UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission Registrant; State of Incorporation; IRS Employer
File Number Address; and Telephone Number Identification No.
1-9187 IES INDUSTRIES INC. (an Iowa Corporation) 42-1271452
IES Tower, Cedar Rapids, Iowa 52401
319-398-4411
0-4117-1 IES UTILITIES INC. (an Iowa Corporation) 42-0331370
IES Tower, Cedar Rapids, Iowa 52401
319-398-4411
Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2)
have been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrants'
classes of common stock, as of April 30, 1997.
IES Industries Inc. Common Stock, no par value - 30,304,617 shares
IES Utilities Inc. Common Stock, $2.50 par value - 13,370,788 shares
IES INDUSTRIES INC. AND IES UTILITIES INC.
INDEX
Page No.
Part I. Financial Information.
Item 1. Consolidated Financial Statements.
IES Industries Inc.:
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3 - 4
Consolidated Statements of Income -
Three and Twelve Months Ended
March 31, 1997 and 1996 5
Consolidated Statements of Cash Flows -
Three and Twelve Months Ended
March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7 - 14
IES Utilities Inc.:
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 15 - 16
Consolidated Statements of Income -
Three and Twelve Months Ended
March 31, 1997 and 1996 17
Consolidated Statements of Cash Flows -
Three and Twelve Months Ended
March 31, 1997 and 1996 18
Notes to Consolidated Financial Statements 19
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition. 20 - 32
Part II. Other Information. 33 - 35
Signatures. 36 - 37
PART I - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS
March 31,
1997 December 31,
ASSETS (in thousands) (Unaudited) 1996
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,015,838 $ 2,007,839
Gas 176,439 175,472
Other 132,421 126,850
2,324,698 2,310,161
Less - Accumulated depreciation 1,054,799 1,030,390
1,269,899 1,279,771
Leased nuclear fuel, net of amortization 31,468 34,725
Construction work in progress 48,726 43,719
1,350,093 1,358,215
Other, net of accumulated depreciation
and amortization of $74,652 and
$70,031, respectively 228,521 223,805
1,578,614 1,582,020
Current assets:
Cash and temporary cash investments 26,625 8,675
Accounts receivable -
Customer, less allowance for doubtful
accounts of $1,165 and $1,087, respectively 34,826 50,821
Other 9,466 12,040
Income tax refunds receivable 9,428 8,890
Production fuel, at average cost 12,042 13,323
Materials and supplies, at average cost 23,992 22,842
Adjustment clause balances 0 10,752
Regulatory assets 32,067 26,539
Prepayments and other 19,698 24,169
168,144 178,051
Investments:
Nuclear decommissioning trust funds 61,516 59,325
Investment in foreign entities 45,142 44,946
Investment in McLeod, Inc. 29,200 29,200
Cash surrender value of life insurance policies 11,562 11,217
Other 7,207 4,903
154,627 149,591
Other assets:
Regulatory assets 196,096 201,129
Deferred charges and other 15,169 14,771
211,265 215,900
$ 2,112,650 $ 2,125,562
IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
CAPITALIZATION AND LIABILITIES 1997 December 31,
(in thousands, except share amounts) (Unaudited) 1996
Capitalization:
Common stock - no par value - authorized
48,000,000 shares; outstanding 30,217,336
and 30,077,212 shares, respectively $ 412,143 $ 407,635
Retained earnings 215,703 219,246
Total common equity 627,846 626,881
Cumulative preferred stock of IES Utilities Inc. 18,320 18,320
Long-term debt (excluding current portion) 651,763 701,100
1,297,929 1,346,301
Current liabilities:
Short-term borrowings 126,000 135,000
Capital lease obligations 14,047 15,125
Maturities and sinking funds 63,480 8,473
Accounts payable 62,142 99,861
Dividends payable 16,527 16,431
Accrued interest 11,041 8,985
Accrued taxes 71,599 43,926
Accumulated refueling outage provision 3,002 1,316
Adjustment clause balances 3,759 0
Environmental liabilities 5,679 5,679
Other 17,754 22,087
395,030 356,883
Long-term liabilities:
Pension and other benefit obligations 43,852 39,643
Capital lease obligations 17,421 19,600
Environmental liabilities 47,560 47,502
Other 21,959 18,488
130,792 125,233
Deferred credits:
Accumulated deferred income taxes 255,087 262,675
Accumulated deferred investment tax credits 33,812 34,470
288,899 297,145
Commitments and contingencies (Note 7)
$ 2,112,650 $ 2,125,562
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three For the Twelve
Months Ended Months Ended
March 31 March 31
1997 1996 1997 1996
(in thousands, except per share amounts)
Operating revenues:
Electric $ 137,286 $ 125,368 $ 586,191 $ 569,262
Gas 84,106 90,024 268,060 215,381
Other 36,295 27,805 134,151 103,173
257,687 243,197 988,402 887,816
Operating expenses:
Fuel for production 29,881 20,292 94,168 97,105
Purchased power 18,673 14,469 92,553 65,029
Gas purchased for resale 64,498 67,437 214,412 159,864
Other operating expenses 52,964 52,525 215,197 205,822
Maintenance 13,568 10,833 51,736 44,763
Depreciation and amortization 28,739 27,384 108,750 99,803
Taxes other than income taxes 13,295 13,262 48,203 48,836
221,618 206,202 825,019 721,222
Operating income 36,069 36,995 163,383 166,594
Interest expense and other:
Interest expense 14,846 12,906 56,763 51,667
Allowance for funds used during
construction -394 -690 -1,807 -2,999
Preferred dividend requirements
of IES Utilities Inc. 229 229 914 914
Miscellaneous, net -244 -1,677 3,765 -4,489
14,437 10,768 59,635 45,093
Income before income taxes 21,632 26,227 103,748 121,501
Income taxes:
Current 16,138 14,110 40,274 51,506
Deferred -6,163 -1,317 6,988 1,138
Amortization of investment
tax credits -658 -661 -2,642 -2,674
9,317 12,132 44,620 49,970
Net income $ 12,315 $ 14,095 $ 59,128 $ 71,531
Average number of common
shares outstanding 30,188 29,645 29,997 29,391
Earnings per average
common share $ 0.41 $ 0.48 $ 1.97 $ 2.43
Dividends declared per
common share $ 0.525 $ 0.525 $ 2.10 $ 2.10
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three For the Twelve
Months Ended Months Ended
March 31 March 31
1997 1996 1997 1996
(in thousands)
Cash flows from operating activities:
Net income $ 12,315 $ 14,095 $ 59,128 $ 71,531
Adjustments to reconcile net income to
net cash flows from operating activities -
Depreciation and amortization 28,739 27,384 108,750 99,803
Amortization of principal under capital
lease obligation 3,369 4,624 15,237 17,781
Deferred taxes and investment tax credits -6,821 -1,978 4,346 -1,536
Refueling outage provision 1,686 2,546 -7,234 3,569
Amortization of other assets 3,039 2,913 9,895 9,247
Other 2,279 1,104 2,078 1,040
Other changes in assets and liabilities -
Accounts receivable 18,569 -7,131 3,546 -20,186
Sale of utility accounts receivable 0 0 7,000 -6,000
Production fuel, materials and supplies 916 1,351 687 3,744
Accounts payable -35,242 -8,620 -5,690 -4,064
Accrued taxes 27,135 16,293 -7,123 20,371
Provision for rate refunds 0 166 -272 -7,728
Adjustment clause balances 14,511 3,387 -2,776 3,733
Gas in storage 6,073 7,744 -2,825 2,798
Other 1,927 772 12,921 -4,456
Net cash flows from operating activities 78,495 64,650 197,668 189,647
Cash flows from financing activities:
Dividends declared on common stock -15,858 -15,582 -63,015 -61,792
Proceeds from issuance of common stock 3,479 3,726 13,917 14,696
Purchase of treasury stock 0 0 -269 0
Net change in IES Diversified Inc. credit
facility 5,695 -995 54,550 52,725
Proceeds from issuance of other long-term
debt 0 0 60,000 50,007
Reductions in other long-term debt -79 -79 -15,454 -50,431
Net change in short-term borrowings -9,000 -9,000 34,000 64,000
Principal payments under capital lease
obligations -2,296 -4,913 -16,491 -15,714
Other 96 -69 -292 -1,576
Net cash flows from financing activities -17,963 -26,912 66,946 51,915
Cash flows from investing activities:
Construction and acquisition expenditures -
Utility -19,758 -23,333 -138,684 -121,437
Other -13,423 -15,359 -94,183 -99,663
Oil and gas properties held for resale 0 9,843 0 0
Deferred energy efficiency expenditures -4,014 -3,667 -17,204 -18,159
Nuclear decommissioning trust funds -1,502 -1,502 -6,008 -6,219
Proceeds from disposition of assets 567 1,204 7,658 12,524
Other -4,452 -1,431 -3 -3,015
Net cash flows from investing activities -42,582 -34,245 -248,424 -235,969
Net increase in cash and temporary
cash investments 17,950 3,493 16,190 5,593
Cash and temporary cash investments
at beginning of period 8,675 6,942 10,435 4,842
Cash and temporary cash investments
at end of period $ 26,625 $ 10,435 $ 26,625 $ 10,435
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 12,308 $ 10,544 $ 54,811 $ 51,615
Income taxes $ -676 $ 8,471 $ 45,733 $ 32,215
Noncash investing and financing activities -
Capital lease obligations incurred $ 112 $ 2,604 $ 11,790 $ 4,405
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
This document contains the Quarterly Reports on Form 10-Q for the
quarter ended March 31, 1997 for each of IES Industries Inc. and IES
Utilities Inc. Information contained herein relating to an individual
registrant is filed by such registrant on its own behalf. Accordingly,
except for its subsidiaries, IES Utilities Inc. makes no representation
as to information relating to IES Industries Inc. or to any other
companies affiliated with IES Industries Inc. IES Industries Inc. and
its consolidated subsidiaries may collectively be referred to as "the
Company".
