UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Name of Registrant, State of
Incorporation, IRS Employer
Commission Address of Principal Executive Identification
File Number Offices and Telephone Number Number
0-4117-1 IES UTILITIES INC. 42-0331370
(an Iowa corporation)
Alliant Tower
Cedar Rapids, Iowa 52401
Telephone (319)398-4411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past (90)
days. Yes X No _____
Number of shares outstanding for each class of common stock as of
April 30, 1998:
Common Stock, $2.50 par value,
13,370,788 shares (all of which
are owned beneficially and of
record by Interstate Energy
Corporation)
CONTENTS
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Statements of Income for the
Three Months Ended
March 31, 1998 and 1997 4
Consolidated Balance Sheets as of March 31,
1998 and December 31, 1997 5
Consolidated Statements of Cash Flows for
the Three Months Ended
March 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Part II. Other Information 21
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
IES UTILITIES INC.
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IES UTILITIES INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three Months Ended
March 31,
1998 1997
(in thousands)
Operating revenues:
Electric utility $140,649 $137,286
Gas utility 60,395 81,428
Other 7,234 7,684
-------- --------
208,278 226,398
-------- --------
Operating expenses:
Electric and steam production fuels 30,649 29,881
Purchased power 11,049 18,673
Cost of gas sold 37,657 60,791
Other operation 47,002 36,296
Maintenance 10,991 12,806
Depreciation and amortization 24,335 23,470
Taxes other than income taxes 12,306 11,893
-------- --------
173,989 193,810
-------- --------
Operating income 34,289 32,588
-------- --------
Interest expense and other:
Interest expense 13,075 12,306
Allowance for funds used during construction (765) (394)
Miscellaneous, net 279 (420)
------- --------
12,589 11,492
------- --------
Income before income taxes 21,700 21,096
------- --------
Income taxes 10,040 9,245
-------- --------
Net income 11,660 11,851
-------- --------
Preferred dividend requirements 229 229
-------- --------
Earnings available for common stock $11,431 $11,622
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
IES UTILITIES INC.
CONSOLIDATED BALANCE SHEETS
March 31,
1998 December 31,
ASSETS (Unaudited) 1997
(in thousands, except
share amounts)
Property, plant and equipment:
Utility -
Plant in service -
Electric $2,080,462 $2,072,866
Gas 188,069 187,098
Steam 55,374 55,374
Other 90,679 90,342
--------- ----------
2,414,584 2,405,680
Less - Accumulated depreciation 1,140,992 1,115,261
--------- ----------
1,273,592 1,290,419
Construction work in progress 49,008 38,923
Leased nuclear fuel, net of amortization 33,761 36,731
-------- ----------
1,356,361 1,366,073
Other property, plant and equipment, net
of accumulated depreciation and
amortization of $1,774 and
$1,709, respectively 5,696 5,762
--------- ---------
1,362,057 1,371,835
--------- ---------
Current assets:
Cash and temporary cash investments 42,276 230
Accounts receivable:
Customer, less allowance for doubtful
accounts of $632 and $630, respectively 24,368 29,259
Other, less allowance for doubtful accounts
of $276 and $224, respectively 12,237 10,142
Production fuel, at average cost 10,382 10,579
Materials and supplies, at average cost 24,225 22,976
Gas stored underground, at average cost 6,683 17,192
Regulatory assets 34,930 36,330
Prepayments and other 7,451 11,680
--------- ---------
162,552 138,388
--------- ---------
Investments:
Nuclear decommissioning trust funds 80,476 77,882
Other 5,370 5,167
--------- ---------
85,846 83,049
--------- ---------
Other assets:
Regulatory assets 174,076 181,162
Deferred charges and other 11,850 12,393
--------- ---------
185,926 193,555
--------- ---------
$1,796,381 $1,786,827
========= =========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock - par value $2.50 per share -
authorized 24,000,000 shares;
13,370,788 shares outstanding $33,427 $33,427
Additional paid-in capital 279,042 279,042
Retained earnings 230,647 233,216
-------- ---------
Total common equity 543,116 545,685
Cumulative preferred stock, not
mandatorily redeemable - par value
$50 per share - authorized 466,406
shares; 366,406 shares outstanding 18,320 18,320
Long-term debt (excluding current portion) 601,915 651,848
-------- ---------
1,163,351 1,215,853
--------- ---------
Current liabilities:
Capital lease obligations 13,115 13,183
Maturities and sinking funds 50,140 140
Accounts payable 49,931 63,282
Dividends payable 14,229 229
Accrued payroll and vacations 8,870 7,615
Accrued interest 12,234 12,230
Accrued taxes 73,531 58,996
Accumulated refueling outage provision 11,905 10,606
Environmental liabilities 4,567 4,054
Other 15,763 11,305
-------- ---------
254,285 181,640
-------- ---------
Long-term liabilities:
Pension and other benefit obligations 37,615 35,232
Capital lease obligations 20,646 23,549
Environmental liabilities 37,406 38,256
Other 22,945 21,630
-------- ---------
118,612 118,667
-------- ---------
Deferred credits:
Accumulated deferred income taxes 228,944 238,829
Accumulated deferred investment tax credits 31,189 31,838
-------- ---------
260,133 270,667
-------- ---------
$1,796,381 $1,786,827
========= =========
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 Months
Ended March 31,
1998 1997
(in thousands)
Cash flows from operating activities:
Net income $11,660 $11,851
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization 24,335 23,470
Amortization of leased nuclear fuel 4,010 3,369
Amortization of deferred energy efficiency
expenditures 6,070 1,900
Deferred taxes and investment tax credits (8,822) (7,837)
Refueling outage provision 1,299 1,686
Other 319 1,332
Other changes in assets and liabilities:
Accounts receivable 2,796 692
Production fuel 197 1,281
Materials and supplies (1,249) (1,172)
Gas stored underground 10,509 5,470
Accounts payable (12,292) (27,688)
Accrued taxes 13,262 28,214
Adjustment clause balances 9,466 14,511
Other 5,449 4,193
-------- -------
Net cash flows from operating activities 67,009 61,272
-------- -------
Cash flows used for financing activities:
Common stock dividends - (14,000)
Preferred stock dividends (229) (229)
