activities -
Depreciation and amortization 19,160 17,796 38,320 35,318 72,409 67,338
Principal payments under capital lease obligations 4,078 3,415 8,505 6,833 13,102 12,687
Deferred taxes and investment tax credits 1,736 (177) 1,982 (212) 12,726 (7,062)
Amortization of deferred charges 276 215 544 413 1,080 1,145
Refueling outage provision 2,914 1,639 6,051 4,634 (3,472) 10,409
Allowance for equity funds used during construction (612) (125) (1,153) (240) (1,737) (1,308)
Other 276 292 551 579 1,328 385
Other changes in assets and liabilities -
Accounts receivable 9,062 13,545 12,714 4,648 (250) (9,248)
Sale of utility accounts receivable (200) 21,000 (200) 13,790 (3,500) 21,500
Production fuel (302) (1,113) 2,755 5,984 1,851 8,834
Accounts payable (3,287) (9,425) (8,586) (10,213) 2,906 (1,661)
Accrued taxes (2,081) (3,160) 463 (4,349) (6,279) 1,141
Provision for rate refunds (9,054) (4,290) (8,639) (4,189) (6,542) (7,598)
Adjustment clause balances (6,797) (3,745) (2,073) 7,750 (3,457) (1,342)
Gas in storage (1,132) (3,121) 8,958 8,858 (2,209) (1,805)
Deferred energy efficiency costs (3,772) (2,717) (7,171) (3,902) (13,016) (8,944)
Other 1,869 1,577 1,501 2,611 6,321 4,209
Net cash flows from operating activities 21,389 42,097 78,721 93,227 138,515 141,858
Cash flows from financing activities:
Dividends declared on common stock (15,000) (5,700) (22,000) (15,700) (37,600) (24,190)
Dividends declared on preferred and preference stock (229) (229) (457) (457) (914) (1,183)
Dividends payable (5,000) 229
Equity infusion from parent company 50,000 50,000
Proceeds from issuance of long-term debt 119,400 31,000
Sinking fund requirements and reductions in
long-term debt and preferred and preference stock (224) (60,224) (224) (60,224) (19,624) (96,048)
Net change in short-term borrowings 17,266 52,288 (6,734) (14,312) (60,982) 74,823
Principal payments under capital lease obligations (4,427) (3,418) (8,147) (6,985) (12,439) (12,976)
Other (557)
Net cash flows from financing activities (2,614) (17,283) (42,562) (47,678) (12,159) 21,098
Cash flows from investing activities:
Construction and acquisition expenditures (29,342) (25,292) (48,334) (42,168) (119,378) (157,022)
Nuclear decommissioning trust funds (1,384) (1,384) (2,767) (2,767) (5,532) (5,532)
Other (98) 1,874 (2,680) (719) (2,393) (1,274)
Net cash flows from investing activities (30,824) (24,802) (53,781) (45,654) (127,303) (163,828)
Net increase (decrease) in cash and
temporary cash investments (12,049) 12 (17,622) (105) (947) (872)
Cash and temporary cash investments
at beginning of period 12,740 1,626 18,313 1,743 1,638 2,510
Cash and temporary cash investments
at end of period $ 691 $ 1,638 $ 691 $ 1,638 $ 691 $ 1,638
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 13,354 $ 11,920 $ 21,948 $ 21,523 $ 39,686 $ 41,571
Income taxes $ 18,659 $ 17,501 $ 18,619 $ 21,283 $ 37,409 $ 39,306
Noncash investing and financing activities -
Capital lease obligations incurred $ 227 $ 2,903 $ 424 $ 13,398 $ 1,632 $ 12,850
The accompanying Notes to Financial Statements are an integral
part of these statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1994
(1) GENERAL:
The interim Financial Statements have been prepared by IES Utilities
Inc. (the Company), without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. The Company is a wholly-owned
subsidiary of IES Industries Inc. (Industries) and was formed as a result of
the merger of Industries' former wholly-owned utility subsidiaries, Iowa
Electric Light and Power Company (IE) and Iowa Southern Utilities Company
(IS), effective December 31, 1993. 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 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 1994
presentation.