From time to time, the Company may make forward-looking statements
within the meaning of the federal securities laws that involve
judgments, assumptions and other uncertainties beyond the control of the
Company. These forward-looking statements may include, among others,
statements concerning revenue and cost trends, cost recovery, cost
reduction strategies and anticipated outcomes, pricing strategies,
changes in the utility industry, planned capital expenditures, financing
needs and availability, statements of the Company's expectations,
beliefs, future plans and strategies, anticipated events or trends and
similar comments concerning matters that are not historical facts.
Investors and other users of the forward-looking statements are
cautioned that such statements are not a guarantee of future performance
of the Company and that such forward-looking statements are subject to
risks and uncertainties that could cause actual results to differ
materially from those expressed in, or implied by, such statements.
Some, but not all, of the risks and uncertainties include weather
effects on sales and revenues, competitive factors, general economic
conditions in the Company's service territory, federal and state
regulatory or government actions, the operating of a nuclear facility
and changes in the rate of inflation.
IES INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1997
(1) GENERAL:
The interim Consolidated Financial Statements have been prepared by
IES Industries Inc. (Industries) and its consolidated subsidiaries,
without audit, pursuant to the rules and
regulations of the United States Securities and Exchange Commission
(SEC). Industries' wholly-owned subsidiaries are IES Utilities Inc.
(Utilities) and IES Diversified Inc. (Diversified). Industries is an
investor-owned holding company whose primary operating company,
Utilities, is engaged principally in the generation, transmission,
distribution and sale of electric energy and the purchase, distribution,
transportation and sale of natural gas. The Company's principal markets
are located in the State of Iowa. The Company also has various non-
utility subsidiaries which are primarily engaged in the energy-related,
transportation and real estate development businesses.
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 1997 presentation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect: 1) the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements, and 2) the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
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, 1996. 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
Leases
Utility accounts receivable (other than discussed in Note 4)
Income taxes
Benefit plans
Common, preferred and preference stock
Debt (other than discussed in Note 6)
Estimated fair value of financial instruments (other than discussed
in Note 5)
Derivative financial instruments
Commitments and contingencies (other than discussed in Note 7)
Jointly-owned electric utility plant
Segments of business
(2) PROPOSED MERGER OF THE COMPANY:
On November 10, 1995, Industries, WPL Holdings, Inc. (WPLH) and
Interstate Power Company (IPC) entered into an Agreement and Plan of
Merger, as amended (Merger Agreement). At the 1996 annual meetings, the
shareowners of all three companies approved the Merger Agreement. The
merger is still subject to approval by several federal and state
regulatory agencies. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for a further discussion.
(3) RATE MATTERS:
(a) Electric Price Announcements -
Utilities and its Iowa-based proposed merger partner, IPC,
announced in 1996 their intentions to hold retail electric prices to
their current levels until at least January 1, 2000. The companies made
the proposal as part of their testimony in the merger-related
application filed with the Iowa Utilities Board (IUB). The proposal
excludes price changes due to government-mandated programs, such as
energy efficiency cost recovery, or unforeseen dramatic changes in
operations. Utilities, Wisconsin Power & Light Company
(WP&L) and IPC also proposed to freeze their
wholesale electric prices for four years from the effective date of the
merger as part of their merger filing with the Federal Energy Regulatory
Commission (FERC). The Company does not expect the merger-related
electric price proposals to have a material adverse effect on its
financial position or results of operations.
(b) Energy Efficiency Cost Recovery -
Until recently, IUB rules mandated 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 is
currently recovering the energy efficiency costs incurred through 1993
for such programs, including its direct expenditures, carrying costs, a
return on its expenditures and a reward. These costs are being
recovered over a four-year period and the recovery began on June 1,
1995.
In December 1996, under provisions of the IUB rules, the Company
filed for recovery of the costs relating to its 1994 and 1995 programs.
Utilities' proposed recovery was for approximately $53 million ($42
million electric and $11 million gas) and was composed of $34 million
for direct expenditures and carrying costs, $10 million for a return on
the expenditures over the recovery period and $9 million for a reward
based on a sharing of the benefits of such programs. The Company
expects to receive the final order in the proceeding in June 1997 with
recovery of the allowed costs to commence in the third quarter of 1997.
Iowa statutory changes enacted in 1996 have
eliminated: 1) the 2% and 1.5% spending requirements described above in
favor of IUB-determined energy savings targets, 2) the delay in
recovery of energy efficiency costs by allowing recovery which is
concurrent with spending and 3) the recovery of a sharing reward. The
IUB commenced a rulemaking in January 1997 to implement the statutory
change and a final order in this proceeding was issued in April 1997.
The new rules provide that the Company will begin to recover its 1996
expenditures, and the 1997 expenditures incurred at such time, during
the summer of 1997 over a time period yet to be determined. The Company
would also begin concurrent recovery of its prospective expenditures at
such time. The implementation of these changes will gradually eliminate
the regulatory asset which exists under the current rate making
mechanism as these costs are recovered.
The Company has the following amounts of energy efficiency costs
included in regulatory assets on its Consolidated Balance Sheets as
follows (in thousands):
March 31, December 31,
1997 1996
Costs incurred through 1993 $ 10,934 $ 12,834
Costs incurred in 1994-1995 33,612 33,161
Costs incurred from 1/1/96 - 3/31/97 18,651 15,087
$ 63,197 $ 61,082
The above amounts include the direct expenditures and carrying
costs incurred by the Company but do not include any amounts for a
return on its expenditures over the recovery period or for a reward.
(4) 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, 1997, $65 million was sold
under the agreement.
SFAS 125, issued by the FASB in 1996 and effective for 1997,
provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. The accounting
for Utilities' sale of accounts receivable agreement is impacted by this
standard. As a result, the agreement was modified in the first quarter
of 1997 to comply with the SFAS 125 requirements and thus the accounting
and reporting for the sale of Utilities' receivables remains unchanged.
(5) INVESTMENTS:
(a) Foreign Entities -
At March 31, 1997, the Company had $45.1 million of investments in
foreign entities on its Consolidated Balance Sheet that included 1)
investments in two New Zealand electric distribution entities, 2) a loan
to a New Zealand company, 3) an investment in a cogeneration facility in
China, and 4) an investment in an international venture capital fund.
The Company accounts for the China investment under the equity method
and the other investments under the cost method. The geographic
concentration of the Company's investments in foreign entities at March
31, 1997, included investments of approximately $31.0 million in New
Zealand, $13.7 million in China and $0.4 million in other countries.
(b) McLeod, Inc. (McLeod) -
At March 31, 1997, the Company had a $20.0 million investment in
Class A common stock of McLeod and a $9.2 million investment in Class B
common stock as well as vested options that, if exercised, would
represent an additional investment of approximately $2.3 million.
McLeod provides local, long-distance and other telecommunications
services.
McLeod completed an Initial Public Offering (IPO) of its Class A
common stock in June 1996 and a secondary offering in November 1996. As
of March 31, 1997, the Company was the beneficial owner of approximately
10.6 million total shares on a fully diluted basis. Class B shares are
convertible at the option of the Company into Class A shares at any time
on a one-for-one basis. The rights of McLeod Class A common stock and
Class B common stock are substantially identical except that Class A
common stock has 1 vote per share and Class B common stock has 0.40 vote
per share. The Company currently accounts for this investment under the
cost method.
The Company has entered into an agreement with McLeod which
provides that for two years commencing on June 10, 1996, the Company
cannot sell or otherwise dispose of any of its securities of McLeod
without the consent of the McLeod Board of Directors. This contractual
sale restriction results in restricted stock under the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
Accounting for Certain Investments in Debt and Equity Securities, until
such time as the restrictions lapse and such shares became qualified for
sale within a one year period. As a result, the Company currently
carries this investment at cost.
The closing price of the McLeod Class A common stock on March 31,
1997, on the Nasdaq National Market, was $17.75 per share. The current
market value of the shares the Company beneficially owns (approximately
10.6 million shares) is impacted by, among other things, the fact that
the shares cannot be sold for a period of time. It is not possible to
estimate what the market value of the shares will be at the point in
time such sale restrictions are lifted. In addition, any gain upon an
eventual sale of this investment would likely be subject to a tax. The
estimated fair value of the McLeod investment at March 31, 1997, based
upon the closing price on March 31 of $17.75, was $185 million.
Under the provisions of SFAS No. 115, the carrying value of the
McLeod investment will be adjusted to estimated fair value at the time
such shares become qualified for sale within a one year period; this
will occur on June 10, 1997, which is one year before the contractual
restrictions on sale are lifted. At that time, the adjustment to
reflect the estimated fair value of this investment will be reflected as
an increase in the investment carrying value with the unrealized gain
reported as a net of tax amount in other common shareholders' equity
until realized (i.e., until the shares are sold by the Company).