Net change in short-term borrowings - (9,000)
Principal payments under capital lease
obligations (4,106) (2,296)
-------- -------
Net cash flows used for financing
activities (4,335) (25,525)
-------- --------
Cash flows used for investing activities:
Construction expenditures (19,198) (19,770)
Deferred energy efficiency expenditures - (4,014)
Nuclear decommissioning trust funds (1,502) (1,502)
Other 72 (236)
------- --------
Net cash flows used for investing
activities (20,628) (25,522)
------- --------
Net increase in cash and temporary cash
investments 42,046 10,225
------- --------
Cash and temporary cash investments at
beginning of period 230 11,608
------- -------
Cash and temporary cash investments at
end of period $42,276 $21,833
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Interest $12,378 $9,777
======= =======
Income taxes $11,804 ($546)
======= =======
Noncash investing and financing
activities - Capital lease obligations
incurred $1,039 $112
======= =======
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The interim consolidated financial statements included herein have been
prepared by IES Utilities Inc. (IESU), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted, although
management believes that the disclosures are adequate to make the
information presented not misleading. The consolidated financial
statements include IESU and its consolidated wholly-owned subsidiary,
IES Ventures Inc. These financial statements should be read in
conjunction with the financial statements and the notes included in
IESU's latest Annual Report on Form 10-K.
In the opinion of management, all adjustments, which are normal and
recurring in nature, necessary for a fair presentation of (a) the
consolidated results of operations for the three months ended March 31,
1998 and 1997, (b) the consolidated financial position at March 31,
1998 and December 31, 1997, and (c) the consolidated statement of cash
flows for the three months ended March 31, 1998 and 1997, have been
made. Because of the seasonal nature of IESU's operations, results for
the quarter ended March 31, 1998, are not necessarily indicative of
results that may be expected for the year ending December 31, 1998.
Certain prior period amounts have been reclassified on a basis
consistent with the 1998 presentation.
2. On January 1, 1998, IESU adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130
establishes standards for reporting of comprehensive income and its
components in a full set of general purpose financial statements. SFAS
130 requires reporting a total for comprehensive income which
includes: (a) unrealized holding gains/losses on securities classified
as available-for-sale under SFAS 115, (b) foreign currency translation
adjustments accounted for under SFAS 52, and (c) minimum pension
liability adjustments made pursuant to SFAS 87. IESU had no
comprehensive income in the periods presented.
3. In April 1998, the three-way business combination between WPL Holdings,
Inc., IES Industries Inc. and Interstate Power Company was
consummated. IESU is now a subsidiary of Interstate Energy
Corporation which is doing business as Alliant Corporation. See Item
2, "Merger" for additional information.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
MERGER
In April 1998, IES Industries Inc. (IES), the parent company of IES
Utilities Inc. (IESU), WPL Holdings, Inc. (WPLH) and Interstate Power
Company (IPC) completed a three-way merger (Merger) forming Interstate
Energy Corporation. Interstate Energy Corporation is currently doing
business as Alliant Corporation (Alliant). In connection with the Merger,
IES was merged with and into WPLH forming Alliant and IPC became a
subsidiary of Alliant. In addition, following the Merger, the holding
companies for the nonregulated businesses of the former WPLH and IES
(Heartland Development Corporation (HDC) and IES Diversified Inc.
(Diversified), respectively) were merged. The resulting company from this
merger was Alliant Industries, Inc. As a result of the Merger, the first
tier subsidiaries of Alliant include: Wisconsin Power & Light Company
(WP&L), IESU, IPC, Alliant Industries, Inc. and Alliant Services Company
(the subsidiary formed to provide administrative services as required
under the Public Utility Holding Company Act of 1935). Among various
other regulatory constraints, Alliant is operating as a registered public
utility holding company subject to the limitations imposed by the Public
Utility Holding Company Act of 1935. For additional information regarding
the terms of the Merger, refer to Note 2 of the "Notes to Consolidated
Financial Statements" of IESU's 1997 Annual Report on Form 10-K.
Alliant currently anticipates cost savings resulting from the Merger of
approximately $749 million over a ten-year period, net of transaction
costs and costs to achieve the savings of approximately $78 million.
Approximately $32 million of costs had been incurred by the Merger
partners through March 31, 1998. Alliant estimates it will record an
additional $32 million to $37 million of expenses in the second
quarter of 1998. Such expenses are primarily for, among other items,
employee retirements and separations, the services of financial advisors,
attorneys and accountants, and costs relating to the various regulatory
approvals needed to complete the Merger. The remainder of the $78 million
will be incurred over the course of the next several years. The estimate
of potential cost savings constitutes a forward-looking statement and
actual results may differ materially from this estimate. The estimate is
necessarily based upon various assumptions that involve judgments with
respect to, among other things, future national and regional economic and
competitive conditions, technological developments, inflation rates,
regulatory treatments, weather conditions, financial market conditions,
future business decisions and other uncertainties. No assurance can be
given that the entire amount of estimated cost savings will actually be
realized. In addition, the allocation between the Alliant companies and
their customers of the estimated cost savings of approximately $749
million over ten years resulting from the Merger, net of costs incurred to
achieve such savings, will be subject to regulatory review and approval.
