UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 October 31, 1997.
IES Industries Inc. Common Stock, no par value - 30,542,669 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 -
September 30, 1997 and December 31, 1996 ............. 3 - 4
Consolidated Statements of Income -
Three, Nine and Twelve Months Ended
September 30, 1997 and 1996 .......................... 5
Consolidated Statements of Cash Flows -
Three, Nine and Twelve Months Ended
September 30, 1997 and 1996 .......................... 6
Notes to Consolidated Financial Statements ............. 7 - 14
IES Utilities Inc.:
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 ............. 15 - 16
Consolidated Statements of Income -
Three, Nine and Twelve Months Ended
September 30, 1997 and 1996 .......................... 17
Consolidated Statements of Cash Flows -
Three, Nine and Twelve Months Ended
September 30, 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 - 34
Part II. Other Information. ....................................... 35 - 38
Signatures. ....................................................... 39 - 40
PART I - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS
September 30,
1997 December 31,
ASSETS (in thousands) (Unaudited) 1996
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,045,422 $ 2,007,839
Gas 181,995 175,472
Other 131,302 126,850
2,358,719 2,310,161
Less - Accumulated depreciation 1,104,678 1,030,390
1,254,041 1,279,771
Leased nuclear fuel, net of amortization 37,968 34,725
Construction work in progress 61,932 43,719
1,353,941 1,358,215
Other, net of accumulated depreciation
and amortization of $84,253 and
$70,031, respectively 244,964 223,805
1,598,905 1,582,020
Current assets:
Cash and temporary cash investments 23,046 8,675
Accounts receivable -
Customer, less allowance for doubtful
accounts of $909 and $1,087, respectively 26,155 50,821
Other 8,593 12,040
Income tax refunds receivable 11,364 8,890
Production fuel, at average cost 10,801 13,323
Materials and supplies, at average cost 24,181 22,842
Adjustment clause balances 0 10,752
Regulatory assets 36,718 26,539
Prepayments and other 21,148 24,169
162,006 178,051
Investments:
Investment in McLeodUSA Inc. 403,027 29,200
Nuclear decommissioning trust funds 74,455 59,325
Investment in foreign entities 47,726 44,946
Cash surrender value of life
insurance policies 12,251 11,217
Other 7,037 4,903
544,496 149,591
Other assets:
Regulatory assets 191,476 201,129
Deferred charges and other 16,966 14,771
208,442 215,900
$ 2,513,849 $ 2,125,562
IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30,
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 30,467,739 and 30,077,212
shares, respectively $ 419,167 $ 407,635
Retained earnings 223,871 219,246
Unrealized security gains (net of taxes) 218,567 0
Cumulative foreign currency translation
adjustments -19 0
Total common equity 861,586 626,881
Cumulative preferred stock of
IES Utilities Inc. 18,320 18,320
Long-term debt (excluding current portion) 854,468 701,100
1,734,374 1,346,301
Current liabilities:
Short-term borrowings 0 135,000
Capital lease obligations 13,294 15,125
Maturities and sinking funds 493 8,473
Accounts payable 49,442 99,861
Dividends payable 16,619 16,431
Accrued interest 12,206 8,985
Accrued taxes 68,833 43,926
Accumulated refueling outage provision 7,970 1,316
Adjustment clause balances 782 0
Environmental liabilities 5,607 5,679
Other 18,507 22,087
193,753 356,883
Long-term liabilities:
Pension and other benefit obligations 47,331 39,643
Capital lease obligations 24,674 19,600
Environmental liabilities 47,402 47,502
Other 23,909 18,488
143,316 125,233
Deferred credits:
Accumulated deferred income taxes 409,910 262,675
Accumulated deferred investment tax credits 32,496 34,470
442,406 297,145
Commitments and contingencies (Note 7)
$ 2,513,849 $ 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 Nine For the Twelve
Months Ended Months Ended Months Ended
September 30 September 30 September 30
1997 1996 1997 1996 1997 1996
(in thousands, except per share amounts)
Operating revenues:
Electric $ 184,676 $ 173,626 $ 459,653 $ 436,027 $ 597,899 $ 562,996
Gas 15,507 28,461 125,381 161,112 238,247 224,666
Other 33,639 31,820 101,608 90,617 136,651 116,792
233,822 233,907 686,642 687,756 972,797 904,454
Operating expenses:
Fuel for production 27,613 29,148 84,026 72,168 96,437 96,733
Purchased power 18,749 18,655 52,472 55,125 85,697 68,600
Gas purchased for resale 7,795 20,841 88,136 120,091 185,396 166,538
Other operating expenses 59,061 55,554 165,381 160,367 219,772 217,788
Maintenance 13,120 14,091 40,169 40,011 49,159 50,067
Depreciation and amortization 27,664 27,417 84,985 82,025 110,353 105,320
Taxes other than income taxes 12,248 12,500 38,441 38,503 48,109 47,510
166,250 178,206 553,610 568,290 794,923 752,556
Operating income 67,572 55,701 133,032 119,466 177,874 151,898
Interest expense and other:
Interest expense 16,339 13,666 46,777 39,506 62,093 52,511
Allowance for funds used
during construction -784 -761 -1,551 -2,141 -1,512 -2,904
Preferred dividend requirements
of IES Utilities Inc. 229 229 686 686 914 914
Miscellaneous, net -1,929 4,883 -235 2,510 -414 1,132
13,855 18,017 45,677 40,561 61,081 51,653
Income before income taxes 53,717 37,684 87,355 78,905 116,793 100,245
Income taxes:
Current 19,913 14,975 40,906 34,551 44,602 45,048
Deferred 2,716 2,481 -3,988 3,298 4,548 1,008
Amortization of investment
tax credits -658 -661 -1,974 -1,984 -2,635 -2,658
21,971 16,795 34,944 35,865 46,515 43,398
Net income $ 31,746 $ 20,889 $ 52,411 $ 43,040 $ 70,278 $ 56,847
Average number of common
shares outstanding 30,452 29,941 30,321 29,796 30,256 29,716
Earnings per average
common share $ 1.04 $ 0.70 $ 1.73 $ 1.44 $ 2.32 $ 1.91
Dividends declared per
common share $ 0.525 $ 0.525 $ 1.575 $ 1.575 $ 2.10 $ 2.10
The accompanying Notes to Consolidated Financial Statements
are an integral part of these statements.