(6) DEBT:
(a) Long-Term Debt -
In the second quarter of 1997, Utilities issued $55 million of
Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to
have their Collateral Trust Bonds redeemed, in whole but not in part, on
May 1, 2002, at 100% of the principal amount thereof, plus accrued
interest. The proceeds from the Collateral Trust Bonds were used to
refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30
million of Series M, 7.625% First Mortgage Bonds and $10 million of
7.375% First Mortgage Bonds.
Diversified has a variable rate credit facility that extends
through November 20, 1999, with two one-year extensions potentially
available to Diversified. The unborrowed portion of the agreement is
also used to support Diversified's commercial paper program. A combined
maximum of $300 million of borrowings under the agreement and commercial
paper program may be outstanding at any one time. Interest rates and
maturities are set at the time of borrowing for direct borrowings under
the agreement and for issuances of commercial paper. The interest rate
options are based upon quoted market rates and the maturities are less
than one year. At March 31, 1997, $28 million was borrowed under this
facility, with interest rates ranging from 5.75% to 5.81%, maturing in
the second quarter of 1997. Diversified had $149.8 million of commercial
paper outstanding at March 31, 1997, with interest rates ranging from
5.47% to 5.56% and maturity dates in the second quarter of 1997.
Diversified intends to continue borrowing under the renewal options of
the facility and no conditions exist at March 31, 1997, that would
prevent such borrowings. Accordingly, this debt is classified as long-
term in the Consolidated Balance Sheets.
(b) Short-Term Debt -
At March 31, 1997, the Company had bank lines of credit aggregating
$146.1 million. Utilities was using $126 million to support commercial
paper (weighted average interest rate of 5.38%) and $11.1 million to
support certain pollution control obligations. Commitment fees are paid
to maintain these lines and there are no conditions which restrict the
unused lines of credit. 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, 1997, there were
no borrowings outstanding under this facility.
(7) CONTINGENCIES:
(a) Environmental Liabilities -
The Company has recorded environmental liabilities of approximately
$53 million in its Consolidated Balance Sheets at March 31, 1997. The
Company's significant environmental liabilities are discussed below.
Former Manufactured Gas Plant (FMGP) Sites
Utilities has been named as a Potentially Responsible Party (PRP)
by various federal and state environmental agencies for 28 FMGP sites,
but believes it is not responsible for two of these sites based on
extensive reviews of the ownership records and historical information
available for the two sites. Utilities has notified the appropriate
regulatory agency that it believes it does not have any responsibility
as relates to these two sites, but no response has been received from
the agency on this issue. Utilities is also aware of six other sites
that it may have owned or operated in the past and for which, as a
result, it may be designated as a PRP in the future in the event that
environmental concerns arise at these sites. Utilities is working
pursuant to the requirements of the various agencies to investigate,
mitigate, prevent and remediate, where necessary, damage to property,
including damage to natural resources, at and around the sites in order
to protect public health and the environment. Utilities believes it has
completed the remediation of ten sites although it is in the process of
obtaining final approval from the applicable environmental agencies on
this issue for each site. Utilities is in various stages of the
investigation and/or remediation processes for the remaining 16 sites
and estimates the range of additional costs to be incurred for
investigation, remediation and monitoring of the sites to be
approximately $23 million to $54 million.
Utilities has recorded environmental liabilities related to the
FMGP sites of approximately $35 million (including $4.7 million as
current liabilities) at March 31, 1997. These amounts are based upon
Utilities' best current estimate of the amount to be incurred for
investigation, remediation and monitoring costs for those sites where
the investigation process has been or is substantially completed, and
the minimum of the estimated cost range for those sites where the
investigation is in its earlier stages. 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.
Regulatory assets of approximately $35 million, which reflect the future
recovery that is being provided through Utilities' rates, have been
recorded in the Consolidated Balance Sheets. Considering the current
rate treatment allowed by the IUB, management believes that the clean-up
costs incurred by Utilities for these FMGP sites will not have a
material adverse effect on its financial position or results of
operations.
In April 1996, Utilities filed a lawsuit against certain of its
insurance carriers seeking reimbursement for investigation, mitigation,
prevention, remediation and monitoring costs associated with the FMGP
sites. Settlement discussions are proceeding between Utilities and its
insurance carriers regarding the recovery of these FMGP-related costs.
Settlement has been reached with four carriers and an agreement in
principle has been reached with two other carriers thus far. Amounts
received from insurance carriers are being deferred pending a
determination of the regulatory treatment of such recoveries.
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 Duane Arnold Energy Center
(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, $9.9
million payable through 2007, has been recorded as a liability in the
Consolidated Balance Sheets, including $0.9 million included in "Current
liabilities - Environmental liabilities," with a related regulatory
asset for the unrecovered amount.
Oil and Gas Properties Dismantlement and Abandonment Costs
Whiting Petroleum Corporation (Whiting), a wholly owned subsidiary
under Diversified, is responsible for certain dismantlement and abandonment
costs related to various off-shore oil and gas properties, the most
significant of which is located off the coast of California. The
Company estimates the total costs for these properties to be
approximately $16 million and the expenditures are not expected to be
incurred for approximately five years. Whiting accrues these costs as
reserves are extracted and such costs are included in "Depreciation and
amortization" in the Consolidated Statements of Income, resulting in a
liability of $7.8 million at March 31, 1997, in the Consolidated Balance
Sheets.
(b) Air Quality Issues -
The Clean Air Act Amendments of 1990 (Act) requires emission
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve
reductions of atmospheric chemicals believed to cause acid rain. The
provisions of the Act are being implemented in two phases; the Phase I
requirements have been met and the Phase II requirements affect eleven
other fossil units beginning in the year 2000. Utilities expects to
meet the requirements of Phase II by switching to lower sulfur fuels,
capital expenditures primarily related to fuel burning equipment and
boiler modifications, and the possible purchase of SO2 allowances.
Utilities estimates capital expenditures at approximately $12.9 million,
including $0.6 million in 1997, in order to meet the acid rain
requirements of the Act.
The acid rain program under the Act also governs SO2 allowances.
An allowance is defined as an authorization for an owner to emit one ton
of SO2 into the atmosphere. Currently, Utilities receives a sufficient
number of allowances annually to offset its emissions of SO2 from its
Phase I units. It is anticipated that in the year 2000, Utilities may
have an insufficient number of allowances annually to offset its
estimated emissions and may have to purchase additional allowances, or
make modifications to the plants or limit operations to reduce
emissions. Utilities is reviewing its options to ensure that it will
have sufficient allowances to offset its emissions in the future.
Utilities believes that the potential cost of ensuring sufficient
allowances will not have a material adverse effect on its financial
position or results of operations.
The Act and other federal laws also require the United States
Environmental Protection Agency (EPA) to study and regulate, if
necessary, additional issues that potentially affect the electric
utility industry, including emissions relating to NOx, ozone transport,
mercury and particulate control; toxic release inventories and
modifications to the PCB rules. In December 1996, the EPA issued
proposed rules that would tighten the National Ambient Air Quality
Standards (NAAQS) for ozone and particulate matter emissions. Also in
the fourth quarter of 1996, the EPA announced that it would issue a
notice in March 1997 requiring the 37 states in the Ozone Transport
Assessment Group (OTAG), which includes Iowa, to implement further
controls on NOx. These proposals could result in the Company having to
incur additional capital expenditures to further reduce its emissions of
NOx, ozone and particulate matter. However, the March 1997 notice has
not yet been issued and it now appears that Iowa may be one of several
states removed from the OTAG process. The current developments in this
process make the impacts of these potential regulations too speculative
to quantify.
In 1995, the EPA published the Sulfur Dioxide Network Design Review
for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-
case modeling method suggests that the Cedar Rapids area could be
classified as "nonattainment" for the NAAQS established for SO2. The
worst-case modeling study suggested that two of Utilities' generating
facilities contribute to the modeled exceedences and recommended that
additional monitors be located near Utilities' sources to assess actual
ambient air quality. As a result of exceedences at a relocated
monitor, the EPA issued a letter in March 1997 to the Iowa Governor's
Office directing the state to develop a plan of action within 120 days.
The Governor of Iowa has since issued a letter to the EPA stating that a
plan of action will be in place with local industry to avoid the area
being declared nonattainment. In this regard, Utilities is entering
into a Consent Agreement with the Iowa Department of Natural Resources.
The intent of this agreement, as currently proposed, is to develop a
three-year plan for a process to explore and implement options to modify
one of Utilities fossil generating facilities to reduce SO2 emissions.
In addition, Utilities is proposing to resolve the remainder of EPA's
nonattainment concerns by modifying the current stacks or installing a
new stack at the other generating facility contributing to the modeled
exceedences, at a potential aggregate capital cost of up to $4.5 million
over the next two years.
Pursuant to a routine internal review of operations, Utilities
determined that certain changes undertaken during the previous three
years at one of its power plants may have required a federal Prevention
of Significant Deterioration (PSD) permit. Utilities initiated
discussions with its regulators on the matter, resulting in the
submittal of a PSD permit application in February 1997. Utilities may
be required to accept operational limits or to install additional
controls and may be subject to liability for not having obtained the
permit previously; however, Utilities believes that any likely actions
resulting from this matter will not have a material adverse effect on
its financial position or results of operations.
