Item 1. Business
IES Industries Inc.
IES Industries Inc. is a holding company which is incorporated under the laws of Iowa. IES Industries Inc.'s 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 339,000 electric and 178,000 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. Diversified also has an investment in an Iowa-based telecommunications company, among other miscellaneous investments. IES Industries Inc. and, to the extent the context requires, its consolidated subsidiaries are referred to in this Form 10-K as "Industries."
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. In 1997, 1996 and 1995, Utilities had no single customer for which electric and/or gas sales accounted for 10% or more of Utilities' consolidated revenues.
Utilities' only wholly-owned subsidiary as of December 31, 1997, was IES Ventures Inc. (Ventures), which is a holding company for nonregulated investments. Ventures' wholly-owned subsidiary at December 31, 1997, was IES Midland Development Inc. (Midland), which owns and operates a landfill in Ottumwa, Iowa.
Utilities' sales of electricity (in Kwh), excluding sales for resale, increased 4.3%, 1.7% and 6.4%, during the years 1997, 1996 and 1995, respectively. Under historically normal weather conditions, total sales (excluding sales for resale) would have increased 3.6%, 3.4% and 4.7% during these same years. Total gas delivered by Utilities, including transported volumes, increased or (decreased) (6.1%), 5.9% and 4.8% during the years 1997, 1996 and 1995, respectively. Under historically normal weather conditions, Utilities' gas sales and transported volumes would have increased or (decreased) (2.4%), 1.9% and 3.5% during these same years.
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 1997, 39.3% of Utilities' electric revenues were earned in June through September, reflecting the use of electricity for cooling, and 71.7% of Utilities' gas revenues were earned in the months of January through 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 1997, 1996 and 1995 were as follows:
1997 1996 1995 Revenues: Electric 74% 76% 79% Gas 23% 21% 19
Operating income: Electric 90% 86% 92% Gas 8% 11% 7
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 7. "MD&A" and the "Electric Operations" and "Gas Operations" sections in Item 1.
Diversified
Other than Utilities' nonregulated investments, the non-utility operations of Industries 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, 1997, 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 Energy is a holding company whose wholly-owned subsidiaries at December 31, 1997, included Industrial Energy Applications, Inc. (IEA) and Whiting Petroleum Corporation (Whiting). IEA offers commodities-based and facilities-based energy services for customers, including supplying natural gas and electricity, standby generation, cogeneration, steam production and propane air systems. Whiting is organized to purchase, develop and produce crude oil and natural gas.
IES Investments is a holding company whose primary wholly-owned subsidiaries at December 31, 1997, 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. Lakeshares is a holding company for resort properties in Iowa. IES Investments also has direct and indirect equity interests in various real estate ventures, primarily concentrated in Cedar Rapids, and holds other passive investments.
At December 31, 1997, IES Investments held an investment in the stock of McLeodUSA Inc. (McLeod), a telecommunications company, valued at $327 million (as compared to a cost basis of $29 million). Pursuant to the applicable accounting rules, the carrying value of the investment is adjusted to the estimated fair value each quarter based on the closing price at the end of the quarter. The adjustment does not impact earnings as the unrealized gain or loss, net of taxes, is recorded directly to the common equity section of the balance sheet. In addition, any such gain or loss is reflected in current earnings only at the time it is realized through a sale. IES Investments has entered into an agreement with McLeod which restricts the sale or disposal of its shares without the consent of the McLeod Board of Directors until September 1998.
IES International is a holding company whose wholly-owned subsidiaries are IES New Zealand Limited (IES New Zealand), Interstate Energy Corporation Pte Ltd. (IECP) and IES Brazil Inc. IES New Zealand has equity investments in two New Zealand electric distribution entities. IECP has a 50% equity investment in two individual cogeneration facilities in China: JIES Heat and Power Ltd. and TIES Heat and Power Ltd. None of the investments under IES International are consolidated, therefore IES International has no operating revenues. IES Brazil Inc. has been formed for the purposes of potential future investments in Brazil. 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.
Refer to Note 15 of the Notes to Consolidated Financial Statements for a further discussion of Industries' segments of business.
