Item 1. Business
IES Industries Inc.
IES Industries Inc. (Industries) is a holding company which is incorporated under the laws of Iowa. Industries' wholly-owned subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc. (Diversified). Utilities is primarily an electric and natural gas utility company operating in the State of Iowa and serving approximately 336,000 electric and 176,000 natural gas retail customers as well as 30 electric resale customers in more than 550 Iowa communities. Diversified is a holding company for non-utility subsidiaries which are primarily engaged in the energy-related, transportation and real estate development businesses. Industries' consolidated assets and earnings are predominantly those of Utilities.
Utilities
Utilities is primarily a public utility operating company engaged in providing electric energy, natural gas and, to a limited extent, steam used for industrial and heating purposes, in the State of Iowa.
Utilities' only wholly-owned subsidiary as of December 31, 1996, was IES Ventures Inc. (Ventures), which is a holding company for unregulated investments. Ventures' wholly-owned subsidiary at December 31, 1996, was IES Midland Development Inc. (Midland), which owns and operates a landfill in Ottumwa, Iowa. Ventures also has a 35% equity investment in Aqua Ventures L.C., which is an aquaculture facility formed to raise fish for human consumption.
Utilities' sales of electricity (in Kwh), excluding off-system sales, increased 1.7%, 5.3% and 4.3%, during the years 1996-1994, respectively. Under historically normal weather conditions, total sales (excluding off-system sales) would have increased 3.5%, 3.6% and 4.8% during 1996-1994, respectively. Total gas delivered by Utilities, including transported volumes, increased or (decreased) 5.9%, 4.8% and (2.7)% during the years 1996-1994, respectively. Under historically normal weather conditions, Utilities' gas sales and transported volumes would have increased 1.9%, 3.5% and 0.7% during 1996-1994, respectively.
There are seasonal variations in Utilities' electric and gas businesses, which are principally related to the use of energy for air conditioning and heating. In 1996, 39.8% of Utilities' electric revenues were earned in June through September, reflecting the use of electricity for cooling, and 72.0% of Utilities' gas revenues were earned in the months of January - March, November and December, reflecting the use of gas for heating.
The approximate percentages of Utilities' revenue and operating income derived from the sale of electricity and gas during the years 1996-1994 are as follows:
1996 1995 1994 Revenues: Electric 76% 79% 78% Gas 21% 19 20
Operating income: Electric 86% 92% 93% Gas 11% 6 6
The relationships between the electric and gas percentages presented above are influenced by changes in energy sales, timing of regulatory price proceedings and changes in the costs of fuel or purchased gas billed to customers through related adjustment clauses.
For additional information concerning electric and gas operations, see Item 1. "Other Information Relating to Utilities Only", Item 7. "Management's Discussion and Analysis of the Results of Operations and Financial Condition" and the "Electric Operations" and "Gas Operations" sections of Item 1.
Diversified
Other than Utilities' unregulated investments, the non-utility operations of the Company are organized under Diversified. Diversified is a holding company whose wholly-owned subsidiaries include IES Transportation Inc. (IES Transportation), IES Energy Inc. (IES Energy), IES Investments Inc. (IES Investments) and IES International Inc. (IES International).
IES Transportation is a holding company whose wholly-owned subsidiaries at December 31, 1996, included the Cedar Rapids and Iowa City Railway Company (CRANDIC) and IES Transfer Services Inc. (Transfer). CRANDIC is a short-line railway which renders freight service between Cedar Rapids and Iowa City. Transfer's operations include transloading and storage services. IES Transportation also has a 75% equity investment in IEI Barge Services, Inc. (Barge) which provides barge terminal and hauling service on the Mississippi River. In addition, IES Transportation has investments in two Iowa railroad companies. IES Transportation's 1996 operating revenues and assets at December 31, 1996 were as follows:
Operating Revenues Assets (in 000s) CRANDIC $ 17,375 $ 39,162 Barge 1,872 8,112 Transfer 415 838 Other (including eliminations) - 286 $ 19,662 $ 48,398
IES Energy is a holding company whose wholly-owned subsidiaries at December 31, 1996, included Industrial Energy Applications, Inc. (IEA) and Whiting Petroleum Corporation (Whiting). IEA offers commodities- based and facilities-based energy services for customers, including purchasing energy, standby generation, cogeneration, steam production and propane air systems. Whiting is organized to purchase, develop and produce crude oil and natural gas. IES Energy's 1996 operating revenues and assets at December 31, 1996 were as follows:
Operating Revenues Assets (in 000s) IEA $ 126,932 $ 52,204 Whiting 65,724 129,227 Other (including eliminations) (1,670) (1,255) $ 190,986 $ 180,176
IES Investments is a holding company whose primary wholly-owned subsidiaries at December 31, 1996, included Iowa Land and Building Company (Iowa Land), IES Investco Inc. (Investco) and Village Lakeshares, Inc. (Lakeshares). Iowa Land is organized to pursue real estate and economic development activities in Utilities' service territory. Investco is a holding company for certain equity investments and currently has no operating revenues. The gains and losses on the sale of such investments are recorded in "Miscellaneous, net" in Industries' Consolidated Statements of Income. Lakeshares is a holding company for resort properties in Iowa.
IES Investments had a $29.2 million investment in McLeod, Inc. (McLeod), a holding company for various telecommunications businesses, at December 31, 1996. The McLeod investment is not consolidated, therefore Industries does not include any of McLeod's operating revenues in its consolidated results. IES Investments also has direct and indirect equity interests in various real estate ventures, primarily concentrated in Cedar Rapids, and holds other passive investments. IES Investments' 1996 operating revenues and assets, other than the international investments noted below, at December 31, 1996, were as follows:
Operating Revenues Assets (in 000s) Iowa Land $ 1,570 $ 11,969 Investco - 2,941 Lakeshares 4,313 11,230 Real estate ventures 3,863 24,893 Investment in McLeod - 29,200 Other (including eliminations) - 13,535 $ 9,746 $ 93,768
IES International is a holding company whose wholly-owned subsidiaries are IES New Zealand Limited (IES New Zealand) and Interstate Energy Corporation Pte Ltd. (IECP). IES New Zealand has equity investments in two New Zealand electric distribution entities. IECP has a 50% equity investment in JIES Heat and Power Ltd., a cogeneration facility in China. None of the investments under IES International are consolidated, therefore IES International has no operating revenues. (IES Investments also has several investments in foreign entities, including a loan to a New Zealand company and an investment in an international venture capital fund. These investments are considered international investments for management purposes and therefore are included in the following schedule.) IES International's assets at December 31, 1996, were as follows:
Assets (in 000s) IES New Zealand $ 19,819 Investment in JIES Heat and Power Ltd. 13,598 IES Investments' foreign investments 11,665 Other (including eliminations) (136) $ 44,946
Refer to Note 15 of Industries' Notes to Consolidated Financial Statements for a further discussion of the Company's segments of business.
Other Information Relating to the Company
PROPOSED MERGER OF THE COMPANY. Industries, WPL Holdings, Inc. (WPLH) and Interstate Power Company (IPC) have entered into an Agreement and Plan of Merger, as amended (Merger Agreement), dated November 10, 1995, which provides for the combination of all three companies (Proposed Merger). 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 Wisconsin Power and Light Company (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, a 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, has been approved by the respective Boards of Directors and shareholders. The merger is conditioned on the receipt of approvals of several federal and state regulatory agencies. The status of these approvals is as follows:
On January 15, 1997, the Federal Energy Regulatory Commission (FERC) issued an order in which it accepted several provisions of the IEC merger application without the need for public hearings. The FERC has set limited issues for hearing, including generation market power in the transmission-constrained Wisconsin Upper Michigan System (WUMS) subregion in Wisconsin. The FERC has also ordered the merger partners to attempt to negotiate a wholesale customer protection mechanism with those intervenors who are not satisfied with the four year rate freeze proposed in the application. If an agreement between the merger partners and the intervenors is not reached, the FERC will decide the issue. A final decision on the merger is expected to be issued by the FERC by the end of the third quarter of 1997.
Utilities and IPC announced in 1996 their intentions to hold retail electric prices to their current levels until at least January 1, 2000. The companies made the proposal as part of their testimony in the IEC merger application filed with the Iowa Utilities Board (IUB). The proposal excludes price changes due to government-mandated programs, such as energy efficiency cost recovery, or unforeseen dramatic changes in operations. Hearings before the IUB are expected to be held in the summer of 1997 with a decision expected by the end of the third quarter of 1997.
In March of 1996, an application requesting approval of the merger was filed with the Public Service Commission of Wisconsin (PSCW). Hearings are currently scheduled for June 4, 1997, with a decision anticipated in the third quarter of 1997. Legislation was introduced in the Wisconsin State Senate in February 1997 which could delay the PSCW approval of the merger. Industries cannot predict the outcome of such legislation.
In March of 1996, an application requesting approval of the merger was also submitted to the Illinois Commerce Commission (ICC). The ICC conducted hearings on November 12, 1996 and final briefs were filed on December 23, 1996. A decision is pending.
On January 15, 1997, the Minnesota Public Utilities Commission (MPUC) announced that it had approved the IEC merger without hearings, subject to a number of technical conditions, which Industries anticipates will not be opposed by the merger partners. Included in these conditions is a four year rate freeze for IEC's electric and gas customers in the state of Minnesota.
An application to establish IEC as a registered holding company under the Public Utility Holding Company Act of 1935 (1935 Act) was submitted to the Securities and Exchange Commission (SEC). The period for comments by interested parties closed on November 5, 1996. A decision on the application is expected at the end of the third quarter of 1997. The SEC historically has interpreted the 1935 Act to preclude registered holding companies, with limited exceptions, from owning both electric and gas utility systems. In addition, the SEC could also require that IEC divest certain non-utility ventures of Industries and WPLH. As part of the application, IEC has requested permission to retain its existing gas utility properties and non-utility ventures.
An impact review of the merger on market power, which is required by the Hart-Scott-Rodino Antitrust Improvements Act, was completed by the U.S. Department of Justice (DOJ). All requirements of this review have been satisfied. If the merger is not consummated before July 7, 1997, the merger partners will be required to submit new information to the DOJ. The merger partners do not believe that any such resubmission would cause a material delay in approval.
An application was filed with the Nuclear Regulatory Commission (NRC) to approve the transfer of indirect control over the licenses of Utilities and WP&L for the Duane Arnold Energy Center (DAEC) nuclear facility and Kewaunee Nuclear Power Plant, respectively, to IEC. Both plants are jointly owned with other companies. The application, which was filed on October 1, 1996, is pending.
See Note 2 of Industries' Notes to Consolidated Financial Statements and Item 14 for further information and the unaudited pro forma financial statements of IEC, respectively.
CONSTRUCTION AND ACQUISITION PROGRAM AND FINANCING. The Company's construction and acquisition program anticipates expenditures of approximately $225 million for 1997, of which approximately $147 million represents expenditures at Utilities and approximately $78 million represents expenditures at Diversified. Of the $147 million of Utilities' expenditures, 39% represents expenditures for electric transmission and distribution facilities, 21% represents electric generation expenditures, 21% represents information technology expenditures and 5% represents gas expenditures. The remaining 14% represents miscellaneous electric, steam and general expenditures. Diversified's anticipated expenditures include approximately $75 million for domestic and international energy-related construction and acquisition expenditures.
The Company'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.
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 $207.2 Diversified's credit facility 172.1 Other subsidiaries' debt 11.2 $390.5
The Company intends to refinance the majority of the debt maturities with long-term securities.
For a discussion regarding the Company's assumptions in financing future capital requirements, see the "Liquidity and Capital Resources" section of Item 7. "Management's Discussion and Analysis of the Results of Operations and Financial Condition."
REGULATION. Because of its ownership of Utilities, Industries is a "holding company" as defined by the 1935 Act. However, Industries claims exemption from regulation under the 1935 Act (except for Section 9(a)2 thereof, which requires that any acquisition of securities of a utility company by Industries be approved by the SEC) on the basis that Industries and Utilities are both organized in the same state and Utilities conducts its business in that state. Congress began examining repeal of PUHCA during 1995 and is expected to continue reviewing this issue. No assurance can be given as to when or if such legislation will be considered or enacted.
Utilities operates pursuant to the laws of the State of Iowa and is thereby subject to the jurisdiction of the IUB. The IUB has authority to regulate rates and standards of service, to prescribe accounting requirements and to approve the location and construction of electric generating facilities having a capacity in excess of 25,000 Kw. The IUB is comprised of three Commissioners appointed by the Governor and ratified by the State Senate. Requests for price relief are based on historical test periods, adjusted for certain known and measurable changes. The IUB must decide on requests for price relief within 10 months of the date of the application for which relief is filed or the interim prices granted become permanent. Interim prices, if allowed, are permitted to become effective, subject to refund, no later than 90 days after the price increase application is filed.
In Iowa, non-exclusive franchises, which cover the use of streets and alleys for public utility facilities in incorporated communities, are granted for a maximum of twenty-five years by a majority vote of local qualified residents. In addition, the IUB defines the boundaries of mutually exclusive service territories for all electric utilities. The IUB has jurisdiction and grants franchises for the use of public highway rights-of-way for electric and gas facilities outside corporate limits.
Utilities is subject to the jurisdiction of the FERC with respect to wholesale electric sales, its accounting practices and the issuance of securities. Revenues derived from Utilities' wholesale and off- system sales amounted to 6.5%, 6.3% and 6.9% of electric revenues for 1996-1994, respectively. Utilities' consolidated subsidiaries are not subject to regulation by the IUB or the FERC.
Following consummation of the Proposed Merger, Interstate Energy will be subject to regulation by the PSCW, as WPLH and WP&L are currently. The PSCW regulates, among otherthings, the type and amount of investments in non-utility businesses. The Company does not expect such regulation to have a materially adverse effect upon Interstate Energy following the Proposed Merger.
See the "Environmental Matters", "Competition", "Electric Operations" and "Gas Operations" sections of Item 1 for a discussion of various other regulatory issues.
EMPLOYEES. At December 31, 1996, the Company had a total of 2,406 (2,016 at Utilities) regular full-time employees. At December 31, 1996, Utilities had 1,081 employees subject to 6 collective bargaining agreements (776 of these employees were part of one agreement), CRANDIC had 71 employees subject to 4 collective bargaining agreements and Barge had 6 employees subject to 1 collective bargaining agreement. None of Utilities' bargaining agreements expires in 1997.
ENVIRONMENTAL MATTERS. The Company is regulated in environmental protection matters by a number of federal, state and local agencies. Such regulations are the result of a number of environmental protection laws passed by the U. S. Congress, state legislature and local governments and enforced by federal, state and county agencies. The laws impacting the Company's operations include the Clean Water Act; Clean Air Act, as amended by the Clean Air Act Amendments of 1990; National Environmental Policy Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986; Occupational Safety and Health Act; National Energy Policy Act of 1992 and a number of others. The Company regularly secures and renews federal, state and local permits to comply with the environmental protection laws and regulations. Costs associated with such compliances have increased in recent years and are expected to increase moderately in the future.
Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 Former Manufactured Gas Plant (FMGP) sites. Utilities has recorded environmental liabilities related to the FMGP sites of approximately $36 million (including $4.7 million as current liabilities) at December 31, 1996. Regulatory assets of approximately $36 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 13(f) of Industries' 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 Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to NOx, ozone transport, mercury and particulate control; toxic release inventories and modifications to the PCB rules.
In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the National Ambient Air Quality Standards established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences.
Pursuant to a routine review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Refer to Note 13(g) of Industries' 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 13(f) of Industries' Notes to Consolidated Financial Statements for a further discussion.
The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such a contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The DOE, however, has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities has been storing spent nuclear fuel on- site since plant operations began in 1974 and has current on-site capability to store spent fuel until 2001. Utilities is aggressively reviewing options for expanding on-site storage. Utilities has been formally notified by the DOE that they anticipate being unable to begin acceptance of spent nuclear fuel by January 31, 1998. Utilities is evaluating courses of action to protect the interests of its customers and its rights under the DOE contract. Utilities is also evaluating legislation proposed to the Congress addressing this issue. In July 1996, the IUB initiated a Notice of Inquiry (NOI) on spent nuclear fuel. One purpose of the NOI was to evaluate whether the current collection of money from Utilities' customers for payment to the NWF should be placed in an escrow account in lieu of being paid to the NWF. Utilities believes that the issue of using an escrow account should be decided at the federal level rather than the state level. Utilities cannot predict the outcome of this NOI.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that each state must take responsibility for the storage of low- level radioactive waste produced within its borders. The State of Iowa has joined the Midwest Interstate Low-Level Radioactive Waste Compact Commission (Compact), which is planning a storage facility to be located in Ohio to store waste generated by the Compact's six member states. At December 31, 1996, Utilities has prepaid costs of approximately $1.1 million to the Compact for the building of such a facility. A Compact disposal facility is anticipated to be in operation in approximately ten years after approval of new enabling legislation by the member states. Such legislation was approved in 1996 by all six states that are members of the Compact. Final approval by the U.S. Congress is now required. On-site storage capability currently exists for low-level radioactive waste expected to be generated until the Compact facility is able to accept waste materials. In addition, the Barnwell, South Carolina disposal facility has reopened for an indefinite time period and Utilities is in the process of shipping to Barnwell the majority of the low-level radioactive waste it has accumulated on-site, and currently intends to ship the waste it produces in the future as long as the Barnwell site remains open, thereby minimizing the amount of low-level waste stored on-site. However, management of the Barnwell site has modified its fee schedule to emphasize total radioactivity content and weight, instead of the historical volume related fees. Utilities is evaluating the outcome of these changes on its potential future disposal costs at the Barnwell site; such changes could result in a revision to Utilities' future disposal plans.
The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental, industry and media attention. A recent study completed by the National Research Council concluded that the current body of evidence does not support the notion that exposure to these fields may result in adverse health effects. Utilities will continue to monitor the events in this area, including future scientific research.
Whiting is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties. Refer to Note 13(f) of Industries' Notes to Consolidated Financial Statements for a further discussion.
Utilities was notified in 1986 that it was designated by the EPA as a PRP (there are 832 in total) for the investigation and cleanup of the Maxey Flats Nuclear Disposal site at Morehead, Kentucky. The EPA notice encouraged all PRPs to undertake voluntary clean up activities at the site. A Steering Committee was organized and Utilities is participating in its activities. The Steering Committee has reached settlement of the issues with the EPA, the State of Kentucky and deminimis parties. Consent Decrees have been finalized and Utilities' share of the cost is estimated at $250,000, which is included in the $53 million of environmental liabilities the Company has recorded at December 31, 1996.
Refer to Note 13 of Industries' Notes to Consolidated Financial Statements for further discussion of environmental matters.