As part of the approval process for the Merger, IESU agreed to various
rate freezes not to exceed four years commencing on the effective date of
the Merger (see "Liquidity and Capital Resources - Rates and Regulatory
Matters" for a further discussion). Assuming capture of the anticipated
Merger-related synergies and no significant legislative or regulatory
changes affecting IESU, IESU does not expect the Merger-related electric
and natural gas price freezes to have a material adverse effect on its
financial position or results of operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this Quarterly Report on Form 10-Q (including
MD&A) that are not of historical fact are forward-looking statements
intended to qualify for the safe harbor from liability established by the
Private Securities Litigation Reform Act of 1995. From time to time, IESU
(including its consolidated subsidiary) may make other forward-looking
statements within the meaning of the federal securities laws that involve
judgments, assumptions and other uncertainties beyond the control of IESU.
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 IESU'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 IESU 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 IESU's service territory, federal and state
regulatory or government actions, unanticipated construction and
acquisition expenditures, issues related to stranded costs and the
recovery thereof, the operations of IESU's nuclear facility, unanticipated
issues or costs associated with achieving Year 2000 compliance, the
ability of Alliant to successfully integrate the operations of the parties
to the Merger, unanticipated costs associated with certain environmental
remediation efforts being undertaken by IESU and changes in the rate of
inflation.
UTILITY INDUSTRY OUTLOOK
IESU competes in an ever-changing utility industry. Set forth below is an
overview of this evolving marketplace.
Electric energy generation, transmission and distribution are in a period
of fundamental change in the manner in which customers obtain, and energy
suppliers provide, energy services. As legislative, regulatory, economic
and technological changes occur, electric utilities are faced with
increasing pressure to become more competitive. Such competitive pressures
could result in loss of customers and an incurrence of stranded costs
(i.e., assets and other costs rendered unrecoverable as the result of
competitive pricing). To the extent stranded costs cannot be recovered
from customers, they would be borne by security holders.
IESU realized all of its electric and gas utility revenues in Iowa in the
first quarter of 1998. During the first quarter of 1998, approximately
96% of the electric revenues were regulated by the Iowa Utilities Board
(IUB) while the other 4% were regulated by the Federal Energy Regulatory
Commission (FERC).
Legislative action which would allow customers to choose their electric
energy supplier is not expected in Iowa this year. Nationwide, however,
18 states (including Illinois and Michigan) have adopted legislative or
regulatory plans to implement electric utility competition. In March
1998, the Clinton Administration unveiled its electric utility competition
plan, proposing that states implement customer choice by January 1, 2003.
Federal Regulation
IESU is subject to regulation by the FERC. The National Energy Policy Act
of 1992 addresses several matters designed to promote competition in the
electric wholesale power generation market. In 1996, the FERC issued
final rules (FERC Orders 888 and 889) requiring electric utilities to open
their transmission lines to other wholesale buyers and sellers of
electricity. In March 1997, FERC issued its orders on rehearing for
Orders 888 and 889 (Orders 888-A and 889-A). In response to FERC Orders
888 and 888-A, Alliant Services Company, on behalf of WP&L, IESU and IPC,
filed an Open Access Transmission Tariff (Tariff) that complies with the
orders. The Tariff supersedes the transmission tariffs previously filed
by the three utilities. Upon receiving the final Merger-related
regulatory order, a compliance tariff was filed by Alliant Services
Company with the FERC. This filing was made to comply with the FERC's
merger order. In response to FERC Orders 889 and 889-A, IESU is
participating in a regional Open Access Same-Time Information System.
FERC Order 888 permits utilities to seek recovery of legitimate, prudent
and verifiable stranded costs associated with providing open access
transmission services. FERC does not have jurisdiction over retail
distribution and, consequently, the final FERC rules do not provide for
the recovery of stranded costs resulting from retail competition. The
various states retain jurisdiction over the question of whether to permit
retail competition, the terms of such retail competition, and the recovery
of any portion of stranded costs that are ultimately determined to have
resulted from retail competition.
IESU cannot predict the long-term consequences of these rules on its
results of operations or financial condition.
In April 1998, Alliant joined the Midwest Independent System Operator
(Midwest ISO) for electric transmission and advised the FERC of its
decision. The Midwest ISO initially was filed with the FERC by nine
energy companies in January 1998. It would establish independent
operation and control of the electric transmission system across a broad
geographic area spanning from West Virginia to Missouri. All buyers and
sellers of electricity would have open access to the transmission system
governed by the Midwest ISO.
The FERC must review and approve the Midwest ISO proposal. As part of its
Merger proceedings, the FERC accepted Alliant's offer to file an ISO
proposal in early 1998. Alliant believes that its decision to join the
Midwest ISO satisfies this agreement with the FERC. Alliant also filed
with the FERC a copy of a Wisconsin-only ISO proposal developed by
Wisconsin Public Power Inc. (WPPI). Alliant was ordered to include the
WPPI proposal in its FERC filing by the Public Service Commission of
Wisconsin (PSCW), which reviewed and commented upon Alliant's ISO filing
with the FERC as a condition of merger approval in Wisconsin. Alliant's
decision to join the Midwest ISO also responds to electric-reliability
legislation that was enacted in Wisconsin.
State Regulation
IESU is subject to regulation by the IUB. The IUB initiated a Notice of
Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging
Competition in the Electric Utility Industry" to address all forms of
competition in the electric utility industry and to gather information and
perspectives on electric competition from all persons or entities with an
interest or stake in the issues. The IUB staff's report in this docket
was accepted by the IUB, finding, in part, that there is no compelling
reason to move quickly into restructuring the electric utility industry in
Iowa, based upon the existing level of relative prices. However, the IUB
is continuing the analysis and debate on restructuring and retail
competition in Iowa.