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three For the Nine For the Twelve
Months Ended Months Ended Months Ended
September 30 September 30 September 30
1997 1996 1997 1996 1997 1996
(in thousands)
Cash flows from operating activities:
Net income $ 31,746 $ 20,889 $ 52,411 $ 43,040 $ 70,278 $ 56,847
Adjustments to reconcile net income to
net cash flows from operating
activities -
Depreciation and amortization 27,664 27,417 84,985 82,025 110,353 105,320
Amortization of principal under
capital lease obligations 3,559 4,945 10,668 14,195 12,964 19,108
Deferred taxes and investment
tax credits 2,058 1,820 -5,962 1,314 1,913 -1,650
Refueling outage provision 2,464 1,831 6,654 6,751 -6,471 9,199
Amortization of other assets 4,248 2,041 9,474 7,191 12,071 9,845
Other -274 -751 2,779 542 3,092 262
Other changes in assets and liabilities -
Accounts receivable -2,571 9,118 28,113 11,418 -5,459 -246
Sale of utility accounts receivable 0 0 0 7,000 0 0
Production fuel, materials and
supplies 2,942 -957 1,882 -473 3,005 3,445
Accounts payable -8,530 -1,840 -47,740 -12,078 -14,728 2,527
Accrued taxes 29,306 21,164 22,433 8,777 -4,309 -10,860
Provision for rate refunds 0 -43 0 -106 0 -12,966
Adjustment clause balances -3,533 -3,559 11,534 -3,898 1,532 -1,220
Gas in storage -5,413 -8,610 3,409 635 1,619 -1,523
Other -1,804 -2,744 3,662 1,980 13,485 3,431
Net cash flows from operating
activities 81,862 70,721 184,302 168,313 199,345 181,519
Cash flows from financing activities:
Dividends declared on common stock -15,994 -15,725 -47,786 -46,950 -63,574 -62,438
Proceeds from issuance of common
stock 3,225 3,381 9,851 10,780 13,235 14,901
Purchase of treasury stock 0 0 -83 -269 -83 -269
Net change in IES Diversified Inc.
credit facility 388 -2,954 19,160 8,016 59,004 44,261
Proceeds from issuance of other
long-term debt 135,000 60,000 190,000 60,000 190,000 110,003
Reductions in other long-term debt -84 -15,078 -63,358 -15,374 -63,438 -65,447
Net change in short-term borrowings -150,000 -47,000 -135,000 -23,000 -78,000 29,000
Principal payments under capital
lease obligations -3,740 -4,626 -9,405 -14,162 -14,351 -19,096
Other -668 -112 -633 -203 -888 -1,817
Net cash flows from financing
activities -31,873 -22,114 -37,254 -21,162 41,905 49,098
Cash flows from investing activities:
Construction and acquisition
expenditures -
Utility -26,271 -39,701 -74,502 -97,043 -119,717 -133,483
Other -9,156 -11,859 -44,826 -45,665 -95,281 -79,683
Oil and gas properties held for
resale 0 0 0 9,843 0 0
Deferred energy efficiency
expenditures -920 -3,887 -8,450 -12,643 -12,664 -17,708
Nuclear decommissioning trust funds -1,502 -1,502 -4,506 -4,506 -6,008 -6,008
Proceeds from disposition of assets 2,107 1,984 3,889 3,840 8,344 8,153
Other -133 204 -4,282 447 -1,244 2,051
Net cash flows from investing
activities -35,875 -54,761 -132,677 -145,727 -226,570 -226,678
Net increase (decrease) in cash
and temporary cash investments 14,114 -6,154 14,371 1,424 14,680 3,939
Cash and temporary cash investments
at beginning of period 8,932 14,520 8,675 6,942 8,366 4,427
Cash and temporary cash investments
at end of period $ 23,046 $ 8,366 $ 23,046 $ 8,366 $ 23,046 $ 8,366
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 12,041 $ 12,899 $ 41,679 $ 36,435 $ 58,290 $ 52,480
Income taxes $ 103 $ 3,568 $ 29,300 $ 36,316 $ 47,864 $ 53,206
Noncash investing and financing
activities -
Capital lease obligations incurred $ 13,789 $ 939 $ 13,912 $ 13,785 $ 14,408 $ 13,896
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 September 30, 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, results of operations from potential
domestic and international investments, the operating of a nuclear
facility and changes in the rate of inflation.
IES INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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 the Federal Energy Regulatory
Commission (FERC) and the SEC. See Management's Discussion and Analysis
of Financial Condition and Results of Operations for a further
discussion.
(3) RATE MATTERS:
(a) Electric and Gas Prices -
In September 1997, Utilities agreed with the Iowa Utilities Board
(IUB) to allow Iowa customers a four year retail electric and gas price
freeze commencing from the effective date of the merger. The agreement
excluded price changes due to government-mandated programs, such as
energy efficiency cost recovery, or unforeseen dramatic changes in
operations. Utilities, Wisconsin Power and 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 FERC. The Company does not expect the merger-related electric
and gas price freezes to have a material adverse effect on its financial
position or results of operations.
(b) Energy Efficiency Cost Recovery -
Under provisions of the IUB rules, Utilities is currently
recovering the costs incurred through 1993 for its energy efficiency
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.
The Company received the IUB's final order in the proceeding in May 1997
which allowed for recovery of direct expenditures and carrying costs as
well as a return on the expenditures over the recovery period. These
costs are being recovered over a four-year period that commenced on
August 1, 1997.
Iowa statutory changes enacted in 1996 have eliminated: 1)
specific electric and gas percentage spending requirements 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 changes and a
final order in this proceeding was issued in April 1997. The new rules
provide that the Company recover its 1996 expenditures, and the 1997
expenditures incurred prior to August 1, 1997, over a four-year recovery
period which began on August 1, 1997. The Company also began concurrent
recovery of its prospective expenditures on August 1, 1997. The
implementation of these changes will gradually eliminate the regulatory
asset which was created under the prior 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 (in
thousands):
September 30, December 31,
1997 1996
Costs incurred through 1993 $ 8,995 $ 12,834
Costs incurred in 1994-1995 33,085 33,161
Costs incurred from 1/1/96 - 7/31/97 21,450 15,087
(Over)/under collection of concurrent recovery 1,544 -
$ 65,074 $ 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.
(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 September 30, 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) McLeodUSA Inc. (McLeod) -
At September 30, 1997, the Company had the following investment in
McLeod, a telecommunications company (all figures are in millions):
Fair Market
Shares Cost Value
Class A Common Stock 9.0 $ 29.0 $ 354.0
Unexercised Vested Options 1.3 - 51.3
Cost to Exercise Vested Options N/A N/A (2.3)
10.3 $ 29.0 $ 403.0
During the second quarter of 1997, the Company converted its
investment in Class B Common Stock into shares of Class A Common Stock
and contributed 300,000 shares of its McLeod Class A shares to the IES
Industries Charitable Foundation.
The Company has entered into an agreement with McLeod which
restricts the sale or disposal of its shares without the consent of the
McLeod Board of Directors until September 1998.
Pursuant to the provisions of SFAS No. 115, the carrying value of
the McLeod investment was adjusted from a cost basis to estimated fair
value at September 30, 1997, based on the September 30 closing price,
given that such shares have become qualified for sale within a one year
period. The adjustment to reflect the estimated fair value of this
investment did not impact the Company's current earnings as the
resulting unrealized gain, net of taxes, was recorded directly to the
common equity section of the balance sheet ("Unrealized security
gains"). Under SFAS 115, any such gains are reflected in current
earnings only at the time they are realized through a sale by the
Company. It is not possible to estimate what the market value of the
shares will be at September 1998 when the current restriction on sales
expires.
(b) Foreign Entities -
At September 30, 1997, the Company had $47.7 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
September 30, 1997, included investments of approximately $32.7 million
in New Zealand, $14.5 million in China and $0.5 million in other
countries.
(6) DEBT:
(a) Long-Term Debt -
In October 1997, Diversified entered into a 3-Year Credit Agreement
with various banking institutions which replaced its variable rate
credit facility. The new agreement will provide Diversified the ability
to finance additional business development opportunities, as needed.