PROPOSED MERGER OF INDUSTRIES. Industries is party to an Agreement and Plan of Merger, dated as of November 10, 1995, as amended (Merger Agreement), by and among, Industries, WPL Holdings, Inc. (WPLH), Interstate Power Company (IPC) and certain related parties. Refer to the "Proposed Merger" section in Item 7. "MD&A" and Note 2 of the Notes to Consolidated Financial Statements for a discussion of the transaction (collectively, the Merger) contemplated by the above referenced Agreement and Plan of Merger.
CAPITAL EXPENDITURE AND INVESTMENT AND FINANCING PLANS. Refer to the "Liquidity and Capital Resources" section in Item 7. "MD&A." for a discussion of anticipated construction and acquisition expenditures for 1998-2002 and assumptions in financing future capital requirements.
REGULATION. Because of its ownership of Utilities, IES Industries Inc. is a "holding company" as defined by the Public Utility Holding Company Act of 1935, as amended (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 Securities and Exchange Commission) on the basis that IES Industries Inc. and Utilities are both organized in the same state and Utilities conducts its business in that state.
Utilities operates pursuant to the laws of the State of Iowa and is thereby subject to the jurisdiction of the Iowa Utilities Board (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 of Iowa 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 Federal Energy Regulatory Commission (FERC) with respect to wholesale electric sales, its accounting practices and the issuance of securities. Revenues derived from Utilities' sales for resale amounted to 4.3%, 6.5% and 6.3% of electric revenues for 1997, 1996 and 1995, respectively. Utilities' consolidated subsidiaries are not subject to regulation by the IUB or the FERC.
Utilities is subject to the jurisdiction of the Nuclear Regulatory Commission (NRC), with respect to the Duane Arnold Energy Center (DAEC), and to the jurisdiction of the United States Department of Energy (DOE) with respect to the disposal of nuclear fuel and other radioactive wastes from the DAEC.
With respect to environmental matters impacting Industries, the United States Environmental Protection Agency administers certain federal statutes and has delegated the administration of other environmental initiatives to the applicable state environmental agencies. In addition, the state agencies have jurisdiction over air and water quality standards associated with fossil fuel fired electric generation and the level and flow of water, safety and other matters pertaining to hydroelectric generation.
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, 1997, Industries had a total of 2,448 (2,045 at Utilities) regular full-time employees. At December 31, 1997, Utilities had 1,089 employees subject to six collective bargaining agreements (788 of these employees were subject to one of these agreements). CRANDIC had 72 employees subject to four collective bargaining agreements and Barge had 12 employees subject to one collective bargaining agreement. Two of Utilities' agreements, covering less than 5% of Utilities' workforce, will expire in 1998.
ENVIRONMENTAL MATTERS. Industries 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 legislatures and local governments and enforced by federal, state and county agencies. The laws impacting Industries' 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. Industries 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.
Refer to Note 13 of the Notes to Consolidated Financial Statements and the "Other Matters-Environmental" section of Item 7. "MD&A" for further discussion of Industries' environmental matters.
COMPETITION. See the "Utility Industry Outlook" section in Item 7. "MD&A" for a discussion of competitive issues impacting Utilities.
RATE MATTERS. Refer to Note 3 of the Notes to Consolidated Financial Statements for a discussion of Utilities' rate matters, including its price freeze announcements.
YEAR 2000. Refer to the "Other Matters-Year 2000" section of Item 7. "MD&A" for a discussion of the impact the date change in the Year 2000 will have on Industries' software, embedded systems and related technologies.
ELECTRIC OPERATIONS -
General Utilities' net peak load (60 minutes integrated) of 1,853,938 kilowatts occurred on July 25, 1997, and represented a new energy peak demand record. At the time of the peak load, 68 interruptible customers were interrupted representing approximately 223,000 kilowatts of a possible 369,413 kilowatts available for interruption. Utilities' additional reserve obligation at the time of the peak was 269,091 kilowatts and the net capability of Utilities' generating stations was 1,891,990 kilowatts, with an additional 232,000 kilowatts being available under purchase contracts, thereby providing an aggregate capability of 2,123,990 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 the 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 20 utilities which are Transmission Owning Members (TOMs) and 51 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 four other midwestern utilities, two 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.