On September 10, 1997, the IUB issued an order adopting an "Action Plan to
Develop a Competitive Model for the Electric Industry in Iowa." The IUB
states in this action plan that while "the IUB has not determined retail
competition in the electric industry is in the best interests of Iowa's
consumers...", the State of Iowa is likely to be affected by federal or
neighboring states' actions so there is a need for the IUB to design a
model that suits Iowa's needs. The priority concerns in the plan are
public interest issues (an Iowa-specific pilot project, customer
information and assessment, environmental impacts, public benefits and
transition costs/benefits) and transmission-related issues (transmission
and distribution system reliability and transmission system operations).
There is no timetable in the action plan. On October 2, 1997, the IUB
staff sent to the advisory group (of which IESU is a member) for written
comment a set of proposed guidelines for an Iowa-specific electric pilot
project that would allow retail access to a "subset of all customer
classes." IESU has indicated to the IUB its interest in pursuing such a
pilot program. The IUB has also issued an order covering unbundling of
natural gas rates for all Iowa customers to be effective in 1999.
Summary
IESU complies with the provisions of Statement of Financial Accounting
Standards No. 71 (SFAS 71) "Accounting for the Effects of Certain Types of
Regulation." SFAS 71 provides that rate-regulated public utilities record
certain costs and credits allowed in the ratemaking process in different
periods than for nonregulated entities. These are deferred as regulatory
assets or regulatory liabilities and are recognized in the consolidated
statements of income at the time they are reflected in rates. If a portion
of IESU's operations becomes no longer subject to the provisions of SFAS
71 as a result of competitive restructurings or otherwise, a write-down of
related regulatory assets and possibly other charges would be required,
unless some form of transition cost recovery is established by the
appropriate regulatory body that would meet the requirements under
generally accepted accounting principles for continued accounting as
regulatory assets during such recovery period. In addition, IESU would be
required to determine any impairment of other assets and write-down any
impaired assets to their fair value. IESU believes it currently meets the
requirements of SFAS 71.
IESU cannot currently predict the long-term consequences of the
competitive and restructuring issues described above on its results of
operations or financial condition. The major objective is to allow IESU
to better prepare for a competitive, deregulated utility industry. The
strategy for dealing with these emerging issues includes seeking growth
opportunities, continuing to offer quality customer service, ongoing cost
reductions and productivity enhancements.
RESULTS OF OPERATIONS -
THREE MONTHS ENDED MARCH 31, 1998 VS. MARCH 31, 1997
Overview
IESU reported first quarter 1998 earnings available for common stock of
$11.4 million compared with $11.6 million for the same period in 1997.
Increased electric and gas margins and lower maintenance expenses were
offset by higher other operation expenses, higher interest expense and
slightly higher income tax expense as described below.
Prior to August 1997, energy efficiency expenditures for state mandated
energy efficiency programs had been recorded as a regulatory asset and
recovered through rates over a four-year period. In August 1997, the IUB
allowed IESU to begin concurrent recovery of its prospective expenditures
(see "Rates and Regulatory Matters" for additional information).
Electric Operations
Electric margins and megawatt-hour (MWH) sales for IESU for the three
months ended March 31 were as follows:
Revenues and Costs MWH's Sold
(In Thousands) Change (In Thousands) Change
Residential $ 54,569 $ 53,084 3% 663 693 (4%)
Commercial 37,611 36,812 2% 583 580 1%
Industrial 40,239 38,695 4% 1,163 1,147 1%
------- -------- ---- ----- ----- ---
Total from ultimate customers 132,419 128,591 3% 2,409 2,420 -
Sales for resale 5,712 6,197 (8%) 189 172 10%
Other 2,518 2,498 1% 10 11 (9%)
------- -------- ---- ------ ----- ---
Total 140,649 137,286 2% 2,608 2,603 -
====== ===== ===
Electric production fuels 26,795 24,893 8%
Purchased power 11,049 18,673 (41%)
------- --------
Margin $102,805 $ 93,720 10%
======= ======== =====
Electric margin increased $9.1 million, or 10%, during the first quarter
of 1998 compared with the same period in 1997 primarily due to the
recovery of concurrent and previously deferred expenditures for state-
mandated energy efficiency programs and reduced purchased power capacity
costs. The recovery for energy efficiency programs is in accordance with
IUB orders (a portion of these recoveries is also amortized to expense in
other operation expenses). Electric revenues included recoveries for
energy efficiency program costs of $7.7 million and $1.3 million for the
first quarters of 1998 and 1997, respectively. Residential sales
decreased by four percent as a result of warmer weather in the first
quarter of 1998 compared with the first quarter of 1997.
IESU's electric tariffs include energy adjustment clauses (EAC) that are
designed to currently recover the costs of fuel and the energy portion of
purchased power billings.
Gas Operations
Gas margins and dekatherm (Dth) sales for IESU for the three months ended
March 31 were as follows:
Revenues and Costs Dekatherms Sold
(In Thousands) Change (In Thousands) Change
1998 1997 1998 1997
Residential $38,002 $ 50,587 (25%) 6,624 7,638 (13%)
Commercial 17,992 25,576 (30%) 3,876 4,333 (11%)
Industrial 3,163 4,240 (25%) 914 835 9%
Transportation
and other 1,238 1,025 21% 3,237 2,764 17%
------- -------- ------- -----
Total 60,395 81,428 (26%) 14,651 15,570 (6%)
======= ===== =====
Cost of gas sold 37,657 60,791 (38%)
------- --------
Margin $22,738 $ 20,637 10%
======= ======== =====
Gas margin increased $2.1 million, or 10%, during the first quarter of
1998 compared with the first quarter of 1997 primarily due to higher
revenues from the recovery of concurrent and previously deferred energy
efficiency expenditures for state mandated energy efficiency program costs
in accordance with IUB orders (a portion of these recoveries is also
amortized to expense in other operation expenses). Gas revenues included
recoveries for energy efficiency program costs of $5.2 million and $1.5
million for the first quarters of 1998 and 1997, respectively. Dekatherm
sales were 6% lower resulting from warmer weather.