Other Information Relating to Utilities Only
COMPETITION. Utilities and its predominant business, 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 April 1996, the FERC issued final rules (FERC Orders 888 and 889), largely confirming earlier proposals, requiring electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. The rules became effective on July 9, 1996. Utilities filed conforming pro-forma open access transmission tariffs with the FERC which became effective October 1, 1995. In response to FERC Order 888, Utilities filed its final pro-forma tariffs with FERC on July 9, 1996. The non-rate provisions of the tariffs were approved on November 13, 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 ofoperations or financial condition.
FERC does not have jurisdiction over the retail jurisdiction, 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 IUB initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging Competition in the Electric Utility Industry" to address all forms of competition in the electric utility industry and to gather information and perspectives on electric competition from all persons or entities with an interest or stake in the issues. In January 1996, the IUB created its own timeline for evaluating industry restructuring in Iowa. Included in the IUB's process was the creation of a 22-member advisory panel, of which Utilities is a member. The IUB conducted public information meetings around the State of Iowa. A draft report was created by the IUB staff and is expected to be finalized in the first quarter of 1997. The draft report indicated that the IUB is of the opinion that there is no compelling reason to move quickly into restructuring the electric utility industry in Iowa. However, they will continue the analysis and debate on restructuring and retail competition in Iowa.
As part of Utilities' strategy for the emerging and competitive power markets, Utilities, IPC, WP&L and a number of other utilities have proposed the creation of an independent system operator (ISO) for the companies' power transmission grid. The companies would retain ownership and control of the facilities, but the ISO would set rates for access and assure fair treatment for all companies seeking access. The proposal requires approval from state regulators and the FERC. Various other proposals for ISO's have been made by other companies and Utilities is monitoring all such proposals. Membership in an ISO could become a condition of merger approval by the various regulatory bodies.
Utilities is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). If a portion of Utilities' operations become no longer subject to the provisions of SFAS 71, as a result of competitive restructurings or otherwise, a write-down of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. In addition, the Company would be required to determine any impairment to other assets and write-down such assets to their fair value. Utilities believes that it still meets the requirements of SFAS 71.
The Company cannot predict the long-term consequences of these competitive issues on its results of operations or financial condition. The Company's strategy for dealing with these emerging issues includes seeking growth opportunities, continuing to offer quality customer service, ongoing cost reductions and productivity enhancements, the major objective of which is to allow Utilities to better prepare for a competitive, deregulated electric utility industry. In this connection, Utilities is in the final stages of a significant process improvement program to improve its service levels, reduce its cost structure and become more market-focused and customer oriented. (The Company's continuous improvement efforts, in general, will be an ongoing effort, however).
Examples of the process improvement changes being implemented are, but are not limited to: managing the business in business unit form, rather than functionally; formation of alliances with vendors of certain types of material and/or services rather than opening most purchases to a bidding process; changing standards and construction practices in transmission and distribution areas; changing certain work practices in power plants; making investments in information technology upgrades; and improving the method by which service is delivered to customers in all customer classes. The specific changes range from simple improvements in current operations to radical changes in the way work is performed and service is delivered. Some of the changes are currently in the pilot stage thus the results from this evaluation period or the potential effects of the pending merger could prove that some of the changes are not efficient or effective and must be revised or eliminated. Subject to delays caused by implementing any such revisions, implementation of the changes began in 1996 and will continue into 1997; however, certain results will not be realized until 1997. In addition, the Company must give consideration to the potential effects of the pending merger as part of the implementation process so that duplication of efforts are avoided.
RATE MATTERS. Refer to Note 3 of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' rate matters, including its electric price freeze proposals.
ELECTRIC OPERATIONS -
General Utilities' net peak load (60 minutes integrated) of 1,833,203 kilowatts occurred on August 6, 1996, and represented a new energy peak demand record. At the time of the peak load, 75 interruptible customers were interrupted representing approximately 206,000 kilowatts of a possible 382,259 kilowatts available for interruption. Utilities' additional reserve obligation at the time of the peak was 262,980 kilowatts and the net capability of Utilities' generating stations was 1,864,390 kilowatts, with an additional 232,000 kilowatts being available under purchase contracts, thereby providing an aggregate capability of 2,096,390 kilowatts.
Utilities projects an electric sales growth rate of approximately 2 to 3 percent per year over the next five years, which will be met by a mix of its existing generation, capacity purchases and new construction. The construction activities will be undertaken in a fashion that best meets the needs of individual customers and the system as a whole. See Note 13(b) of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' firm contracts for the purchase of capacity.
Utilities' electric facilities are interconnected with certain Iowa and neighboring utilities. Also, Utilities is a member of the Mid-Continent Area Power Pool (MAPP). This pool is comprised of 18 utilities which are Transmission Owning Members (TOMs) and 58 energy- related companies providing services in the upper midwest region of the United States, and operates pursuant to an agreement which provides for the interchange of electric energy, the sharing of responsibilities for production capacity and reserve and the supply of electric energy.
Utilities is a party to the Twin Cities-Iowa-St. Louis 345 Kv Interconnection Coordinating Agreement (the Coordinating Agreement) with five other midwestern utilities, three of which operate in the State of Iowa. The Coordinating Agreement provides for the interconnection of the respective systems of the companies through a 345 Kv transmission line and for the interchange of power on various bases. The rates under the Coordinating Agreement are primarily determined by agreement between the delivering and receiving companies.
Utilities maintains and operates transmission and substation facilities connecting with its high voltage transmission systems pursuant to a non-cancelable operating agreement (the Operating Agreement) with Central Iowa Power Cooperative (CIPCO). The Operating Agreement, which will terminate on December 31, 2035, provides for the joint use of certain transmission facilities of Utilities and CIPCO.
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. RPGI 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 accounted for approximately 5% of Utilities' total 1996 electric sales, excluding off-system sales; 2) Utilities currently has to supplement its generating capability with purchased power to meet its sales load; and 3) Utilities' annual electric sales growth rate continues to be strong.
Upon consummation of the Proposed Merger, Utilities expects to realize reduced electric production costs through the joint dispatch of systems and increased marketing opportunities in the wholesale and interchange markets through electric interconnections with other utilities.
For comments relating to agreements between Utilities and its partners for the joint ownership of the DAEC, the Ottumwa Generating Station (OGS) and Neal Unit No. 3, see Item 2.
Item 2. Properties
Industries has no significant properties other than common stock of affiliates, temporary cash investments and cash surrender value of corporate life insurance policies.
Utilities' principal electric generating stations at December 31, 1996, are as follows:
(1) Represents Utilities' 70% ownership interest in this 520,000 Kw generating station. The plant is operated by Utilities.
(2) Represents Utilities' 48% ownership interest in this 715,500 Kw generating station. The plant is operated by Utilities.
(3) Represents Utilities' 28% ownership interest in this 515,000 Kw generating station which is operated by an unaffiliated utility.
(4) Burlington Combustion Turbine Unit 3 became operational June 28, 1996.
(5) Red Cedar Cogeneration Station became operational December 13, 1996.
At December 31, 1996, the transmission lines of Utilities, operating from 34,000 to 345,000 volts, approximated 4,436 circuit miles (substantially all located in Iowa). Utilities owned 108 transmission substations (all located in Iowa) with a total installed capacity of 8,647 MVa and 468 distribution substations (all located in Iowa) with a total installed capacity of 2,626 MVa.
Subsidiaries other than Utilities also own property which primarily represents investments in transportation, energy-related, telecommunications and real estate properties.
The Company's principal properties are suitable for their intended use. Utilities' principal properties are held subject to liens of indentures relating to its bonds.
Item 3.
Item 3. 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 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 two carriers and an agreement in principle has been reached with three other carriers thus far. Any amounts received from insurance carriers will be deferred pending a determination of the regulatory treatment of such recoveries.
Industries, Diversified, IES Energy, MicroFuel Corporation (the Corporation) now known as Ely, Inc. in which IES Energy has a 69.40% equity ownership, and other parties have been sued in Linn County District Court in Cedar Rapids, Iowa, by Allen C. Wiley. Mr. Wiley claims money damages on various tort and contract theories arising out of the 1992 sale of the assets of the Corporation, of which Mr. Wiley was a director and shareholder. All of the defendants in Mr. Wiley's suit answered the complaint and denied liability. Industries and Diversified were dismissed from the suit in a motion for summary judgment. In addition, a grant of summary judgment has reduced Mr. Wiley's claims against the remaining parties to breach of fiduciary duty. A separate motion for summary judgment, which was filed seeking dismissal of the remaining claims against the remaining parties, was overruled on September 20, 1996, and the trial has been set for May 1998. All of the defendants are vigorously contesting the claims.
The Corporation commenced a separate suit to determine the fair value of Mr. Wiley's shares under Iowa Code section 490. A decision was issued on August 31, 1994, by the Linn County District Court ruling that the value of Mr. Wiley's shares was $377,600 based on a 40 cent per share valuation. The Corporation contended that the value of Mr. Wiley's shares was 2.5 cents per share. The Decision was appealed to the Iowa Supreme Court by the Corporation on a number of issues, including the Corporation's position that the trial court erred as a matter of law in discounting the testimony of the Corporation's expert witness. The Iowa Supreme Court assigned the case to the Iowa Court of Appeals. On February 2, 1996, the Iowa Court of Appeals reversed the District Court ruling after determining the District Court erred in discounting the expert testimony. The case was remanded back to the District Court for consideration of the expert testimony, but with no additional evidence taken. The District Court re-affirmed its original decision on August 28, 1996, and the Corporation has again appealed to the Iowa Supreme Court.
On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda) filed a request with the IUB that the IUB initiate formal complaint proceedings against Utilities. Lambda alleges that Utilities is discriminating against it by refusing to enter into contracts with it for remote displacement service and by favoring IEA in such matters. On October 17, 1996, Utilities filed a Response which denied the allegations, and alleged, inter alia, that Lambda is unlawfully attempting to provide retail electrical services in Utilities' exclusive service territory. The IUB has set the matter for hearing on March 17, 1997. A decision is expected in the second quarter of 1997.
On October 9, 1996, the Company filed a civil suit in the Iowa District Court in and for Linn County against Lambda, Robert Latham, Louie Ervin, and David Charles (collectively the "Defendants", including three former employees of the Company and/or its subsidiaries) alleging, inter alia, violations of Iowa's trade secret act and interference with existing and prospective business advantage. On November 1, 1996, the Defendants filed their Answer and Counterclaims alleging, inter alia, violation of Iowa competition law, tortious interference and commercial disparagement. The Defendants therewith also filed a Third-Party Petition against Utilities, IEA and Lee Liu, Chairman of the Board & Chief Executive Officer of Industries and Utilities, alleging, inter alia, tortious interference and commercial disparagement.
Reference is made to Notes 3 and 13 of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' rate proceedings and the Company's environmental matters, respectively. Also see Item 1. "Business - Environmental Matters" and Item 7. "Management's Discussion and Analysis of the Results of Operations and Financial Condition - Environmental Matters."
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters
IES Industries Inc.
(a) Price Range of Industries' Common Stock and Dividends Declared
Industries' Common Stock is listed on the New York Stock Exchange (NYSE) under the symbol "IES." The table below sets forth, for the calendar quarters indicated, the reported high and low sales prices of Industries' Common Stock as reported on the NYSE Composite Tape based on published financial sources, and the dividends declared per share on Industries' Common Stock.
Industries' Common stock High Sale Low Sale Dividend (i) First Quarter $ 29 5/8 $ 26 1/2 $ .525 Second Quarter 30 1/8 25 1/2 .525 Third Quarter 34 3/4 29 .525 Fourth Quarter 31 1/2 29 .525 Year $ 34 3/4 $ 25 1/2 $ 2.10
First Quarter $ 27 5/8 $ 24 5/8 $ .525 Second Quarter 26 3/8 20 3/8 .525 Third Quarter 26 3/4 21 3/8 .525 Fourth Quarter 28 1/2 25 7/8 .525 Year $ 28 1/2 $ 20 3/8 $ 2.10
The closing price of Industries' common stock on December 31, 1996 was $29 7/8.
(i) Industries has paid regular quarterly dividends on its common stock since April 1, 1950. Although Industries' practice has been to pay dividends quarterly, the timing of payment and amount of future dividends are necessarily dependent upon earnings, financial requirements and other factors.
(b) Approximate Number of Equity Security Holders of Industries
Approximate Number of Record Title of Class Holders (as of December 31, 1996)
Common Stock, no par value 27,468
(c) Restriction on Payment of Dividends by Industries
Under provisions of the Merger Agreement, Industries' annual dividend payment cannot exceed $2.10 per share, the current annual payment level, pending the Proposed Merger.
See Item 1, "Proposed Merger of the Company" for a further discussion of Industries' pending merger.
IES Utilities Inc.
(a) Price Range of Utilities' Common Stock and Dividends Declared
All outstanding common stock of Utilities is held by its parent (Industries), and is not traded.
(b) Approximate Number of Equity Security Holders of Utilities
All outstanding common stock of Utilities is held by its parent (Industries).
(c) Restriction on Payment of Dividends by Utilities
Utilities has the right under the terms of the Subordinated Deferrable Interest Debentures, so long as an Event of Default has not occurred and is not continuing, to extend the interest payment period at any time and from time to time on the Subordinated Deferrable Interest Debentures to a period not exceeding 20 consecutive quarters. If Utilities exercises its right to extend the interest payment period, Utilities may not, during any such extended interest payment period, declare or pay dividends on, or redeem, purchase or acquire, or make any liquidation payment with respect to, any of its capital stock or make any guarantee payment with respect to the foregoing. Utilities does not intend to exercise its right to extend the interest payment period.
Item 6.
Item 6. Selected Consolidated Financial Data
The following selected consolidated financial data, in the opinion of the Company, includes adjustments, which are normal and recurring in nature, necessary for the fair presentation of the results of operations and financial position. See Item 7.
Item 7.
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
Utilities and its predominant business, 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 April 1996, the Federal Energy Regulatory Commission (FERC) issued final rules (FERC Orders 888 and 889), largely confirming earlier proposals, requiring electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. The rules became effective on July 9, 1996. Utilities filed conforming pro-forma open access transmission tariffs with the FERC which became effective October 1, 1995. In response to FERC Order 888, Utilities filed its final pro-forma tariffs with FERC on July 9, 1996. The non- rate provisions of the tariffs were approved on November 13, 1996. FERC has not yet ruled on the rate provisions of the tariffs. The geographic position of Utilities' transmission system could provide revenue opportunities in the open access environment. Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, received approval in the 1995 FERC proceeding to market electric power at market based rates. The Company cannot predict the long-term consequences of these rules on its results of operations or financial condition.
FERC does not have jurisdiction over the retail jurisdiction, and thus the final FERC rules do not provide for the recovery of stranded costs resulting from retail competition. The various states retain jurisdiction over the question of whether to permit retail competition, the terms of such retail competition and the recovery of any portion of stranded costs that are ultimately determined by FERC and the states to have resulted from retail competition.
The Iowa Utilities Board (IUB) initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging Competition in the Electric Utility Industry" to address all forms of competition in the electric utility industry and to gather information and perspectives on electric competition from all persons or entities with an interest or stake in the issues. In January 1996, the IUB created its own timeline for evaluating industry restructuring in Iowa. Included in the IUB's process was the creation of a 22-member advisory panel, of which Utilities is a member. The IUB conducted public information meetings around the State of Iowa. A draft report was created by the IUB staff and is expected to be finalized in the first quarter of 1997. The draft report indicated that the IUB is of the opinion that there is no compelling reason to move quickly into restructuring the electric utility industry in Iowa. However, they will continue the analysis and debate on restructuring and retail competition in Iowa.
As part of Utilities' strategy for the emerging and competitive power markets, Utilities, Interstate Power Company (IPC) and Wisconsin Power and Light Company (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 Company, WPLH and IPC have entered into a merger agreement, as discussed later). The companies would retain ownership and control of the facilities, but the ISO would set rates for access and assure fair treatment for all companies seeking access. The proposal requires approval from state regulators and the FERC. Various other proposals for ISO's have been made by other companies and Utilities is monitoring all such proposals. Membership in an ISO could become a condition of merger approval by the various regulatory bodies.
Utilities is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). If a portion of Utilities' operations become no longer subject to the provisions of SFAS 71, as a result of competitive restructurings or otherwise, a write-down of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. In addition, the Company would be required to determine any impairment to other assets and write-down such assets to their fair value. Utilities believes that it still meets the requirements of SFAS 71.
The Company cannot predict the long-term consequences of these competitive issues on its results of operations or financial condition. The Company's strategy for dealing with these emerging issues includes seeking growth opportunities, continuing to offer quality customer service, ongoing cost reductions and productivity enhancements, the major objective of which is to allow Utilities to better prepare for a competitive, deregulated electric utility industry. In this connection, Utilities is in the final stages of a significant process improvement program to improve its service levels, reduce its cost structure and become more market-focused and customer oriented. (The Company's continuous improvement efforts, in general, will be an ongoing effort, however).
Examples of the process improvement changes being implemented are, but are not limited to: managing the business in business unit form, rather than functionally; formation of alliances with vendors of certain types of material and/or services rather than opening most purchases to a bidding process; changing standards and construction practices in transmission and distribution areas; changing certain work practices in power plants; making investments in information technology upgrades; and improving the method by which service is delivered to customers in all customer classes. The specific changes range from simple improvements in current operations to radical changes in the way work is performed and service is delivered. Some of the changes are currently in the pilot stage thus the results from this evaluation period or the potential effects of the pending merger could prove that some of the changes are not efficient or effective and must be revised or eliminated. Subject to delays caused by implementing any such revisions, implementation of the changes began in 1996 and will continue into 1997; however, certain results will not be realized until 1997. In addition, the Company must give consideration to the potential effects of the pending merger as part of the implementation process so that duplication of efforts are avoided.
PROPOSED MERGER OF THE COMPANY
The Company, WPLH and IPC have entered into an Agreement and Plan of Merger, as amended (Merger Agreement), dated November 10, 1995. As a result of the transactions contemplated by the Merger Agreement, the combined company, Interstate Energy Corporation (Interstate Energy), anticipates cost savings of approximately $749 million over a ten-year period, net of transaction costs and costs to achieve the savings of approximately $14 million and $64 million, respectively. 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 estimated cost savings will actually be realized.
The merger, which is conditioned upon, among other things, receipt of certain regulatory and governmental approvals, is expected to close by the end of the third quarter of 1997. As part of the approval process, management has proposed retail and wholesale price freezes to be implemented in certain jurisdictions. Refer to Notes 2 and 3 of the Notes to Consolidated Financial Statements for additional information regarding the proposed merger and the proposed price freezes.
RESULTS OF OPERATIONS OF THE COMPANY
The following discussion analyzes significant changes in the components of net income and financial condition from the prior periods for the Company.