The agreement extends through October 20, 2000, with one-year extensions
available upon agreement by the parties. The agreement will terminate on
September 1, 1998, however, if the proposed merger discussed in Note 2
is not consummated on or prior to May 10, 1998. The unborrowed portion
of this agreement is also used to support Diversified's commercial paper
program. A combined maximum of $450 million of borrowings under this
agreement and the commercial paper program may be outstanding at any one
time. Interest rates and maturities are set at the time of borrowing
for direct borrowings under this agreement and for issuances of
commercial paper. The interest rate options are based upon quoted
market rates and the maturities are less than one year.
At September 30, 1997, there were no borrowings outstanding under
the variable rate credit facility. Diversified had $191.3 million of
commercial paper outstanding at September 30, 1997, with interest rates
ranging from 5.77% to 5.95% and maturity dates in the fourth quarter of
1997. Diversified intends to continue borrowing under the renewal
options of this facility and the new agreement and no conditions exist
at September 30, 1997, that would prevent such borrowings. Accordingly,
this debt is classified as long-term in the Consolidated Balance Sheets.
In August 1997, Utilities issued $135 million of 6-5/8% Senior
Debentures, due 2009. The proceeds from these debentures were used to
reduce Utilities' short-term borrowings.
Utilities repaid at maturity $8 million of 6-1/8% First Mortgage
Bonds during the second quarter of 1997.
Also in the second quarter of 1997, Utilities issued $55 million of
Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to
have their Collateral Trust Bonds redeemed, in whole but not in part, on
May 1, 2002, at 100% of the principal amount thereof, plus accrued
interest. The proceeds from the Collateral Trust Bonds were used to
refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30
million of Series M, 7.625% First Mortgage Bonds and $10 million of
7.375% First Mortgage Bonds.
(b) Short-Term Debt -
In October 1997, Diversified also entered into a 364-Day Credit
Agreement with various banking institutions. This agreement will also
provide Diversified the ability to finance additional business
development opportunities, as needed. The agreement extends through
October 20, 1998, with 364 day extensions available upon agreement by
the parties. The agreement will terminate on September 1, 1998,
however, if the proposed merger discussed in Note 2 is not consummated
on or prior to May 10, 1998. The unborrowed portion of this agreement
is also used to support Diversified's commercial paper program. A
combined maximum of $150 million of borrowings under this agreement and
the commercial paper program may be outstanding at any one time.
Interest rates and maturities are set at the time of borrowing for
direct borrowings under this agreement and for issuances of commercial
paper. The interest rate options are based upon quoted market rates and
the maturities are less than one year.
At September 30, 1997, the Company had bank lines of credit
aggregating $45.1 million. Utilities was using $11.1 million to support
certain pollution control obligations. Commitment fees are paid to
maintain these lines and there are no conditions which restrict the
unused lines of credit. From time to time, the Company may borrow from
banks and other financial institutions in lieu of commercial paper. The
Company has agreements with several financial institutions for such
borrowings. There are no commitments associated with these agreements
and there were no borrowings outstanding under these agreements at
September 30, 1997.
(7) CONTINGENCIES:
(a) Environmental Liabilities -
The Company has recorded environmental liabilities of approximately
$53 million in its Consolidated Balance Sheets at September 30, 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 twelve 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 fourteen
sites and estimates the range of additional costs to be incurred for
investigation, remediation and monitoring of the sites to be
approximately $21 million to $52 million.
Utilities has recorded environmental liabilities related to the
FMGP sites of approximately $33 million (including $4.7 million as
current liabilities) at September 30, 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 $33 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 ten carriers and an agreement in
principle has been reached with four 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 at September 30, 1997, $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 four 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 $9.4 million at September 30, 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, the possible purchase of SO2 allowances and a
possible NOx averaging plan. Utilities currently estimates capital
expenditures at approximately $8.6 million, including $0.9 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 July 1997, the EPA issued final
rules that would tighten the National Ambient Air Quality Standards
(NAAQS) for ozone and particulate matter emissions. Utilities is
currently reviewing the rules to determine what impact they may have on
its operations.
In the fourth quarter of 1996, the EPA announced that it would
issue a notice requiring the 37 states in the Ozone Transport Assessment
Group (OTAG), which includes Iowa, to implement further controls on NOx.
In June 1997, OTAG made their final recommendations to the EPA. In
October 1997, the EPA followed these recommendations and excluded Iowa
from the requirement to reduce NOx emissions in the State with the
understanding that Iowa will work with Wisconsin in the development of
the SE Wisconsin attainment State Implementation Plan (SIP). Utilities
believes the potential cost of this effort will not have a material
adverse effect on its financial position or results of operations.
In 1995, the EPA published the Sulfur Dioxide Network Design Review
for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-
case modeling method 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 then issued a letter to the EPA stating that a plan of
action would be in place with local industry to avoid the area being
declared nonattainment. In this regard, Utilities has entered into a
consent order with the Iowa Department of Natural Resources (IDNR). The
objective of this consent order is to establish the necessary
commitments which will maintain the area in attainment for SO2. Two
primary commitments were made by Utilities in this consent order: 1)
Utilities will limit SO2 emissions from the two noted generating
facilities located in Cedar Rapids, and 2) Utilities will install a new
stack at one of the facilities at a potential aggregate capital cost of
up to $4.5 million over the next two years. In September 1997, the EPA
provided comments to the IDNR on the consent order. In October 1997,
Utilities proposed certain modifications to the consent order in
response to the EPA comments. These proposed modifications include
revising the stack option such that the potential aggregate cost would
only be approximately $2.5 million over the next two years. The final
consent order is expected to be approved by both the IDNR and ultimately
by the EPA in either the fourth quarter of 1997 or the first quarter of
1998.
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
expects to receive the PSD permit by the fourth quarter of 1997.