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS
March 31,
1997 December 31,
ASSETS (in thousands) (Unaudited) 1996
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,015,838 $ 2,007,839
Gas 176,439 175,472
Other 132,421 126,850
2,324,698 2,310,161
Less - Accumulated depreciation 1,054,799 1,030,390
1,269,899 1,279,771
Leased nuclear fuel, net of amortization 31,468 34,725
Construction work in progress 48,726 43,719
1,350,093 1,358,215
Other, net of accumulated depreciation
and amortization of $1,518 and $1,438,
respectively 5,791 5,872
1,355,884 1,364,087
Current assets:
Cash and temporary cash investments 21,833 11,608
Accounts receivable -
Customer, less allowance for doubtful
accounts of $623 and $546, respectively 25,049 22,461
Other 7,990 11,270
Income tax refunds receivable 2,117 2,664
Production fuel, at average cost 12,042 13,323
Materials and supplies, at average cost 22,888 21,716
Adjustment clause balances 0 10,752
Regulatory assets 32,067 26,539
Prepayments and other 13,558 18,705
137,544 139,038
Investments:
Nuclear decommissioning trust funds 61,516 59,325
Cash surrender value of life insurance
policies 4,457 4,281
Other 88 313
66,061 63,919
Other assets:
Regulatory assets 196,096 201,129
Deferred charges and other 10,808 10,437
206,904 211,566
$ 1,766,393 $ 1,778,610
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
March 31,
CAPITALIZATION AND LIABILITIES 1997 December 31,
(in thousands, except share amounts) (Unaudited) 1996
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 228,959 231,337
Total common equity 541,428 543,806
Cumulative preferred stock - par value $50
per share - authorized 466,406 shares;
366,406 shares outstanding 18,320 18,320
Long-term debt (excluding current portion) 462,389 517,334
1,022,137 1,079,460
Current liabilities:
Short-term borrowings 126,000 135,000
Capital lease obligations 14,047 15,125
Maturities and sinking funds 63,140 8,140
Accounts payable 48,598 76,287
Accrued interest 10,886 8,839
Accrued taxes 68,620 40,953
Accumulated refueling outage provision 3,002 1,316
Adjustment clause balances 3,759 0
Environmental liabilities 5,517 5,517
Other 15,074 17,114
358,643 308,291
Long-term liabilities:
Pension and other benefit obligations 29,383 25,826
Capital lease obligations 17,421 19,600
Environmental liabilities 39,565 40,299
Other 17,402 14,030
103,771 99,755
Deferred credits:
Accumulated deferred income taxes 248,030 256,634
Accumulated deferred investment tax credits 33,812 34,470
281,842 291,104
Commitments and contingencies (Note 7)
$ 1,766,393 $ 1,778,610
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three For the Twelve
Months Ended Months Ended
March 31 March 31
1997 1996 1997 1996
(in thousands)
Operating revenues:
Electric $ 137,286 $ 125,368 $ 586,191 $ 569,262
Gas 81,428 69,241 173,051 153,358
Other 7,684 4,159 23,367 13,135
226,398 198,768 782,609 735,755
Operating expenses:
Fuel for production 29,881 20,292 94,168 97,105
Purchased power 18,673 14,469 92,553 65,029
Gas purchased for resale 60,791 47,369 117,298 100,434
Other operating expenses 36,296 38,358 147,939 149,196
Maintenance 12,806 9,992 48,684 41,899
Depreciation and amortization 23,470 22,024 86,421 80,820
Taxes other than income taxes 11,893 12,060 43,436 44,699
193,810 164,564 630,499 579,182
Operating income 32,588 34,204 152,110 156,573
Interest expense and other:
Interest expense 12,306 10,893 45,128 44,895
Allowance for funds used during construction -394 -690 -1,807 -2,999
Miscellaneous, net -420 -963 5,835 -117
11,492 9,240 49,156 41,779
Income before income taxes 21,096 24,964 102,954 114,794
Federal and state income taxes:
Current 17,082 13,361 39,051 48,812
Deferred -7,179 -1,864 5,093 1,409
Amortization of investment tax credits -658 -661 -2,642 -2,674
9,245 10,836 41,502 47,547
Net income 11,851 14,128 61,452 67,247
Preferred dividend requirements 229 229 914 914
Net income available for common stock $ 11,622 $ 13,899 $ 60,538 $ 66,333
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three For the Twelve
Months Ended Months Ended
March 31 March 31
1997 1996 1997 1996
(in thousands)
Cash flows from operating activities:
Net income $ 11,851 $ 14,128 $ 61,452 $ 67,247
Adjustments to reconcile net income to net cash
flows from operating activities -
Depreciation and amortization 23,470 22,024 86,421 80,820
Amortization of principal under capital
lease obligations 3,369 4,624 15,237 17,781
Deferred taxes and investment tax credits -7,837 -2,525 2,451 -1,265
Refueling outage provision 1,686 2,546 -7,234 3,569
Amortization of other assets 2,952 2,913 9,832 9,247
Other 280 0 545 447
Other changes in assets and liabilities -
Accounts receivable 692 -7,459 -5,049 -17,302
Sale of utility accounts receivable 0 0 7,000 -6,000
Production fuel, materials and supplies 894 902 644 2,612
Accounts payable -25,211 -10,296 -2,033 -10,451
Accrued taxes 28,214 17,070 -90 16,638
Provision for rate refunds 0 166 -272 -7,728
Adjustment clause balances 14,511 3,387 -2,776 3,733
Gas in storage 5,470 7,744 -2,825 2,798
Other 5,266 1,506 11,047 -6,006
Net cash flows from operating activities 65,607 56,730 174,350 156,140
Cash flows from financing activities:
Dividends declared on common stock -14,000 -10,000 -48,000 -40,000
Dividends declared on preferred stock -229 -229 -914 -914
Proceeds from issuance of long-term debt 0 0 60,000 50,000
Reductions in long-term debt 0 0 -15,140 -50,140
Net change in short-term borrowings -9,000 -14,647 30,759 51,697
Principal payments under capital
lease obligations -2,296 -4,913 -16,491 -15,714
Other 0 -86 -333 -1,910
Net cash flows from financing activities -25,525 -29,875 9,881 -6,981
Cash flows from investing activities:
Construction and acquisition expenditures -
Utility -19,758 -23,374 -138,765 -121,833
Other -12 -197 -1,083 -2,965
Deferred energy efficiency expenditures -4,014 -3,667 -17,204 -18,159
Nuclear decommissioning trust funds -1,502 -1,502 -6,008 -6,219
Other -4,571 -415 228 -2,039
Net cash flows from investing activities -29,857 -29,155 -162,832 -151,215
Net increase (decrease) in cash and temporary
cash investments 10,225 -2,300 21,399 -2,056
Cash and temporary cash investments at
beginning of period 11,608 2,734 434 2,490
Cash and temporary cash investments at end
of period $ 21,833 $ 434 $ 21,833 $ 434
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 9,777 $ 8,530 $ 43,318 $ 44,845
Income taxes $ -546 $ 7,138 $ 37,699 $ 33,371
Noncash investing and financing activities -
Capital lease obligations incurred $ 112 $ 2,604 $ 11,790 $ 4,405
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Except as modified below, the IES Industries Inc. (Industries)
Notes to Consolidated Financial Statements are incorporated by reference
insofar as they relate to IES Utilities Inc. (Utilities). Industries'
Note 5 does not relate to Utilities and, therefore, is not incorporated
by reference.
(1) GENERAL:
The interim Consolidated Financial Statements have been prepared by
IES Utilities Inc. (Utilities) and its consolidated subsidiaries,
without audit, pursuant to the rules and regulations of the United
States Securities and Exchange Commission (SEC). Utilities' only wholly-
owned subsidiary is IES Ventures Inc. (Ventures), which is a holding
company for unregulated investments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION
IES Industries Inc.'s Consolidated Financial Statements include the
accounts of IES Industries Inc. (Industries) and its consolidated
subsidiaries (collectively the Company). Industries' wholly-owned
subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc.
(Diversified). The information presented in this management's
discussion and analysis addresses the financial statements of Industries
and Utilities as presented in this joint filing. Information related to
Utilities also relates to Industries' Consolidated Financial Statements.
Information related to Diversified does not pertain to the discussion of
the financial condition and results of operations of Utilities. The
references to various Notes to Consolidated Financial Statements are all
to Industries' Notes to Consolidated Financial Statements.
COMPETITION
Electric energy generation, transmission and distribution, are in a
period of fundamental change in the manner in which customers obtain,
and energy suppliers provide, energy services. As legislative,
regulatory, economic and technological changes occur, electric utilities
are faced with increasing pressure to become more competitive. Such
competitive pressures could result in loss of customers and an
incurrence of stranded costs (i.e., the cost of assets rendered
unrecoverable as the result of competitive pricing). To the extent
stranded costs cannot be recovered from customers, they would be borne
by security holders.
The National Energy Policy Act of 1992 addresses several matters
designed to promote competition in the electric wholesale power
generation market. In 1996, the Federal Energy Regulatory Commission
(FERC) issued final rules (FERC Orders 888 and 889) requiring electric
utilities to open their transmission lines to other wholesale buyers and
sellers of electricity. The rules became effective in July 1996.
Utilities filed conforming pro-forma open access transmission tariffs
with the FERC which became effective in October 1995. In response to
FERC Order 888, Utilities filed its final pro-forma tariffs with FERC in
July 1996. The non-rate provisions of the tariffs were approved in
November 1996. FERC has not yet ruled on the rate provisions of the
tariffs. The geographic position of Utilities' transmission system
could provide revenue opportunities in the open access environment.
Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary
under Diversified, received approval in the 1995 FERC proceeding to
market electric power at market based rates. The Company cannot predict
the long-term consequences of these rules on its results of operations
or financial condition.
FERC does not have jurisdiction over retail distribution, and thus
the final FERC rules do not provide for the recovery of stranded costs
resulting from retail competition. The various states retain
jurisdiction over the question of whether to permit retail competition,
the terms of such retail competition and the recovery of any portion of
stranded costs that are ultimately determined by FERC and the states to
have resulted from retail competition.
The Iowa Utilities Board (IUB) initiated a Notice of Inquiry
(Docket No. NOI-95-1) in early 1995 on the subject of "Emerging
Competition in the Electric Utility Industry" to address all forms of
competition in the electric utility industry and to gather information
and perspectives on electric competition from all persons or entities
with an interest or stake in the issues. In January 1996, the IUB
created its own timeline for evaluating industry restructuring in Iowa.
Included in the IUB's process was the creation of a 22-member advisory
panel, of which Utilities is a member. The IUB conducted public
information meetings around the State of Iowa. The Staff's report in
this docket was accepted by the IUB, finding, in part, that there is no
compelling reason to move quickly into restructuring the electric
utility industry in Iowa, based upon the current level of relative
prices. However, they will continue the analysis and debate on
restructuring and retail competition in Iowa.
As part of Utilities' strategy for the emerging and competitive
power markets, Utilities, Interstate Power Company (IPC) and Wisconsin
Power and Light Company (WP&L) (the utility subsidiary of WPL Holdings,
Inc. (WPLH)), and a number of other utilities have proposed the creation
of an independent system operator (ISO) for the companies' power
transmission grid. The companies would retain ownership and control of
the facilities, but the ISO would set rates for access and assure fair
treatment for all companies seeking access. The proposal requires
approval from state regulators and the FERC. Various other proposals
for ISO's have been made by other companies, and Utilities is monitoring
all such proposals. Membership in an ISO could become a condition of
merger approval by the various regulatory bodies.
Utilities is subject to the provisions of Statement of Financial
Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). If a portion of Utilities' operations
become no longer subject to the provisions of SFAS 71, as a result of
competitive restructurings or otherwise, a write-down of related
regulatory assets would be required, unless some form of transition cost
recovery is established by the appropriate regulatory body which would
meet the requirements under generally accepted accounting principles for
continued accounting as regulatory assets during such recovery period.
In addition, the Company would be required to determine any impairment
to other assets and write-down such assets to their fair value.
Utilities believes that it still meets the requirements of SFAS 71.
The Company cannot predict the long-term consequences of these
competitive issues on its results of operations or financial condition.
The Company's strategy for dealing with these emerging issues includes
seeking growth opportunities, continuing to offer quality customer
service, ongoing cost reductions and productivity enhancements, the
major objective of which is to allow Utilities to better prepare for a
competitive, deregulated electric utility industry. In this connection,
Utilities is in the final stages of a significant process improvement
program to improve its service levels, reduce its cost structure and
become more market-focused and customer oriented. (The Company's
continuous improvement efforts, in general, will be an ongoing effort,
however).
PROPOSED MERGER OF THE COMPANY
Industries, WPLH and IPC have entered into an Agreement and Plan of
Merger, as amended, dated November 10, 1995, which provides for the
combination of all three companies. The new company will be named
Interstate Energy Corporation (IEC).
WPLH is a holding company headquartered in Madison, Wisconsin, and
is the parent company of WP&L and Heartland Development Corporation
(HDC). WP&L supplies electric and gas service to approximately 385,000
and 150,000 customers, respectively, in south and central Wisconsin.
HDC and its principal subsidiaries are engaged in businesses in three
major areas: environmental engineering and consulting, affordable
housing and energy services. IPC, an operating public utility
headquartered in Dubuque, Iowa, supplies electric and gas service to
approximately 165,000 and 49,000 customers, respectively, in northeast
Iowa, northwest Illinois and southern Minnesota.
The proposed merger, which will be accounted for as a pooling of
interests, was approved by the respective shareowners on September 5,
1996. The merger is conditioned on the receipt of approvals of several
federal and state agencies. Updates to the status of these approvals
are as follows (for additional information regarding the merger please
refer to the Company's 1996 Annual Report on Form 10-K):
The FERC issued an order on January 15, 1997, finding no
substantial market-power concerns with the merger. Some limited issues
were set for hearings which began on April 23, 1997 and ended on May 2,
1997. A final decision is expected in the third or fourth quarter of
1997.
On May 7, 1997, the Illinois Commerce Commission issued and order
approving the proposed merger.
On March 24, 1997, the Minnesota Public Utilities Commission issued
an order approving the merger without hearings, subject to a number of
technical conditions which the parties are willing to meet. Included is
a 4-year rate freeze for IEC's Minnesota customers.
A hearing regarding the merger is expected to begin July 14, 1997,
before the Iowa Utilities Board.
On May 7, 1997, WP&L filed testimony with the Public Service
Commission of Wisconsin proposing a retail electric, gas and water rate
freeze from the date of the merger approval through calendar year 2000.
The companies expect to receive all necessary regulatory approvals
relating to the merger by the third or fourth quarter of 1997. Refer to
Note 3(a) of the Notes to Consolidated Financial Statements for a
discussion of merger-related retail and wholesale price proposals that
Utilities has announced.
RESULTS OF OPERATIONS OF THE COMPANY
The following discussion analyzes significant changes in the
components of net income and financial condition from the prior periods
for the Company.
The Company's net income decreased ($1.8) million and ($12.4)
million during the three and twelve month periods, respectively.
Earnings per average common share decreased ($0.07) and ($0.46) for the
respective periods. Utilities' net income available for common stock
decreased ($2.3) million and ($5.8) million during the three and twelve
month periods, respectively. The impact of weather on Utilities'
electric and gas sales contributed significantly to the decrease in
earnings for both periods. Weather conditions in the first quarter of
1997 were milder than normal and weather conditions in the first quarter
of 1996 were colder than normal. In addition, the twelve month periods
were impacted by cooler weather conditions during the summer of 1996
than the summer of 1995. Accordingly, in comparing the three and twelve
month periods, the Company estimates that weather impacted earnings by
approximately ($0.06) per share and ($0.28) per share, respectively.
The decrease in earnings for the twelve month period was also impacted
by costs incurred relating to the successful defense of the hostile
takeover attempt mounted by MidAmerican Energy Company (MAEC) in the
third quarter of 1996 and a higher effective income tax rate. The
Company estimates that the cost of the hostile takeover defense reduced
earnings for the twelve month period by ($0.15) per share. Increased
operating expenses and interest expense also contributed to the earnings
decrease for both periods. Increased electric and steam sales to
industrial customers at Utilities and increased earnings at the
Company's oil and gas subsidiary, Whiting Petroleum Corporation
(Whiting), partially offset these items each period.
The Company's operating income decreased ($0.9) million and ($3.2)
million during the three and twelve month periods, respectively, while
Utilities' operating income decreased ($1.6) million and ($4.5) million
during the same periods.
Electric Operations
Electric margins and Kwh sales for Utilities for the three months ended
March 31 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 52,816 $ 49,852 691,010 709,412
General service 23,820 22,276 310,588 314,491
Large general service 51,100 41,598 1,411,096 1,275,964
Sales for resale and other 7,677 6,961 143,143 149,979
Total, excluding off-
system sales 135,413 120,687 2,555,837 2,449,846
Off-system sales 1,873 4,681 46,895 256,557
Total 137,286 125,368 2,602,732 2,706,403
Fuel for production
(excluding steam) 24,893 18,163
Purchased power 18,673 14,469
Margin $ 93,720 $ 92,736
The electric margin increased $1.0 million during the three month
period primarily due to higher large general service Kwh sales relating
to continuing industrial growth in Utilities' service territory. This
increase was partially offset by lower Kwh sales to residential and
rural and general service customers, largely due to the impact of
weather. Under historically normal weather conditions, total Kwh sales
(excluding off-system sales) for the three month period would have
increased 5.6%, as compared to the actual increase of 4.3%.
Electric margins and Kwh sales for Utilities for the twelve months ended
March 31 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 215,763 $ 219,683 2,615,302 2,720,333
General service 99,741 101,672 1,227,212 1,256,724
Large general service 222,724 204,130 5,635,739 5,350,033
Sales for resale and other 31,281 25,327 580,942 586,996
Total, excluding off-
system sales 569,509 550,812 10,059,195 9,914,086
Off-system sales 16,682 18,450 1,021,636 1,084,190
Total 586,191 569,262 11,080,831 10,998,276
Fuel for production
(excluding steam) 81,338 90,680
Purchased power 92,553 65,029
Margin $ 412,300 $ 413,553
The electric margin decreased ($1.3) million during the twelve
month period primarily due to lower Kwh sales to residential and rural
and general service customers and a true-up adjustment to unbilled sales
recorded in 1995. In addition to the weather conditions for the three
month period mentioned previously, the twelve month period Kwh sales for
residential and rural and general service customers were also impacted
by cooler weather conditions during the summer of 1996 as compared to
the summer of 1995. These decreases were partially offset by continued
large general service Kwh sales growth and lower purchased power
capacity costs.
Under historically normal weather conditions, total sales
(excluding off-system sales) for the twelve month period would have
increased 4.1%, as compared to the actual increase of 1.5%.