Subsequent to the consummation of the 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 information 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
IES Industries Inc. has no significant properties.
Utilities' principal electric generating stations at December 31, 1997, were as follows:
At December 31, 1997, the transmission lines of Utilities, operating from 34,000 to 345,000 volts, approximated 4,440 circuit miles (substantially all located in Iowa). Utilities owned 111 transmission substations (substantially all located in Iowa) with a total installed capacity of 8,832 MVa and 468 distribution substations (all located in Iowa) with a total installed capacity of 2,666 MVa.
Subsidiaries other than Utilities also own property which primarily represents investments in transportation, energy-related, telecommunications and real estate properties.
Industries' 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 Manufactured Gas Plant (MGP) sites, and indemnification for all sums that it has or may become obligated to pay for the investigation, mitigation, prevention, remediation and monitoring of environmental impacts to property, including natural resources like groundwater, at and around the MGP sites. Settlement discussions are proceeding between Utilities and its insurance carriers regarding the recovery of these MGP-related costs. Settlement has been reached with sixteen carriers thus far. Any amounts received from insurance carriers are being deferred pending a determination of the regulatory treatment of such recoveries.
IES Industries Inc., Diversified, IES Energy Inc. (a wholly-owned subsidiary of Diversified), MicroFuel Corporation (the Corporation) now known as Ely, Inc. in which IES Energy has a 69.40% equity ownership, and other parties have been sued in Linn County District Court in Cedar Rapids, Iowa, by Allen C. Wiley. Mr. Wiley claims money damages on various tort and contract theories arising out of the 1992 sale of the assets of the Corporation, of which Mr. Wiley was a director and shareholder. All of the defendants in Mr. Wiley's suit answered the complaint and denied liability. IES Industries Inc. 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 cents 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. The case has been re-assigned to the Iowa Court of Appeals without oral argument.
On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda) filed a request with the IUB that the IUB initiate formal complaint proceedings against Utilities. Lambda alleged that Utilities was discriminating against it by refusing to enter into contracts with it for remote displacement service and by favoring Industrial Energy Applications, Inc. (IEA), a subsidiary of Industries, in such matters. On October 17, 1996, Utilities filed a Response which denied the allegations, and alleged, inter alia, that Lambda was unlawfully attempting to provide retail electrical services in Utilities' exclusive service territory. On August 25, 1997, the IUB issued its Final Decision and Order rejecting Lambda's complaint. On October 10, 1997, the IUB issued its rehearing order which again rejected Lambda's complaint.
On October 9, 1996, the Company filed a civil suit in the Iowa District Court in and for Linn County against Lambda, Robert Latham, Louie Ervin, and David Charles (three former employees of Industries), collectively the "Defendants", alleging, inter alia, violations of Iowa's trade secret act and interference with existing and prospective business advantage. On November 1, 1996, the Defendants filed their Answer and Counterclaims alleging, inter alia, violation of Iowa competition law, tortious interference and commercial disparagement. The Defendants therewith also filed a Third-Party Petition against Utilities, IEA and Lee Liu, Chairman of the Board & Chief Executive Officer of IES Industries Inc. and Utilities, alleging, inter alia, tortious interference and commercial disparagement.
Reference is made to Note 3 of the Notes to Consolidated Financial Statements for a discussion of Utilities' rate proceedings and Note 13 of the Notes to Consolidated Financial Statements for a discussion of Industries' environmental matters and other legal and administrative proceedings arising in the ordinary course of business. Also see the "Other Matters" section of Item 7. "MD&A".
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 Equity and Related Stockholder Matters
(a) Price Range of IES Industries Inc.'s Common Stock and Dividends Declared
IES Industries Inc.'s 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 IES Industries Inc.'s Common Stock as reported on the NYSE Composite Tape based on published financial sources, and the dividends declared per share on IES Industries Inc.'s Common Stock.