Utilities may be required to accept operational limits or to install
additional controls and may be subject to a penalty 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
September 30,
1997 December 31,
ASSETS (in thousands) (Unaudited) 1996
Property, plant and equipment:
Utility -
Plant in service -
Electric $ 2,045,422 $ 2,007,839
Gas 181,995 175,472
Other 131,302 126,850
2,358,719 2,310,161
Less - Accumulated depreciation 1,104,678 1,030,390
1,254,041 1,279,771
Leased nuclear fuel, net of amortization 37,968 34,725
Construction work in progress 61,932 43,719
1,353,941 1,358,215
Other, net of accumulated depreciation
and amortization of $1,615 and
$1,438, respectively 5,695 5,872
1,359,636 1,364,087
Current assets:
Cash and temporary cash investments 15,951 11,608
Accounts receivable -
Customer, less allowance for doubtful
accounts of $709 and $546, respectively 14,144 22,461
Other 8,907 11,270
Income tax refunds receivable 2,908 2,664
Production fuel, at average cost 10,801 13,323
Materials and supplies, at average cost 22,759 21,716
Adjustment clause balances 0 10,752
Regulatory assets 36,718 26,539
Prepayments and other 14,712 18,705
126,900 139,038
Investments:
Nuclear decommissioning trust funds 74,455 59,325
Cash surrender value of life insurance
policies 4,812 4,281
Other 78 313
79,345 63,919
Other assets:
Regulatory assets 191,476 201,129
Deferred charges and other 11,168 10,437
202,644 211,566
$ 1,768,525 $ 1,778,610
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30,
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 236,028 231,337
Total common equity 548,497 543,806
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) 651,781 517,334
1,218,598 1,079,460
Current liabilities:
Short-term borrowings 0 135,000
Capital lease obligations 13,294 15,125
Maturities and sinking funds 140 8,140
Accounts payable 37,269 76,287
Accrued interest 12,193 8,839
Accrued taxes 66,288 40,953
Accumulated refueling outage provision 7,970 1,316
Adjustment clause balances 782 0
Environmental liabilities 5,517 5,517
Other 15,335 17,114
158,788 308,291
Long-term liabilities:
Pension and other benefit obligations 31,600 25,826
Capital lease obligations 24,674 19,600
Environmental liabilities 37,844 40,299
Other 19,164 14,030
113,282 99,755
Deferred credits:
Accumulated deferred income taxes 245,361 256,634
Accumulated deferred investment
tax credits 32,496 34,470
277,857 291,104
Commitments and contingencies (Note 7)
$ 1,768,525 $ 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 Nine For the Twelve
Months Ended Months Ended Months Ended
September 30 September 30 September 30
1997 1996 1997 1996 1997 1996
(in thousands)
Operating revenues:
Electric $ 184,676 $ 173,626 $ 459,653 $ 436,027 $ 597,899 $ 562,996
Gas 15,507 12,169 122,711 103,854 179,720 151,906
Other 5,528 4,375 19,369 13,296 25,915 17,143
205,711 190,170 601,733 553,177 803,534 732,045
Operating expenses:
Fuel for production 27,613 29,148 84,026 72,168 96,437 96,733
Purchased power 18,749 18,655 52,472 55,125 85,697 68,600
Gas purchased for resale 7,835 5,034 84,413 64,445 123,846 96,116
Other operating expenses 42,783 37,594 117,242 112,506 154,736 154,902
Maintenance 12,224 13,192 37,675 37,516 46,028 46,901
Depreciation and amortization 21,840 21,908 68,605 65,957 87,623 84,709
Taxes other than income taxes 10,956 11,386 34,563 34,996 43,170 43,054
142,000 136,917 478,996 442,713 637,537 591,015
Operating income 63,711 53,253 122,737 110,464 165,997 141,030
Interest expense and other:
Interest expense 13,371 11,466 38,446 33,346 48,813 44,375
Allowance for funds used during
construction -784 -761 -1,551 -2,141 -1,512 -2,904
Miscellaneous, net 588 6,230 1,915 5,090 2,117 5,597
13,175 16,935 38,810 36,295 49,418 47,068
Income before income taxes 50,536 36,318 83,927 74,169 116,579 93,962
Federal and state income taxes:
Current 21,124 15,132 45,520 33,487 47,362 42,513
Deferred 1,434 1,834 -6,996 1,296 2,116 527
Amortization of investment
tax credits -658 -661 -1,974 -1,984 -2,635 -2,658
21,900 16,305 36,550 32,799 46,843 40,382
Net income 28,636 20,013 47,377 41,370 69,736 53,580
Preferred dividend requirements 229 229 686 686 914 914
Net income available for
common stock $ 28,407 $ 19,784 $ 46,691 $ 40,684 $ 68,822 $ 52,666
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 Nine For the Twelve
Months Ended Months Ended Months Ended
September 30 September 30 September 30
1997 1996 1997 1996 1997 1996
(in thousands)
Cash flows from operating activities:
Net income $ 28,636 $ 20,013 $ 47,377 $ 41,370 $ 69,736 $ 53,580
Adjustments to reconcile net income to
net cash flows from operating activities -
Depreciation and amortization 21,840 21,908 68,605 65,957 87,623 84,709
Amortization of principal under capital
lease obligations 3,559 4,945 10,668 14,195 12,964 19,108
Deferred taxes and investment tax credits 776 1,173 -8,970 -688 -519 -2,131
Refueling outage provision 2,464 1,831 6,654 6,751 -6,471 9,199
Amortization of other assets 4,225 2,041 9,406 7,191 11,987 9,845
Other -36 13 192 -24 496 657
Other changes in assets and liabilities -
Accounts receivable -1,564 5,466 10,680 6,440 -8,962 -1,146
Sale of utility accounts receivable 0 0 0 7,000 0 0
Production fuel, materials and supplies 2,847 -1,118 2,178 -190 3,019 3,560
Accounts payable -9,447 2,353 -36,339 -11,075 -12,379 3,832
Accrued taxes 30,933 21,259 25,091 8,301 5,556 -12,313
Provision for rate refunds 0 -43 0 -106 0 -12,966
Adjustment clause balances -3,533 -3,559 11,534 -3,898 1,532 -1,220
Gas in storage -5,413 -8,280 2,806 965 1,289 -1,193
Other -326 -2,816 7,399 1,607 13,117 -2,058
Net cash flows from operating
activities 74,961 65,186 157,281 143,796 178,988 151,463
Cash flows from financing activities:
Dividends declared on common stock -14,000 -12,000 -42,000 -34,000 -52,000 -44,000
Dividends declared on preferred stock -229 -229 -686 -686 -914 -914
Proceeds from issuance of long-term
debt 135,000 60,000 190,000 60,000 190,000 110,000
Reductions in long-term debt 0 -15,000 -63,140 -15,140 -63,140 -65,140
Net change in short-term borrowings -150,000 -47,345 -135,000 -27,658 -82,230 23,426
Principal payments under capital
lease obligations -3,740 -4,626 -9,405 -14,162 -14,351 -19,096
Other -711 -182 -821 -354 -887 -2,056
Net cash flows from financing
activities -33,680 -19,382 -61,052 -32,000 -23,522 2,220
Cash flows from investing activities:
Construction and acquisition
expenditures -
Utility -26,271 -39,701 -74,521 -97,084 -119,819 -133,524
Other 0 -2 -8 -344 -930 -902
Deferred energy efficiency
expenditures -920 -3,887 -8,450 -12,643 -12,664 -17,708
Nuclear decommissioning trust funds -1,502 -1,502 -4,506 -4,506 -6,008 -6,008
Other -18 272 -4,401 1,149 -1,196 3,137
Net cash flows from investing
activities -28,711 -44,820 -91,886 -113,428 -140,617 -155,005
Net increase (decrease) in cash and
temporary cash investments 12,570 984 4,343 -1,632 14,849 -1,322
Cash and temporary cash investments
at beginning of period 3,381 118 11,608 2,734 1,102 2,424
Cash and temporary cash investments
at end of period $ 15,951 $ 1,102 $ 15,951 $ 1,102 $ 15,951 $ 1,102
Supplemental cash flow information:
Cash paid during the period for -
Interest $ 9,073 $ 10,866 $ 33,215 $ 30,443 $ 44,842 $ 44,511
Income taxes $ 0 $ 3,921 $ 31,875 $ 35,489 $ 41,770 $ 51,691
Noncash investing and financing
activities -
Capital lease obligations incurred $ 13,789 $ 939 $ 13,912 $ 13,785 $ 14,408 $ 13,896
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. 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. Included in the IUB's process
was the creation of an advisory panel, of which Utilities is a member.
The IUB staff's report in this docket was accepted by the IUB, finding,
in part, that there is no compelling reason to move quickly into
restructuring the electric utility industry in Iowa, based upon the
current level of relative prices. However, they are continuing the
analysis and debate on restructuring and retail competition in Iowa.