It is suggested that these Financial Statements be read in conjunction
with the Financial Statements and the notes thereto included in the Company's
Form 10-K for the year ended December 31, 1993. 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:
General
Summary of significant accounting policies (other than discussed in Note
2)
Acquisition of Iowa service territory of Union Electric Company
Leases (other than discussed in Note 6)
Income taxes
Benefit plans (other than discussed in Note 2(a))
Preferred and preference stock
Debt (other than discussed in Note 5)
Estimated fair value of financial instruments (other than discussed in
Note 2(b))
Commitments
Jointly-owned electric utility plant
Segments of business
(2) NEW ACCOUNTING STANDARDS:
(a) Accounting for Postemployment Benefits -
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) 112, "Employers' Accounting for
Postemployment Benefits," and its adoption did not have a material effect on
the Company's financial position or results of operations. This statement
requires that benefits offered to former or inactive employees after
termination of employment, but before retirement, be accrued over the service
lives of the employees if all of the following conditions are met: 1) the
obligation relates to services already performed; 2) the employees' rights
vest; 3) the payments are probable; and 4) the amounts are reasonably
determinable. Otherwise, such obligations are to be recognized at the time
they become probable and reasonably determinable. Prior to 1994, the Company
had generally accounted for these obligations as they were paid.
(b) Accounting for Certain Investments in Debt and Equity Securities -
On January 1, 1994, the Company adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." This standard, which
applies to the Company's nuclear decommissioning trust funds at June 30, 1994,
requires that unrealized gains and losses on such investments be included in
the reported balance of such investments. At June 30, 1994, the balance of
the "Nuclear decommissioning trust funds" as shown in the Balance Sheets
included $0.1 million of unrealized losses on the investments held in the
trust funds. The reserve for decommissioning costs, included in "Accumulated
depreciation" in the Balance Sheets was adjusted by a corresponding amount,
and there was no effect on net income from adopting this standard.
(3) RATE MATTERS:
(a) 1991 Electric Rate Case -
In October 1991, IE applied to the Iowa Utilities Board (IUB) for an
increase in retail electric rates of $18.9 million annually, or 6.0%. The IUB
approved an interim rate increase of $15.6 million, annually, which became
effective in December 1991, subject to refund.
In December 1992, the IUB issued its "Order On Rehearing," which
affirmed its original decision approving an annual electric rate increase of
$7.9 million. IE appealed one issue in the IUB's Order to the Iowa District
Court (Court) and, in December 1993, the Court issued its decision upholding
the IUB's Order. As a result of the Court's decision, the Company completed a
refund of $9.2 million, including interest, in the second quarter of 1994.
There was no effect on electric revenues or net income when the refund was
made because the Company had been reserving for the effect of the refund.
(b) 1994 Electric Rate Case -
On July 8, 1994, the Company applied to the IUB for an increase in
retail electric rates of approximately $21 million annually, or 4.3%. The
Company's proposal includes approximately $19 million in annual revenue
requirement related to increased recovery levels of depreciation expense,
nuclear decommissioning expense and post-employment benefit costs. 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. Any
increase approved by the IUB is not expected to be effective before May 1995;
no interim increase was requested.
Included in the requested increase is a proposal to increase the annual
recovery of anticipated costs to decommission the Duane Arnold Energy Center
(DAEC), the Company's nuclear generating plant, to approximately $12 million
annually, from the current level of $5.5 million. Decommissioning expense is
included in "Depreciation and amortization" in the Statements of Income and
the cumulative amount is included in "Accumulated depreciation" in the Balance
Sheets to the extent recovered through rates. The proposal is based on the
following assumptions: 1) cost to decommission the DAEC of $252.7 million in
1993 dollars, based on the Nuclear Regulatory Commission (NRC) minimum formula
(which exceeds the amount in the current site-specific study); 2) inflation of
5.56% annually to the year 2014, when decommissioning is expected to begin; 3)
the prompt dismantling and removal method of decommissioning; 4) monthly
funding of all future collections into external trust funds and funded on a
tax-qualified basis to the extent possible; 5) an average after-tax return of
5.88% for all external investments; and 6) a collection method that levelizes
the recovery through rates, in real terms, through 2014. Current levels of
rate recovery: 1) do not recognize estimated future inflation for the entire
period prior to commencement of the decommissioning process; 2) assume that
decommissioning begins in 2010; and 3) provide recovery on a straight-line
basis without considering the effects of inflation. Earnings on the external
trust funds 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.