Refer to Notes 3(a) and 3(b) of the Notes to Consolidated Financial
Statements for a discussion of merger-related retail and wholesale
electric price proposals that Utilities has announced and the energy
efficiency cost recoveries, respectively.
Utilities' electric tariffs include energy adjustment clauses (EAC)
that are designed to currently recover the costs of fuel and the energy
portion of purchased power billings.
Gas Operations
Gas margins and dekatherm (Dth) sales for Utilities and IEA for the
three months ended March 31 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 50,587 $ 44,428 7,638 8,511
Commercial 25,575 21,186 4,333 4,762
Industrial 4,240 2,807 835 841
Transportation and
other 1,026 820 2,764 2,826
Total Utilities 81,428 69,241 15,570 16,940
IEA 2,678 20,783 975 8,487
Total 84,106 90,024 16,545 25,427
Gas purchased for resale 64,498 67,437
Margin $ 19,608 $ 22,587
Total gas margin decreased ($3.0) million during the three month
period due to lower gas margins at both Utilities and IEA. The decrease
in Utilities' margin was primarily due to lower Dth sales, resulting
from the milder weather conditions in 1997. Under historically normal
weather conditions, Utilities' gas sales and transported volumes would
have decreased (2.8%) during the three month period, as compared to the
actual decrease of (8.1%).
IEA's reported Dth gas sales were significantly lower as a result
of IEA contributing substantially all of its gas marketing business to a
joint venture, effective January 1, 1997, in exchange for a partial
interest in the joint venture. The investment in the joint venture is
accounted for under the equity accounting method and IEA's allocated
portion of gas revenues and gas expenses resulting from the joint
venture are recorded in "Miscellaneous, net" on Industries' Consolidated
Statements of Income. Fluctuations in gas prices and the
competitiveness of the gas marketing business also contributed to the
lower margin at IEA.
Gas margins and Dth sales for Utilities and IEA for the twelve months
ended March 31 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 103,866 $ 95,569 16,807 17,595
Commercial 51,356 45,098 9,894 10,168
Industrial 13,689 9,195 3,790 3,076
Transportation and
other 4,140 3,496 10,279 10,908
Total Utilities 173,051 153,358 40,770 41,747
IEA 95,009 62,023 35,542 33,284
Total 268,060 215,381 76,312 75,031
Gas purchased for resale 214,412 159,864
Margin $ 53,648 $ 55,517
Total gas margin decreased ($1.9) million during the twelve month
period due to a lower margin at IEA which was partially offset by an
increased margin at Utilities. While IEA's Dth gas sales increased
during this time period, their margins actually decreased due to
fluctuations in gas prices, the competitiveness of the gas marketing
business and the formation of the joint venture, as discussed above.
The increase in Utilities' margin was primarily due to the impact
of an annual increase of $6.3 million in Utilities' gas rates that was
implemented in the fourth quarter of 1995. This was partially offset by
lower Dth sales, largely due to the milder weather conditions. Under
historically normal weather conditions, Utilities' gas sales and
transported volumes would have decreased (1.0%) during the twelve month
period, as compared to the actual decrease of (2.3%).
Utilities' gas tariffs include purchased gas adjustment clauses
(PGA) that are designed to currently recover the cost of gas sold.
Other Revenues The Company's other revenues increased $8.5 million and
$31.0 million during the three and twelve month periods, respectively
($3.5 million and $10.2 million at Utilities). The increase for both
periods was primarily because of increased steam revenues at Utilities,
increased operating activities at IEA and increased oil and gas revenues
at Whiting. Steam revenues at Utilities increased during both periods
due to an increase in volumes sold resulting from the addition of new
industrial customers. The increase in Whiting revenues during both
periods was primarily due to increases in oil and gas prices.
Operating Expenses The Company's other operating expenses increased
$0.4 million and $9.4 million during the three and twelve month periods,
respectively (($2.1) million and ($1.3) million at Utilities). The
increase for both periods was primarily due to costs relating to the
increased operating activities at IEA and higher information technology
costs. These increases were partially offset by decreases in costs
relating to the Company's process improvement programs and decreased
operating expenses at the Duane Arnold Energy Center (DAEC), Utilities'
nuclear generating facility. Lower operating expenses at Whiting also
partially offset the three month increase. Increases in costs relating
to the pending merger and higher operating expenses at Whiting also
contributed to the twelve month increase.
The Company's maintenance expenses increased $2.7 million and $7.0
million during the three and twelve month periods, respectively ($2.8
million and $6.8 million at Utilities). The increase for both periods
was primarily due to increased maintenance activities at Utilities'
fossil-fueled generating stations. The twelve month increase was
partially offset by lower maintenance expenses at the DAEC.
The Company's depreciation and amortization expense increased $1.4
million and $8.9 million during the three and twelve month periods,
respectively ($1.4 million and $5.6 million at Utilities), primarily
because of increases in utility plant in service. The twelve month
increase was also due to increases in amortization costs relating to the
future dismantlement and abandonment of Whiting's offshore oil and gas
properties. Depreciation and amortization expenses for both periods
include a provision for decommissioning the DAEC, which is collected
through rates. The current annual recovery level is $6.0 million.
During the first quarter of 1996, the Financial Accounting
Standards Board (FASB) issued an Exposure Draft on Accounting for
Liabilities Related to Closure and Removal of Long-Lived Assets which
deals with, among other issues, the accounting for decommissioning
costs. If current electric utility industry accounting practices for
such decommissioning are changed: (1) annual provisions for
decommissioning could increase and (2) the estimated cost for
decommissioning could be recorded as a liability, rather than as
accumulated depreciation, with recognition of an increase in the
recorded amount of the related DAEC plant. 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.
Interest Expense and Other The Company's interest expense increased
$1.9 million and $5.1 million during the three and twelve month periods,
respectively ($1.4 million and $0.2 million at Utilities), primarily
because of increases in the average amount of short-term debt
outstanding at Utilities, the average amount of borrowings under
Diversified's credit facility and a higher amount of long-term debt
outstanding at Utilities. The twelve month increase was partially
offset by lower average interest rates, rate refund interest recorded in
1995 at Utilities and the effects of an interest rate swap agreement at
Diversified.
Miscellaneous, net for the Company reflects a comparative decrease
in income of ($8.3) million during the twelve month period (($6.0)
million at Utilities), primarily due to approximately $7.8 million in
costs incurred relating to the successful defense of the hostile
takeover attempt mounted by MAEC and certain property write-downs at
Diversified. Dividends received from the two New Zealand entities in
which the company has equity investments partially offset these items.
Income Taxes The Company's income tax expense decreased ($2.8) million
and ($5.4) million during the three and twelve month periods,
respectively (($1.6) million and ($6.0) million at Utilities), primarily
due to lower pretax income. Also contributing to the decrease for the
three month period was a reserve recorded in the first quarter of 1996
related to an Internal Revenue Service (IRS) audit for tax years 1991-
1993. The decrease for both periods was partially offset by the
incurrence of certain merger-related expenses which are not tax
deductible. The decrease for the twelve month period was partially
offset due to the recording of additional tax expense for the settlement
of the IRS audit in the fourth quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements are primarily attributable to
Utilities' construction programs, its debt maturities and the level of
Diversified's business opportunities. The Company's pretax ratio of
times interest earned was 2.84 and 3.37 for the twelve months ended
March 31, 1997 and March 31, 1996, respectively. Cash flows from
operating activities for the twelve months ended March 31, 1997 and
March 31, 1996 were $198 million and $190 million, respectively.
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
regulatory recovery of Utilities' costs. See Notes 3 and 7 of the Notes
to Consolidated Financial Statements as well as the Company's 1996
Annual Report on Form 10-K.
Access to the long-term and short-term capital and credit markets,
and costs of external financing, are dependent on the Company's
creditworthiness. The Company's debt ratings are as follows:
Moody's Standard & Poor's
Utilities - Long-term debt A2 A
- Commercial paper P1 A1
Diversified - Commercial paper P2 A2
The Company's liquidity and capital resources will be affected by
environmental, regulatory and competitive issues, including the ultimate
disposition of remediation issues surrounding the Company's
environmental liabilities and the Clean Air Act as amended, as discussed
in Note 7 of the Notes to Consolidated Financial Statements and the
Company's 1996 Annual Report on Form 10-K, and emerging competition in
the electric utility industry as discussed in the Competition section.
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.
At March 31, 1997, Utilities had approximately $63 million of
energy efficiency program costs recorded as regulatory assets. See Note
3(b) of the Notes to Consolidated Financial Statements for a discussion
of the timing of the filings for the recovery of these costs under IUB
rules and Iowa statutory changes recently enacted relating to these
programs.
At March 31, 1997, the Company had a $20.0 million investment in
Class A common stock of McLeod, Inc. (McLeod) and a $9.2 million
investment in Class B common stock as well as vested options that, if
exercised, would represent an additional investment of approximately
$2.3 million. McLeod provides local, long-distance and other
telecommunications services. See Note 5(b) of the Notes to Consolidated
Financial Statements for further information on the Company's investment
in McLeod.
The Company has financial guarantees amounting to $23.0 million
outstanding at March 31, 1997, which are not reflected in the
consolidated financial statements. Such guarantees are generally issued
to support third-party borrowing arrangements and similar transactions.