The Company's net income decreased ($3.3) million and ($2.6) million during 1996 and 1995, respectively. Earnings per average common share declined to $2.04 in 1996 from $2.20 in 1995. The 1996 decrease in earnings was primarily due to costs incurred relating to the successful defense of the hostile takeover attempt mounted by MidAmerican Energy Company (MAEC) and preparing for the Company's pending three-way merger. The Company estimates that the hostile takeover defense and merger costs reduced 1996 earnings by $0.15 per share and $0.11 per share, respectively. The 1996 earnings benefited from increased electric, gas and steam sales at Utilities, the impact of a natural gas pricing increase implemented in the fourth quarter of 1995 and increased earnings at the Company's oil and gas subsidiary, Whiting Petroleum Corporation (Whiting). Increased operating expenses, higher interest expense and a higher effective income tax rate also contributed to the decrease in earnings in 1996. The 1995 results reflect the impact of the IUB price reduction order in Utilities' latest electric rate case. The effect of the lower electric prices, including the required refund, reduced the 1995 net income by approximately $9.7 million ($0.33 per share). Warmer than normal weather conditions during the summer months, which added $0.18 to earnings, and an aggressive cost containment program partially offset the negative effects of the IUB order. The 1994 results were affected by milder than normal weather, particularly during the summer months.
The Company's operating income increased $12.6 million and $3.8 million during 1996 and 1995, respectively. The contrasting relationship between the change in operating income and net income for 1996 was due to the hostile takeover defense costs of $7.8 million, which are included in "Miscellaneous, net" in the Consolidated Statements of Income, higher interest expense and a higher effective income tax rate. The 1995 difference was also due to increased interest expense and a higher effective income tax rate. Reasons for the changes in the results of operations are explained in the following discussion.
Electric Operations
Electric margins and Kwh sales for Utilities were as follows:
Electric margins increased $8.3 million and $16.1 million during 1996 and 1995, respectively. The increase during 1996 was primarily due to higher sales relating to continuing sales growth in Utilities' service territory, lower purchased power capacity costs and increased revenues due to the recovery of previously deferred energy efficiency expenditures. These increases were partially offset by a true-up adjustment to Utilities' unbilled sales recorded in 1995 and lower sales to residential and rural customers during 1996, primarily due to cooler weather conditions during the summer of 1996 as compared to the summer of 1995. The 1995 electric margin increase was primarily due to higher sales due to a significantly warmer summer in 1995 as compared to 1994, sales growth, the unbilled sales adjustment, lower purchased power capacity costs and the recovery of energy efficiency costs. These increases were partially offset by a reduction in revenues of approximately $17 million as a result of the IUB price reduction order, of which approximately $3.5 million related to revenues collected in the fourth quarter of 1994. Refer to Notes 3(a) and 3(b) of the Notes to Consolidated Financial Statements for a discussion of merger-related retail and wholesale electric price proposals that Utilities has announced and the energy efficiency cost recoveries, respectively.
Under historically normal weather conditions, total sales (excluding off-system sales) during 1996 and 1995 would have increased 3.5% and 3.6%, as compared to actual increases of 1.7% and 5.3%, 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 to customers. See Note 1(k) of the Notes to Consolidated Financial Statements for discussion of the EAC.
Gas Operations
Gas margins and dekatherm sales for Utilities and IEA were as follows:
Revenues and Costs Dths Sold (In thousands) (In thousands) 1996 1995 1994 1996 1995 1994 Utilities - Residential $ 97,708 $ 84,562 $ 82,795 17,680 16,302 15,766 Commercial 46,966 40,390 40,912 10,323 9,534 9,298 Industrial 12,256 8,790 12,515 3,796 3,098 4,010
Transportation and other 3,934 3,550 2,811 10,341 10,871 8,901 Total Utilities 160,864 137,292 139,033 42,140 39,805 37,975 IEA 113,115 53,047 26,536 43,055 31,916 14,443 Total 273,979 190,339 165,569 85,195 71,721 52,418
Gas purchased for resale 217,351 141,716 120,795 Margin $ 56,628 $ 48,623 $ 44,774
Total gas margins increased $8.0 million and $3.8 million during 1996 and 1995, respectively. The 1996 increase was primarily due to an annual increase of $6.3 million in Utilities' gas rates that was implemented in the fourth quarter of 1995, recovery of Utilities' previously deferred energy efficiency expenditures and the increased sales, largely the result of more favorable weather conditions in 1996. While IEA's gas sales were up significantly in 1996, their margins actually decreased due to fluctuations in gas prices and the competitiveness of the gas marketing business. Therefore, this decrease partially offset the increase in Utilities' margin. The 1995 margin increase was primarily due to the price increase at Utilities mentioned above, recovery of Utilities' previously deferred energy efficiency expenditures and higher IEA gas margins resulting from increased volumes sold due to heightened marketing efforts as well as expanding into additional regional markets.
Under historically normal weather conditions, Utilities' gas sales and transported volumes would have increased 1.9% and 3.5% in 1996 and 1995, as compared to actual increases of 5.9% and 4.8%, respectively.
Utilities' gas tariffs include purchased gas adjustment clauses (PGA) that are designed to currently recover the cost of gas sold. See Note 1(k) of the Notes to Consolidated Financial Statements for discussion of the PGA.
Other Revenues Other revenues increased $25.5 million and $17.2 million during 1996 and 1995, respectively, primarily because of increased revenues at Whiting due to increases in oil and gas prices and increased gas volumes sold during 1996, and increases in oil and gas volumes sold in 1995. An increase in Utilities' steam revenues also contributed to the increase in both years. The steam volumes sold increased significantly during 1996 and 1995 primarily due to the addition of a new industrial customer. The 1995 increase was partially offset as a result of the sale of several of Diversified's subsidiaries during 1995 and 1994. The operations of the subsidiaries that were sold were not significant to the results of operations or financial position of the Company.
Operating Expenses Other operating expenses increased $13.4 million and $24.5 million in 1996 and 1995, respectively. Contributing to the increase in both periods were increased operating activities at Whiting and IEA, increased labor and benefits costs at Utilities, increases in the amortization of previously deferred energy efficiency expenditures at Utilities (which are currently being recovered through rates) and costs relating to the pending merger. The 1996 increase was partially offset by decreased operating expenses at the Duane Arnold Energy Center (DAEC), Utilities' nuclear generating facility. The 1995 increase was also due to costs relating to the Company's process improvement program, partially offset by lower nuclear operating and insurance costs at Utilities, decreased costs resulting from the sale of the Diversified subsidiaries and a cost-cutting effort implemented after the receipt of the IUB electric price reduction order earlier in 1995.
Maintenance expenses increased or (decreased) $2.9 million and ($6.7) million during 1996 and 1995, respectively. The 1996 increase was due to increased maintenance activities at Utilities' fossil-fueled generating stations, partially offset by lower maintenance expenses at the DAEC. The 1995 decrease was due to lower maintenance expenses at the DAEC and at Utilities' fossil-fueled generating stations as well as the cost containment actions discussed above.
Depreciation and amortization increased $9.4 million and $11.6 million in 1996 and 1995, respectively, because of increases in utility plant in service, the acquisition of oil and gas operating properties and amortization costs relating to the future dismantlement and abandonment of Whiting's offshore oil and gas properties. (See Note 13(f) of the Notes to Consolidated Financial Statements for a further discussion of the dismantlement and abandonment costs). The 1995 increase was partially offset by lower depreciation rates implemented at Utilities as a result of the IUB electric price reduction order. 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 relative to 1996 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. See Note 1(g) of the Notes to Consolidated Financial Statements for a discussion of the recovery of decommissioning costs allowed in Utilities' most recent rate case.
Taxes other than income taxes increased or (decreased) ($0.8) million and $2.7 million during 1996 and 1995, respectively, largely due to changes in property taxes at Utilities caused by fluctuations in assessed property values. The 1996 decrease was partially offset by an increase in production taxes at Whiting.
Interest Expense and Other Interest expense increased $4.1 million and $4.7 million in 1996 and 1995, respectively, primarily because of increases in the average amount of short-term debt outstanding at Utilities and the average amount of borrowings under Diversified's credit facility. Lower average interest rates, partially attributable to refinancing long-term debt at lower rates and the mix of long-term and short-term debt, partially offset the increases for both periods. The increase in interest expense during 1996 was also due to a higher amount of long-term debt outstanding at Utilities, partially offset by rate refund interest recorded in 1995 at Utilities and the effects of the interest rate swap agreement discussed in Note 12(a) of the Notes to Consolidated Financial Statements.
Miscellaneous, net reflects comparative decreases in income of ($5.5) million and ($0.3) million during 1996 and 1995, respectively. The 1996 decrease was primarily due to approximately $7.8 million in costs incurred relating to the successful defense of the hostile takeover attempt mounted by MAEC and certain property write-downs at Diversified. The decrease was partially offset by dividends received from the two New Zealand entities in which the company has equity investments and various gains realized on the disposition of assets. The 1995 decrease was primarily because of higher fees associated with an increase in the average amount of utility accounts receivable sold, partially offset by various gains realized on the sale of several investments by Diversified.
Federal and State Income Taxes Federal and state income taxes increased $4.9 million and $0.9 million in 1996 and 1995, respectively. The increase for both periods was due to a higher effective tax rate resulting from: 1) the effect of property related temporary differences for which deferred taxes had not previously been provided in rates, pursuant to rate making principles, that are now becoming payable and are being recovered from ratepayers and 2) adjustments to tax reserves. The 1996 increase in effective tax rate was also due to recording the impacts of a tentative Internal Revenue Service audit settlement for tax years 1991-1993 as well as the incurrence of certain merger-related expenses, which are not tax deductible.
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 2.99, 3.12 and 3.38 in 1996-1994, respectively. Cash flows from operating activities were $183 million, $200 million and $217 million in 1996-1994, respectively. The 1996 decrease was primarily due to the timing of income tax payments and other changes in working capital. The 1995 decrease was primarily due to expenditures related to the 1995 DAEC refueling outage and other changes in working capital.
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 13 of the Notes to Consolidated Financial Statements.
Access to the long-term and short-term capital and credit markets, and costs of external financing, are dependent on the Company's creditworthiness. The Company's debt ratings are as follows:
Moody's Standard & Poor's
Utilities - Long-term debt A2 A - Commercial paper P1 A1
Diversified - Commercial paper P2 A2
Utilities' credit ratings are under review for potential upgrade related to the pending merger.
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 13 of the Notes to Consolidated Financial Statements, 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 December 31, 1996, Utilities had approximately $61 million of energy efficiency program costs recorded as regulatory assets. See Note 3(b) of the Notes to Consolidated Financial Statements for a discussion of the timing of the filings for the recovery of these costs under IUB rules and Iowa statutory changes recently enacted relating to these programs.
At December 31, 1996, the Company had a $20.0 million investment in Class A common stock of McLeod, Inc. (McLeod), a $9.2 million investment in Class B common stock and vested options that, if exercised, would represent an additional investment of approximately $2.3 million. McLeod provides local, long-distance and other telecommunications services. See Notes 6(b) and 11 of the Notes to Consolidated Financial Statements for further information on the Company's investment in McLeod.
The Company has financial guarantees amounting to $22.9 million outstanding at December 31, 1996, 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 the likelihood of material cash payments by the Company under these agreements is remote.
The Company increased its investments in foreign entities by approximately $20 million in 1996 (see Note 6(a) of the Notes to Consolidated Financial Statements for a further discussion). The Company also continues to explore other international investment opportunities. Such investments carry a higher level of risk than the Company's traditional utility investments or Diversified's domestic investments. Such risks could include foreign government actions, foreign economic and currency risks and others. The Company may also incur business development expenses for potential projects pursued by the Company that may never materialize. The Company is striving to select international investments where these risks are both understood and minimized.
The Resale Power Group of Iowa (RPGI), consisting of virtually all of Utilities' wholesale customers, has notified Utilities that it will not purchase its power supply from Utilities after December 31, 1998. It is possible that certain RPGI customers will drop out of RPGI in order to remain as Utilities' customers. RPGI 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 accounted for approximately 5% of Utilities' total 1996 electric sales, excluding off-system sales; 2) Utilities currently has to supplement its generating capability with purchased power to meet its sales load; and 3) Utilities' annual electric sales growth rate continues to be strong.
Under provisions of the Merger Agreement, there are restrictions on the amount of common stock and long-term debt the Company can issue pending the merger. The Company does not expect the restrictions to have a material effect on its ability to meet its future capital requirements.
CONSTRUCTION AND ACQUISITION PROGRAM
The Company's construction and acquisition program anticipates expenditures of approximately $225 million for 1997, of which approximately $147 million represents expenditures at Utilities and approximately $78 million represents expenditures at Diversified. Of the $147 million of Utilities' expenditures, 39% represents expenditures for electric transmission and distribution facilities, 21% represents electric generation expenditures, 21% represents information technology expenditures and 5% represents gas expenditures. The remaining 14% represents miscellaneous electric, steam and general expenditures. Diversified's anticipated expenditures include approximately $75 million for domestic and international energy-related construction and acquisition expenditures.
The Company'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 $ 207.2 Diversified's credit facility 172.1 Other subsidiaries' debt 11.2 $ 390.5
The Company intends to refinance the majority of the debt maturities with long-term securities.
In September 1996, Utilities repaid at maturity $15 million of Series J, 6.25% First Mortgage Bonds and, in a separate transaction, issued $60 million of Collateral Trust Bonds, 7.25%, due 2006.
Utilities has entered into an Indenture of Mortgage and Deed of Trust dated September 1, 1993 (New Mortgage). The New Mortgage provides for, among other things, the issuance of Collateral Trust Bonds upon the basis of First Mortgage Bonds being issued by Utilities. The lien of the New Mortgage is subordinate to the lien of Utilities' first mortgages until such time as all bonds issued under the first mortgages have been retired and such mortgages satisfied. Accordingly, to the extent that Utilities issues Collateral Trust Bonds on the basis of First Mortgage Bonds, it must comply with the requirements for the issuance of First Mortgage Bonds under Utilities' first mortgages. Under the terms of the New Mortgage, Utilities has covenanted not to issue any additional First Mortgage Bonds under its first mortgages except to provide the basis for issuance of Collateral Trust Bonds.
The indentures pursuant to which Utilities issues First Mortgage Bonds constitute direct first mortgage liens upon substantially all tangible public utility property and contain covenants which restrict the amount of additional bonds which may be issued. At December 31, 1996, such restrictions would have allowed Utilities to issue at least $241 million of additional First Mortgage Bonds.
In order to provide an instrument for the issuance of unsecured subordinated debt securities, Utilities entered into an Indenture dated December 1, 1995 (Subordinated Indenture). The Subordinated Indenture provides for, among other things, the issuance of unsecured subordinated debt securities. Any debt securities issued under the Subordinated Indenture are subordinate to all senior indebtedness of Utilities, including First Mortgage Bonds and Collateral Trust Bonds.
Utilities has received authority from the FERC and the SEC to issue up to $250 million of long-term debt, and has $190 million of remaining authority under the current FERC docket through April 1998, and $140 million of remaining authority under the current SEC shelf registration.
Diversified has a variable rate credit facility that extends through November 20, 1999, with two one-year extensions potentially available to Diversified. Refer to Note 10(a) of the Notes to Consolidated Financial Statements for a further discussion of this credit facility.
The Articles of Incorporation of Utilities authorize and limit the aggregate amount of additional shares of Cumulative Preference Stock and Cumulative Preferred Stock that may be issued. At December 31, 1996, Utilities could have issued an additional 700,000 shares of Cumulative Preference Stock and 100,000 additional shares of Cumulative Preferred Stock. In addition, Industries had 5,000,000 shares of Cumulative Preferred Stock, no par value, authorized for issuance, none of which were outstanding at December 31, 1996.
The Company's capitalization ratios at year-end were as follows:
1996 1995
Long-term debt 52% 49% Preferred stock 1 2 Common equity 47 49 100% 100%
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 December 31, 1996, Utilities had outstanding short-term borrowings of $135 million.
Utilities has an agreement, which expires in 1999, with a financial institution to sell, with limited recourse, an undivided fractional interest of up to $65 million in its pool of utility accounts receivable. At December 31, 1996, Utilities had sold $65 million under the agreement. Refer to Note 5 of the Notes to Consolidated Financial Statements for a further discussion of this agreement, including the issuance of a new accounting standard which impacts the accounting for the sales.
At December 31, 1996, the Company had bank lines of credit aggregating $136.1 million. Utilities was using $110 million to support commercial paper (weighted average interest rate of 5.70%) and $11.1 million to support certain pollution control obligations. Commitment fees are paid to maintain these lines and there are no conditions which restrict the unused lines of credit. In addition to the above, Utilities has an uncommitted credit facility with a financial institution whereby it can borrow up to $40 million. Rates are set at the time of borrowing and no fees are paid to maintain this facility. At December 31, 1996, there was $25 million outstanding under this facility (weighted average interest rate of 6.28%).
ENVIRONMENTAL MATTERS
Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 Former Manufactured Gas Plant (FMGP) sites. Utilities has recorded environmental liabilities related to the FMGP sites of approximately $36 million (including $4.7 million as current liabilities) at December 31, 1996. Regulatory assets of approximately $36 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 13(f) of the Notes to Consolidated Financial Statements for a further discussion, including a discussion of a lawsuit filed by Utilities seeking recovery of FMGP-related costs from its insurance carriers.
The Clean Air Act Amendments of 1990 (Act) requires emission reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve reductions of atmospheric chemicals believed to cause acid rain. The acid rain program under the Act also governs SO2 allowances. The Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to NOx, ozone transport, mercury and particulate control; toxic release inventories and modifications to the PCB rules.
In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the National Ambient Air Quality Standards established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences.
Pursuant to a routine review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Refer to Note 13(g) 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 13(f) of the Notes to Consolidated Financial Statements for a further discussion.
The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such a contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The DOE, however, has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities has been storing spent nuclear fuel on- site since plant operations began in 1974 and has current on-site capability to store spent fuel until 2001. Utilities is aggressively reviewing options for expanding on-site storage. Utilities has been formally notified by the DOE that they anticipate being unable to begin acceptance of spent nuclear fuel by January 31, 1998. Utilities is evaluating courses of action to protect the interests of its customers and its rights under the DOE contract. Utilities is also evaluating legislation proposed to the Congress addressing this issue. In July 1996, the IUB initiated a Notice of Inquiry (NOI) on spent nuclear fuel. One purpose of the NOI was to evaluate whether the current collection of money from Utilities' customers for payment to the NWF should be placed in an escrow account in lieu of being paid to the NWF. Utilities believes that the issue of using an escrow account should be decided at the federal level rather than the state level. Utilities cannot predict the outcome of this NOI.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that each state must take responsibility for the storage of low- level radioactive waste produced within its borders. The State of Iowa has joined the Midwest Interstate Low-Level Radioactive Waste Compact Commission (Compact), which is planning a storage facility to be located in Ohio to store waste generated by the Compact's six member states. At December 31, 1996, Utilities has prepaid costs of approximately $1.1 million to the Compact for the building of such a facility. A Compact disposal facility is anticipated to be in operation in approximately ten years after approval of new enabling legislation by the member states. Such legislation was approved in 1996 by all six states that are members of the Compact. Final approval by the U.S. Congress is now required. On-site storage capability currently exists for low-level radioactive waste expected to be generated until the Compact facility is able to accept waste materials. In addition, the Barnwell, South Carolina disposal facility has reopened for an indefinite time period and Utilities is in the process of shipping to Barnwell the majority of the low-level radioactive waste it has accumulated on-site, and currently intends to ship the waste it produces in the future as long as the Barnwell site remains open, thereby minimizing the amount of low-level waste stored on-site. However, management of the Barnwell site has modified its fee schedule to emphasize total radioactivity content and weight, instead of the historical volume related fees. Utilities is evaluating the outcome of these changes on its potential future disposal costs at the Barnwell site; such changes could result in a revision to Utilities' future disposal plans.