Recently, the IUB has taken several actions. On August 18, 1997,
the IUB issued an order that promulgated draft principles for an
independent system operator and invited public comment. On September
10, 1997, the IUB issued an order adopting an "Action Plan to Develop a
Competitive Model for the Electric Industry in Iowa." The IUB states in
this action plan that while "the IUB has not determined retail
competition in the electric industry is in the best interests of Iowa's
consumers...", the State of Iowa is likely to be affected by federal or
neighboring states' actions and so there is a need for the IUB to design
a model that suits Iowa's needs. The action plan is to be developed by
the IUB's staff, with outside assistance as needed, and with review and
comment by the IUB's advisory group. The priority concerns in the plan
are public interest issues (an Iowa-specific pilot project, customer
information and assessment, environmental impacts, public benefits and
transition costs/benefits) and transmission-related issues (transmission
and distribution system reliability and transmission system operations).
There is no timetable in the action plan. On October 2, 1997, the IUB
staff sent to the advisory group for written comment a set of proposed
guidelines for an Iowa-specific pilot project that would allow retail
access to a "subset of all customer classes."
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. The Public Service Commission of Wisconsin (PSCW)
has conditioned the merger on the filing of a PSCW-approved ISO with
FERC.
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, Utilities 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 these is to allow Utilities to better prepare for a
competitive, deregulated electric utility industry.
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 regulatory 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. On July 3, 1997, an administrative law judge issued a non-binding
recommendation that FERC approve the merger subject to the terms of a
stipulation agreement on competition issues entered into between the
companies and FERC trial staff. A final decision is expected in the
fourth quarter of 1997.
On May 7, 1997, the Illinois Commerce Commission (ICC) issued an
order approving the proposed merger.
On March 24, 1997, the Minnesota Public Utilities Commission (MPUC)
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 IPC's Minnesota customers.
On September 26, 1997, the IUB issued an order stating that it does
not disapprove of the proposed merger. The order included a number of
conditions, which the parties are willing to meet, including a 4-year
rate freeze.
On November 4, 1997, the PSCW issued an order approving the
proposed merger. The approval included a number of conditions, which
the parties are willing to meet, including a 4-year rate freeze.
The SEC comment period ended November 5, 1996. Final review will
commence following FERC approval.
The merger partners have submitted new information to the U.S.
Department of Justice (DOJ) pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act. The DOJ completed its impact review of the merger on
market power and all requirements of such review were satisfied.
The Nuclear Regulatory Commission (NRC) published its order in the
Federal Register on August 28, 1997, allowing principal ownership and
operations of the Duane Arnold Energy Center (DAEC) to transfer to
Interstate Energy Corporation.
The companies expect to receive all necessary regulatory approvals
relating to the merger by the end of 1997. Refer to Note 3(a) of the
Notes to Consolidated Financial Statements for a discussion of merger-
related retail and wholesale price freezes at Utilities.
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.
Summary
The Company's net income increased $10.9 million, $9.4 million and
$13.4 million during the three, nine and twelve month periods,
respectively. Earnings per average common share increased $0.34, $0.29
and $0.41 for the respective periods. Utilities' net income available
for common stock increased $8.6 million, $6.0 million and $16.2 million
during the three, nine and twelve month periods, respectively.
Increased electric sales (excluding off-system sales) resulting from
continuing growth in Utilities' service territory and more favorable
weather conditions contributed to the increase in earnings for all
periods. In comparing the three, nine and twelve month periods with the
prior periods, the Company estimates that the weather impacted earnings
per share by approximately $0.15, $0.10 and $0.12, respectively. The
increase in earnings for all periods was also due to the takeover
defense costs (approximately $0.15 per share) that the company incurred
in the third quarter of 1996 and a lower effective tax rate. Partially
offsetting the increase for all periods were increased interest and
depreciation expenses. The nine and twelve month increases were also
partially offset by the recording of a $2.5 million loss on non-utility
investments at Utilities during the second quarter of 1997.
The Company's operating income increased $11.9 million, $13.6
million and $26.0 million during the three, nine and twelve month
periods, respectively, while Utilities' operating income increased $10.5
million, $12.3 million and $25.0 million during the same periods.
Electric Operations
Electric margins and Kwh sales for Utilities for the three months ended
September 30 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 71,252 $ 63,594 734,577 667,458
General service 30,670 28,085 318,645 295,997
Large general service 72,525 68,809 1,490,581 1,432,420
Sales for resale and other 9,384 9,066 148,108 148,369
Total, excluding off-
system sales 183,831 169,554 2,691,911 2,544,244
Off-system sales 845 4,072 31,604 288,561
Total 184,676 173,626 2,723,515 2,832,805
Fuel for production
(excluding steam) 24,458 27,106
Purchased power 18,749 18,655
Margin $ 141,469 $ 127,865
Electric margins and Kwh sales for Utilities for the nine months ended
September 30 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 174,245 $ 162,665 2,026,344 1,968,766
General service 77,687 72,622 920,048 886,972
Large general service 179,234 163,341 4,346,519 4,072,837
Sales for resale and other 24,469 23,080 420,995 435,340
Total, excluding off-
system sales 455,635 421,708 7,713,906 7,363,915
Off-system sales 4,018 14,319 151,597 929,784
Total 459,653 436,027 7,865,503 8,293,699
Fuel for production
(excluding steam) 72,507 65,734
Purchased power 52,472 55,125
Margin $ 334,674 $ 315,168
Electric margins and Kwh sales for Utilities for the twelve months ended
September 30 were as follows:
Revenues and Costs Kwhs Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Residential and rural $ 224,380 $ 208,313 2,691,282 2,582,785
General service 103,261 96,340 1,264,192 1,215,829
Large general service 229,115 208,406 5,774,288 5,419,536
Sales for resale and other 31,954 30,058 573,434 581,446
Total, excluding off-
system sales 588,710 543,117 10,303,196 9,799,596
Off-system sales 9,189 19,879 453,110 1,285,161
Total 597,899 562,996 10,756,306 11,084,757
Fuel for production
(excluding steam) 81,381 88,728
Purchased power 85,697 68,600
Margin $ 430,821 $ 405,668
The electric margin increased $13.6 million, $19.5 million and
$25.2 million during the three, nine and twelve month periods,
respectively, primarily due to higher Kwh sales (excluding off-system
sales). The sales increases during all periods were due to continuing
sales growth in Utilities' service territory and more favorable weather
conditions. Revenues also increased significantly due to the recovery
of previously deferred expenditures for state mandated energy efficiency
programs pursuant to an IUB order (the majority of these recoveries are
also amortized to expense in other operating expenses). Lower purchased
power capacity costs also contributed to the increase in margin for all
periods. Under historically normal weather conditions, total Kwh sales
(excluding off-system sales) for the three, nine and twelve month
periods would have increased 1.5%, 3.4% and 4.0%, respectively, as
compared to actual increases of 5.8%, 4.8% and 5.1%.