IES Industries Inc.'s Common Stock High Sale Low Sale Dividend (i) First Quarter $ 31 $ 28 3/4 $ .525 Second Quarter 30 3/8 28 1/8 .525 Third Quarter 32 1/2 29 1/2 .525 Fourth Quarter 38 3/16 30 13/16 .525 ------- -------- --------- Year $ 38 3/16 $ 28 1/8 $ 2.10
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
The closing price of IES Industries Inc.'s common stock on December 31, 1997 was $36 13/16.
(i) IES Industries Inc. 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 IES Industries Inc.
Approximate Number of Record Title of Class Holders (as of December 31, 1997)
Common Stock, no par value 35,789
(c) Restriction on Payment of Dividends by IES Industries Inc.
Under provisions of the Merger Agreement, IES Industries Inc.'s annual dividend payment cannot exceed $2.10 per share, the current annual payment level, pending the Proposed Merger.
See Item 1, "Proposed Merger of Industries" for a further discussion of Industries' pending merger.
Item 6.
Item 6. Selected Financial Data
The following selected financial data, in the opinion of Industries, 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 FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
PROPOSED MERGER
IES Industries Inc. (Industries), WPL Holdings, Inc. (WPLH) and Interstate Power Company (IPC) are in the process of completing a three- way merger (Merger) forming Interstate Energy Corporation (Merged Company). In connection with the Merger, Industries will be merged with and into WPLH forming the Merged Company and IPC will become a subsidiary of the Merged Company. In addition, following the Merger, the holding companies for the nonregulated businesses of the former WPLH and Industries (Heartland Development Corporation (HDC) and IES Diversified Inc. (Diversified), respectively) will be merged into each other. The resulting company from this merger is referred to as New Diversified. As a result of the Merger, the first tier subsidiaries of the Merged Company will include: Wisconsin Power & Light Company (WP&L), Utilities, IPC, New Diversified and Alliant Services Company (the subsidiary formed to provide administrative services as required under the Public Utility Holding Company Act of 1935). Among various other regulatory constraints, the Merged Company will operate as a registered public utility holding company subject to the limitations imposed by the Public Utility Holding Company Act of 1935. For additional information regarding the terms of the Merger, see Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this Form 10-K.
The merger partners currently anticipate cost savings resulting from the Merger of approximately $749 million over a ten-year period, net of transaction costs and costs to achieve the savings of approximately $78 million. Approximately $22 million of these costs had been incurred through December 31, 1997. Upon consummation of the Merger, the merger partners estimate the Merged Company will expense approximately $40 million of additional merger-related costs (e.g., required payments to or for financial advisors, employee retirements and separations, attorneys, accountants, etc.). The estimate of potential cost savings constitutes a forward-looking statement and actual results may differ materially from this estimate. The estimate is necessarily based upon various assumptions that involve judgments with respect to, among other things, future national and regional economic and competitive conditions, technological developments, inflation rates, regulatory treatments, weather conditions, financial market conditions, future business decisions and other uncertainties. No assurance can be given that the entire amount of estimated cost savings will actually be realized. In addition, the allocation between WPLH, Industries and IPC and their customers of the estimated cost savings of approximately $749 million over ten years resulting from the Merger, net of costs incurred to achieve such savings, will be subject to regulatory review and approval.
As part of the approval process for the Merger, Utilities has agreed to various rate freezes not to exceed four years commencing on the effective date of the Merger (see Note 3 of the Notes to Consolidated Financial Statements for a further discussion).
Assuming capture of the anticipated merger-related synergies and no significant legislative or regulatory changes affecting Industries, Industries does not expect the merger-related electric and natural gas price freezes to have a material adverse effect on its financial position or results of operations.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-K (including MD&A) that are not of historical fact are forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. From time to time, Industries (including its consolidated subsidiaries) may make other forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of Industries. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of Industries' expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance of Industries and that such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include weather effects on sales and revenues, competitive factors, general economic conditions in Utilities' service territory, federal and state regulatory or government actions, the operations of Utilities' nuclear facility, the ability of the Merged Company to successfully integrate the operations of WPLH, Industries and IPC and changes in the rate of inflation.
UTILITY INDUSTRY OUTLOOK
Utilities competes in an ever-changing utility industry. Set forth below is an overview of this evolving marketplace.