The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental, industry and media attention. A recent study completed by the National Research Council concluded that the current body of evidence does not support the notion that exposure to these fields may result in adverse health effects. Utilities will continue to monitor the events in this area, including future scientific research.
Whiting is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties. Refer to Note 13(f) of the Notes to Consolidated Financial Statements for a further discussion.
OTHER MATTERS
Labor Issues Utilities has six collective bargaining agreements, covering approximately 54% of its workforce. None of the agreements expires in 1997.
Financial Derivatives The Company has a policy that financial derivatives are to be used only to mitigate business risks and not for speculative purposes. Derivatives have been used by the Company on a very limited basis. At December 31, 1996, the only material financial derivatives outstanding for the Company were the interest rate swap agreement and gas futures contracts described in Note 12 of the Notes to Consolidated Financial Statements.
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.
Selected Consolidated Quarterly Financial Data (unaudited)
The following unaudited consolidated quarterly data, in the opinion of the Company, includes adjustments, which are normal and recurring in nature, necessary for the fair presentation of the results of operations and financial position. Utilities' results of operations are a significant portion of Industries' consolidated results. The quarterly amounts were affected by, among other items, Utilities' rate activities, seasonal weather conditions, changes in sales and operating expenses and costs incurred relating to the successful defense of the hostile takeover attempt mounted by MidAmerican Energy Company. Refer to Management's Discussion and Analysis of the Results of Operations and Financial Condition for a discussion of these items. The fourth quarter of 1996 net income benefited from lower than anticipated costs for a refueling outage at Utilities' nuclear power plant.
IES INDUSTRIES INC. Quarter Ended March 31 June 30 September 30 December 31 (in thousands, except per share amounts) Operating revenues $ 243,197 $ 210,648 $ 233,907 $ 286,160 Operating income 36,995 26,770 55,701 44,842 Net income 14,095 8,056 20,889 17,867 Earnings per average common share 0.48 0.27 0.70 0.59
Operating revenues $ 206,392 $ 189,447 $ 238,467 $ 216,704 Operating income 22,115 33,456 63,710 32,431 Net income 6,740 12,508 31,120 13,808 Earnings per average common share 0.23 0.43 1.06 0.48
IES UTILITIES INC. Quarter Ended March 31 June 30 September 30 December 31 (in thousands) Operating revenues $ 198,768 $ 164,240 $ 190,170 $ 201,801 Operating income 34,204 23,009 53,253 43,259 Net income 14,128 7,230 20,013 22,358 Net income available for common stock 13,899 7,001 19,784 22,131
Operating revenues $ 172,839 $ 157,671 $ 200,448 $ 178,868 Operating income 19,896 30,444 61,360 30,565 Net income 6,161 11,067 29,842 12,208 Net income available for common stock 5,932 10,838 29,613 11,981
Item 8.
Item 8. Financial Statements and Supplementary Data
Information required by Item 8. begins on page 44 for Industries and page 73 for Utilities.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of IES Industries Inc.:
We have audited the accompanying consolidated balance sheets and statements of capitalization of IES Industries Inc. (an Iowa corporation) and subsidiary companies as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the financial statement schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IES Industries Inc. and subsidiary companies as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois January 31, 1997
IES INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of Consolidation -
The Consolidated Financial Statements include the accounts of IES Industries Inc. (Industries) and its consolidated subsidiaries (collectively the Company). Industries is an investor-owned holding company whose primary operating company, IES Utilities Inc. (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.
All subsidiaries for which Industries owns directly or indirectly more than 50% of the voting stock are included as consolidated subsidiaries. Industries' wholly-owned subsidiaries are Utilities and IES Diversified Inc. (Diversified). All significant intercompany balances and transactions, other than energy-related transactions affecting Utilities, have been eliminated from the Consolidated Financial Statements. Such energy-related transactions are made at prices that approximate market value and the associated costs are recoverable from Utilities' customers through the rate making process.
Investments for which the Company has at least a 20% voting interest are generally accounted for under the equity method of accounting. These investments are stated at acquisition cost, increased or decreased for the Company's equity in undistributed net income or loss, which is included in "Miscellaneous, net" in the Consolidated Statements of Income. Investments that do not meet the criteria for the consolidating or equity methods of accounting are accounted for under the cost method.
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.
Certain prior period amounts have been reclassified on a basis consistent with the 1996 presentation.
(b) Regulation -
Because of its ownership of Utilities, Industries is a holding company under the Public Utility Holding Company Act of 1935, but claims an exemption from all provisions thereof except Section 9(a)(2), which applies to the purchase of stock of other utility companies. Utilities is subject to regulation by the Iowa Utilities Board (IUB) and the Federal Energy Regulatory Commission (FERC).
Refer to Note 2 for a discussion of the proposed merger of the Company.
(c) Regulatory Assets -
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). The regulatory assets represent probable future revenue to Utilities associated with certain incurred costs as these costs are recovered through the rate making process. At December 31, regulatory assets as reflected in the Consolidated Balance Sheets were comprised of the following items:
1996 1995 (in millions)
Deferred income taxes (Note 1(d)) $ 84.7 $ 91.1 Energy efficiency program costs (Note 3(b)) 61.1 49.7 Environmental liabilities (Note 13(f)) 46.3 46.9 Employee pension and benefit costs (Note 8) 22.9 27.5 Other 12.7 14.8 227.7 230.0 Classified as "Current assets - regulatory assets" 26.6 22.8 Classified as "Other assets - regulatory assets" $ 201.1 $ 207.2
Refer to the individual notes referenced above for a further discussion of certain items reflected in regulatory assets.
If a portion of Utilities' operations become no longer subject to the provisions of SFAS 71, a write-off of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. In addition, the Company would be required to determine any impairment to other assets and write-down such assets to their fair value. Effective January 1, 1996, the Company adopted SFAS 121 which established accounting standards for the impairment of long-lived assets. This standard also requires that regulatory assets that are no longer probable of recovery through future revenues be charged to earnings. There was no impact on the Company's financial position or results of operations upon adoption of SFAS 121.
(d) Income Taxes -
The Company follows the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax liabilities and assets, as appropriate, for all temporary differences between the tax basis of assets and liabilities and the amounts reported in the financial statements. Deferred taxes are recorded using currently enacted tax rates.
Except as noted below, income tax expense includes provisions for deferred taxes to reflect the tax effects of temporary differences between the time when certain costs are recorded in the accounts and when they are deducted for tax return purposes. As temporary differences reverse, the related accumulated deferred income taxes are reversed to income. Investment tax credits for Utilities have been deferred and are subsequently credited to income over the average lives of the related property.
Consistent with rate making practices for Utilities, deferred tax expense is not recorded for certain temporary differences (primarily related to utility property, plant and equipment). As the deferred taxes become payable, over periods exceeding 30 years for some generating plant differences, they are recovered through rates. Accordingly, Utilities has recorded deferred tax liabilities and regulatory assets, as identified in Note 1(c).
(e) Temporary Cash Investments -
Temporary cash investments are stated at cost, which approximates market value, and are considered cash equivalents for the Consolidated Statements of Cash Flows. These investments consist of short-term liquid investments that have maturities of less than 90 days from the date of acquisition.
(f) Depreciation of Utility Property, Plant and Equipment -
Utilities uses the remaining life method of depreciation for its nuclear generating facility, the Duane Arnold Energy Center (DAEC), and the straight-line method for all other utility property. The remaining life of the DAEC is based on the Nuclear Regulatory Commission (NRC) license life of 2014. The average rates of depreciation for electric and gas properties of Utilities, consistent with current rate making practices, were as follows:
1996 1995 1994
Electric 3.5% 3.4% 3.6% Gas 3.5% 3.5% 3.8%
The electric and gas depreciation rates declined in 1995 from 1994 because of revised depreciation rates approved in rate proceedings of Utilities.
(g) Decommissioning of the DAEC -
Pursuant to the most recent electric rate case order, the IUB allows Utilities to recover $6.0 million annually for the cost to decommission the DAEC. Decommissioning expense is included in "Depreciation and amortization" in the Consolidated Statements of Income and the cumulative amount is included in "Accumulated depreciation" in the Consolidated Balance Sheets to the extent recovered through rates. The current recovery figures are based on the following assumptions: 1) cost to decommission the DAEC of $252.8 million, which is Utilities' 70% portion in 1993 dollars, based on the NRC minimum formula (which exceeds the amount in the current site-specific study completed in 1994); 2) inflation of 4.91% annually through 1997; 3) the prompt dismantling and removal method of decommissioning, which is assumed to begin in the year 2014; 4) monthly funding of all future collections into external trust funds and funded on a tax-qualified basis to the extent possible; and 5) an average after-tax return of 6.82% for all external investments. All of these assumptions are subject to change in future regulatory proceedings. At December 31, 1996, Utilities had $59.3 million invested in external decommissioning trust funds as indicated in the Consolidated Balance Sheets, and also had an internal decommissioning reserve of $21.7 million recorded as accumulated depreciation. Earnings on the external trust funds, which were $2.2 million in 1996, are recorded as interest income and a corresponding interest expense payable to the funds is recorded. The earnings accumulate in the external trust fund balances and in accumulated depreciation on utility plant.
See "Management's Discussion and Analysis of the Results of Operations and Financial Condition" for a discussion of the Exposure Draft on Accounting for Liabilities Related to Closure and Removal of Long-Lived Assets, issued by the Financial Accounting Standards Board (FASB) in the first quarter of 1996, which deals with, among other issues, the accounting for decommissioning costs.
(h) Property, Plant and Equipment -
Utility plant (other than acquisition adjustments of $29.4 million, net of accumulated amortization, recorded at cost) is recorded at original cost, which includes overhead and administrative costs and an allowance for funds used during construction (AFC). The AFC, which represents the cost during the construction period of funds used for construction purposes, is capitalized by Utilities as a component of the cost of utility plant. The amount of AFC applicable to debt funds and to other (equity) funds, a non-cash item, is computed in accordance with the prescribed FERC formula. The aggregate gross rates used by Utilities for 1996-1994 were 5.5%, 6.5% and 9.3%, respectively. These capitalized costs are recovered by Utilities in rates as the cost of the utility plant is depreciated.
Other property, plant and equipment is recorded at cost. Upon retirement or sale of other property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in "Miscellaneous, net" in the Consolidated Statements of Income.
Normal repairs, maintenance and minor items of utility plant and other property, plant and equipment are expensed. Ordinary retirements of utility plant, including removal costs less salvage value, are charged to accumulated depreciation upon removal from utility plant accounts, and no gain or loss is recognized.
(i) Oil and Gas Properties -
Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary under Diversified, uses the full cost method of accounting for its oil and gas properties. Accordingly, all costs of acquisition, exploration and development of properties are capitalized. Amortization of proved oil and gas properties is calculated using the units of production method. At December 31, 1996, capitalized costs less related accumulated amortization did not exceed the sum of 1) the present value of future net revenue from estimated production of proved oil and gas reserves (calculated using current prices); plus 2) the cost of properties not being amortized, if any; plus 3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less 4) income tax effects related to differences in the book and tax basis of oil and gas properties. The Company had $9.8 million on its Consolidated Balance Sheet at December 31, 1995, relating to specific oil and gas properties purchased by Whiting in the fourth quarter of 1995 that it intended to sell during 1996. The Company subsequently decided not to sell these properties and, accordingly, the balance at December 31, 1996 is included in "Other property, plant and equipment" on the Consolidated Balance Sheet.
(j) Operating Revenues -
The Company accrues revenues for services rendered but unbilled at month-end in order to more properly match revenues with expenses.
(k) Adjustment Clauses -
Utilities' tariffs provide for subsequent adjustments to its electric and natural gas rates for changes in the cost of fuel and purchased energy and in the cost of natural gas purchased for resale. Changes in the under/over collection of these costs are reflected in "Fuel for production" and "Gas purchased for resale" in the Consolidated Statements of Income. The cumulative effects are reflected in the Consolidated Balance Sheets as a current asset or current liability, pending automatic reflection in future billings to customers.
(l) Accumulated Refueling Outage Provision -
The IUB allows Utilities to collect, as part of its base revenues, funds to offset other operating and maintenance expenditures incurred during refueling outages at the DAEC. As these revenues are collected, an equivalent amount is charged to other operating and maintenance expenses with a corresponding credit to a reserve. During a refueling outage, the reserve is reversed to offset the refueling outage expenditures.
(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), providing for: a) IPC becoming a wholly-owned subsidiary of WPLH, and b) the merger of Industries with and into WPLH, which merger will result in the combination of Industries and WPLH as a single holding company (collectively, the Proposed Merger). The new holding company will be named Interstate Energy Corporation (Interstate Energy) and Industries will cease to exist. The Proposed Merger, which will be accounted for as a pooling of interests and is intended to be tax-free for federal income tax purposes, has been approved by the respective Boards of Directors and shareholders. It is still subject to approval by several federal and state regulatory agencies. The companies expect to receive such regulatory approvals by the end of the third quarter of 1997.
The summary below contains selected unaudited pro forma financial data for the year ended December 31, 1996. The financial data should be read in conjunction with the historical consolidated financial statements and related notes of the Company, WPLH, and IPC and in conjunction with the unaudited pro forma combined financial statements and related notes of Interstate Energy included in Item 14. The pro forma combined earnings per share reflect the issuance of shares associated with the exchange ratios discussed below.
PRO FORMA IES COMBINED INDUSTRIES WPLH IPC (Unaudited) (in thousands, except per share amounts)
Operating revenues $ 973,912 $ 932,844 $ 326,084 $ 2,232,840 Net income from continuing operations 60,907 73,205 25,860 159,972 Earnings per share from continuing operations 2.04 2.38 2.69 2.12 Assets at December 31, 1996 2,125,562 1,900,531 639,200 4,665,293 Long-term obligations at December 31, 1996 744,298 430,190 188,731 1,363,219
Under the terms of the Merger Agreement, the outstanding shares of WPLH's common stock will remain unchanged and outstanding as shares of Interstate Energy. Each outstanding share of the Company's common stock will be converted to 1.14 shares of Interstate Energy's common stock. Each share of IPC's common stock will be converted to 1.11 shares of Interstate Energy's common stock. It is anticipated that Interstate Energy will retain WPLH's common share dividend payment level as of the effective time of the merger. On January 22, 1997, the Board of Directors of WPLH declared a quarterly dividend of $0.50 per share. This represents an equivalent annual rate of $2.00 per share.
WPLH is a holding company headquartered in Madison, Wisconsin, and is the parent company of Wisconsin Power and Light Company (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.
Interstate Energy will be the parent company of Utilities, WP&L and IPC and will be registered under the Public Utility Holding Company Act of 1935, as amended (1935 Act). The Merger Agreement provides that these operating utility companies will continue to operate as separate entities for a minimum of three years beyond the effective date of the merger. In addition, the non-utility operations of the Company and WPLH will be combined shortly after the effective date of the merger under one entity to manage the diversified operations of Interstate Energy. The corporate headquarters of Interstate Energy will be in Madison.
The SEC historically has interpreted the 1935 Act to preclude registered holding companies, with limited exceptions, from owning both electric and gas utility systems. Although the SEC has recommended that registered holding companies be allowed to hold both gas and electric utility operations if the affected states agree, it remains possible that the SEC may require as a condition to its approval of the Proposed Merger that the Company, WPLH and IPC divest their gas utility properties, and possibly certain non-utility ventures of the Company and WPLH, within a reasonable time after the effective date of the Proposed Merger.
(3) RATE MATTERS:
(a) Electric Price Announcements -
Utilities and its Iowa-based proposed merger partner, IPC, announced in 1996 their intentions to hold retail electric prices to their current levels until at least January 1, 2000. The companies made the proposal as part of their testimony in the merger-related application filed with the IUB; the application was later withdrawn and was resubmitted in January 1997 and the companies included the same proposal in the resubmittal of the filing. The proposal excludes price changes due to government-mandated programs, such as energy efficiency cost recovery, or unforeseen dramatic changes in operations.
Utilities, 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 price proposals to have a material adverse effect on its financial position or results of operations.
(b) Energy Efficiency Cost Recovery -
Current IUB rules mandate Utilities to spend 2% of electric and 1.5% of gas gross retail operating revenues for energy efficiency programs. Under provisions of the IUB rules, Utilities is currently recovering the energy efficiency costs incurred through 1993 for such programs, including its direct expenditures, carrying costs, a return on its expenditures and a reward. These costs are being recovered over a four-year period and the recovery began on June 1, 1995.
In December 1996, under provisions of the IUB rules, the Company filed for recovery of the costs relating to its 1994 and 1995 programs. Utilities' proposed recovery was for approximately $53 million ($42 million electric and $11 million gas) and was composed of $34 million for direct expenditures and carrying costs, $10 million for a return on the expenditures over the recovery period and $9 million for a reward based on a sharing of the benefits of such programs. The Company expects to receive the final order in the proceeding in June 1997 with recovery of the allowed costs to commence in the third quarter of 1997.
Iowa statutory changes enacted in 1996, and applicable to future programs once the legislation is implemented by the IUB, have eliminated: 1) the 2% and 1.5% spending requirements described above in favor of IUB-determined energy savings targets, 2) the delay in recovery of energy efficiency costs by allowing recovery which is concurrent with spending and 3) the recovery of a sharing reward. The IUB commenced a rulemaking in January 1997 to implement the statutory change and a final order in this proceeding is expected in the second quarter of 1997. The proposed rules provide that the Company would begin to recover its 1996 expenditures, and the 1997 expenditures incurred at such time, during the summer of 1997 over a likely four-year recovery period. The Company would also begin concurrent recovery of its prospective expenditures at such time. The implementation of these changes will gradually eliminate the regulatory asset which exists under the current rate making mechanism as these costs are recovered.