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 freezes at Utilities 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 Industrial
Energy Applications, Inc. (IEA), a wholly-owned subsidiary under
Diversified, for the three months ended September 30 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 8,802 $ 6,968 1,025 1,013
Commercial 4,259 3,031 758 711
Industrial 1,656 1,364 440 472
Transportation and
other 790 806 2,287 2,308
Total Utilities 15,507 12,169 4,510 4,504
IEA - 16,292 - 6,777
Total 15,507 28,461 4,510 11,281
Gas purchased for resale 7,795 20,841
Margin $ 7,712 $ 7,620
Gas margins and Dth sales for Utilities and IEA for the nine months
ended September 30 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 75,037 $ 64,754 11,140 11,894
Commercial 37,078 30,322 6,520 6,838
Industrial 7,926 6,027 1,874 1,885
Transportation and
other 2,670 2,751 7,507 7,613
Total Utilities 122,711 103,854 27,041 28,230
IEA 2,670 57,258 978 23,914
Total 125,381 161,112 28,019 52,144
Gas purchased for resale 88,136 120,091
Margin $ 37,245 $ 41,021
Gas margins and Dth sales for Utilities and IEA for the twelve months
ended September 30 were as follows:
Revenues and Costs Dths Sold
(In thousands) (In thousands)
1997 1996 1997 1996
Utilities -
Residential $ 107,991 $ 94,586 16,927 17,546
Commercial 53,722 44,061 10,005 10,075
Industrial 14,155 9,583 3,784 3,139
Transportation and
other 3,852 3,676 10,235 10,355
Total Utilities 179,720 151,906 40,951 41,115
IEA 58,527 72,760 20,118 32,241
Total 238,247 224,666 61,069 73,356
Gas purchased for resale 185,396 166,538
Margin $ 52,851 $ 58,128
Total gas margin increased or (decreased) $0.1 million, ($3.8)
million and ($5.3) million during the three, nine and twelve month
periods, respectively. The decreases during the nine and twelve month
periods were primarily due to lower gas margins at IEA. IEA's reported
Dth gas sales were significantly lower during each period 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.
Utilities' gas margin increased or (decreased) $0.5 million, ($1.1)
million and $0.1 million during the three, nine and twelve month
periods, respectively. The decrease in Utilities' margin during the
nine month period was primarily due to lower Dth sales resulting from
less favorable weather conditions in 1997. Under historically normal
weather conditions, Utilities' gas sales and transported volumes would
have increased or (decreased) 1.2%, (1.2%) and 1.0% during the three,
nine and twelve month periods, respectively, as compared to actual
increases or (decreases) of 0.1%, (4.2%) and (0.4%).
The contrasting relationship between the change in Utilities' gas
revenues and Dths sold during the nine and twelve month periods was
primarily due to higher per unit gas costs during the 1997 periods.
Utilities' gas tariffs include purchased gas adjustment clauses (PGA)
that are designed to currently recover the cost of gas sold.
Refer to Note 3(a) of the Notes to Consolidated Financial
Statements for a discussion of a merger-related gas price freeze at
Utilities.
Other Revenues The Company's other revenues increased $1.8 million,
$11.0 million and $19.9 million during the three, nine and twelve month
periods, respectively ($1.2 million, $6.1 million and $8.8 million at
Utilities). Steam revenues at Utilities increased during all periods
due to an increase in volumes sold resulting from the addition of a new
industrial customer and increased demand from existing customers.
Increased operating activities at IEA also contributed to the increases
during the nine and twelve month periods.
Operating Expenses The Company's other operating expenses increased or
(decreased) $3.5 million, $5.0 million and $2.0 million during the
three, nine and twelve month periods, respectively ($5.2 million, $4.7
and ($0.2) million at Utilities). The increase for all periods was
primarily due to increased amortization of previously deferred energy
efficiency expenditures at Utilities and increased international and
domestic business development activities at Diversified, partially
offset by lower operating expenses at Whiting. The nine and twelve
month increases were also due to the increased operating activities at
IEA, partially offset by decreased operating expenses at the DAEC,
Utilities' nuclear generating facility.
The Company's and Utilities' maintenance expenses increased or
(decreased) ($1.0) million, $0.2 million and ($0.9) million during the
three, nine and twelve month periods, respectively. The three month
decrease was primarily due to decreased maintenance activities at
Utilities' fossil-fueled generating stations. The twelve month decrease
was primarily due to lower maintenance expenses at the DAEC, partially
offset by increased maintenance activities on Utilities' transmission
and distribution facilities.
The Company's depreciation and amortization expense increased $0.2
million, $3.0 million and $5.0 million during the three, nine and twelve
month periods, respectively (($0.1) million, $2.6 million and $2.9
million at Utilities), primarily because of increases in utility plant
in service. The twelve month increase was also due to increases in
amortization costs of Whiting's oil and gas properties. Depreciation and
amortization expenses for all 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
$2.7 million, $7.3 million and $9.6 million during the three, nine and
twelve month periods, respectively ($1.9 million, $5.1 million and $4.4
million at Utilities), primarily because of increases in the average
amount of borrowings at Diversified and the amount of long-term debt
outstanding at Utilities. The three month increase was partially offset
by decreases in the average amount of short-term debt outstanding at
Utilities.
Miscellaneous, net for the Company reflects comparative increases
in income of $6.8 million, $2.7 million and $1.5 million during the
three, nine and twelve month periods, respectively ($5.6 million, $3.2
million and $3.5 million at Utilities). Approximately $7.5 million of
costs were incurred during the three month period ended September 30,
1996 relating to the successful defense of the hostile takeover attempt
mounted by MidAmerican Energy Company. The nine and twelve month
increases were partially offset by the recording of a $2.5 million loss
on non-utility investments at Utilities during the second quarter of
1997 and certain property write-downs.
Income Taxes The Company's income tax expense increased or (decreased)
$5.2 million, ($0.9) million and $3.1 million during the three, nine and
twelve month periods, respectively ($5.6 million, $3.8 million and $6.5
million at Utilities). Higher pre-tax income contributed to the three
and twelve month increases and partially offset the nine month decrease.
The impact of a tax deduction resulting from the contribution of 300,000
shares of the Company's investment in McLeodUSA Inc. (McLeod) to the IES
Charitable Foundation partially offset the three and twelve month
increases and contributed to the nine month decrease. Reserves recorded
during the first and second quarters of 1996 related to an Internal
Revenue Service (IRS) audit for tax years 1991-1993 also contributed to
the nine month decrease and partially offset the twelve month increase.
CONSOLIDATED BALANCE SHEETS
Pursuant to the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", the carrying value of the
McLeod investment was adjusted from a cost basis to estimated fair value
at September 30, 1997, based on the September 30 closing price, given
that the McLeod shares have become qualified for sale within a one year
period. The adjustment included an increase to "Investment in McLeodUSA
Inc." of $374 million, an increase to "Unrealized security gains (net of
taxes)" of $219 million and an increase to "Accumulated deferred income
taxes" of $155 million. (See note 5(a) for a further discussion of the
McLeod investment). The $50 million decrease in "Accounts payable" at
September 30, 1997, compared to December 31, 1996, was primarily due to
a decrease in natural gas payables caused by the seasonal nature of the
natural gas business and the accounting change for IEA's gas business
resulting from the formation of the joint venture.
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 2.90 and 2.93 for the twelve months ended
September 30, 1997 and September 30, 1996, respectively. Cash flows
from operating activities for the twelve months ended September 30, 1997
and September 30, 1996 were $199 million and $182 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 - Secured long-term debt A2 A+
- Unsecured long-term debt A3 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 September 30, 1997, Utilities had approximately $65 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 recovery of these costs.
At September 30, 1997, the Company had an investment in McLeodUSA
Inc., a telecommunications company, valued at $403.0 million based on
the September 30 closing price. See Note 5(a) of the Notes to
Consolidated Financial Statements for further information concerning the
Company's investment in McLeodUSA, including recent accounting changes.
The Company has financial guarantees amounting to $18.8 million
outstanding at September 30, 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.