Electric energy generation, transmission, and distribution are in a period of fundamental change in the manner in which customers obtain, and energy suppliers provide, energy services. As legislative, regulatory, economic and technological changes occur, electric utilities are faced with increasing pressure to become more competitive. Such competitive pressures could result in loss of customers and an incurrence of stranded costs (i.e., assets and other costs rendered unrecoverable as the result of competitive pricing). To the extent stranded costs cannot be recovered from customers, they would be borne by security holders.
Utilities realized all of its electric and gas utility revenues in 1997 in Iowa. Approximately 96% of the electric revenues were regulated by the Iowa Utilities Board (IUB) while the other 4% were regulated by the Federal Energy Regulatory Commission (FERC).
Federal Regulation
Utilities is subject to regulation by the FERC. The National Energy Policy Act of 1992 addresses several matters designed to promote competition in the electric wholesale power generation market. In 1996, the FERC issued final rules (FERC Orders 888 and 889) requiring electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. In March 1997, FERC issued its orders on rehearing for Orders 888 and 889 (Orders 888-A and 889-A). In response to FERC Orders 888 and 888-A, Utilities has on file with the FERC pro forma open access transmission tariffs. In response to FERC Orders 889 and 889-A, Utilities is participating in a regional Open Access Same-Time Information System. Industries cannot predict the long-term consequences of these rules on its results of operations or financial condition.
FERC Order 888 permits utilities to seek recovery of legitimate, prudent and verifiable stranded costs associated with providing open access and transmission services. FERC does not have jurisdiction over retail distribution and, consequently, the final FERC rules do not provide for the recovery of stranded costs resulting from retail competition. The various states retain jurisdiction over the question of whether to permit retail competition, the terms of such retail competition, and the recovery of any portion of stranded costs that are ultimately determined to have resulted from retail competition.
State Regulation
Utilities is subject to regulation by the IUB. The IUB initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging Competition in the Electric Utility Industry" to address all forms of competition in the electric utility industry and to gather information and perspectives on electric competition from all persons or entities with an interest or stake in the issues. The IUB staff's report in this docket was accepted by the IUB, finding, in part, that there is no compelling reason to move quickly into restructuring the electric utility industry in Iowa, based upon the existing level of relative prices. However, the IUB is continuing the analysis and debate on restructuring and retail competition in Iowa.
On August 18, 1997, the IUB issued an order that promulgated draft principles for an Independent System Operator (ISO) and invited public comment. On September 10, 1997, the IUB issued an order adopting an "Action Plan to Develop a Competitive Model for the Electric Industry in Iowa." The IUB states in this action plan that while "the IUB has not determined retail competition in the electric industry is in the best interests of Iowa's consumers...", the State of Iowa is likely to be affected by federal or neighboring states' actions so there is a need for the IUB to design a model that suits Iowa's needs. The priority concerns in the plan are public interest issues (an Iowa-specific pilot project, customer information and assessment, environmental impacts, public benefits and transition costs/benefits) and transmission-related issues (transmission and distribution system reliability and transmission system operations). There is no timetable in the action plan. On October 2, 1997, the IUB staff sent to the advisory group (of which Utilities is a member) for written comment a set of proposed guidelines for an Iowa- specific electric pilot project that would allow retail access to a "subset of all customer classes." Utilities has indicated to the IUB its interest in pursuing such a pilot program. The IUB has also issued an order covering unbundling of natural gas rates for all Iowa customers to be effective in 1999.
On September 26, 1996, the Public Service Commission of Wisconsin (PSCW) issued an order which establishes the minimum standards for a Wisconsin ISO. The standards will be applied by the PSCW in Advance Plan proceedings, merger review cases, transmission construction cases and other proceedings as appropriate. The order provides that the standards will be reviewed and revised as necessary in light of ongoing regional and national events, such as FERC requirements or policy, regional institutions, or relevant actions of neighboring states. In approving the merger involving WPLH, Industries and IPC, the PSCW gave the merger partners a choice of either filing their own ISO proposal, giving notice of their intent to join a regional ISO or spinning off existing transmission assets and operations into a separate independent transmission company. Utilities, IPC and WP&L developed an ISO proposal of their own. However, the PSCW did not believe it met the PSCW's ISO guidelines. Utilities, IPC and WP&L subsequently asked the PSCW to permit them to join the Midwest ISO, a regional ISO that has been filed with FERC. The member companies of the ISO would retain ownership of the facilities, but the ISO would assume control of the facilities, set rates for access and assure fair treatment for all companies seeking access. Various other proposals for ISOs, which are being monitored by the merger partners, have been proposed by other entities.