(4) UTILITY ACCOUNTS RECEIVABLE:
The Company has entered into an agreement, which expires in 1999, with a
financial institution to sell, with limited recourse, an undivided fractional
interest of up to $65 million in its pool of utility accounts receivable. At
June 30, 1994, $53 million was sold under the agreement.
(5) SHORT-TERM DEBT:
At June 30, 1994, the Company had bank lines of credit aggregating $67.7
million of which $7.7 million was being used to support pollution control
obligations and $3 million to support commercial paper. 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, the Company has an
uncommitted credit facility with a financial institution whereby it can borrow
up to $40 million. Rates are set at the time of borrowing and no fees are
paid to maintain this facility. At June 30, 1994, there were no outstanding
borrowings under this facility. The Company also has a letter of credit in
the amount of $3.4 million supporting its variable rate pollution control
obligations.
(6) OFFICE LEASE GUARANTY:
The Company entered into a five-year lease agreement, effective
July 1, 1994, as lessee for its corporate general office in Cedar Rapids,
Iowa. The lessor is a trust (IES Utilities Trust, not affiliated with the
Company) formed by various financial institutions. The term of the lease is
five years, with two one-year extensions available at the Company's option.
The Company had previously been leasing the building from a different lessor.
Pursuant to its Guaranty, if the Company defaults on its obligations under the
lease, the Company will be required to pay all debt service payments related
to the debt incurred by the lessor for purchase of the building, all amounts
payable with respect to the equity contributions (including a return on the
contributions) made to the trust by the financial institutions, and other
payments associated with the lease transaction. The aggregate amount of the
potential payments with respect to the Guaranty is approximately $20 million.
(7) CONTINGENCIES:
(a) Nuclear Insurance Programs -
The Price-Anderson Amendments Act of 1988 (1988 Act) provides the
Company with the benefit of $9.158 billion of public liability coverage
consisting of $200 million of insurance and $8.958 billion of potential
retroactive assessments from the owners of nuclear power plants. Based upon
its ownership of the DAEC, under the 1988 Act, the Company could be assessed a
maximum of $79 million per nuclear incident, with a maximum of $10 million per
year (of which the Company's 70% ownership portion would be $55 million and $7
million, respectively) if losses relating to the incidents exceeded $200
million. These limits are subject to adjustments for inflation in future
years.
The Company is a member of Nuclear Electric Insurance Limited (NEIL),
which provides insurance coverage for the cost of certain property losses at
nuclear generating stations and for the cost of replacement power during
certain outages. Companies insured through NEIL are subject to retroactive
premium adjustments if losses exceed accumulated reserve funds. NEIL's
accumulated reserve funds are currently sufficient to cover its exposure in
the event of a single incident under the property damage or replacement power
coverages. However, the Company could be assessed annually a maximum of $8.5
million for certain property losses and $1 million for replacement power if
NEIL's losses relating to accidents exceeded its accumulated reserve funds.
The Company is not aware of any losses that it believes are likely to result
in an assessment.
(b) Environmental Liabilities -
At June 30, 1994, the Company's Balance Sheets reflect approximately
$24 million (including $4.3 million as current) of liabilities for
investigation and remediation of environmental issues. The recorded amount
represents the Company's estimate of the minimum aggregate amount that will be
incurred for investigation and remediation of the environmental issues, which
amount is substantially related to clean-up costs associated with certain
former manufactured gas plant (FMGP) sites. In April 1994, the Company
received updated investigation reports on a number of sites, which, at some
sites, indicated a greater volume of contaminated material needing treatment,
and a greater volume of substances requiring higher cost incineration, than
was anticipated in prior estimates. Prior estimates were based on
investigations conducted at what were expected to be representative sites. It
is possible that future cost estimates will be greater than the current
estimates as further investigations are conducted and as additional facts
become known. The Company has not initiated the investigation on two of the
27 sites for which it has been identified as a Potentially Responsible Party
(PRP), but intends to do so, and is continuing work on sites requiring
remediation.