The Company continues to explore domestic investment opportunities,
including investments in the domestic utility business. Such
investments could be significant.
At September 30, 1997, the Company had approximately $47.7 million
of investments in foreign entities (see Note 5(b) 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 domestic 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 Board
of Directors recently authorized the Company to pursue and propose
additional foreign investments, not to exceed $300 million, in Brazil,
which is undergoing a privatization of its electric companies. The
Company is striving to select international investments where these
risks are both understood and manageable.
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, three of the thirty
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. In addition to these anticipated
expenditures, the Board of Directors recently authorized the Company to
pursue and propose additional foreign investments, not to exceed $300
million, in Brazil, which is undergoing a privatization of its electric
companies. The Company had construction and acquisition expenditures of
approximately $119 million for the nine months ended September 30, 1997,
including approximately $74 million of utility expenditures and $45
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 will mature prior to December 31, 2001:
(in millions)
Utilities $ 184.0
Diversified's credit facility 191.3
Other subsidiaries' debt 10.9
$ 386.2
The Company intends to refinance the majority of the debt
maturities with long-term securities.
In August 1997, Utilities issued $135 million of 6-5/8% Senior
Debentures, due 2009. The proceeds from these debentures were used to
reduce Utilities' short-term borrowings.
Utilities repaid at maturity $8 million of 6-1/8% First Mortgage
Bonds during the second quarter of 1997.
Also in the second quarter of 1997, Utilities issued $55 million of
Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to
have their Collateral Trust Bonds redeemed, in whole but not in part, on
May 1, 2002, at 100% of the principal amount thereof, plus accrued
interest. The proceeds from the Collateral Trust Bonds were used to
refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30
million of Series M, 7.625% First Mortgage Bonds and $10 million of
7.375% First Mortgage Bonds.
In 1993, Utilities entered into an Indenture of Mortgage and Deed
of Trust dated as of September 1, 1993 (New Mortgage). The New Mortgage
provides for, among other things, the issuance of Collateral Trust Bonds
upon the basis of First Mortgage Bonds being issued by Utilities. The
lien of the New Mortgage is subordinate to the lien of Utilities' first
mortgages until such time as all bonds issued under the first mortgages
have been retired and such mortgages satisfied. Accordingly, to the
extent that Utilities issues Collateral Trust Bonds on the basis of
First Mortgage Bonds, it must comply with the requirements for the
issuance of First Mortgage Bonds under Utilities' first mortgages.
Under the terms of the New Mortgage, Utilities has covenanted not to
issue any additional First Mortgage Bonds under its first mortgages
except to provide the basis for issuance of Collateral Trust Bonds.
The indentures pursuant to which Utilities issues First Mortgage
Bonds constitute direct first mortgage liens upon substantially all
tangible public utility property and contain covenants which restrict
the amount of additional bonds which may be issued. At September
30, 1997, such restrictions would have allowed Utilities to issue at
least $229 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, Collateral Trust Bonds and Senior
Debentures.
In order to provide an instrument for the issuance of senior
unsecured debt securities, Utilities entered into an Indenture dated as
of August 1, 1997 (Senior Unsecured Indenture). The Senior Unsecured
Indenture provides for, among other things, the issuance of senior
unsecured debt securities. Any debt securities issued under the Senior
Unsecured Indenture will rank on parity with other unsecured
unsubordinated debt of the Company.
Subsequent to the issuance of $135 million of Senior Debentures in
August 1997, Utilities does not have any remaining authority to issue
additional long-term debt under either the current FERC docket or the
current Securities and Exchange Commission shelf registrations.
Utilities plans to evaluate future needs for authority to issue
additional long-term debt.
In October 1997, Diversified entered into a 3-Year Credit Agreement
with various banking institutions which replaced its variable rate
credit facility. Refer to Note 6(a) of the Notes to Consolidated
Financial Statements for a further discussion of this agreement.
The Articles of Incorporation of Utilities authorize and limit the
aggregate amount of additional shares of Cumulative Preference Stock and
Cumulative Preferred Stock that may be issued. At September 30, 1997,
Utilities could have issued an additional 700,000 shares of Cumulative
Preference Stock and no additional shares of Cumulative Preferred Stock.
In addition, Industries had 5,000,000 shares of Cumulative Preferred
Stock, no par value, authorized for issuance, none of which were
outstanding at September 30, 1997.
The Company's capitalization ratios at September 30, 1997 were as
follows:
Long-term debt 49%
Preferred stock 1
Common equity 50
100%
The Company's capitalization ratios were significantly impacted
during the third quarter of 1997 by: 1) the issuance of $135 million of
6-5/8% Senior Debentures, and 2) the recognition of unrealized security
gains relating to the investment in McLeod which was recorded, net of
tax, directly in the common equity section on the balance sheet.
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 September 30, 1997, Utilities
had no outstanding short-term borrowings.
Utilities has an agreement, which expires in 1999, with a financial
institution to sell, with limited recourse, an undivided fractional
interest of up to $65 million in its pool of utility accounts
receivable. At September 30, 1997, Utilities had sold $65 million under
the agreement.
In October 1997, Diversified entered into a 364-Day Credit
Agreement with various banking institutions which replaced its variable
rate credit facility. Refer to Note 6(b) of the Notes to Consolidated
Financial Statements for a further discussion of this agreement.
At September 30, 1997, the Company had bank lines of credit
aggregating $45.1 million. Utilities was using $11.1 million to support
certain pollution control obligations. Commitment fees are paid to
maintain these lines and there are no conditions which restrict the
unused lines of credit. From time to time, the Company may borrow from
banks and other financial institutions in lieu of commercial paper. The
Company has agreements with several financial institutions for such
borrowings. There are no commitments associated with these agreements
and there were no borrowings outstanding under these agreements at
September 30, 1997.
ENVIRONMENTAL MATTERS
Utilities has been named as a Potentially Responsible Party (PRP)
by various federal and state environmental agencies for 28 FMGP sites.
Utilities has recorded environmental liabilities related to the FMGP
sites of approximately $33 million (including $4.7 million as current
liabilities) at September 30, 1997. Regulatory assets of approximately
$33 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 and mercury, toxic release inventories and
modifications to the PCB rules. In July 1997, the EPA issued new rules
pertaining to ozone and particulate matter emissions.
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. Utilities entered into a consent order with the Iowa
Department of Natural Resources (IDNR) in the third quarter of 1997 on
this issue and has subsequently proposed certain modifications to the
consent order in response to comments provided by the EPA to the IDNR.
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 (NWPA) assigned responsibility
to the U.S. Department of Energy (DOE) to establish a facility for the
ultimate disposition of high level waste and spent nuclear fuel and
authorized the DOE to enter into contracts with parties for the disposal
of such material beginning in January 1998. Utilities entered into such
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 is evaluating and
pursuing multiple options including litigation and legislation to
protect its customers and its contractual and statutory rights that are
diminished by delays in the DOE program. The NWPA assigns
responsibility of interim storage of spent nuclear fuel to generators of
such spent nuclear fuel, such as Utilities. In accordance with this
responsibility, Utilities has been storing spent nuclear fuel on-site
since plant operations began in 1974 and has current on-site capability
to store spent fuel until 2001. Utilities is currently reviewing
options for expanding on-site storage capability. To provide assurance
that both the short and long term storage needs are satisfied, a
combination of expanding the capacity of the existing fuel pool and
construction of a dry cask modular facility may provide the best
solution. Analysis and discussion of this and other options continues.