The Company has the following amounts of energy efficiency costs included in regulatory assets on its Consolidated Balance Sheets at December 31 (in thousands):
1996 1995
Costs incurred through 1993 $ 12,834 $ 18,287 Costs incurred in 1994-1995 33,161 31,393 Costs incurred in 1996 15,087 - $ 61,082 $ 49,680
The above amounts include the direct expenditures and carrying costs incurred by the Company but do not include any amounts for a return on its expenditures over the recovery period or for a reward.
(4) LEASES:
Utilities has a capital lease covering its 70% undivided interest in nuclear fuel purchased for the DAEC. Future purchases of fuel may also be added to the fuel lease. This lease provides for annual one-year extensions and Utilities intends to continue exercising such extensions. Interest costs under the lease are based on commercial paper costs incurred by the lessor. Utilities is responsible for the payment of taxes, maintenance, operating cost, risk of loss and insurance relating to the leased fuel.
The lessor has a $45 million credit agreement with a bank supporting the nuclear fuel lease. The agreement continues on a year-to- year basis, unless either party provides at least a three-year notice of termination; no such notice of termination has been provided by either party.
Annual nuclear fuel lease expenses include the cost of fuel, based on the quantity of heat produced for the generation of electric energy, plus the lessor's interest costs related to fuel in the reactor and administrative expenses. These expenses (included in "Fuel for production" in the Consolidated Statements of Income) for 1996-1994 were $18.2 million, $18.0 million and $17.8 million, respectively.
The Company's operating lease rental expenses for 1996-1994 were $8.3 million, $10.4 million and $11.1 million, respectively.
The Company's future minimum lease payments by year are as follows:
Capital Operating Year Lease Leases (in thousands)
1997 $ 16,808 $ 6,891 1998 9,889 6,565 1999 6,969 4,741 2000 3,004 2,510 2001 861 1,370 Thereafter 307 197 37,838 $ 22,274 Less: Amount representing interest 3,113 Present value of net minimum capital lease payments $ 34,725
(5) UTILITY ACCOUNTS RECEIVABLE:
Customer accounts receivable, including unbilled revenues, arise primarily from the sale of electricity and natural gas. At December 31, 1996, Utilities was serving a diversified base of residential, commercial and industrial customers consisting of approximately 336,000 electric and 176,000 gas customers and did not have any significant concentrations of credit risk.
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. Expenses related to the sale of receivables are paid to the financial organization under this contract and approximated a 5.86% annual rate during 1996. During 1996 and 1995, the monthly proceeds from the sale of accounts receivable averaged $62.9 million and $61.9 million, respectively. At December 31, 1996, $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 is being modified to comply with the SFAS 125 requirements and thus the accounting and reporting for the sale of Utilities' receivables will remain unchanged.
(6) INVESTMENTS:
(a) Foreign Entities -
At December 31, 1996, the Company had $44.9 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 December 31, 1996, included investments of approximately $30.9 million in New Zealand, $13.6 in China and $0.4 million in other countries.
(b) McLeod, Inc. (McLeod) -
At December 31, 1996, the Company had a $20.0 million investment in Class A common stock of McLeod, a $9.2 million investment in Class B common stock and vested options that, if exercised, would represent an additional investment of approximately $2.3 million. McLeod provides local, long-distance and other telecommunications services.
McLeod completed an Initial Public Offering (IPO) of its Class A common stock in June 1996 and a secondary offering in November 1996. As of December 31, 1996, the Company is the beneficial owner of approximately 10.6 million total shares on a fully diluted basis. Class B shares are convertible at the option of the Company into Class A shares at any time on a one-for-one basis. The rights of McLeod Class A common stock and Class B common stock are substantially identical except that Class A common stock has 1 vote per share and Class B common stock has 0.40 vote per share. The Company currently accounts for this investment under the cost method.
The Company has entered into an agreement with McLeod which provides that for two years commencing on June 10, 1996, the Company cannot sell or otherwise dispose of any of its securities of McLeod without the consent of the McLeod Board of Directors. This contractual sale restriction results in restricted stock under the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain Investments in Debt and Equity Securities, until such time as the restrictions lapse and such shares became qualified for sale within a one year period. As a result, the Company currently carries this investment at cost.
The closing price of the McLeod Class A common stock on December 31, 1996, on the Nasdaq National Market, was $25.50 per share. The current market value of the shares the Company beneficially owns (approximately 10.6 million shares) is currently impacted by, among other things, the fact that the shares cannot be sold for a period of time and it is not possible to estimate what the market value of the shares will be at the point in time such sale restrictions are lifted. In addition, any gain upon an eventual sale of this investment would likely be subject to a tax.
Under the provisions of SFAS No. 115, the carrying value of the McLeod investment will be adjusted to estimated fair value at the time such shares become qualified for sale within a one year period; this will occur on June 10, 1997, which is one year before the contractual restrictions on sale are lifted. At that time, the adjustment to reflect the estimated fair value of this investment will be reflected as an increase in the investment carrying value with the unrealized gain reported as a net of tax amount in other common shareholders equity until realized (i.e., sold by the Company).
(7) INCOME TAXES:
The components of federal and state income taxes for the years ended December 31, were as follows:
1996 1995 1994 (in millions)
Current tax expense $ 38.2 $ 34.7 $ 37.5 Deferred tax expense 11.8 10.5 6.7 Amortization and adjustment of investment tax credits (2.6) (2.7) (2.6) $ 47.4 $ 42.5 $ 41.6
The overall effective income tax rates shown below for the years ended December 31, were computed by dividing total income tax expense by income before income taxes.
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefits 6.6 5.5 5.9 Effect of rate making on property related differences 2.8 2.6 1.6 Amortization of investment tax credits (2.4) (2.5) (2.5) Adjustment of prior period taxes 1.4 (0.4) (1.6) Other items, net 0.4 (0.4) - Overall effective income tax rate 43.8% 39.8% 38.4%
The accumulated deferred income taxes as set forth below in the Consolidated Balance Sheets at December 31, arise from the following temporary differences:
1996 1995 (in millions)
Property related $ 293 $ 296 Investment tax credit related (24) (26) Decommissioning related (15) (14) Other 9 1 $ 263 $ 257
(8) BENEFIT PLANS:
(a) Pension Plans -
The Company has two non-contributory pension plans that, collectively, cover substantially all of its employees. Plan benefits are generally based on years of service and compensation during the employees' latter years of employment. Payments made from the pension funds to retired employees and beneficiaries during 1996 totaled $10.7 million.
The Company's policy is to fund the pension cost at an amount that is at least equal to the minimum funding requirements mandated by the Employee Retirement Income Security Act (ERISA) and that does not exceed the maximum tax deductible amount for the year. The Company has an investment policy governing asset allocation guidelines for its pension plans. The target ranges are as follows: 1) 37%-43% in large and mid- sized domestic company equity securities, 2) 7%-13% in foreign equity securities, 3) 7%-13% in small domestic company equity securities, 4) 0- 5% in real estate, and 5) the remainder in fixed income securities. As of December 31, 1996, the plan's investment mix was consistent with the policy guidelines.
Pursuant to the provisions of SFAS 71, certain adjustments to Utilities' pension provision are necessary to reflect the accounting for pension costs allowed in its most recent rate cases.
The components of the pension provision for the years ended December 31, were as follows:
1996 1995 1994 (in thousands)
Service cost $ 5,997 $ 5,215 $ 5,863 Interest cost on projected benefit obligation 12,711 11,811 11,431 Assumed return on plans' assets (14,976) (12,567) (12,593) Early retirement benefits 4,713 - - Net amortization 906 268 841 Pension cost 9,351 4,727 5,542 Adjustment to funding level (9,351) (4,727) (5,431) Total pension costs paid to the Trustee $ - $ - $ 111
Actual return on plans' assets $ 26,297 $ 36,614 $ (97)
During 1996, the Company incurred a one-time charge of $4.7 million related to an early retirement program. Of such costs, $0.2 million was charged to expense and the remaining amount was deferred for future recovery through the regulatory process.
A reconciliation of the funded status of the plans to the amounts recognized in the Consolidated Balance Sheets at December 31, is presented below:
1996 1995 (in thousands)
Fair market value of plans' assets $ 212,394 $ 195,329 Actuarial present value of benefits rendered to date - Accumulated benefits based on compensation to date, including vested benefits of $130,334,000 and $119,996,000, respectively 142,515 131,274 Additional benefits based on estimated future salary levels 42,940 41,581 Projected benefit obligation 185,455 172,855 Plans' assets in excess of projected benefit obligation 26,939 22,474 Remaining unrecognized net asset existing at January 1, 1987, being amortized over 20 years (3,179) (3,511) Unrecognized prior service cost 15,523 16,905 Unrecognized net gain (54,442) (41,795) Accrued pension cost recognized in the Consolidated Balance Sheets $ (15,159) $ (5,927)
Assumed rate of return, all plans 9.00% 8.00% Weighted average discount rate of projected benefit obligation, all plans 7.50% 7.50% Assumed rate of increase in future compensation levels for the plans 4.75% 4.75%
The assumed rate of return was increased to 9.00% in 1996 based on actual historical performance of the previously stated investment mix.
The Company also sponsors defined contribution pension plans (401(k) plans) covering substantially all employees. The Company's contributions to the plans, which are based on the participants' level of contribution and cannot exceed 2.8% of the participants' salaries or wages, were $1.7 million, $1.5 million and $1.8 million in 1996, 1995 and 1994, respectively.
(b) Other Postemployment Benefit Plans -
The Company provides certain benefits to retirees (primarily health care benefits). The IUB adopted rules stating that postretirement benefits other than pensions will be included in Utilities' rates pursuant to the provisions of SFAS 106. The rules permit Utilities to amortize the transition obligation as of January 1, 1993, over 20 years and require that all amounts collected are to be funded into an external trust to pay benefits as they become due. The gas and electric portions of these costs are being recovered through rates beginning in 1993 and 1995, respectively, including amounts that were deferred by the Company, pursuant to IUB rules, between when SFAS 106 was adopted and when recovery through rates began. The amounts deferred are being amortized as they are collected through rates over a three-year period. Utilities' unamortized balance of these deferred costs was $1.5 million at December 31, 1996.
Pursuant to the provisions of SFAS 71, certain adjustments to Utilities' other postretirement benefit provisions are necessary to reflect the accounting for other postretirement benefit costs allowed in its most recent rate cases.
The components of postretirement benefit costs for the years ended December 31, were as follows:
1996 1995 1994 (in thousands)
Service cost $ 1,888 $ 1,387 $ 1,838 Interest cost on accumulated postretirement benefit obligation 3,726 3,175 3,275 Assumed return on plans' assets (388) (56) (60) Net amortization of transition obligation and other 1,970 1,813 2,037 Amortized/(deferred) postretirement benefit costs 1,863 2,220 (2,732) Regulatory recognition of incurred cost 49 1,162 - Net postretirement benefit costs $ 9,108 $ 9,701 $ 4,358
Actual return on plans' assets $ 945 $ 273 $ 47
A reconciliation of the funded status of the plans to the amounts recognized in the Consolidated Balance Sheets at December 31, is presented below:
1996 1995 (in thousands)
Fair market value of plans' assets $ 12,312 $ 6,515 Accumulated postretirement benefit obligation - Active employees not yet eligible 19,056 22,254 Active employees eligible 4,866 6,282 Retirees 25,992 22,575 Total accumulated postretirement benefit obligation 49,914 51,111 Accumulated postretirement benefit obligation in excess of plans' assets (37,602) (44,596) Unrecognized transition obligation 31,020 34,415 Unrecognized net (gain)/loss (2,505) 349 Unrecognized prior service cost (427) 151 Accrued postretirement benefit cost in the Consolidated Balance Sheets $ (9,514) $ (9,681)
Assumed rate of return 9.00% 8.00% Weighted average discount rate of accumulated postretirement benefit obligation 7.50% 7.50% Medical trend on paid charges: Initial trend rate 9.00% 10.00% Ultimate trend rate 6.50% 6.50%
The assumed rate of return was increased to 9.00% in 1996 based on actual historical performance of investments of a similar nature. The assumed medical trend rates are critical assumptions in determining the service and interest cost and accumulated postretirement benefit obligation related to postretirement benefit costs. A 1% change in the medical trend rates, holding all other assumptions constant, would have changed the 1996 service and interest cost by $1.2 million (21%) and the accumulated postretirement benefit obligation at December 31, 1996, by $8.5 million (17%).
(9) COMMON, PREFERRED AND PREFERENCE STOCK:
(a) Common Stock -
The following table presents information relating to the changes in common stock.
Common Stock Number of Shares Outstanding Amount (in thousands) Balance, December 31, 1993 28,304,188 $ 360,301 Shares issued in connection with acquisition of oil and gas companies 139,102 4,027 Purchases of treasury stock (213,300) (6,233) Stock plan issuances* 547,056 15,395 Balance, December 31, 1994 28,777,046 373,490 Shares issued in connection with acquisition of oil and gas companies 75,638 1,925 Stock plan issuances* 655,731 15,854 Balance, December 31, 1995 29,508,415 391,269 Purchases of treasury stock (9,448) (269) Stock plan issuances* 578,245 16,635 Balance, December 31, 1996 30,077,212 $ 407,635
Shares reserved for issuance pursuant to the Company's stock plans at December 31, 1996* 1,632,869
* Dividend Reinvestment and Stock Purchase Plan, Employee Stock Purchase Plan, Employee Savings Plan, Long-Term Incentive Plan, IES Bonus Stock Ownership Plan and Whiting Stock Option Plans
During 1996, Industries reacquired 9,448 shares of its common stock on the open market, at an average price of $28.44 per share, which were subsequently issued to various Company Directors and employees. During 1994, Industries reacquired 213,300 shares of its common stock on the open market, at an average price of $29.22 per share, which were subsequently issued to the Dividend Reinvestment Plan and certain of its benefit plans. At December 31, 1996, no shares remained held as treasury stock.
(b) Preferred and Preference Stock:
Utilities has 466,406 shares of Cumulative Preferred Stock, $50 par value, authorized for issuance at December 31, 1996, of which the 6.10%, 4.80% and 4.30% Series had 100,000, 146,406 and 120,000 shares, respectively, outstanding at both December 31, 1996 and 1995. These shares are redeemable at the option of Utilities upon 30 days notice at $51.00, $50.25 and $51.00 per share, respectively, plus accrued dividends.
There are 5,000,000 shares of Industries Cumulative Preferred Stock (no par value) and 700,000 shares of Utilities Cumulative Preference Stock ($100 par value) authorized for issuance, of which none were outstanding at December 31, 1996.
(10) DEBT:
(a) Long-Term Debt -
In September 1996, Utilities repaid at maturity $15 million of Series J, 6.25% First Mortgage Bonds and, in a separate transaction, issued $60 million of Collateral Trust Bonds, 7.25%, due 2006.
Utilities' Indentures and Deeds of Trust securing its First Mortgage Bonds constitute direct first mortgage liens upon substantially all tangible public utility property. Utilities' Indenture and Deed of Trust securing its Collateral Trust Bonds constitutes a second lien on substantially all tangible public utility property while First Mortgage Bonds remain outstanding.
Diversified has a variable rate credit facility that extends through November 20, 1999, with two one-year extensions potentially available to Diversified. The unborrowed portion of the agreement is also used to support Diversified's commercial paper program. A combined maximum of $300 million of borrowings under the agreement and commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing for direct borrowings under the agreement and for issuances of commercial paper. The interest rate options are based upon quoted market rates and the maturities are less than one year. At December 31, 1996, $23 million was borrowed under this facility, bearing an interest rate of 5.75%, maturing in the first quarter of 1997. Diversified had $149.1 million of commercial paper outstanding at December 31, 1996, with interest rates ranging from 5.50% to 7.10% and maturity dates in the first quarter of 1997. Diversified intends to continue borrowing under the renewal options of the facility and no conditions exist at December 31, 1996, that would prevent such borrowings. Accordingly, this debt is classified as long-term in the Consolidated Balance Sheets. Refer to Note 12(a) for a discussion of an interest rate swap agreement Diversified entered into relating to this facility.
Total sinking fund requirements, which Utilities intends to meet by pledging additional property under the terms of its Indentures and Deeds of Trust, and debt maturities for 1997-2001 are $9 million, $1 million, $61 million, $67 million and $255 million, respectively. The Company intends to refinance the majority of the debt maturities with long-term securities.
(b) Short-Term Debt -
At December 31, 1996, the Company had bank lines of credit aggregating $136.1 million. Utilities was using $110 million to support commercial paper and $11.1 million to support certain pollution control obligations. Commitment fees are paid to maintain these lines and there are no conditions which restrict the unused lines of credit. In addition to the above, Utilities has an uncommitted credit facility with a financial institution whereby it can borrow up to $40 million. Rates are set at the time of borrowing and no fees are paid to maintain this facility. Information regarding short-term debt (all issued by Utilities) is as follows (dollars in thousands):
1996 1995 1994
As of end of year - Commercial paper outstanding $ 110,000 $ 101,000 $ 37,000 Notes payable outstanding 25,000 - - Weighted average interest rate on commercial paper 5.70% 5.81% 6.13% Weighted average interest rate on notes payable 6.28% - -
For the year ended - Maximum month-end amount of short-term debt $ 145,000 $ 132,000 $ 37,000 Average daily amount outstanding 120,112 79,159 5,269 Weighted average interest rate 5.52% 5.97% 5.31%
(11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Current Assets and Current Liabilities - The carrying amount approximates fair value because of the short maturity of such financial instruments. Nuclear Decommissioning Trust Funds - The carrying amount represents the fair value of these trust funds, as reported by the trustee. The balance of the "Nuclear decommissioning trust funds" as shown in the Consolidated Balance Sheets included $9.4 million of unrealized gains at December 31, 1996, and $5.3 million of unrealized gains at December 31, 1995, on the investments held in the trust funds. The accumulated reserve for decommissioning costs was adjusted by a corresponding amount. Cumulative Preferred Stock of Utilities - Based upon the market yield of similar securities and quoted market prices. Long-Term Debt - Based upon the market yield of similar securities and quoted market prices. Investments carried at cost - Fair value of the McLeod investment is based on quoted market prices at December 31, 1996 (including an assumed exercise of the Company's options at the December 31, 1996 market price less the exercise price); the 1995 fair value is based on the carrying value as there was no quoted market price prior to the 1996 IPO. Fair value of the New Zealand investments is based on quoted market prices; while the market is not of a breadth and scope comparable to a U.S. market as required for SFAS 115 accounting purposes, the Company does believe it produces a reasonable representation of the fair market value of the investment. Fair value of the other investments is based on quoted market prices where available, and cost when not available as the Company believes the carrying value approximates fair value for such investments.