IESU's gas tariffs include purchased gas adjustment clauses (PGA) that
are designed to currently recover the cost of gas sold.
Operating Expenses
IESU's other operation expenses increased $10.7 million during the first
quarter of 1998 compared to the first quarter of 1997. The increase was
primarily due to an increase of $8.9 million in energy efficiency expenses
and higher Merger-related costs.
Maintenance expense decreased $1.8 million primarily due to reduced
maintenance costs at the fossil-fueled generating plants.
IESU's depreciation and amortization expense increased $0.9 million
primarily because of increases in utility plant in service. Depreciation
and amortization expenses for all periods include a provision for
decommissioning the Duane Arnold Energy Center (DAEC), IESU's nuclear
generating facility, currently collected through rates at an annual
recovery level of $6.0 million.
Interest Expense and Other
Interest expense and other increased $1.1 million during the first quarter
of 1998 compared with the first quarter of 1997 primarily due to higher
interest expense and lower returns on energy efficiency recoveries given
that the expenditures are now being recovered concurrently (effective
August 1997).
Income Taxes
IESU's income tax expense increased $0.8 million due to slightly higher
pre-tax income and an increase in the overall effective tax rate. The
effective tax rate increase was due to additional non-deductible Merger-
related expenses.
LIQUIDITY AND CAPITAL RESOURCES
IESU's capital requirements are primarily attributable to its construction
and acquisition programs and its debt maturities. IESU anticipates that
future capital requirements will be met by cash generated from operations
and external financing. The level of cash generated from operations is
partially dependent upon economic conditions, legislative activities,
environmental matters and timely regulatory recovery of utility costs.
IESU's liquidity and capital resources will be affected by environmental
and regulatory issues. Emerging competition in the utility industry could
also impact IESU's liquidity and capital resources, as discussed
previously in the "Utility Industry Outlook" section.
IESU has certain off-balance sheet financial guarantees amounting to
approximately $18 million outstanding at March 31, 1998. Such guarantees
were generally issued to support third-party borrowing arrangements and
similar transactions. Management currently believes the possibility of
IESU having to make any material cash payments under these agreements is
remote.
Cash flows generated from operating activities increased in the first
quarter of 1998 compared with the first quarter of 1997 primarily due to
higher amortization of deferred energy efficiency costs. Cash flows used
for financing activities were significantly lower in the first quarter of
1998 as compared with the first quarter of 1997 due to dividends declared
in March 1998 but not paid until April 1998 and a net reduction in short-
term borrowings. The dividends were paid in the first quarter of 1997.
Cash flows used for investing activities were lower in the first quarter
of 1998 as compared with the first quarter of 1997 primarily due to the
concurrent recovery of energy efficiency expenditures in 1998.
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets, and
costs of external financing, are dependent on IESU's creditworthiness.
The debt ratings of IESU are as follows:
Moody's Standard &
Poor's
- Secured long-term debt A2 A+
- Unsecured long-term
debt A3 A
- Commercial paper P1 A1
IESU expects to participate in a utility money pool which will be funded,
as needed, by Alliant through the issuance of commercial paper. This
utility money pool is expected to replace the commercial paper program
currently in place at IESU.
Other than IESU's periodic sinking fund requirements, which IESU intends
to meet by pledging additional property, $185.1 million of long-term debt
will mature prior to December 31, 2002. Depending upon market conditions,
it is currently anticipated that a majority of the maturing debt will be
refinanced with the issuance of long-term securities.
IESU currently has no authority from FERC or the Securities and Exchange
Commission (SEC) to issue additional long-term debt. IESU is evaluating
its future financing needs and will make the necessary regulatory filings
as needed. Under the most restrictive terms of its indentures, IESU could
have issued at least $234 million of long-term debt at March 31, 1998.
The Articles of Incorporation of IESU authorize and limit the aggregate
amount of additional shares of Cumulative Preference Stock and Cumulative
Preferred Stock that may be issued. At March 31, 1998, IESU could have
issued an additional 700,000 shares of Cumulative Preference Stock and no
additional shares of Cumulative Preferred Stock.
IESU's capitalization ratios were as follows:
March 31, December 31,
1998 1997
Common equity 47% 45%
Preferred stock 1 1
Long-term debt 52 54
------- -------
100% 100%
For interim financing, IESU is authorized by the FERC to issue up to $200
million of short-term debt. IESU had no short-term debt outstanding at
March 31, 1998. In addition to providing for ongoing working capital
needs, this availability of short-term financing provides IESU flexibility
in the issuance of long-term securities. The level of short-term
borrowing fluctuates based on seasonal corporate needs, the timing of
long-term financing, and capital market conditions. To maintain
flexibility in its capital structure and to take advantage of favorable
short-term rates, IESU also uses proceeds from the sales of accounts
receivable and unbilled revenues to finance a portion of its long-term
cash needs. IESU anticipates that short-term debt will continue to be
available at reasonable costs due to current ratings by independent
utility analysts and rating services.