The Company has been named as a PRP for the FMGP sites by either the
Iowa Department of Natural Resources (IDNR) or the United States Environmental
Protection Agency (EPA). The Company is working pursuant to the requirements
of the IDNR and EPA to investigate, mitigate, prevent and remediate, where
necessary, damage to property, including damage to natural resources, at and
around the 27 sites in order to protect public health and the environment.
Such investigations are expected to be completed by 1999 and site-specific
remediations are anticipated to be completed within three years after the
completion of the investigations of each site. The Company may be required to
monitor these sites for a number of years upon completion of remediation.
Such monitoring costs are not included in the estimates above.
The Company is investigating the possibility of obtaining monies through
insurance coverage and third party cost sharing for FMGP investigation and
clean-up costs. The amount of shared costs, if any, can not be reasonably
determined and, accordingly, no potential sharing has been recorded at
June 30, 1994. Regulatory assets of approximately $24 million have been
recorded in the Balance Sheets, which reflect the future recovery that is
being provided through rates. Considering the recorded reserves for
environmental liabilities and the past rate treatment allowed by the IUB,
management believes that the clean-up costs incurred for these FMGP sites will
not have a material adverse effect on the Company's financial position or
results of operations.
(c) Clean Air Act -
The Clean Air Act Amendments Act 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 the Company's
units beginning in 1995 and Phase II affecting all units beginning in the year
2000.
The Company expects to meet the requirements of the Act by switching to
lower sulfur fuels and through capital expenditures primarily related to fuel
burning equipment and boiler modifications. The Company estimates capital
expenditures at approximately $28 million, including $5 million in 1994, in
order to meet these requirements of the Act.
(d) National Energy Policy Act of 1992 -
The National Energy Policy Act of 1992 requires owners of nuclear power
plants to pay a special assessment into a "Uranium Enrichment Decontamination
and Decommissioning Fund." The assessment is based upon prior nuclear fuel
purchases and, for the DAEC, averages $1.4 million annually through 2007, of
which the Company's 70% share is $1.0 million. The Company is recovering the
costs associated with this assessment through its electric fuel adjustment
clauses over the period the costs are assessed. The Company's 70% share of
the future assessment, $12.9 million payable through 2007, has been recorded
as a liability in the Balance Sheets, including $0.8 million included in
"Current liabilities - Other," with a related regulatory asset for the
unrecovered amount.
(e) Federal Energy Regulatory Commission (FERC) Order No. 636 -
The FERC issued Order No. 636 (Order 636) in 1992. Order 636, as
modified on rehearing: 1) requires the Company's pipeline suppliers to
unbundle their services so that gas supplies are obtained separately from
transportation service, and transportation and storage services are operated
and billed as separate and distinct services; 2) requires the pipeline
suppliers to offer "no notice" transportation service under which firm
transporters (such as the Company) can receive delivery of gas up to their
contractual capacity level on any day without prior scheduling; 3) allows
pipelines to abandon long-term (one year or more) transportation service
provided to a customer under an expiring contract whenever the customer fails
to match the highest rate and longest term (up to 20 years) offered to the
pipeline by other customers for the particular capacity; and 4) provides for a
mechanism under which pipelines can recover prudently incurred transition
costs associated with the restructuring process. The Company may benefit from
enhanced access to competitively priced gas supply and more flexible
transportation services as a result of Order 636. However, the Company will
be required to pay certain transition costs incurred and billed by its
pipeline suppliers as Order 636 is implemented.
The Company's three pipeline suppliers have filed tariffs with the FERC
implementing Order 636 and the pipelines have also made filings with the FERC
to begin collecting their respective transition costs. The Company began
paying the transition costs in November 1993, and, at June 30, 1994, has
recorded a liability of $5.1 million for such transition costs that have been
incurred by the pipelines to date, including $2.3 million expected to be
billed through June 1995. While the magnitude of the total transition costs
to be charged to the Company cannot yet be determined, the Company believes
any transition costs the FERC would allow the pipelines to collect would be
recovered from its customers, based upon past regulatory treatment of similar
costs by the IUB. Accordingly, regulatory assets, in amounts corresponding to
the 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. (the Company).