The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in millions):
1996 1995 Carrying Fair Carrying Fair Value Value Value Value
Cumulative preferred stock of Utilities $ 18 $ 12 $ 18 $ 11 Long-term debt, including current portion 712 722 620 644 Investments carried at cost - Investment in McLeod, Inc. (Note 6(b)) 29 267 9 9 Investments in New Zealand (Note 6(a)) 31 45 25 22 Other 3 4 3 5
Since Utilities is subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of its financial instruments may not be realized by the Company's shareholders.
(12) DERIVATIVE FINANCIAL INSTRUMENTS:
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.
(a) Interest Rate Swap Agreement -
In February 1996, Diversified entered into an interest rate swap agreement on a variable rate borrowing of $100 million converting this debt into a fixed-rate borrowing at a rate of 4.7 percent. The swap period is for two years with an additional one-year option available to the counterparty and the agreement includes quarterly settlement dates. Diversified realized approximately $0.7 million in interest expense savings in 1996 under the agreement. The fair value of this financial instrument is based on the amounts estimated to terminate or settle the agreement. At December 31, 1996, the agreement, if settled on that date, would have required the counterparty to pay the Company approximately $1.2 million. Such value is based on the difference in the interest rates as well as the amount of time remaining in the agreement. The Company has no intention of terminating the agreement at this time.
(b) Gas Futures Contracts -
Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, has entered into natural gas contracts on the New York Mercantile Exchange (NYMEX) in the notional amount of $6.4 million at December 31, 1996. The original contract terms range from one to seventeen months. The contracts are intended to mitigate risk from fluctuations in the price of natural gas that will be required to satisfy sales commitments for future deliveries to customers and for sales from storage. Gains and losses on these hedging contracts are deferred and recognized in income when the transactions being hedged are finalized.
(13) COMMITMENTS AND CONTINGENCIES:
(a) Construction Program -
The Company's construction and acquisition program anticipates expenditures of approximately $225 million for 1997, which includes $147 million at Utilities and $78 million at Diversified. Substantial commitments have been made in connection with these expenditures.
(b) Purchased Power, Coal and Natural Gas Contracts -
Utilities has entered into purchased power capacity and coal contracts and its minimum commitments are as follows (dollars and tons in thousands):
Purchased Power Coal Dollars Mw's Dollars Tons
1997 $ 11,175 69 - 144 $ 68,323 4,472 1998 3,415 9 - 109 17,250 886 1999 3,283 1 - 101 17,509 874 2000 283 1 15,696 762 2001 283 1 15,913 751
The Company has several purchased power contracts for the annual six-month summer season and thus the minimum and maximum of the noted range represent the power purchased during the winter and summer seasons, respectively. The Company expects to supplement its coal contracts with spot market purchases to fulfill its future fossil fuel needs.
Utilities also has various natural gas supply, transportation and storage contracts outstanding. The gas supply commitments are all index based and the minimum dekatherm commitments, in thousands, for 1997-2001 are 10,699, 5,074, 5,074, 3,574 and 3,574, respectively. The minimum transportation and storage commitments for 1997-2001, in thousands, are $32,080, $31,842, $29,220, $27,050 and $24,008, respectively. The Company expects to supplement its natural gas supply with spot market purchases as needed.
(c) Information Technology Services -
The Company entered into an agreement, expiring in 2004, with Electronic Data Systems Corporation (EDS) for information technology services. The contract is subject to declining termination fees. The Company's anticipated operating and capital expenditures under the agreement for 1997 are estimated to total approximately $12.5 million. Future costs under the agreement are variable and are dependent upon the Company's level of usage of technological services from EDS.
(d) Financial Guarantees -
The Company has financial guarantees amounting to $22.9 million outstanding at December 31, 1996, 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 the likelihood of material cash payments by the Company under these agreements is remote.
(e) Nuclear Insurance Programs -
Public liability for nuclear accidents is governed by the Price Anderson Act of 1988 which sets a statutory limit of $8.9 billion for liability to the public for a single nuclear power plant incident and requires nuclear power plant operators to provide financial protection for this amount. As required, Utilities provides this financial protection for a nuclear incident at the DAEC through a combination of liability insurance ($200 million) and industry-wide retrospective payment plans ($8.7 billion). Under the industry-wide plan, each operating licensed nuclear reactor in the United States is subject to an assessment in the event of a nuclear incident at any nuclear plant in the United States. Based on its ownership of the DAEC, Utilities could be assessed a maximum of $79.3 million per nuclear incident, with a maximum of $10 million per incident per year (of which Utilities' 70% ownership portion would be approximately $55 million and $7 million, respectively) if losses relating to the incident exceeded $200 million. These limits are subject to adjustments for changes in the number of participants and inflation in future years.
Utilities is a member of Nuclear Mutual Limited (NML) and Nuclear Electric Insurance Limited (NEIL). These companies provide $1.9 billion of insurance coverage on certain property losses at DAEC for property damage, decontamination and premature decommissioning. The proceeds from such insurance, however, must first be used for reactor stabilization and site decontamination before they can be used for plant repair and premature decommissioning. NEIL also provides separate coverage for the cost of replacement power during certain outages. Owners of nuclear generating stations insured through NML and NEIL are subject to retroactive premium adjustments if losses exceed accumulated reserve funds. NML and NEIL's accumulated reserve funds are currently sufficient to more than cover its exposure in the event of a single incident under the primary and excess property damage or replacement power coverages. However, Utilities could be assessed annually a maximum of $3.0 million under NML, $6.4 million for NEIL property and $0.7 million for NEIL replacement power if losses exceed the accumulated reserve funds. Utilities is not aware of any losses that it believes are likely to result in an assessment.
In the unlikely event of a catastrophic loss at DAEC, the amount of insurance available may not be adequate to cover property damage, decontamination and premature decommissioning. Uninsured losses, to the extent not recovered through rates, would be borne by Utilities and could have a material adverse effect on Utilities' financial position and results of operations.
(f) Environmental Liabilities -
The Company has recorded environmental liabilities of approximately $53 million in its Consolidated Balance Sheets at December 31, 1996. The Company's significant environmental liabilities are discussed below.
Former Manufactured Gas Plant (FMGP) Sites
Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 FMGP sites, but believes it is not responsible for two of these sites based on extensive reviews of the ownership records and historical information available for the two sites. Utilities has notified the appropriate regulatory agency that it believes it does not have any responsibility as relates to these two sites, but no response has been received from the agency on this issue. Utilities is also aware of six other sites that it may have owned or operated in the past and for which, as a result, it may be designated as a PRP in the future in the event that environmental concerns arise at these sites. Utilities is working pursuant to the requirements of the various agencies to investigate, mitigate, prevent and remediate, where necessary, damage to property, including damage to natural resources, at and around the sites in order to protect public health and the environment. Utilities believes it has completed the remediation of ten sites although it is in the process of obtaining final approval from the applicable environmental agencies on this issue for each site. Utilities is in various stages of the investigation and/or remediation processes for the remaining 16 sites and estimates the range of additional costs to be incurred for investigation, remediation and monitoring of the sites to be approximately $24 million to $54 million.
Utilities has recorded environmental liabilities related to the FMGP sites of approximately $36 million (including $4.7 million as current liabilities) at December 31, 1996. 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 $36 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 two carriers and an agreement in principle has been reached with three other carriers thus far. Any amounts received from insurance carriers will be 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 DAEC, averages $1.4 million annually through 2007, of which Utilities' 70% share is $1.0 million. Utilities is recovering the costs associated with this assessment through its electric fuel adjustment clauses over the period the costs are assessed. Utilities' 70% share of the future assessment, $9.9 million payable through 2007, has been recorded as a liability in the Consolidated Balance Sheets, including $0.9 million included in "Current liabilities - Environmental liabilities," with a related regulatory asset for the unrecovered amount.
Oil and Gas Properties Dismantlement and Abandonment Costs
Whiting is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties, the most significant of which is located off the coast of California. The Company estimates the total costs for these properties to be approximately $16 million and the expenditures are not expected to be incurred for approximately five years. Whiting accrues these costs as reserves are extracted and such costs are included in "Depreciation and amortization" in the Consolidated Statements of Income, resulting in a liability of $7.0 million at December 31, 1996, in the Consolidated Balance Sheets.
The Company adopted the provisions of Statement of Position 96-1 (SOP-96-1), Environmental Remediation Liabilities, in 1996. This statement provides authoritative guidance for recognition, measurement and disclosure of environmental remediation liabilities in financial statements. Upon adoption of SOP-96-1, the Company's estimated liability increased by approximately $2.2 million, primarily resulting from the recording of Utilities' anticipated FMGP postremediation monitoring costs, and a related increase to regulatory assets was also recorded.
(g) Air Quality Issues -
The Clean Air Act Amendments of 1990 (Act) requires emission reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve reductions of atmospheric chemicals believed to cause acid rain. The provisions of the Act are being implemented in two phases; the Phase I requirements have been met and the Phase II requirements affect eleven other fossil units beginning in the year 2000. Utilities expects to meet the requirements of Phase II by switching to lower sulfur fuels, capital expenditures primarily related to fuel burning equipment and boiler modifications, and the possible purchase of SO2 allowances. Utilities estimates capital expenditures at approximately $12.9 million, including $0.6 million in 1997, in order to meet the acid rain requirements of the Act.
The acid rain program under the Act also governs SO2 allowances. An allowance is defined as an authorization for an owner to emit one ton of SO2 into the atmosphere. Currently, Utilities receives a sufficient number of allowances annually to offset its emissions of SO2 from its Phase I units. It is anticipated that in the year 2000, Utilities may have an insufficient number of allowances annually to offset its estimated emissions and may have to purchase additional allowances, or make modifications to the plants or limit operations to reduce emissions. Utilities is reviewing its options to ensure that it will have sufficient allowances to offset its emissions in the future. Utilities believes that the potential cost of ensuring sufficient allowances will not have a material adverse effect on its financial position or results of operations.
The Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to NOx, ozone transport, mercury and particulate control; toxic release inventories and modifications to the PCB rules. In December 1996, the EPA issued proposed rules that would tighten the National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter emissions. Also in the fourth quarter of 1996, the EPA announced that it would issue a notice in March 1997 requiring the 37 states in the Ozone Transport Assessment Group (OTAG), which includes Iowa, to implement further controls on NOx. These proposals could result in the Company having to incur additional capital expenditures to further reduce its emissions of NOx, ozone and particulate matter. Currently, the impacts of these potential regulations are too speculative to quantify.
In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the NAAQS established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences and recommended that additional monitors be located near Utilities' sources to assess actual ambient air quality. As a result of these exceedences, Utilities is entering into a Consent Agreement with the Iowa Department of Natural Resources. The intent of this agreement, as currently proposed, is to develop a three-year plan for a process to explore and implement options to modify one of Utilities fossil generating facilities to reduce SO2 emissions. In addition, Utilities is proposing to resolve the remainder of EPA's nonattainment concerns by either modifying the current stack or installing a new stack at the other generating facility contributing to the modeled exceedences at a potential aggregate capital cost of up to $4.5 million over the next two years.
Pursuant to a routine internal review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Utilities initiated discussions with its regulators on the matter and is preparing the PSD permit application for filing in the first quarter of 1997. Utilities may be required to accept operational limits or to install additional controls and may be subject to liability for not having obtained the permit previously; however, Utilities believes that any likely actions resulting from this matter will not have a material adverse effect on its financial position or results of operations.
(h) Spent Nuclear Fuel -
The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such a contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The DOE, however, has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities has been storing spent nuclear fuel on- site since plant operations began in 1974 and has current on-site capability to store spent fuel until 2001. Utilities is aggressively reviewing options for expanding on-site storage. Utilities has been formally notified by the DOE that they anticipate being unable to begin acceptance of spent nuclear fuel by January 31, 1998. Utilities is evaluating courses of action to protect the interests of its customers and its rights under the DOE contract. Utilities is also evaluating legislation proposed to the Congress addressing this issue.
(i) Legal Proceedings -
The Company is involved in other legal and administrative proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Although unable to predict the outcome of these matters, the Company believes that appropriate liabilities have been established and final disposition of these actions will not have a material adverse effect on its financial position or results of operations.
(14) JOINTLY-OWNED ELECTRIC UTILITY PLANT:
Under joint ownership agreements with other Iowa utilities, Utilities has undivided ownership interests in jointly-owned electric generating stations and related transmission facilities. Each of the respective owners is responsible for the financing of its portion of the construction costs. Kilowatt-hour generation and operating expenses are divided on the same basis as ownership with each owner reflecting its respective costs in its Statements of Income. Information relative to Utilities' ownership interest in these facilities at December 31, 1996 is as follows:
Ottumwa Neal DAEC Unit 1 Unit 3 (Nuclear) (Coal) (Coal) ($ in millions)
Utility plant in service $ 501.0 $ 190.2 $ 60.7 Accumulated depreciation $ 217.2 $ 91.0 $ 28.8 Construction work in progress $ 1.2 $ 0.1 $ 0.1 Plant capacity - Mw 520 716 515 Percent ownership 70% 48% 28% In-service date 1974 1981 1975
(15) SEGMENTS OF BUSINESS:
The principal business segments of Industries are the generation, transmission, distribution and sale of electric energy by Utilities and the purchase, distribution, transportation and sale of natural gas by Utilities and IEA. Certain financial information relating to Industries' significant segments of business is presented below:
Year Ended December 31 1996 1995 1994 (in thousands) Operating results: Revenues - Electric $ 574,273 $ 560,471 $ 537,327 Gas 273,979 190,339 165,569
Operating income - Electric 132,278 130,390 125,487 Gas 14,978 11,056 8,762
Other information: Depreciation and amortization - Electric 77,578 72,487 68,640 Gas 6,200 6,176 6,214
Construction and acquisition expenditures - * Electric 115,810 108,356 112,773 Gas 20,980 9,368 10,066
Assets - Identifiable assets - Electric 1,438,370 1,395,666 1,347,024 Gas 228,780 199,050 192,397 1,667,150 1,594,716 1,539,421 Other corporate assets 458,412 390,875 309,672 Total consolidated assets $ 2,125,562 $ 1,985,591 $ 1,849,093
* Excludes intercompany acquisitions which are eliminated for consolidated financial statement purposes.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of IES Utilities Inc.:
We have audited the accompanying consolidated balance sheets and statements of capitalization of IES Utilities Inc. (an Iowa corporation) and subsidiary companies as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the financial statement schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IES Utilities Inc. and subsidiary companies as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois January 31, 1997
IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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' Notes 1(i), 6, 9(a) and 12 do not relate to Utilities and, therefore, are not incorporated by reference.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of Consolidation -
Utilities is a wholly-owned subsidiary of Industries. The Consolidated Financial Statements include the accounts of Utilities and its consolidated subsidiaries. Utilities is engaged principally in the generation, transmission, distribution and sale of electric energy, the purchase, distribution, transportation and sale of natural gas and to provide steam for industrial and heating purposes. Utilities' markets are located in the state of Iowa.
All subsidiaries for which Utilities owns directly or indirectly more than 50% of the voting stock are included as consolidated subsidiaries. Utilities' only wholly-owned subsidiary at December 31, 1996 was IES Ventures Inc. (Ventures). Ventures' wholly-owned subsidiary at December 31, 1996 was IES Midland Development Inc. All significant intercompany balances and transactions have been eliminated from the Consolidated Financial Statements.
(4) LEASES:
Utilities' operating lease rental expenses for 1996-1994 were $7.1 million, $9.0 million and $9.8 million, respectively.
Utilities' future minimum lease payments by year are as follows:
Capital Operating Year Lease Leases (in thousands)
1997 $ 16,808 $ 5,601 1998 9,889 5,374 1999 6,969 3,658 2000 3,004 1,654 2001 861 1,329 Thereafter 307 19 37,838 $ 17,635 Less: Amount representing interest 3,113 Present value of net minimum capital lease payments $ 34,725
(7) INCOME TAXES:
The components of federal and state income taxes for the years ended December 31, were as follows:
1996 1995 1994 (in millions)
Current tax expense $ 35.3 $ 33.5 $ 38.4 Deferred tax expense 10.4 10.3 2.2 Amortization and adjustment of investment tax credits (2.6) (2.7) (2.6) $ 43.1 $ 41.1 $ 38.0
Utilities' overall effective income tax rates shown below for the years ended December 31, were computed by dividing total income tax expense by income before income taxes.
1996 1995 1994
Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefits 6.9 5.9 6.1 Effect of rate making on property related differences 2.9 2.8 1.7 Amortization of investment tax credits (2.5) (2.7) (2.7) Adjustment of prior period taxes (3.3) (0.1) (1.9) Other items, net 1.3 - 0.1 Overall effective income tax rate 40.3% 40.9% 38.3%
Utilities' accumulated deferred income taxes as set forth below in the Consolidated Balance Sheets at December 31, arise from the following temporary differences:
1996 1995 (in millions)
Property related $ 275 $ 282 Investment tax credit related (24) (26) Decommissioning related (15) (14) Other 21 11 $ 257 $ 253
(8) BENEFIT PLANS:
(a) Pension Plans -
Payments made from the pension funds to retired employees and beneficiaries during 1996 totaled $10.4 million for Utilities.
The components of the pension provision for the years ended December 31, were as follows:
1996 1995 1994 (in thousands)
Service cost $ 5,439 $ 4,721 $ 5,786 Interest cost on projected benefit obligation 12,435 11,577 11,265 Assumed return on plans' assets (14,653) (12,340) (12,426) Early retirement benefits 4,498 - - Net amortization 885 260 826 Pension cost 8,604 4,218 5,451 Adjustment to funding level (8,604) (4,218) (5,340) Total pension costs paid to the Trustee $ - $ - $ 111
Actual return on plans' assets $ 25,727 $ 35,947 $ (101)
During 1996, Utilities incurred a one-time charge of $4.5 million related to an early retirement program. These costs were deferred for future recovery through the regulatory process.
A reconciliation of the funded status of the plans to the amounts recognized in Utilities' Consolidated Balance Sheets at December 31, is presented below:
1996 1995 (in thousands)
Fair market value of plans' assets $ 205,699 $ 191,782 Actuarial present value of benefits rendered to date - Accumulated benefits based on compensation to date, including vested benefits of $125,983,000 and $117,624,000, respectively 137,772 128,674 Additional benefits based on estimated future salary levels 41,589 40,790 Projected benefit obligation 179,361 169,464 Plans' assets in excess of projected benefit obligation 26,338 22,318 Remaining unrecognized net asset existing at January 1, 1987, being amortized over 20 years (3,124) (3,451) Unrecognized prior service cost 15,195 16,564 Unrecognized net gain (50,818) (40,707) Accrued pension cost recognized in the Consolidated Balance Sheets $ (12,409) $ (5,276)
Assumed rate of return, all plans 9.00% 8.00% Weighted average discount rate of projected benefit obligation, all plans 7.50% 7.50% Assumed rate of increase in future compensation levels for the plans 4.75% 4.75%
Utilities' employees also participate in defined contribution pension plans (401(k) plans) covering substantially all employees. Utilities' contributions to the plans, which are based on the participants' level of contribution and cannot exceed 2.8% of the participants' salaries or wages, were $1.5 million, $1.4 million and $1.6 million in 1996, 1995 and 1994, respectively.