IESU had $41 million in bank lines of credit at March 31, 1998 available
to support its borrowings ($11 million of which was utilized). Commitment
fees are paid to maintain these lines and there are no conditions which
restrict the unused lines of credit. From time to time, IESU may also borrow
from banks and other financial institutions in lieu of commercial paper,
and has agreements with several financial institutions for such
borrowings. There are no commitment fees associated with these agreements
and there were no borrowings outstanding under these agreements at March
31, 1998.
Given the above financing flexibility available to IESU, management
believes it has the necessary financing capabilities in place to
adequately finance its capital requirements for the foreseeable future.
Capital Requirements
Capital expenditure and investment and financing plans are subject to
continual review and change. The capital expenditure and investment
programs may be revised significantly as a result of many considerations,
including changes in economic conditions, variations in actual sales and
load growth compared to forecasts, requirements of environmental, nuclear
and other regulatory authorities, acquisition opportunities, the
availability of alternate energy and purchased power sources, the ability
to obtain adequate and timely rate relief, escalations in construction
costs and conservation and energy efficiency programs.
IESU's construction and acquisition expenditures for the first quarter of
1998 were $19.2 million compared with $19.8 million in the first quarter
of 1997. IESU's construction and acquisition program anticipates
expenditures of approximately $124 million for 1998, of which 46%
represents expenditures for electric transmission and distribution
facilities, 17% represents electric generation expenditures, 12%
represents information technology expenditures and 7% represents gas
utility expenditures. The remaining 18% represents miscellaneous
electric, steam and general expenditures. IESU's levels of utility
construction and acquisition expenditures are projected to be $129 million
in 1999, $103 million in 2000, $98 million in 2001 and $99 million in
2002. IESU anticipates funding the large majority of its utility
construction and acquisition expenditures during 1998-2002 through
internally generated funds, supplemented by external financings as needed.
DAEC, a 520-megawatt boiling water reactor plant, is operated by IESU and
IESU has a 70% ownership interest in the plant. The DAEC operating
license expires in 2014. Pursuant to the most recent electric rate case
order, the IUB allows IESU to recover $6.0 million annually for the cost
to decommission the DAEC. The current recovery figures are based on an
assumed cost to decommission the DAEC of $252.8 million, which is IESU's
70% portion in 1993 dollars, based on the Nuclear Regulatory Commission
(NRC) minimum formula (which exceeds the amount in the current
site-specific study completed in 1994). At March 31, 1998, IESU had $80.5
million invested in external decommissioning trust funds and also had an
internal decommissioning reserve of $21.7 million recorded as accumulated
depreciation.
Refer to the "Other Matters-Environmental" section for a discussion of
various issues that may impact IESU's future capital requirements.
Rates and Regulatory Matters
In September 1997, IESU agreed with the IUB to provide Iowa customers a
four-year retail electric and gas price freeze commencing on the effective
date of the Merger. The agreement excluded price changes due to
government-mandated programs (such as energy efficiency cost recovery),
the electric fuel adjustment clause and purchase gas adjustment clause and
unforeseen dramatic changes in operations. In addition, the price freeze
does not preclude a review by either the IUB or Office of Consumer
Advocate (OCA) into whether IESU is exceeding a reasonable return on
common equity. In November 1997, as part of its approval of the Merger,
FERC accepted a proposal by IESU, WP&L, and IPC, which provides for a
four-year freeze on wholesale electric prices beginning with the effective
date of the Merger. Assuming capture of the anticipated Merger-related
synergies and no significant legislative or regulatory changes affecting
IESU, IESU 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.
Under provisions of the IUB rules, IESU is currently recovering the costs
it has incurred for its energy efficiency programs. IESU has the
following amounts of energy efficiency costs included in regulatory assets
on its Consolidated Balance Sheets (in thousands):
Four-Year
Recovery
Beginning March 31, 1998 December 31, 1997
Costs incurred through 1993 6/95 $6,167 $7,779
Costs incurred in 1994 -1995 8/97 28,357 30,924
Costs incurred from 1/96 - 7/97 8/97 17,955 19,847
(Over) under collection
of concurrent recovery N/A (532) 850
------- --------
$51,947 $59,400
======= ========
OTHER MATTERS
Year 2000
IESU utilizes software, embedded systems and related technologies
throughout its business that will be affected by the date change in the
Year 2000. An internal task force has been assembled to review and
develop the full scope, work plan and cost estimates to ensure that IESU's
systems continue to meet its internal and customer needs.
Phase I of the project, which encompassed a review of the necessary
software modifications that will need to be made to IESU's financial and
customer systems, has been completed. IESU currently estimates that the
remaining costs to be incurred on this phase of the project will be
approximately $2 million to $3 million in the aggregate.
The task force has also begun Phase II of the project which is an
extensive review of IESU's embedded systems for Year 2000 conversion
issues. The task force has inventoried critical embedded operating
systems and is working with the system vendors to ascertain Year 2000
compliance of the systems. The task force is also developing detailed
plans for testing and remediating critical systems (i.e., systems whose
failure could affect employee safety or business operations).
As part of an awareness effort, IESU has also notified its utility
customers of its Year 2000 project efforts. Key suppliers are also being
contacted to confirm their Year 2000 readiness plans. Efforts are also
underway to develop contingency plans for critical embedded operating
systems. IESU is currently unable to estimate the costs to be incurred on
this phase of the project but does believe that the cost will be
significant. An estimate of the expenses to be incurred on this phase of
the project is expected to be available by the third quarter of 1998.
The goal of IESU is to have all the material Year 2000 conversions made
sufficiently in advance of December 31, 1999 to allow for unanticipated
issues. At this time, management is unable to determine if the Year 2000
issue will have a material adverse effect on IESU's financial position or
results of operations.