The Company believes that any possible cash payments associated with
these agreements will not have a material adverse effect on the
financial position or results of operations of the Company.
At March 31, 1997, the Company had approximately $45 million of
investments in foreign entities (see Note 5(a) of the Notes to
Consolidated Financial Statements for a further discussion). In
addition, the Company also continues to explore other international
investment opportunities. Such investments may carry a higher level of
risk than the Company's traditional utility investments or Diversified's
domestic investments. Such risks could include foreign government
actions, foreign economic and currency risks and others. The Company
may also incur business development expenses for potential projects
pursued by the Company that may never materialize. The Company is
striving to select international investments where these risks are both
understood and minimized.
The Resale Power Group of Iowa (RPGI), consisting of virtually all
of Utilities' wholesale customers, has notified Utilities that it will
not purchase its power supply from Utilities after December 31, 1998.
It is possible that certain RPGI customers will drop out of RPGI in
order to remain as Utilities' customers; to-date, two customers have
signed contracts to remain with Utilities. All RPGI customers will
continue to purchase transmission services from Utilities after December
31, 1998. While the Company cannot determine the outcome of this issue
at this time, the result will not have a material adverse effect on its
financial position or results of operations given 1) Utilities'
wholesale sales only account for approximately 5% of Utilities' total
electric sales, excluding off-system sales; 2) Utilities currently has
to supplement its generating capability with purchased power to meet its
sales load; 3) Utilities' annual electric sales growth rate continues to
be strong; and 4) Utilities will continue to realize transmission
revenues from such customers.
Under provisions of the Merger Agreement, there are restrictions on
the amount of common stock and long-term debt the Company can issue
pending the merger. The Company does not expect the restrictions to
have a material effect on its ability to meet its future capital
requirements.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program anticipates
expenditures of approximately $225 million for 1997, of which
approximately $147 million represents expenditures at Utilities and
approximately $78 million represents expenditures at Diversified. Of
the $147 million of Utilities' expenditures, 39% represents expenditures
for electric transmission and distribution facilities, 21% represents
electric generation expenditures, 21% represents information technology
expenditures and 5% represents gas expenditures. The remaining 14%
represents miscellaneous electric, steam and general expenditures.
Diversified's anticipated expenditures include approximately $75 million
for domestic and international energy-related construction and
acquisition expenditures. The Company had construction and acquisition
expenditures of approximately $33 million for the three months ended
March 31, 1997, including approximately $20 million of utility
expenditures and $13 million of non-utility expenditures.
The Company's levels of construction and acquisition expenditures
are projected to be $208 million in 1998, $212 million in 1999,
$182 million in 2000 and $198 million in 2001. It is estimated that
virtually all of Utilities' construction and acquisition expenditures
will be provided by cash from operating activities (after payment of
dividends) for the five-year period 1997-2001. Financing plans for
Diversified's construction and acquisition program will vary, depending
primarily on the level of energy-related acquisitions.
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 and business
combination 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.
Under provisions of the Merger Agreement, there are restrictions on
the amount of construction and acquisition expenditures the Company can
make pending the merger. The Company does not expect the restrictions
to have a material effect on its ability to implement its anticipated
construction and acquisition program.
LONG-TERM FINANCING
Other than Utilities' periodic sinking fund requirements, which
Utilities intends to meet by pledging additional property, the following
long-term debt (excluding the $55 million of First Mortgage Bonds
retired prior to maturity in the second quarter of 1997) will mature
prior to December 31, 2001:
(in millions)
Utilities $ 192.2
Diversified's credit facility 177.8
Other subsidiaries' debt 11.1
$ 381.1
The Company intends to refinance the majority of the debt
maturities with long-term securities.
In the second quarter of 1997, Utilities issued $55 million of
Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to
have their Collateral Trust Bonds redeemed, in whole but not in part, on
May 1, 2002, at 100% of the principal amount thereof, plus accrued
interest. The proceeds from the Collateral Trust Bonds were used to
refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30
million of Series M, 7.625% First Mortgage Bonds and $10 million of
7.375% First Mortgage Bonds.
Utilities 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, 1997,
such restrictions would have allowed Utilities to issue at least
$241 million of additional First Mortgage Bonds.
In order to provide an instrument for the issuance of unsecured
subordinated debt securities, Utilities entered into an Indenture dated
December 1, 1995 (Subordinated Indenture). The Subordinated Indenture
provides for, among other things, the issuance of unsecured subordinated
debt securities. Any debt securities issued under the Subordinated
Indenture are subordinate to all senior indebtedness of Utilities,
including First Mortgage Bonds and Collateral Trust Bonds.
Utilities has received authority from the FERC and the Securities
and Exchange Commission (SEC) to issue up to $250 million of long-term
debt, and has $135 million of remaining authority under the current FERC
docket through April 1998, and $85 million of remaining authority under
the current SEC shelf registration.
Diversified has a variable rate credit facility that extends
through November 20, 1999, with two one-year extensions potentially
available to Diversified. Refer to Note 6(a) of the Notes to
Consolidated Financial Statements for a further discussion of this
credit facility.
The Articles of Incorporation of Utilities authorize and limit the
aggregate amount of additional shares of Cumulative Preference Stock and
Cumulative Preferred Stock that may be issued. At March 31, 1997,
Utilities could have issued an additional 700,000 shares of Cumulative
Preference Stock and 100,000 additional shares of Cumulative Preferred
Stock. In addition, Industries had 5,000,000 shares of Cumulative
Preferred Stock, no par value, authorized for issuance, none of which
were outstanding at March 31, 1997.
The Company's capitalization ratios at March 31, 1997 were as
follows:
Long-term debt 52%
Preferred stock 1
Common equity 47
100%
The ratios include $55 million of long-term debt due in less than
one-year because the Company refinanced the debt with long-term
securities in the second quarter of 1997.
Under provisions of the Merger Agreement, there are restrictions on
the amount of common stock and long-term debt the Company can issue
pending the merger. The Company does not expect the restrictions to
have a material effect on its ability to meet its future capital
requirements.
SHORT-TERM FINANCING
For interim financing, Utilities is authorized by the FERC to
issue, through 1998, 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, 1997, Utilities had
outstanding short-term borrowings of $126 million.
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, 1997, Utilities had sold $65 million under the
agreement.
At March 31, 1997, the Company had bank lines of credit aggregating
$146.1 million. Utilities was using $126 million to support commercial
paper (weighted average interest rate of 5.38%) and $11.1 million to
support certain pollution control obligations. Commitment fees are paid
to maintain these lines and there are no conditions which restrict the
unused lines of credit. 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, 1997, there were
no borrowings outstanding under this facility.
ENVIRONMENTAL MATTERS
Utilities has been named as a Potentially Responsible Party (PRP)
by various federal and state environmental agencies for 28 Former
Manufactured Gas Plant (FMGP) sites. Utilities has recorded
environmental liabilities related to the FMGP sites of approximately $35
million (including $4.7 million as current liabilities) at March 31,
1997. Regulatory assets of approximately $35 million, which reflect the
future recovery that is being provided through Utilities' rates, have
been recorded in the Consolidated Balance Sheets. Considering the
current rate treatment allowed by the IUB, management believes that the
clean-up costs incurred by Utilities for these FMGP sites will not have
a material adverse effect on its financial position or results of
operations. Refer to Note 7(a) of the Notes to Consolidated Financial
Statements for a further discussion, including a discussion of a lawsuit
filed by Utilities seeking recovery of FMGP-related costs from its
insurance carriers.
The Clean Air Act Amendments of 1990 (Act) requires emission
reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve
reductions of atmospheric chemicals believed to cause acid rain. The
acid rain program under the Act also governs SO2 allowances. The Act
and other federal laws also require the United States Environmental
Protection Agency (EPA) to study and regulate, if necessary, additional
issues that potentially affect the electric utility industry, including
emissions relating to NOx, ozone transport, mercury and particulate
control; toxic release inventories and modifications to the PCB rules.
In 1995, the EPA published the Sulfur Dioxide Network Design Review
for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-
case modeling method suggests that the Cedar Rapids area could be
classified as "nonattainment" for the National Ambient Air Quality
Standards established for SO2. The worst-case modeling study suggested
that two of Utilities' generating facilities contribute to the modeled
exceedences.
Pursuant to a routine review of operations, Utilities determined
that certain changes undertaken during the previous three years at one
of its power plants may have required a federal Prevention of
Significant Deterioration (PSD) permit. Refer to Note 7(b) of the Notes
to Consolidated Financial Statements for a further discussion of the
above mentioned air quality issues.
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." Refer to Note 7(a) of the
Notes to Consolidated Financial Statements for a further discussion.
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 the Nuclear Waste Fund
(NWF) held by the U.S. Treasury, however, Utilities has since been
formally notified by the DOE that they anticipate being unable to begin
acceptance of spent nuclear fuel by January 31, 1998. Furthermore, the
DOE has experienced significant delays in its efforts and material
acceptance is now expected to occur no earlier than 2010 with the
possibility of further delay being likely. Utilities 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 2001. Utilities is
aggressively reviewing options for expanding on-site storage and
according to their current analysis, construction of an on-site storage
facility with dry cask modular capability is the most favorable option.