Summary
Utilities complies with the provisions of Statement of Financial Accounting Standards No. 71 (SFAS 71) "Accounting for the Effects of Certain Types of Regulation." SFAS 71 provides that rate-regulated public utilities record certain costs and credits allowed in the ratemaking process in different periods than for nonregulated entities. These are deferred as regulatory assets or regulatory liabilities and are recognized in the consolidated statements of income at the time they are reflected in rates. If a portion of Utilities' operations becomes no longer subject to the provisions of SFAS 71 as a result of competitive restructurings or otherwise, a write-down of related regulatory assets and possibly other charges would be required, unless some form of transition cost recovery is established by the appropriate regulatory body that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. In addition, Utilities would be required to determine any impairment of other assets and write-down any impaired assets to their fair value. Utilities believes it meets the requirements of SFAS 71.
Industries cannot currently predict the long-term consequences of the competitive and restructuring issues described above on its results of operations or financial condition. The major objective is to allow Utilities to better prepare for a competitive, deregulated utility industry. The strategy for dealing with these emerging issues includes seeking growth opportunities, continuing to offer quality customer service, ongoing cost reductions and productivity enhancements.
RESULTS OF OPERATIONS
Overview
Industries' net income increased $5.4 million and decreased $3.3 million in 1997 and 1996, respectively. Earnings per average common share increased to $2.18 in 1997 from $2.04 in 1996. The increase in net income for 1997 was primarily due to increased electric sales (excluding sales for resale), a lower effective income tax rate, increased operating income at Diversified, parent company of Industries' non-utility operations, and the impact of $7.8 million of costs incurred in 1996 relating to the successful defense of the hostile takeover attempt of Industries by MidAmerican Energy Company (MAEC). The 1997 increase was partially offset by higher interest expense, higher utility operating expenses and start-up expenses in international and domestic growth areas. The 1996 decrease in net income was primarily due to costs incurred defending against the hostile takeover attempt by MAEC and preparing for the pending three-way merger, increased operating expenses, higher interest expense and a higher effective income tax rate. The 1996 decrease was partially offset by 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 Whiting Petroleum Corporation (Whiting).
Electric Operations - Utility
Electric margins and Mwh sales for Utilities were as follows:
The electric margins increased $26.0 million and $8.3 million during 1997 and 1996, respectively, primarily due to higher Kwh sales (excluding sales for resale) and lower purchased power capacity costs. The sales increases during both periods were primarily due to continuing sales growth in Utilities' service territory. Cooler weather conditions during the summer of 1996 also impacted margins and the residential sales comparisons. Revenues and margins also increased $10.6 million during 1997 and $2.0 million during 1996 due to the increased recovery of concurrent and previously deferred energy efficiency expenditures for state-mandated energy efficiency programs pursuant to an IUB order (the majority of these recoveries are amortized to expense in other operating and gas marketing expenses). The decrease in sales for resale during 1997 was primarily due to the implementation of FERC Orders 888 and 888-A.
Under historically normal weather conditions, total sales (excluding sales for resale) during 1997 and 1996, respectively, would have increased 3.6% and 3.4%, as compared to actual increases of 4.3% and 1.7%, respectively.
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 announcements and the energy efficiency cost recoveries, respectively.
Utilities' electric tariffs include energy adjustment clauses (EAC) that are designed to currently recover the costs of fuel and the energy portion of purchased power billings. See Note 1(j) of the Notes to Consolidated Financial Statements for discussion of the EAC.