Labor Issues
IESU has six collective bargaining agreements, covering approximately 50%
of its workforce. Two of the agreements, covering less than 5% of IESU's
workforce, will expire on July 1, 1998.
Financial Instruments
IESU had no derivative financial instruments outstanding at March 31,
1998.
Accounting Pronouncements
In February 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This SOP
provides authoritative guidance for determining whether computer software
is in fact internal-use software, citing specific examples and situations
that answer that preliminary question. Further, it provides guidelines on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public.
Additionally, SOP 98-1 addresses specifics of accounting by discussing
expensing versus capitalization of costs, accounting for the costs
incurred in the upgrading of the software and amortizing the capitalized
cost of software. This statement is effective for fiscal years beginning
after December 15, 1998 and is not expected to have a material adverse
impact on IESU's financial position or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." This SOP provides guidance on the financial
reporting of start-up costs and organization costs. Costs of start-up
activities and organization costs are required to be expensed as incurred.
The statement is effective for periods beginning after December 15, 1998.
IESU will be adopting the requirements of this statement in 1999 and does
not anticipate any material impact on its financial statements upon
adoption.
Accounting for Obligations Associated with the Retirement of Long-Lived
Assets
The staff of the SEC has questioned certain of the current accounting
practices of the electric utility industry, including IESU, regarding the
recognition, measurement and classification of decommissioning costs for
nuclear generating stations in financial statements of electric utilities.
In response to these questions, the FASB is reviewing the accounting for
closure and removal costs, including decommissioning of nuclear power
plants. If current electric utility industry accounting practices for
nuclear power plant decommissioning are changed, the annual provision for
decommissioning could increase relative to 1997, and the estimated cost
for decommissioning could be recorded as a liability (rather than as
accumulated depreciation), with recognition of an increase in the cost of
the related nuclear power plant. Assuming no significant change in
regulatory treatment, IESU does not believe that such changes, if required,
would have an adverse effect on its financial position or results of
operations due to its ability to recover decommissioning costs through
rates.
Inflation
IESU does not expect the effects of inflation at current levels to have a
significant effect on its financial position or results of operations.
Environmental
The pollution abatement program of IESU is subject to continuing review
and is revised from time to time due to changes in environmental
regulations, changes in construction plans and escalation of construction
costs. While IESU cannot precisely forecast the effect of future
environmental regulations on its operations, it has taken steps to
anticipate the future while also meeting the requirements of current
environmental regulations.
IESU has current or previous ownership interests in properties previously
associated with the production of gas at manufactured gas plants (MGP) for
which they may be liable for investigation, remediation and monitoring
costs relating to the sites. A summary of information relating to the
sites is as follows:
Number of known sites for which liability 34
may exist
Liability recorded at March 31, 1998 $32.9
(millions)
Regulatory asset recorded at March 31, 1998 $32.9
(millions)
IESU is working pursuant to the requirements of various federal and state
agencies to investigate, mitigate, prevent and remediate, where necessary,
the environmental impacts to property, including natural resources, at and
around the sites in order to protect public health and the environment.
IESU believes that they have completed the remediation at various sites,
although they are still in the process of obtaining final approval from
the applicable environmental agencies for some of these sites.
IESU has recorded environmental liabilities related to the MGP sites; such
amounts are based on the best current estimate of the amount to be
incurred for investigation, remediation and monitoring costs for those
sites where the investigation process has been or is substantially
completed, and the minimum of the estimated cost range for those sites
where the investigation is in its earlier stages. Management currently
estimates the range of costs to be incurred for the investigation,
remediation and monitoring of the sites to be approximately $23 million to
$52 million. It is possible that future cost estimates will be greater
than the current estimates as the investigation process proceeds and as
additional facts become known.
The IUB does not allow for the deferral of MGP-related costs but it has
permitted utilities to recover prudently incurred costs. As a result,
regulatory assets have been recorded by IESU which reflect the probable
future rate recovery. Considering the current rate treatment, and
assuming no material change therein, IESU believes that the clean-up costs
incurred for these MGP sites will not have a material adverse effect on
its financial position or results of operations.
In April 1996, IESU filed a lawsuit against certain of its insurance
carriers seeking reimbursement for its MGP-related costs. Settlement
discussions are proceeding with its insurance carriers regarding the
recovery of these costs. Settlement has been reached with sixteen
carriers, and agreement in principle has been reached with three carriers.
IESU is continuing to pursue additional recoveries. Amounts received from
insurance carriers are being deferred by IESU pending a determination of
the regulatory treatment of such recoveries. IESU is unable to predict
the amount of any additional insurance recoveries it may realize.
The Clean Air Act Amendments of 1990 (Act) require emission reductions of
sulfur dioxide (SO2), nitrogen oxides (NOx) and other air pollutants to
achieve reductions of atmospheric chemicals believed to cause acid rain.
IESU has met the provisions of Phase I of the Act and is in the process of
meeting the requirements of Phase II of the Act (effective in the year
2000). The Act also governs SO2 allowances, which are defined as an
authorization for an owner to emit one ton of SO2 into the atmosphere.
IESU is reviewing its options to ensure it will have sufficient allowances
to offset its emissions in the future. IESU believes that the potential
costs of complying with these provisions of Title IV of the Act will not
have a material adverse impact on its financial position or results of
operations.
The Act and other federal laws also require the United States
Environmental Protection Agency (EPA) to study and regulate, if necessary,
additional issues that potentially affect the electric utility industry,
including emissions relating to ozone transport, mercury and particulate
control as well as modifications to the Polychlorinated Biphenyl (PCB)
rules. In July 1997, the EPA issued final rules that would tighten the
National Ambient Air Quality Standards (NAAQS) for ozone and particulate
matter emissions. IESU is currently reviewing the rules to determine what
impact they may have on its operations.