RESULTS OF OPERATIONS
The Company's net income available for common stock as compared to the
same periods last year decreased $1.2 million and $0.7 million for the three
and six month periods, respectively, and increased $14.3 million during the
twelve month period ended June 30, 1994. The Company's operating income
decreased $0.3 million and $0.8 million for the three and six month periods,
respectively, and increased $15.5 million during the twelve month period.
Reasons for the changes in the results of operations are explained in the
following discussion.
ELECTRIC REVENUES
Electric revenues and Kwh sales (before off-system sales) increased or
(decreased) for the periods ended June 30, 1994, compared with prior periods,
as follows:
Revenues Kwh Sales
(millions)
Three months $ 0.8 2.7%
Six months $ (1.9) 4.0%
Twelve months $ 63.0 13.3%
After adjusting for the effects of weather, sales increased 0.1%, 2.5%
and 11.6% for the three, six and twelve month periods, respectively. The
underlying growth in the Company's service territory is reflected in increases
in commercial and industrial sales for all periods. The increase for the
twelve month period also reflects the acquisition of the Iowa service
territory from Union Electric Company (UE) on December 31, 1992, for the full
1994 period, but for only one-half of the 1993 period. Excluding the effects
of the sales to the former UE customers, sales for the twelve month period
increased 7.1%.
The Company's 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 increase for the three month period was primarily the result
of the Kwh sales increase and higher off-system sales to other utilities,
substantially offset by lower fuel costs recovered through the EAC and lower
average revenue per Kwh, in part related to the sales mix among customer
classes.
The revenue decrease for the six month period was primarily related to
lower fuel costs recovered through the EAC, lower off-system sales to other
utilities and lower average revenue per Kwh, partially offset by the increase
in Kwh sales.
The revenue increase for the twelve month period was substantially
because of the increase in Kwh sales, largely related to the acquisition of
the UE territory, increased off-system sales to other utilities and higher
recoveries of fuel costs through the EAC. These effects were partially offset
by lower average revenue per Kwh primarily caused by the mix of sales among
customer classes, as increased sales to lower margin industrial customers
comprised a significant portion of the sales increase.
GAS REVENUES
Gas revenues decreased $1.6 million, $0.8 million and $6.0 million for
the three, six and twelve month periods ended June 30, 1994, respectively.
The Company's gas tariffs include purchased gas adjustment clauses (PGA) that
are designed to currently recover the cost of gas sold. The reduction in gas
revenues for all periods was attributable to lower gas costs recovered through
the PGA and lower dekatherm sales to ultimate consumers. Sales to ultimate
consumers decreased 4.5%, 4.3% and 4.9% for the three, six and twelve month
periods, respectively. Including transported volumes, sales increased 6.9%
for the three month period, and decreased 0.6% and 1.5% for the six and twelve
month periods, respectively. After adjusting for the effects of weather,
sales (including transported volumes) increased 15.6% and 1.0% for the three
and six month periods, respectively, and were flat for the twelve month
period.
OPERATING EXPENSES
Fuel for production decreased $2.4 million and $4.6 million during the
three and six month periods, respectively, primarily because of larger under
collections of fuel costs through the EAC in 1994; such under collections are
recorded as reductions to fuel for production expenses. This decrease was
partially offset by the effect of increased Kwh generation during the periods.
Fuel for production increased $4.8 million during the twelve month period
primarily because of increased Kwh generation at the Company's fossil-fueled
generating stations, partially offset by lower generation at the Company's
nuclear generating plant, the Duane Arnold Energy Center (DAEC). The lower
generation at the DAEC was because of a refueling outage in the 1994 period.