(b) Other Postemployment Benefit Plans -
The components of postretirement benefit costs for the years ended December 31, were as follows:
1996 1995 1994 (in thousands)
Service cost $ 1,714 $ 1,227 $ 1,785 Interest cost on accumulated postretirement benefit obligation 3,577 3,049 3,175 Assumed return on plans' assets (388) (56) (60) Net amortization of transition obligation and other 1,987 1,822 2,039 Amortized/(deferred) postretirement benefit costs 1,863 2,220 (2,732) Costs billed to affiliate - (265) - Regulatory recognition of incurred cost 49 1,162 - Net postretirement benefit costs $ 8,802 $ 9,159 $ 4,207
Actual return on plans' assets $ 945 $ 273 $ 47
A reconciliation of the funded status of the plans to the amounts recognized in Utilities' Consolidated Balance Sheets at December 31, is presented below:
1996 1995 (in thousands)
Fair market value of plans' assets $ 12,312 $ 6,515 Accumulated postretirement benefit obligation - Active employees not yet eligible 17,990 20,936 Active employees eligible 4,675 6,148 Retirees 25,300 21,846 Total accumulated postretirement benefit obligation 47,965 48,930 Accumulated postretirement benefit obligation in excess of plans' assets (35,653) (42,415) Unrecognized transition obligation 31,020 34,415 Unrecognized net (gain)/loss (2,571) 268 Unrecognized prior service cost - 151 Accrued postretirement benefit cost in the Consolidated Balance Sheets $ (7,204) $ (7,581)
Assumed rate of return 9.00% 8.00% Weighted average discount rate of accumulated postretirement benefit obligation 7.50% 7.50% Medical trend on paid charges: Initial trend rate 9.00% 10.00% Ultimate trend rate 6.50% 6.50%
The assumed medical trend rates are critical assumptions in determining the service and interest cost and accumulated postretirement benefit obligation related to postretirement benefit costs. A 1% change in the medical trend rates, holding all other assumptions constant, would have changed the 1996 service and interest cost for Utilities by $1.1 million (21%) and the accumulated postretirement benefit obligation for Utilities at December 31, 1996, by $8.1 million (17%).
(11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS:
Long-Term Debt - The estimated fair value is based upon the market yield of similar securities and quoted market prices. At December 31, 1996, and December 31, 1995, the carrying amount of Utilities' long-term debt was $528 million and $483 million, compared to estimated fair values of $538 million and $507 million, respectively.
(13) COMMITMENTS AND CONTINGENCIES:
(c) Information Technology Services -
Industries entered into an agreement, expiring in 2004, with Electronic Data Systems Corporation (EDS) for information technology services. The contract is subject to declining termination fees. Utilities' anticipated operating and capital expenditures under the agreement for 1997 are estimated to total approximately $12.1 million. Future costs under the agreement are variable and are dependent upon Utilities' level of usage of technological services from EDS.
(d) Financial Guarantees -
Utilities' has financial guarantees amounting to $22.6 million outstanding at December 31, 1996, which are not reflected in Utilities' consolidated financial statements. Such guarantees are generally issued to support third-party borrowing arrangements and similar transactions. Utilities believes that the likelihood of material cash payments by Utilities under these agreements is remote.
(15) SEGMENTS OF BUSINESS:
The principal business segments of Utilities are the generation, transmission, distribution and sale of electric energy and the purchase, distribution, transportation and sale of natural gas. Certain financial information relating to Utilities' significant segments of business is presented below:
Year Ended December 31 1996 1995 1994 (in thousands) Operating results: Revenues - Electric $ 574,273 $ 560,471 $ 537,327 Gas 160,864 137,292 139,033
Operating income - Electric 132,278 130,390 125,487 Gas 17,088 9,208 8,135
Other information: Depreciation and amortization - Electric 77,578 72,487 68,640 Gas 6,200 6,176 6,214
Construction and acquisition expenditures - Electric 115,929 108,902 120,180 Gas 12,981 9,368 10,066
Assets - Identifiable assets - Electric 1,438,370 1,395,666 1,347,024 Gas 205,680 192,045 186,911 1,644,050 1,587,711 1,533,935 Other corporate assets 134,560 120,924 111,433 Total consolidated assets $ 1,778,610 $ 1,708,635 $ 1,645,368
Item 9.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant
Information regarding the identification of directors of IES Industries Inc. and IES Utilities Inc. and compliance with Section 16(a) reporting requirements of the Securities and Exchange Commission is included in Industries' definitive proxy statement (Proxy Statement) prepared for the 1997 annual meeting of stockholders, which will be filed within 120 days of December 31, 1996, (Proxy Statement under the captions "Proposal - Nomination and Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. The executive officers of the registrants as of December 31, 1996 are as follows: (Figures following the names represent the officer's age as of December 31, 1996).
Executive Officers of IES Industries Inc.
Lee Liu, 63, Chairman of the Board & Chief Executive Officer. First elected officer in 1975.
Larry D. Root, 60, President & Chief Operating Officer. Re-elected officer in 1996. (i)
James E. Hoffman, 43, Executive Vice President. First elected officer in 1996. (ii)
Thomas M. Walker, 49, Executive Vice President & Chief Financial Officer. First elected officer in 1996. (iii)
Peter W. Dietrich, 57, Vice President, Corporate Development. First elected officer in 1988.
Dean E. Ekstrom, 49, Vice President, Administration. First elected officer in 1991.
Stephen W. Southwick, 50, Vice President, General Counsel & Secretary. First elected officer in 1982.
John E. Ebright, 53, Controller & Chief Accounting Officer. First elected officer in 1996. (iv)
Dennis B. Vass, 47, Treasurer. First elected officer in 1995.
Executive Officers of IES Utilities Inc.
Lee Liu, 63, Chairman of the Board & Chief Executive Officer. First elected officer in 1975.
Larry D. Root, 60, President & Chief Operating Officer. Re-elected officer in 1996. (i)
James E. Hoffman, 43, Executive Vice President, Customer Service & Energy Delivery. First elected officer in 1995. (ii)
Thomas M. Walker, 49, Executive Vice President & Chief Financial Officer. First elected officer in 1996. (iii)
John F. Franz, Jr., 57, Vice President, Nuclear. First elected officer in 1992.
Harold W. Rehrauer, 59, Vice President, Field Operations. First elected officer in 1987.
Stephen W. Southwick, 50, Vice President, General Counsel & Secretary. First elected officer in 1982.
Philip D. Ward, 56, Vice President, Generation. First elected officer in 1990.
John E. Ebright, 53, Controller & Chief Accounting Officer. First elected officer in 1996. (iv)
Dennis B. Vass, 47, Treasurer. First elected officer in 1995.
Officers are elected annually by the Board of Directors and each of the officers named above, except Larry D. Root, James E. Hoffman, Thomas M. Walker and John E. Ebright, has been employed by Industries or one of its significant subsidiaries as an officer or in other responsible positions at such companies for at least five years. There are no family relationships among these officers or among the officers and directors. There are no arrangements or understandings with respect to election of any person as an officer.
(i) Larry D. Root, who retired in 1995, was re-elected as President & Chief Operating Officer of both IES Industries Inc. and IES Utilities Inc. effective November 6, 1996. Mr. Root was first elected as an officer in 1979.
(ii) James E. Hoffman was elected Executive Vice President of IES Industries Inc. effective November 6, 1996. Prior to his appointment as Executive Vice President, Customer Service & Energy Delivery of IES Utilities Inc. in 1995, he was employed by MCI Communications as Chief Information Officer from 1990 to 1995.
(iii) Thomas M. Walker was elected Executive Vice President & Chief Financial Officer of both IES Industries Inc. and IES Utilities Inc. effective December 16, 1996. Prior to joining the Company in December 1996, he was employed from 1990 - 1995 by Information Resources, Inc. as Executive Vice President, Chief Financial and Administrative Officer and Member of the Board of Directors.
(iv) John E. Ebright was elected Controller & Chief Accounting Officer of both IES Industries Inc. and IES Utilities Inc. effective July 8, 1996. Prior to joining the Company in July 1996, he was employed by MidCon Corp., a subsidiary of Occidental Petroleum Corporation, as Vice President and Controller from 1987 to 1996.
Item 11.
Item 11. Executive Compensation
Information regarding executive compensation and transactions is included in the Proxy Statement under the captions "Compensation of Directors", "Summary Compensation Table" and "IES Industries Plans" and is incorporated herein by reference, except for the "Report of the Compensation Committee on Executive Compensation" and the "Performance Graph", which are not incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of December 31, 1996.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and management is included in the Proxy Statement under the captions "Security Ownership of Beneficial Owners" and "Security Ownership of Management" and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of December 31, 1996.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is included in the Proxy Statement under the captions "Other Transactions" and "Compensation of Directors" and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of December 31, 1996.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements (Included in Part II of this report) -
Page No. IES IES Description Industries Utilities Inc. Inc.
Report of Independent Public Accountants 44 73
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 45 74
Consolidated Statements of Retained Earnings for the years ended December 31, 1996, 1995 and 1994 45 74
Consolidated Balance Sheets at December 31, 1996 and 1995 46 - 47 75 - 76
Consolidated Statements of Capitalization at December 31, 1996 and 1995 48 77
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 49 78
Notes to Consolidated Financial Statements 50 - 72 79 - 84
(a) 2. Financial Statement Schedules (Included in Part IV of this report) -
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1996, 1995 and 1994 95
Other schedules are omitted as not required under Rules of Regulation S-X
(a) 3. Exhibits Required by Securities and Exchange Commission Regulation S-K -
The Exhibits designated by an asterisk are filed herewith and all other Exhibits as stated to be filed are incorporated herein by reference.
Exhibit
2(a) Agreement and Plan of Merger, dated as of November 10, 1995, as amended, by and among WPL Holdings, Inc., IES Industries Inc., Interstate Power Company, WPLH Acquisition Co. and Interstate Power Company (Filed as Exhibit 2.1 to Industries' Joint Proxy Statement, dated July 11, 1996).
2(b) Amendment No. 2 to Agreement and Plan of Merger, as amended, dated August 16, 1996, by and among IES Industries Inc., WPL Holdings, Inc., Interstate Power Company, WPLH Acquisition Co. and Interstate Power Company (Filed as Annex 1 to the Supplement to the Joint Proxy Statement of WPL Holdings, Inc., IES Industries Inc. and Interstate Power Company, dated August 21, 1996).
2(c) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among WPL Holdings, Inc. and IES Industries Inc. (Filed as Exhibit 2.2 to Industries' Current Report on Form 8-K, dated November 10, 1995).
2(d) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among WPL Holdings, Inc. and Interstate Power Company. (Filed as Exhibit 2.3 to Industries' Current Report on Form 8-K, dated November 10, 1995).
2(e) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among IES Industries Inc. and WPL Holdings, Inc. (Filed as Exhibit 2.4 to Industries' Current Report on Form 8-K, dated November 10, 1995).
2(f) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among IES Industries Inc. and Interstate Power Company. (Filed as Exhibit 2.5 to Industries' Current Report on Form 8-K, dated November 10, 1995).
2(g) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among Interstate Power Company and WPL Holdings, Inc. (Filed as Exhibit 2.6 to Industries' Current Report on Form 8-K, dated November 10, 1995).
2(h) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among Interstate Power Company and IES Industries Inc. (Filed as Exhibit 2.7 to Industries' Current Report on Form 8-K, dated November 10, 1995).
3(a) Articles of Incorporation of IES Industries Inc. (Industries), Amended and Restated as of May 4, 1993 (Filed as Exhibit 3(a) to Industries' Form 10-K for the year 1993).
3(b) Articles of Incorporation of IES Utilities Inc. (Utilities), Amended and Restated as of January 6, 1994 (Filed as Exhibit 4(b) to Utilities' Current Report on Form 8-K, dated January 7, 1994).
* 3(c) Bylaws of Industries, as amended February 4, 1997.
* 3(d) Bylaws of Utilities, as amended February 4, 1997.
4(a) Indenture of Mortgage and Deed of Trust, dated as of September 1, 1993, between Utilities (formerly Iowa Electric Light and Power Company (IE)) and The First National Bank of Chicago, as Trustee (Mortgage) (Filed as Exhibit 4(c) to IE's Form 10-Q for the quarter ended September 30, 1993).
4(b) Supplemental Indentures to the Mortgage:
Number Dated as of IE/Utilities File Reference Exhibit
First October 1, 1993 Form 10-Q, 11/12/93 4(d) Second November 1, 1993 Form 10-Q, 11/12/93 4(e) Third March 1, 1995 Form 10-Q, 5/12/95 4(b) Fourth September 1, 1996 Form 8-K, 9/19/96 4(c)(i)
4(c) Indenture of Mortgage and Deed of Trust, dated as of August 1, 1940, between Utilities (formerly IE) and The First National Bank of Chicago, Trustee (1940 Indenture) (Filed as Exhibit 2(a) to IE's Registration Statement, File No. 2-25347).
4(d) Supplemental Indentures to the 1940 Indenture:
Number Dated as of IE/Utiliites File Reference Exhibit
First March 1, 1941 2-25347 2(a) Second July 15, 1942 2-25347 2(a) Third August 2, 1943 2-25347 2(a) Fourth August 10, 1944 2-25347 2(a) Fifth November 10, 1944 2-25347 2(a) Sixth August 8, 1945 2-25347 2(a) Seventh July 1, 1946 2-25347 2(a) Eighth July 1, 1947 2-25347 2(a) Ninth December 15, 1948 2-25347 2(a) Tenth November 1, 1949 2-25347 2(a) Eleventh November 10, 1950 2-25347 2(a) Twelfth October 1, 1951 2-25347 2(a) Thirteenth March 1, 1952 2-25347 2(a) Fourteenth November 5, 1952 2-25347 2(a) Fifteenth February 1, 1953 2-25347 2(a) Sixteenth May 1, 1953 2-25347 2(a) Seventeenth November 3, 1953 2-25347 2(a) Eighteenth November 8, 1954 2-25347 2(a) Nineteenth January 1, 1955 2-25347 2(a) Twentieth November 1, 1955 2-25347 2(a) Twenty-first November 9, 1956 2-25347 2(a) Twenty-second November 6, 1957 2-25347 2(a) Twenty-third November 4, 1958 2-25347 2(a) Twenty-fourth November 3, 1959 2-25347 2(a) Twenty-fifth November 1, 1960 2-25347 2(a) Twenty-sixth January 1, 1961 2-25347 2(a) Twenty-seventh November 7, 1961 2-25347 2(a) Twenty-eighth November 6, 1962 2-25347 2(a) Twenty-ninth November 5, 1963 2-25347 2(a) Thirtieth November 4, 1964 2-25347 2(a) Thirty-first November 2, 1965 2-25347 2(a) Thirty-second September 1, 1966 Form 10-K, 1966 4.10 Thirty-third November 30, 1966 Form 10-K, 1966 4.10 Thirty-fourth November 7, 1967 Form 10-K, 1967 4.10 Thirty-fifth November 5, 1968 Form 10-K, 1968 4.10 Thirty-sixth November 1, 1969 Form 10-K, 1969 4.10 Thirty-seventh December 1, 1970 Form 8-K, 12/70 1 Thirty-eighth November 2, 1971 2-43131 2(g) Thirty-ninth May 1, 1972 Form 8-K, 5/72 1 Fortieth November 7, 1972 2-56078 2(i) Forty-first November 7, 1973 2-56078 2(j) Forty-second September 10, 1974 2-56078 2(k) Forty-third November 5, 1975 2-56078 2(l) Forty-fourth July 1, 1976 Form 8-K, 7/76 1 Forty-fifth November 1, 1976 Form 8-K, 12/76 1 Forty-sixth December 1, 1977 2-60040 2(o) Forty-seventh November 1, 1978 Form 10-Q, 6/30/79 1 Forty-eighth December 1, 1979 Form S-16, 2-65996 2(q) Forty-ninth November 1, 1981 Form 10-Q, 3/31/82 2 Fiftieth December 1, 1980 Form 10-K, 1981 4(s) Fifty-first December 1, 1982 Form 10-K, 1982 4(t) Fifty-second December 1, 1983 Form 10-K, 1983 4(u) Fifty-third December 1, 1984 Form 10-K, 1984 4(v) Fifty-fourth March 1, 1985 Form 10-K, 1984 4(w) Fifty-fifth March 1, 1988 Form 10-Q, 5/12/88 4(b) Fifty-sixth October 1, 1988 Form 10-Q, 11/10/88 4(c) Fifty-seventh May 1, 1991 Form 10-Q, 8/13/91 4(d) Fifty-eighth March 1, 1992 Form 10-K, 1991 4(c) Fifty-ninth October 1, 1993 Form 10-Q, 11/12/93 4(a) Sixtieth November 1, 1993 Form 10-Q, 11/12/93 4(b) Sixty-first March 1, 1995 Form 10-Q, 5/12/95 4(a) Sixty-second September 1, 1996 Form 8-K, 9/19/96 4(f)
4(e) Indenture or Deed of Trust dated as of February 1, 1923, between Utilities (successor to Iowa Southern Utilities Company (IS) as result of merger of IS and IE) and The Northern Trust Company (The First National Bank of Chicago, successor) and Harold H. Rockwell (Richard D. Manella, successor), as Trustees (1923 Indenture) (Filed as Exhibit B-1 to File No. 2-1719).
4(f) Supplemental Indentures to the 1923 Indenture:
Dated as of File Reference Exhibit
May 1, 1940 2-4921 B-1-k May 2, 1940 2-4921 B-1-l October 1, 1945 2-8053 7(m) October 2, 1945 2-8053 7(n) January 1, 1948 2-8053 7(o) September 1, 1950 33-3995 4(e) February 1, 1953 2-10543 4(b) October 2, 1953 2-10543 4(q) August 1, 1957 2-13496 2(b) September 1, 1962 2-20667 2(b) June 1, 1967 2-26478 2(b) February 1, 1973 2-46530 2(b) February 1, 1975 2-53860 2(aa) July 1, 1975 2-54285 2(bb) September 2, 1975 2-57510 2(bb) March 10, 1976 2-57510 2(cc) February 1, 1977 2-60276 2(ee) January 1, 1978 0-849 2 March 1, 1979 0-849 2 March 1, 1980 0-849 2 May 31, 1986 33-3995 4(g) July 1, 1991 0-849 4(h) September 1, 1992 0-849 4(m) December 1, 1994 0-4117-1 4(f)
* 4(g) Third Amended and Restated Credit Agreement dated as of November 20, 1996 among IES Diversified Inc. as Borrower, certain banks and Citibank, N.A., as Agent.