Utilities continues to evaluate these and other courses of action to
protect the interests of its customers and its rights under the DOE
contract. Utilities is also evaluating legislation proposed to the
Congress addressing this issue. In July 1996, the IUB initiated a
Notice of Inquiry (NOI) on spent nuclear fuel. In April 1997, IUB staff
recommendations were accepted by the IUB and concluded that a state
mandated escrowing of utility payments was inappropriate. The IUB also
endorsed the feasibility of Utilities' plans for additional spent fuel
storage in the state of Iowa. These recommendations are consistent with
Utilities' comments in the NOI proceeding.
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, 1997, Utilities had prepaid costs of approximately
$1.1 million to the Compact for the building of such a facility. A
Compact disposal facility is anticipated to be in operation in
approximately ten years after approval of new enabling legislation by
the member states. Such legislation was approved in 1996 by all six
states that are members of the Compact. Final approval by the U.S.
Congress is now required. On-site storage capability currently exists
for low-level radioactive waste expected to be generated until the
Compact facility is able to accept waste materials. In addition, the
Barnwell, South Carolina disposal facility has reopened for an
indefinite time period and Utilities currently intends to ship to this
facility the waste it produces as long as the Barnwell site remains
open, thereby minimizing the amount of low-level waste stored on-site.
Whiting is responsible for certain dismantlement and abandonment
costs related to various off-shore oil and gas properties. Refer to
Note 7(a) of the Notes to Consolidated Financial Statements for a
further discussion.
OTHER MATTERS
Labor Issues Utilities has six collective bargaining agreements,
covering approximately 54% of its workforce. None of the agreements
expires in 1997.
Financial Derivatives The Company has a policy that financial
derivatives are to be used only to mitigate business risks and not for
speculative purposes. Derivatives have been used by the Company on a
very limited basis. At March 31, 1997, the only material financial
derivatives outstanding for the Company were an interest rate swap
agreement at Diversified and gas futures contracts at IEA.
Accounting Pronouncements SFAS 128, Earnings Per Share, was issued by
the FASB in the first quarter of 1997. SFAS 128 deals with, among other
issues, the computation and disclosure of earnings per share amounts
when a company has stock options, warrants and/or
convertible securities outstanding. SFAS 128 is effective for periods
ending after December 15, 1997, and is not expected to have a
material impact upon adoption.
Inflation The Company does not expect the effects of inflation at
current levels to have a significant effect on its financial position or
results of operations.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On April 30, 1996, Utilities filed suit, IES Utilities Inc. v. Home
Ins. Co., et al., No. 4-96-CV-10343 (S.D. Iowa filed Apr. 30, 1996),
against various insurers who had sold comprehensive general liability
policies to Iowa Southern Utilities Company (ISU) and Iowa Electric
Light and Power Company (IE) (Utilities was formed as the result of a
merger of ISU and IE). The suit seeks judicial determination of the
respective rights of the parties, a judgment that each defendant is
obligated under its respective insurance policies to pay in full all
sums that Utilities has become or may become obligated to pay in
connection with its defense against allegations of liability for
property damage at and around Former Manufactured Gas Plant (FMGP)
sites, and indemnification for all sums that it has or may become
obligated to pay for the investigation, mitigation, prevention,
remediation and monitoring of damage to property, including damage to
natural resources like groundwater, at and around the FMGP sites.
Settlement discussions are proceeding between Utilities and its
insurance carriers regarding the recovery of these FMGP-related costs.
Settlement has been reached with four carriers and an agreement in
principle has been reached with two other carriers thus far. Amounts
received from insurance carriers are being deferred pending a
determination of the regulatory treatment of such recoveries.
Industries, Diversified, IES Energy Inc. (a wholly-owned subsidiary
of Diversified), MicroFuel Corporation (the Corporation) now known as
Ely, Inc. in which IES Energy has a 69.40% equity ownership, and other
parties have been sued in Linn County District Court in Cedar Rapids,
Iowa, by Allen C. Wiley. Mr. Wiley claims money damages on various tort
and contract theories arising out of the 1992 sale of the assets of the
Corporation, of which Mr. Wiley was a director and shareholder. All of
the defendants in Mr. Wiley's suit answered the complaint and denied
liability. Industries and Diversified were dismissed from the suit in a
motion for summary judgment. In addition, a grant of summary judgment
has reduced Mr. Wiley's claims against the remaining parties to breach
of fiduciary duty. A separate motion for summary judgment, which was
filed seeking dismissal of the remaining claims against the remaining
parties, was overruled on September 20, 1996, and the trial has been set
for May 1998. All of the defendants are vigorously contesting the
claims.
The Corporation commenced a separate suit to determine the fair
value of Mr. Wiley's shares under Iowa Code section 490. A decision was
issued on August 31, 1994, by the Linn County District Court ruling that
the value of Mr. Wiley's shares was $377,600 based on a 40 cent per
share valuation. The Corporation contended that the value of Mr. Wiley's
shares was 2.5 cents per share. The Decision was appealed to the Iowa
Supreme Court by the Corporation on a number of issues, including the
Corporation's position that the trial court erred as a matter of law in
discounting the testimony of the Corporation's expert witness. The Iowa
Supreme Court assigned the case to the Iowa Court of Appeals. On
February 2, 1996, the Iowa Court of Appeals reversed the District Court
ruling after determining the District Court erred in discounting the
expert testimony. The case was remanded back to the District Court for
consideration of the expert testimony, but with no additional evidence
taken. The District Court re-affirmed its original decision on August
28, 1996, and the Corporation has again appealed to the Iowa Supreme
Court.
On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda)
filed a request with the IUB that the IUB initiate formal complaint
proceedings against Utilities. Lambda alleges that Utilities is
discriminating against it by refusing to enter into contracts with it
for remote displacement service and by favoring IEA, a subsidiary of the
Company, in such matters. On October 17, 1996, Utilities filed a
Response which denied the allegations, and alleged, inter alia, that
Lambda is unlawfully attempting to provide retail electrical services in
Utilities' exclusive service territory. The IUB hearings were held in
March 1997. A decision is expected in the second quarter of 1997.
On October 9, 1996, the Company filed a civil suit in the Iowa
District Court in and for Linn County against Lambda, Robert Latham,
Louie Ervin, and David Charles (collectively the "Defendants", including
three former employees of the Company and/or its subsidiaries) alleging,
inter alia, violations of Iowa's trade secret act and interference with
existing and prospective business advantage. On November 1, 1996, the
Defendants filed their Answer and Counterclaims alleging, inter alia,
violation of Iowa competition law, tortious interference and commercial
disparagement. The Defendants therewith also filed a Third-Party
Petition against Utilities, IEA and Lee Liu, Chairman of the Board &
Chief Executive Officer of Industries and Utilities, alleging, inter
alia, tortious interference and commercial disparagement. On April 9,
1997, Utilities amended its suit to include Central Iowa Power
Cooperative alleging that it, too, inter alia had violated Iowa's trade
secret act, and had tortiously interfered with existing and prospective
business advantage.
Reference is made to Notes 3 and 7 of Industries' Notes to
Consolidated Financial Statements for a discussion of Utilities' rate
proceedings and the Company's environmental matters, respectively, and
Item 2. Management's Discussion and Analysis of the Results of
Operations and Financial Condition - Environmental Matters.
Item 2. Changes in the Rights of the Company's Security Holders.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Results of Votes of Security Holders.
None.
Item 5. Other Information.
(a) IES Utilities Inc. has calculated their 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, 1997 3.09
December 31, 1996 3.23
December 31, 1995 3.04
December 31, 1994 3.18
December 31, 1993 3.41
December 31, 1992 2.49
(b) Leland Cox joined Utilities in April 1997 as Vice President, Sales
and Service.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits -
*4(a) Fifth Supplemental Indenture, dated as of April 1,
1997, supplementing Utilities' Indenture of Mortgage and Deed
of Trust, dated September 1, 1993.
*4(b) Sixty-third Supplemental Indenture, dated as of
April 1, 1997, supplementing Utilities' Indenture of Mortgage
and Deed of Trust, dated August 1, 1940.
*4(c) Commercial Paper Dealer Agreement, dated as of
November 9, 1994, between IES Diversified Inc. and Citicorp
Securities, Inc.
*4(d) First Amendment, dated as of March 24, 1997, to the
Commercial Paper Dealer Agreement, dated as of November 9,
1994, between IES Diversified Inc. and Citicorp Securities,
Inc.
*10(a) Receivables Purchase and Sale Agreement dated as of
June 30, 1989, as Amended and Restated as of February 28,
1997, among IES Utilities Inc. (as Seller) and CIESCO L.P. (as
the Investor) and Citicorp North America, Inc. (as Agent).
*12 Ratio of Earnings to Fixed Charges (IES Utilities Inc.)
*27(a) Financial Data Schedule (IES Industries Inc.)
*27(b) Financial Data Schedule (IES Utilities Inc.)
* Exhibits designated by an asterisk are filed herewith.
(b) Reports on Form 8-K -
IES Industries Inc.
None.
IES Utilities Inc.
Items Reported Financial Statements Date of Report
5 None April 28, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
IES INDUSTRIES INC.
(Registrant)
Date: May 14, 1997 By /s/ Thomas M. Walker
(Signature)
Thomas M. Walker
Executive Vice President &
Chief Financial Officer
By /s/ John E. Ebright
(Signature)
John E. Ebright
Controller & Chief Accounting Officer
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 14, 1997 By /s/ Thomas M. Walker
(Signature)
Thomas M. Walker
Executive Vice President &
Chief Financial Officer
By /s/ John E. Ebright
(Signature)
John E. Ebright
Controller & Chief Accounting Officer