Purchased power increased $0.1 million and $11.8 million during the
three and twelve month periods, respectively, primarily because of increased
energy purchases related to increased Kwh sales, partially offset by decreased
capacity charges. The decreased capacity charges were attributable to the
expiration, in April 1993, of the Muscatine purchase power agreement, net of
higher capacity costs relating to contracts associated with the acquisition of
the UE territory. Purchased power decreased $8.5 million during the six month
period primarily because of a $7 million decrease in capacity charges relating
to the expiration of the purchase power agreement with the City of Muscatine.
Lower energy purchases, primarily because of lower off-system sales to other
utilities and increased generation, also contributed to the reduction in
purchased power costs during this period.
Gas purchased for resale decreased $1.7 million, $0.8 million and
$6.8 million for the three, six and twelve month periods, respectively. The
decrease for all periods is primarily due to lower dekatherm sales, partially
offset by higher natural gas prices.
Other operating expenses decreased $0.9 million for the three month
period and increased $2.3 million and $6.3 million for the six and twelve
month periods, respectively. The decrease for the three month period is
primarily due to lower electric transmission and distribution costs, partially
offset by higher labor and benefit costs. The increases for the six and
twelve month periods are primarily attributable to increased labor and benefit
costs and higher information systems costs, partially offset by lower electric
transmission and distribution costs and, for the twelve month period, lower
costs at the DAEC.
Maintenance expenditures increased $1.3 million, $1.8 million and
$3.8 million during the three, six and twelve month periods, respectively.
The increases for all periods were primarily related to increased maintenance
activities at the Company's generating stations and increased electric
transmission and distribution expenditures.
Depreciation and amortization increased during all periods primarily
because of increases in utility plant in service. Depreciation and
amortization expenses for both years include a provision for decommissioning
the DAEC ($5.5 million annually), which is collected through rates.
The staff of the Securities and Exchange Commission (SEC) has questioned
certain of the current accounting practices 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 has agreed to review
the accounting for removal costs, including decommissioning. If such current
electric utility industry accounting practices are changed, annual provisions
for decommissioning could increase, the estimated cost for decommissioning
could be recorded as a liability rather than as accumulated depreciation, and
the liability for the entire expected cost to decommission the DAEC may be
required to be recorded currently. If such changes are required, the Company
believes that there would not be an adverse effect on its financial position
or results of operations based on current rate making practices. See Note 3
of the Notes to Financial Statements for a further discussion of
decommissioning.
Property taxes increased $1.1 million, $2.4 million and $5.4 million
during the three, six and twelve month periods, respectively. These increases
are primarily because of increases in assessed property values. The
acquisition of the UE service territory also contributed to the twelve month
increase.
The increase in income taxes for all periods is, in part, because of the
effect of certain temporary differences for which the Company did not record
deferred taxes pursuant to rate making practices. Increased pre-tax income
for the six and twelve month periods and the effect of a 1% increase in the
Federal statutory income tax rate in the twelve month period also contributed
to the increase for those periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily attributable to its
construction programs and debt maturities and sinking fund requirements. Cash
flows from operating activities for the twelve months ended June 30, 1994,
were approximately $139 million. These funds were primarily used for
construction and acquisition expenditures.
It is anticipated that the Company's future capital requirements will be
met by both cash flows from operations and external financing. The level of
cash flows from operations is partially dependent upon economic conditions,
legislative activities, environmental matters and timely rate relief. See
Note 3 and Note 7 of the Notes to Financial Statements for a discussion of the
Company's rate cases and contingencies. Access to the long-term and
short-term capital and credit markets is necessary for obtaining funds
externally.
The Company's liquidity and capital resources will be affected by
environmental and legislative issues, including the ultimate disposition of
remediation issues surrounding the former manufactured gas plant (FMGP) issue,
the Clean Air Act as amended, the National Energy Policy Act of 1992, and
Federal Energy Regulatory Commission (FERC) Order 636, as discussed in Note 7
of the Notes to Financial Statements. Consistent with rate making principles,
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 Iowa Utilities Board (IUB) has adopted rules which mandate the
Company to spend 2% of electric and 1.5% of gas gross retail operating
revenues 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. At June 30, 1994, the Company had $25.7 million of such
costs recorded as regulatory assets. Under this mandate, the Company will
make its initial filing for recovery of these costs in mid-August 1994, but
does not expect to begin recovering the costs until 1995.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program anticipates
expenditures of $150 million for 1994, of which approximately 44% represents
expenditures for electric transmission and distribution facilities, 18%
represents fossil-fueled generation expenditures and 10% represents nuclear
generation expenditures. The Company had construction and acquisition
expenditures of approximately $48 million for the six months ended
June 30, 1994. Substantial commitments have been made in connection with the
remaining anticipated expenditures.