In 1995, the EPA published the Sulfur Dioxide Network Design Review for
Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst-case
modeling method suggested that the Cedar Rapids area could be classified
as "nonattainment" for the NAAQS standards established for SO2. The
worst-case modeling suggested that two of IESU's generating facilities
contributed to the modeled exceedences. As a result of exceedences at a
monitor near one of IESU's generating facilities, the EPA issued a letter
to the Iowa Governor's office directing the state to develop a plan of
action. In this regard, IESU entered into a consent order with the Iowa
Department of Natural Resources (IDNR) in the third quarter of 1997 on
this issue. IESU agreed to limit the SO2 emissions from the two noted
generating facilities and to install a new stack (potential aggregate
capital cost of up to $2.5 million over the next two years of which $1.5
million is included in the anticipated 1998 capital requirements and the
remaining $1.0 million is included in the anticipated 1999 capital
requirements) at one of the facilities. The IDNR approved the consent
order in the fourth quarter of 1997 and it is expected to be approved by
the EPA in the second quarter of 1998.
Pursuant to a routine internal review of documents, IESU determined that
certain changes undertaken during previous years at one of its generating
facilities may have required a federal Prevention of Significant
Deterioration (PSD) permit. IESU initiated discussions with its
regulators on the matter, resulting in the submittal of a PSD permit
application in February 1997. IESU expects to receive the permit in the
second quarter of 1998. IESU may be subject to a penalty for not having
obtained the permit previously; however, IESU believes that any likely
actions resulting from this matter will not have a material adverse effect
on its financial position or results of operation.
Pursuant to a separate routine internal review of plant operations, IESU
determined that certain permit limits were exceeded in 1997 at one of its
generating facilities in Cedar Rapids, Iowa. IESU has initiated
discussions with its regulators on the matter and has proposed a
compliance plan which includes equipment modifications and contemplates
operational changes. In addition, IESU has committed to submitting a PSD
permit application in the second quarter of 1998, if necessary. IESU may
be subject to a penalty for exceeding permit limits established for this
facility; however, management believes that any likely actions resulting
from this matter will not have a material adverse effect on IESU's
financial position or results of operations.
A global treaty has been negotiated that could require reductions of
greenhouse gas emissions from utility plants. Negotiators left
significant implementation and compliance questions open to resolution at
meetings to be held starting in November 1998. At this time, management
is unable to predict whether the United States Congress will ratify the
treaty. Given the uncertainty of the treaty ratification and the ultimate
terms of the final regulations, management cannot currently estimate the
impact the implementation of the treaty would have on IESU's operations.
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. IESU entered into such contract and has made
the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S.
Treasury. IESU was subsequently notified by the DOE that it was not able
to begin acceptance of spent nuclear fuel by the January 31, 1998
deadline. Furthermore, DOE has experienced significant delays in its
efforts and material acceptance is now expected to occur no earlier than
2010 with the possibility of further delay being likely. IESU is
evaluating and pursuing multiple options, including litigation and
legislation to protect its customers and its contractual and statutory
rights that are diminished by delays in the DOE program.
The NWPA assigns responsibility for interim storage of spent nuclear fuel
to generators of such spent nuclear fuel, such as IESU. In accordance
with this responsibility, IESU has been storing spent nuclear fuel on site
at DAEC since plant operations began. DAEC has current on-site capability
to store spent fuel until 2001. IESU is currently reviewing its options
to expand on-site storage capability. To provide assurance that both the
operating and post-shutdown storage needs are satisfied, a combination of
expanding the capacity of the existing fuel pool and construction of a dry
cask modular facility are being contemplated. Legislation is being
considered on the federal level to provide for the establishment of an
interim storage facility as early as 2002.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandates
that each state must take responsibility for the storage of low-level
radioactive waste produced within its borders. The State of Iowa is a
member of the six-state Midwest Interstate Low-Level Radioactive Waste
Compact (Compact) which is responsible for development of any new disposal
capability within the Compact member states. In June 1997, the Compact
commissioners voted to discontinue work on a proposed waste disposal
facility in the State of Ohio because the expected cost of such a facility
was comparably higher than other options currently available. Dwindling
waste volumes and continued access to existing disposal facilities were
also reasons cited for the decision. A disposal facility located near
Barnwell, South Carolina continues to accept the low-level waste and IESU
currently ships the waste DAEC produces to such site, thereby minimizing
the amount of low-level waste stored on-site. In addition, given
technological advances, waste compaction and the reduction in the amount
of waste generated, DAEC has on-site storage capability sufficient to
store low-level waste expected to be generated over at least the next ten
years, with continuing access to the Barnwell disposal facility extending
that on-site storage capability indefinitely.
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. IESU is recovering the costs associated
with this assessment through its electric fuel adjustment clauses over the
period the costs are assessed. IESU's 70% share of the future assessment
at March 31, 1998 was $8.9 million and has been recorded as a liability
with a related regulatory asset for the unrecovered amount.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
IESU is in discussions with the regulators regarding certain
environmental permit issues. For a discussion of these matters, see MD&A
above, which information is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
IESU filed a Current Report on Form 8-K, dated April 21, 1998, reporting
(pursuant to Items 5 and 7) that the three-way business combination
between WPL Holdings, Inc., IES Industries Inc. and Interstate Power
Company was consummated on April 21, 1998.
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 on the 14th day of May 1998.
IES UTILITIES INC.
By: /s/ Edward M. Gleason Vice President, Treasurer and Corporate
Edward M. Gleason Secretary (Principal Financial Officer)
By: /s/ John E. Ebright Vice President-Controller
John E. Ebright (Principal Accounting Officer)