4(h) Indenture (For Unsecured Subordinated Debt Securities), dated as of December 1, 1995, between Utilities and The First National Bank of Chicago, as Trustee (Subordinated Indenture) (Filed as Exhibit 4(i) to Utilities' Amendment No. 1 to Registration Statement, File No. 33-62259).
10(a) Operating and Transmission Agreement between Central Iowa Power Cooperative and IE (Filed as Exhibit 10(q) to IE's Form 10-K for the year 1990).
10(b) Duane Arnold Energy Center Ownership Participation Agreement dated June 1, 1970 between Central Iowa Power Cooperative, Corn Belt Power Cooperative and IE. (Filed as Exhibit 5(kk) to IE's Registration Statement, File No. 2-38674).
10(c) Duane Arnold Energy Center Operating Agreement dated June 1, 1970 between Central Iowa Power Cooperative, Corn Belt Power Cooperative and IE. (Filed as Exhibit 5(ll) to IE's Registration Statement, File No. 2-38674).
10(d) Duane Arnold Energy Center Agreement for Transmission, Transformation, Switching, and Related Facilities dated June 1, 1970 between Central Iowa Power Cooperative, Corn Belt Power Cooperative and IE. (Filed as Exhibit 5(mm) to IE's Registration Statement, File No. 2-38674).
10(e) Basic Generating Agreement dated April 16, 1975 between Iowa Public Service Company, Iowa Power and Light Company, Iowa-Illinois Gas and Electric Company and IS for the joint ownership of Ottumwa Generating Station-Unit 1 (OGS-1). (Filed as Exhibit 1 to IE's Form 10-K for the year 1977).
10(f) Addendum Agreement to the Basic Generating Agreement for OGS-1 dated December 7, 1977 between Iowa Public Service Company, Iowa-Illinois Gas and Electric Company, Iowa Power and Light Company, IS and IE for the purchase of 15% ownership in OGS-1. (Filed as Exhibit 3 to IE's Form 10-K for the year 1977).
10(g) Second Amended and Restated Credit Agreement dated as of September 17, 1987 between Arnold Fuel, Inc. and the First National Bank of Chicago and the Amended and Restated Consent and Agreement dated as of September 17, 1987 by IE. (Filed as Exhibit 10(j) to IE's Form 10-K for the year 1987).
Management Contracts and/or Compensatory Plans (Exhibits 10(h) through 10(s))
10(h) Supplemental Retirement Plan. (Filed as Exhibit 10(l) to Industries' Form 10-K for the year 1987).
10(i) Management Incentive Compensation Plan. (Filed as Exhibit 10(m) to Industries' Form 10-K for the year 1987).
10(j) Key Employee Deferred Compensation Plan. (Filed as Exhibit 10(n) to Industries' Form 10-K for the year 1987).
10(k) Long-Term Incentive Plan. (Filed as Exhibit A to Industries' Proxy Statement dated March 20, 1995).
10(l) Executive Guaranty Plan. (Filed as Exhibit 10(p) to Industries' Form 10-K for the year 1987).
10(m) Executive Change of Control Severance Agreement - CEO (Filed as Exhibit 10(a) to Industries' Form 10-Q for the quarter ended September 30, 1996 (File No. 1-9187)).
10(n) Executive Change of Control Severance Agreement - Vice Presidents (Filed as Exhibit 10(b) to Industries' Form 10-Q for the quarter ended September 30, 1996 (File No. 1-9187)).
10(o) Executive Change of Control Severance Agreement - Other Officers (Filed as Exhibit 10(c) to Industries' Form 10-Q for the quarter ended September 30, 1996 (File No. 1-9187)).
10(p) Amendments to Key Employee Deferred Compensation Agreement for Directors. (Filed as Exhibit 10(u) to Industries' Form 10-Q for the quarter ended March 31, 1990).
10(q) Amendments to Key Employee Deferred Compensation Agreement for Key Employees. (Filed as Exhibit 10(v) to Industries' Form 10-Q for the quarter ended March 31, 1990).
10(r) Amendments to Management Incentive Compensation Plan. (Filed as Exhibit 10(y) to Industries' Form 10-Q for the quarter ended March 31, 1990).
*10(s) Director Retirement Plan.
10(t) Agreement and Plan of Merger, dated as of February 27, 1991, by and between IE Industries Inc. and Iowa Southern Inc. (Filed as Exhibit 2 to Industries' Form 8-K dated February 27, 1991).
10(u) IES Industries Inc. Shareholders' Rights Plan. (Filed as Exhibit I-2 to Industries' Registration Statement on Form 8-A filed November 13, 1991).
10(v) Lease and Security Agreement, dated October 1, 1993, between IES Diversified Inc., as lessee, and Sumitomo Bank Leasing and Finance, Inc., as lessor. (Filed as Exhibit 10(z) to Industries' Form 10-K for the year 1993).
10(w) Receivables Purchase and Sale Agreement dated as of June 30, 1989, as Amended and Restated as of April 15, 1994, among IES Utilities Inc. (as Seller) and CIESCO L.P. (as the Investor) and Citicorp North America, Inc. (as Agent). (Filed as Exhibit 10(a) to Utilities' Form 10-Q for the quarter ended March 31, 1994 (File No. 0-4117-1)).
10(x) Guaranty (IES Utilities Trust No. 1994-A) from IES Utilities Inc., dated as of June 29, 1994. (Filed as Exhibit 10(b) to Utilities' Form 10-Q for the quarter ended June 30, 1994 (File No. 0-4117-1)).
10(y) Copy of Coal Supply Agreement, dated July 27, 1977, between IS and Sunoco Energy Development Co. (former parent of Cordero Mining Co.), and letter memorandum thereto, dated October 29, 1984, relating to the purchase of coal supplies for the fuel requirements at the Ottumwa Generating Station. (Filed as Exhibit 10-A-4 to File No. 33-3995).
*12 Ratio of Earnings to Fixed Charges (IES Utilities Inc.)
*21 Subsidiaries of the Registrant (IES Industries Inc.)
*23(a) Consent of Independent Public Accountants (IES Industries Inc.)
*23(b) Consent of Independent Public Accountants (IES Utilities Inc.)
*27(a) Financial Data Schedule (IES Industries Inc.)
*27(b) Financial Data Schedule (IES Utilities Inc.)
Note: Pursuant to (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt that has not been registered if the total amount of securities authorized thereunder does not exceed 10% of total assets of the Company but hereby agrees to furnish to the Commission on request any such instruments.
(a) 4. Unaudited Pro Forma Combined Financial Information of Interstate Energy Corporation:
Unaudited Pro Forma Combined Balance Sheet at December 31, 1996 97 - 98
Unaudited Pro Forma Combined Statements of Income for the years ended December 31, 1996, 1995 and 1994 99 - 101
Notes to Unaudited Pro Forma Combined Financial Statements 102 - 104
(b) Reports on Form 8-K -
Industries - None.
Utilities - None.
IES INDUSTRIES INC. AND IES UTILITIES INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Column A Column B Column E
Balance Balance Description January 1 December 31 (in thousands)
VALUATION AND QUALIFYING ACCOUNTS WHICH ARE DEDUCTED IN THE BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY:
IES Utilities Inc.: Accumulated Provision for Uncollectible Accounts: Year ended December 31, 1996 $ 676 $ 757 Year ended December 31, 1995 $ 650 $ 676 Year ended December 31, 1994 $ 409 $ 650
Non-utility Subsidiaries: Accumulated Provision for Uncollectible Accounts: Year ended December 31, 1996 $ 685 $ 774 Year ended December 31, 1995 $ 372 $ 685 Year ended December 31, 1994 $ 506 $ 372
Note: The above provisions relate to various customer, notes and other receivable balances included in several line items on the Company's Consolidated Balance Sheets.
OTHER RESERVES:
IES Utilities Inc.: Accumulated Provision for Rate Refunds Year ended December 31, 1996 $ 106 $ - Year ended December 31, 1995 $ - $ 106 Year ended December 31, 1994 $ 8,670 $ -
IES Utilities Inc.: Accumulated Provision for Merchandise Warranty, Property Insurance, Injuries and Damages, Workmen's Compensation and Other Miscellaneous Claims Year ended December 31, 1996 $ 2,876 $ 2,694 Year ended December 31, 1995 $ 2,516 $ 2,876 Year ended December 31, 1994 $ 1,611 $ 2,516
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF INTERSTATE ENERGY CORPORATION
IES Industries Inc. (IES), WPL Holdings, Inc. (WPLH), Interstate Power Company (IPC), and certain related parties have entered into an Agreement and Plan of Merger, dated as of November 10, 1995, as amended (the Merger Agreement), providing for (a) the merger of IES with and into WPLH and (b) the merger of IPC with a subsidiary of WPLH pursuant to which IPC will become a subsidiary of WPLH (the above referenced mergers are collectively referred herein to as the Mergers). In connection with the consummation of the Mergers, WPLH will change its name to Interstate Energy Corporation. Detailed information with respect to the Merger Agreement and the proposed Mergers is contained in the Joint Proxy Statement/Prospectus, dated July 11, 1996, as supplemented by the Supplement to Joint Proxy Statement/Prospectus, dated August 21, 1996, contained in WPLH's Registration Statements on Form S-4, Registration Nos. 333-07931 and 333-10401 relating to the meetings of shareowners of WPLH, IES and IPC to vote on the Merger Agreement and related matters.
The following unaudited pro forma financial information combines the historical consolidated balance sheets and statements of income of WPLH, IES and IPC, including their respective subsidiaries, after giving effect to the Mergers. The historical data for WPLH have been adjusted to reflect the restatement of such data to account for certain discontinued operations discussed in the notes hereto. The unaudited pro forma combined balance sheet at December 31, 1996 gives effect to the Mergers as if they had occurred at December 31, 1996. The unaudited pro forma combined statements of income for each of the three years in the period ended December 31, 1996 give effect to the Mergers as if they had occurred at January 1, 1994. These statements are prepared on the basis of accounting for the Mergers as a pooling of interests and are based on the assumptions set forth in the notes thereto. In addition, the pro forma financial information does not give effect to the expected synergies or the cost to be incurred to achieve such synergies. The pro forma financial information, however, does reflect the transaction costs to effect the Mergers.
The following pro forma financial information has been prepared from, and should be read in conjunction with, the historical consolidated financial statements and related notes thereto of WPLH, IES and IPC. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Mergers been consummated on the date, or at the beginning of the periods, for which the Mergers are being given effect nor is it necessarily indicative of future operating results or financial position.
INTERSTATE ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. The pro forma combined financial statements reflect the conversion of each share of IES Common Stock (no par value) outstanding into 1.14 shares of WPLH Common Stock ($.01 par value) and the conversion of each share of IPC Common Stock ($3.50 par value) into 1.11 shares of WPLH Common Stock ($.01 par value), and the continuation of each share of WPLH Common Stock ($.01 par value) outstanding as one share of Interstate Energy Common Stock, as provided in the Merger Agreement. The pro forma adjustment to common stock equity restates the common stock account to equal par value for all shares to be issued ($.01 par value per share of Interstate Energy Common Stock) and reclassifies the excess to other stockholders' equity. The pro forma combined statements of income are presented as if the companies were combined on January 1, 1994. The pro forma combined balance sheet gives effect to the Mergers as if they occurred at December 31, 1996.
The number of shares of common stock used for calculating per share amounts is based on the exchange ratio shown below.
2. The Preferred Stock of IPC has been reclassified in the pro forma statements as preferred stock of subsidiary companies and deducted in the determination of income from continuing operations which reflects the holding company structure of the entity formed through the Mergers.
3. IES's income from continuing operations for the year ended December 31, 1996 included costs incurred relating to its successful defense of a hostile takeover attempt mounted by MidAmerican Energy Company. The after-tax impact on income from continuing operations was a decrease of $4.6 million.
Nonrecurring items affecting WPLH's performance for the year ended December 31, 1996 included the impact of the sale of a combustion turbine and the sale of WPLH's assisted-living real estate investments. The after-tax impact of these items on continuing operations was an increase of $5.9 million. Nonrecurring items affecting WPLH's 1994 performance included the impact of early retirement and severance programs and the reversal of a coal contract penalty assessed by the Public Service Commission of Wisconsin which was charged to income in 1989. The net after-tax impact of these items on income from continuing operations for the year ended December 31, 1994 was a decrease of $8.3 million related to the early retirement and severance programs offset by an increase of $4.9 million related to the coal contract penalty reversal.
4. The allocation between WPLH, IES and IPC and their customers of the estimated cost savings of approximately $749 million over ten years resulting from the Mergers, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. Costs arising from the proposed Mergers are currently estimated to be approximately $78 million (including transaction costs of $11 million related to fees for financial advisors, attorneys, accountants and consultants). 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 estimated costs savings will actually be realized.
In addition to the $11 million of remaining transaction costs, since the announcement of the Merger Agreement on November 11, 1995, IES, IPC and WPLH have collectively incurred $6 million of merger-related transaction costs through December 31, 1996, which have been expensed and are reflected in the combined income statements as presented. The remaining $11 million of transaction costs have been reflected in the pro forma balance sheet at December 31, 1996 such that shareowners' equity has been reduced by $11 million and accrued liabilities have been increased by $11 million. None of the estimated cost savings, or costs to achieve such savings, have been reflected in the pro forma combined financial statements.
5. Intercompany transactions (including purchased and exchange power transactions) between WPLH, IES and IPC during the periods presented were included in the determination of regulated rates and were not material. Accordingly, no pro forma adjustments were made to eliminate such transactions.
6. The financial statements of WPLH reflect the discontinuance of operations of its utility energy and marketing consulting business in 1995. The discontinuance of this business resulted in a pre-tax loss in the fourth quarter of 1995 of $7.7 million. The after-tax loss on disposition was $11.0 million reflecting the associated tax expense on disposition due to the non-deductibility of the carrying value of goodwill at sale. During 1996, WPLH recognized an additional loss of $1.3 million, net of applicable income tax benefit, associated with the final disposition of the business. Operating revenues, operating expenses, other income and expense and income taxes for the discontinued operations for the time periods presented have been excluded from income from continuing operations. Interest expense has been adjusted for the amounts associated with direct obligations of the discontinued operations.
Operating revenues, related losses, and income tax benefits associated with the discontinued operations for the years ending December 31 were as follows:
1995 1994 Operating revenues $ 24,979 $ 34,798
Loss from discontinued operations before income tax $ 3,663 $ 1,806 Income tax benefit 1,451 632 Loss from discontinued operations $ 2,212 $ 1,174
7. Accounting principles have been consistently applied in the financial statement presentations for WPLH, IES and IPC with one exception. IPC does not include unbilled electric and gas revenues in its calculation of total revenues. The utility subsidiaries of WPLH and IES accrue unbilled revenues. The impact of this difference in accounting principles among the companies does not have a material impact on the unaudited pro forma combined financial statements as presented and, accordingly, no adjustments have been made to conform accounting principles.
8. At December 31, 1996, IES had a $20.0 million investment in Class A common stock of McLeod, Inc. (McLeod), a $9.2 million investment in Class B common stock and vested options that, if exercised, would represent an additional investment of approximately $2.3 million. McLeod provides local, long-distance and other telecommunications services.
McLeod completed an Initial Public Offering (IPO) of its Class A common stock in June 1996 and a secondary offering in November 1996. As of December 31, 1996, IES is the beneficial owner of approximately 10.6 million total shares on a fully diluted basis. Class B shares are convertible at the option of IES into Class A shares at any time on a one-for-one basis. The rights of McLeod Class A common stock and Class B common stock are substantially identical except that Class A common stock has 1 vote per share and Class B common stock has 0.40 vote per share. IES currently accounts for this investment under the cost method.
IES has entered into an agreement with McLeod which provides that for two years commencing on June 10, 1996, IES cannot sell or otherwise dispose of any of its securities of McLeod without the consent of the McLeod Board of Directors. This contractual sale restriction results in restricted stock under the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain Investments in Debt and Equity Securities, until such time as the restrictions lapse and such shares became qualified for sale within a one year period. As a result, IES currently carries this investment at cost.
The closing price of the McLeod Class A common stock on December 31, 1996, on the Nasdaq National Market, was $25.50 per share. The current market value of the shares IES beneficially owns (approximately 10.6 million shares) is currently impacted by, among other things, the fact that the shares cannot be sold for a period of time and it is not possible to estimate what the market value of the shares will be at the point in time such sale restrictions are lifted. In addition, any gain upon an eventual sale of this investment would likely be subject to a tax.
Under the provisions of SFAS No. 115, the carrying value of the McLeod investment will be adjusted to estimated fair value at the time such shares become qualified for sale within a one year period; this will occur on June 10, 1997, which is one year before the contractual restrictions on sale are lifted. At that time, the adjustment to reflect the estimated fair value of this investment will be reflected as an increase in the investment carrying value with the unrealized gain reported as a net of tax amount in other common shareholders' equity until realized (i.e. until the shares are sold by IES).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 1997.
IES INDUSTRIES INC. (Registrant)
By /s/ Lee Liu Lee Liu Chairman of the Board & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 14, 1997:
/s/ Lee Liu Chairman of the Board & Lee Liu Chief Executive Officer (Principal Executive Officer)
/s/ Thomas M. Walker Executive Vice President & Thomas M. Walker Chief Financial Officer (Principal Financial Officer)
/s/ John E. Ebright Controller & Chief Accounting Officer John E. Ebright (Principal Accounting Officer)
/s/ C.R.S. Anderson Director C.R.S. Anderson
J. Wayne Bevis Director J. Wayne Bevis
/s/ Jack R. Newman Director Jack R. Newman
/s/ Robert D. Ray Director Robert D. Ray
/s/ David Q. Reed Director David Q. Reed
/s/ Henry Royer Director Henry Royer
/s/ Robert W. Schlutz Director Robert W. Schlutz
/s/ Anthony R. Weiler Director Anthony R. Weiler
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 1997.
IES UTILITIES INC. (Registrant)
By /s/ Lee Liu Lee Liu Chairman of the Board & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 14, 1997:
/s/ Lee Liu Chairman of the Board & Lee Liu Chief Executive Officer (Principal Executive Officer)
/s/ Thomas M. Walker Executive Vice President & Thomas M. Walker Chief Financial Officer (Principal Financial Officer)
/s/ John E. Ebright Controller & Chief Accounting Officer John E. Ebright (Principal Accounting Officer)
/s/ C.R.S. Anderson Director C.R.S. Anderson
J. Wayne Bevis Director J. Wayne Bevis
/s/ Jack R. Newman Director Jack R. Newman
/s/ Robert D. Ray Director Robert D. Ray
/s/ David Q. Reed Director David Q. Reed
/s/ Henry Royer Director Henry Royer
/s/ Robert W. Schlutz Director Robert W. Schlutz
/s/ Anthony R. Weiler Director Anthony R. Weiler