The Company's levels of construction and acquisition expenditures are
projected to be $149 million in 1995, $144 million in 1996, $149 million in
1997, and $160 million in 1998. 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 1994-1998.
Capital expenditure, 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 periodic sinking fund requirements, which the Company intends
to meet by pledging additional property, approximately $124 million of
long-term debt has scheduled maturities prior to December 31, 1998. The
Company intends to refinance the majority of the debt maturities with
long-term debt.
The Indentures pursuant to which the Company issues First Mortgage Bonds
constitute direct first mortgage liens upon substantially all tangible public
utility property and contain covenants that restrict the amount of additional
bonds that may be issued. At June 30, 1994, such restrictions would have
allowed the Company to issue $276 million of additional First Mortgage Bonds.
The Company has received authority from the FERC to issue $250 million of
First Mortgage Bonds and is currently authorized by the SEC to issue
$50 million of long-term debt under an existing registration statement.
The Company's Articles of Incorporation authorize and limit the
aggregate amount of additional shares of Cumulative Preferred Stock and
Cumulative Preference Stock which may be issued. At June 30, 1994, the
Company could have issued 700,000 shares of Cumulative Preference Stock, $100
par value, and 100,000 additional shares of Cumulative Preferred Stock, $50
par value.
The Company's capitalization ratios at June 30, were as follows:
1994 1993
Long-term debt 48% 44%
Preferred stock 2 2
Common equity 50 54
100% 100%
The 1994 ratios include $50 million of long-term debt that is due
in less than one year because it is the Company's intention to
refinance the debt with long-term issues. The 1993 common equity
ratio was temporarily high because the Company had not yet issued
long-term debt to replace other recently redeemed long-term debt.
SHORT-TERM FINANCING
For interim financing, the Company is authorized by the FERC to issue,
through 1994, up to $125 million of short-term notes. This availability of
short-term financing provides flexibility in the issuance of long-term
securities. At June 30, 1994, the Company had $3.0 million of commercial
paper and $14.3 million of notes payable to associated companies outstanding.
The Company has an agreement, which expires in 1999, with a financial
institution to sell, with limited recourse, an undivided fractional interest
of $65 million in its pool of utility accounts receivable. At June 30, 1994,
$53 million had been sold under the agreement.
At June 30, 1994, the Company had bank lines of credit aggregating $67.7
million, of which $7.7 million was being used to support pollution control
obligations and $3.0 million to support commercial paper. 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, the Company has an
uncommitted credit facility with a financial institution whereby it can borrow
up to $40 million. The Company also has a letter of credit in the amount of
$3.4 million supporting its variable rate pollution control obligations.
ENVIRONMENTAL MATTERS
At June 30, 1994, the Company's Balance Sheets reflect approximately
$24 million of liabilities for investigation and remediation of environmental
issues. The recorded amount represents the Company's estimate of the minimum
aggregate amount that will be incurred for investigation and remediation of
the environmental issues, which amount is substantially related to clean-up
costs associated with certain former manufactured gas plant (FMGP) sites. In
April 1994, the Company received updated investigation reports on a number of
sites, which, at some sites, indicated a greater volume of contaminated
material needing treatment, and a greater volume of substances requiring
higher cost incineration, than was anticipated in prior estimates. Prior
estimates were based on investigations conducted at what were expected to be
representative sites. It is possible that future cost estimates will be
greater than the current estimates as further investigations are conducted and
as additional facts become known. The Company has not initiated the
investigation on two of the 27 sites for which it has been identified as a
Potentially Responsible Party (PRP), but intends to do so, and is continuing
work on sites requiring remediation.