The Low-Level Radioactive Waste Policy Amendments Act of 1985
mandated that each state must take responsibility for the storage of low-
level radioactive waste produced within its borders. The State of Iowa
is a member of the Midwest Interstate Low-Level Radioactive Waste
Compact Commission (Compact), which is responsible for any development
of new disposal capability within the member states of the Compact. In
June 1997, the Compact commissioners voted to discontinue work on a
proposed waste disposal facility in the State of Ohio because the
expected cost of such a facility was comparably higher than other
options currently available. At September 30, 1997, Utilities had
prepaid costs of approximately $1.1 million to the Compact. Utilities
expects to receive these funds back from the Compact by the end of the
year. The Compact is currently evaluating its plans for the future.
Utilities continues to ship the waste it produces to a disposal facility
located near Barnwell, South Carolina, thereby minimizing the amount of
low-level waste stored on-site. Utilities has on-site storage capability
that would be available in the event of disruptions of shipments to the
Barnwell facility.
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
Year 2000 The Company utilizes software, embedded systems, and related
technologies throughout its businesses that will be affected by the date
change in the Year 2000. An internal project is currently under way to
determine the full scope, work plan and related costs to insure that its
systems continue to meet its customer and internal needs. The Company
has begun to incur expenses to resolve this issue. These expenses may
continue through the year 1999 and may be significant.
Labor Issues Utilities has six collective bargaining agreements,
covering approximately 54% of its workforce. None of the agreements
expires in 1997. Two of the agreements, covering less than 5% of
Utilities' workforce, will expire in 1998.
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 September 30, 1997, the Company did not have any
material financial derivatives outstanding.
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.
SFAS 130, Reporting Comprehensive Income, was issued by the FASB in
the second quarter of 1997. SFAS 130 establishes standards for
reporting of comprehensive income and its components in a full set of
general purpose financial statements. SFAS 130 will require the Company
to report a total for comprehensive income which includes, among other
items (a) unrealized holding gains / losses on securities classified as
available-for-sale under SFAS 115, (b) foreign currency translation
adjustments accounted for under SFAS 52, and (c) minimum pension
liability adjustments made pursuant to SFAS 87. SFAS 130 is effective
for periods beginning after December 15, 1997.
SFAS 131, Disclosures About Segments of an Enterprise and Related
Information, was issued by the FASB in the second quarter of 1997. SFAS
131 requires disclosures for each business segment that are similar to
those required under current standards with the addition of quarterly
disclosure requirements and a finer partitioning of geographic
disclosures. SFAS 131 is effective for periods beginning after December
15, 1997.
Joint Venture On June 11, 1997, WPLH announced the formation of a
joint venture with Cargill. The joint venture, to be named Cargill-IEC,
will be an energy-commodity trading company that will offer a range of
energy trading, marketing and risk management services to wholesale
electric customers. Power trading will begin under the joint venture
upon receipt of a FERC license which is anticipated during the fourth
quarter of 1997. Interstate Energy Corporation will ultimately be the
formal partner with Cargill in the new joint venture.
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 ten carriers and an agreement in
principle has been reached with four 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 alleged that Utilities was
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 was unlawfully attempting to provide retail electrical services
in Utilities' exclusive service territory. On August 25, 1997, the IUB
issued its Final Decision and Order rejecting Lambda's complaint. On
October 10, 1997, the IUB issued its rehearing order which again
rejected Lambda's complaint.
On October 9, 1996, the Company filed a civil suit in the Iowa
District Court in and for Linn County against Lambda, Robert Latham,
Louie Ervin, and David Charles (three former employees of the Company
and/or its subsidiaries), collectively the "Defendants", alleging, inter
alia, violations of Iowa's trade secret act and interference with
existing and prospective business advantage. On November 1, 1996, the
Defendants filed their Answer and Counterclaims alleging, inter alia,
violation of Iowa competition law, tortious interference and commercial
disparagement. The Defendants therewith also filed a Third-Party
Petition against Utilities, IEA and Lee Liu, Chairman of the Board &
Chief Executive Officer of 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 (CIPCO) alleging that it, too, inter alia had violated
Iowa's trade secret act, and had tortiously interfered with existing and
prospective business advantage. Utilities is in the process of
dismissing CIPCO from the suit.
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.
Under provisions of the 3-Year and 364-Day Credit Agreements
recently entered into by Diversified, declaration of common dividends by
Industries could be restricted prior to its pending merger if certain
provisions are not met. The Company does not anticipate such provisions
will restrict any future dividend payments.
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:
September 30, 1997 3.19
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
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. (Filed as Exhibit 4(a) to
Industries' Form 10-Q for the quarter ended March 31, 1997
(File No. 1-9187)).
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. (Filed as Exhibit
4(b) to Industries' Form 10-Q for the quarter ended March 31,
1997 (File No. 1-9187)).
4(c) Commercial Paper Dealer Agreement, dated as of
November 9, 1994, between IES Diversified Inc. and Citicorp
Securities, Inc. (Filed as Exhibit 4(c) to Industries' Form 10-
Q for the quarter ended March 31, 1997 (File No. 1-9187)).
4(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. (Filed as Exhibit 4(d) to Industries' Form 10-Q for the
quarter ended March 31, 1997 (File No. 1-9187)).
4(e) Indenture (For Senior Unsecured Debt Securities),
dated as of August 1, 1997, between Utilities and The First
National Bank of Chicago, as Trustee. (Filed as Exhibit 4(j)
to Utilities' Registration Statement, File No. 333-32097).
*4(f) 3-Year Credit Agreement dated as of October 20, 1997
among IES Diversified Inc. as Borrower, certain banks, First
Chicago Capital Markets, Inc. as Syndication Agent and
Citibank, N.A. as Agent.
*4(g) 364-Day Credit Agreement dated as of October 20,
1997 among IES Diversified Inc. as Borrower, certain banks,
First Chicago Capital Markets, Inc. as Syndication Agent and
Citibank, N.A. as Agent.
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).
(Filed as Exhibit 10(a) to Industries' Form 10-Q for the
quarter ended March 31, 1997 (File No. 1-9187)).
10(b) Director Retirement Plan. (Filed as Exhibit 10(b)
to Industries' Form 10-Q for the quarter ended June 30, 1997
(File No. 1-9187)).
*10(c) IES Industries Inc. Grantor Trust for Director Retirement
Plan.
*10(d) IES Industries Inc. Grantor Trust for Deferred
Compensation Agreements.
*10(e) IES Industries Inc. Grantor Trust for Supplemental
Retirement Agreements.
*10(f) IES Utilities Inc. Grantor Trust for Deferred Compensation
Agreements.
*10(g) IES Utilities Inc. Grantor Trust for Supplemental
Retirement Agreements.
*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.
Items Reported Financial Statements Date of Report
5 None October 30, 1997
IES Utilities Inc.
Items Reported Financial Statements Date of Report
5 None July 29, 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: November 12, 1997 By /s/ Stephen W. Southwick
(Signature)
Stephen W. Southwick
Vice President, General Counsel &
Secretary
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: November 12, 1997 By /s/ Stephen W. Southwick
(Signature)
Stephen W. Southwick
Vice President, General Counsel &
Secretary
By /s/ John E. Ebright
(Signature)
John E. Ebright
Controller & Chief Accounting Officer