Considering the recorded reserves for environmental liabilities and the
past rate treatment allowed by the IUB, management believes that the clean-up
costs incurred for these FMGP sites will not have a material adverse effect on
its financial position or results of operations.
Refer to Note 7 of the Notes to Financial Statements for information
relating to potential environmental liabilities associated with certain FMGP
sites.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 (Act),
which mandated that each state must take responsibility for the storage of
low-level radioactive waste produced within its borders, will have an impact
on disposal practices for low-level radioactive waste over the next several
years. The State of Iowa has joined the Midwest Interstate Low-Level
Radioactive Waste Compact Commission (Midwest Compact Commission), which is
planning a storage facility to be located in Ohio to store waste generated by
the six states in the Midwest Compact Commission. At June 30, 1994, the
Company has prepaid costs of approximately $1 million (included in "Current
assets - Prepayments and other" in the Balance Sheets) to the Midwest Compact
Commission for the building of such a facility. Due to the legal and
political uncertainties, the Company cannot estimate the future payments, if
any, that will be made to the Midwest Compact Commission.
The Company and the other members of the Midwest Compact Commission
shipped their low-level wastes to waste management facilities in Barnwell,
South Carolina, Hanford, Washington and/or Beatty, Nevada through
June 30, 1994. Currently, the Company is storing its low-level radioactive
waste generated at the DAEC on-site until new disposal arrangements are
finalized among the Midwest Compact Commission members. On-site storage
capability currently exists for low-level radioactive waste expected to be
generated through the DAEC's license life under normal operating conditions.
In February 1993, the Nuclear Regulatory Commission (NRC) proposed a
rule that would not permit on-site storage of low-level radioactive waste
after January 1, 1996, unless the generator of such waste can document that it
has exhausted other reasonable waste management options. The Company is
currently investigating its options for the disposal of its low-level
radioactive waste.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
Reference is made to Notes 3 and 7 of the Notes to 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.
(a) The Company held its annual Meeting of Shareholders on
May 17, 1994.
(b) The following matter was voted upon at the Annual Meeting of
Shareholders:
The election of nominees for Directors who will serve for a
one-year term or until their respective successors shall be duly
elected. The nominees, all of whom were elected, were as follows:
C.R.S. Anderson, J. Wayne Bevis, Dr. George Daly, Blake O. Fisher,
Jr., G. Sharp Lannom, IV, Lee Liu, Robert D. Ray, David Q. Reed,
Henry Royer, Robert W. Schlutz, and Anthony R. Weiler.
IES Industries Inc., the sole shareholder of the Company, voted
all 13,370,788 shares for the election of the above nominees.
Item 5. Other Information.
a) 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:
June 30, 1994 3.39
December 31, 1993 3.41
December 31, 1992 2.49
December 31, 1991 2.64
December 31, 1990 2.65
December 31, 1989 2.82
b) Effective August 2, 1994, Mr. Jack R. Newman, President of the law
firm of Newman, Bouknight, & Edgar, P.C. was elected to serve on
the Company's Board of Directors.
For the twelve months ended June 30, 1994, the Company incurred
$596,483 for legal services with Mr. Newman's firm.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
* 3(a) Bylaws of Registrant, as amended May 17, 1994.
10(a) Receivables Purchase and Sale Agreement dated as of
June 30, 1989, as Amended and Restated as of
April 15, 1994, 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
the Company's Form 10-Q for the quarter ended
March 31, 1994).
*10(b) Guaranty (IES Utilities Trust No. 1994-A) from IES
Utilities Inc., dated as of June 29, 1994.
*12 Ratio of Earnings to Fixed Charges.
* Exhibits designated by an asterisk are filed herewith.
(b) Reports on Form 8-K -
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IES UTILITIES INC.
(Registrant)
Date August 10, 1994 By /s/ Dr. Robert J. Latham
(Signature)
Dr. Robert J. Latham
Senior Vice President, Finance
and Corporate Affairs, & Treasurer
By /s/ Richard A. Gabbianelli
(Signature)
Richard A. Gabbianelli
Controller & Chief Accounting Officer