Gas Operations - Utility
Gas margins and Dth sales for Utilities were as follows:
Total gas margin increased or (decreased) ($0.1) million and $10.9 during 1997 and 1996, respectively. The 1997 sales decrease was substantially offset by higher revenues from the recovery of concurrent and previously deferred energy efficiency expenditures for state mandated energy efficiency programs pursuant to an IUB order (the majority of these recoveries are amortized to expense in other operating and gas marketing expenses). The sales decrease was largely due to milder weather conditions as well as lower grain drying related sales in 1997. The 1996 increase was primarily due to an increase in gas prices implemented in the fourth quarter of 1995, increased sales due to favorable weather conditions and higher revenues from the recovery of energy efficiency programs.
Under historically normal weather conditions, Utilities' gas sales and transported volumes would have increased or (decreased) (2.4%) and 1.9% in 1997 and 1996, as compared to the actual increases or (decreases) of (6.1%) and 5.9%, respectively.
Utilities' gas tariffs include purchased gas adjustment clauses (PGA) that are designed to currently recover the cost of gas sold. See Note 1(j) of the Notes to Consolidated Financial Statements for discussion of the PGA.
The gas revenues and cost of gas sold of Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, for 1996 and 1995 have been reclassed into "Gas marketing, oil and gas and other revenues" and "Other operating and gas marketing expenses", respectively, consistent with the 1997 presentation.
Gas Marketing, Oil and Gas and Other Revenues Industries' gas marketing, oil and gas and other revenues were generated as follows (in millions):
1997 1996 1995 IEA (including gas marketing $18 $127 $60 Whiting (oil and gas revenues) 69 66 48 Utilities (steam revenues) 26 20 12 Other 30 26 33 ---- ---- ---- $143 $239 $153 ==== ==== ====
Gas marketing, oil and gas and other revenues decreased $96 million and increased $86 million during 1997 and 1996, respectively, primarily due to fluctuations in IEA's gas marketing revenues. The 1997 decrease in IEA's gas marketing revenues was a result of IEA contributing substantially all of its gas marketing business to a joint venture, effective January 1, 1997, in exchange for a partial interest in the joint venture. The investment in the joint venture is accounted for under the equity accounting method and IEA's allocated portion of gas revenues and gas expenses resulting from the joint venture are recorded in "Miscellaneous, net" on Industries' Consolidated Statements of Income. The 1996 increase in IEA's gas marketing revenues was primarily due to increases in gas prices and gas volumes sold. Whiting's revenues increased during 1996 due to increases in gas prices and gas volumes sold. Steam revenues at Utilities increased during both years due to an increase in volumes sold resulting from the addition of a new industrial customer and increased demand from existing customers.
Operating Expenses: Industries' other operating and gas marketing expenses were as follows (in millions):
1997 1996 1995
Utilities $161 $148 $144 IEA (including gas marketing costs) 14 129 57 Whiting 28 30 25 Other 28 19 24 ---- ---- ---- $231 $326 $250 ==== ==== ====
Other operating and gas marketing expenses decreased $95 million and increased $76 million in 1997 and 1996, respectively, primarily due to fluctuations in IEA's gas marketing costs as discussed in the "Gas marketing, oil and gas and other revenues" section. Utilities' other operating expenses increased during 1997 primarily due to increased amortization of previously deferred energy efficiency expenditures and costs related to an early retirement program, partially offset by lower employee labor and benefit costs. The 1997 decrease was also partially offset by increased international and domestic business development activities at Diversified. Utilities' other operating expenses increased during 1996 primarily due to increased amortization of previously deferred energy efficiency expenditures, increased labor and benefits costs and costs relating to the Merger, partially offset by decreased operating costs at the Duane Arnold Energy Center (DAEC), Utilities' nuclear generating facility.
Maintenance expenses increased $8.2 million and $2.9 million in 1997 and 1996, respectively. The 1997 increase was primarily due to increased maintenance expenses at the DAEC, higher transmission and distribution maintenance expenditures, and increased maintenance activities at Utilities' fossil-fueled generating stations. The 1996 increase was primarily due to increased maintenance activities at the fossil-fueled generating stations, partially offset by lower DAEC maintenance expenses.
Depreciation and amortization increased $6.7 million and $9.4 million during 1997 and 1996, respectively, primarily due to increases in utility plant in service and the acquisition of oil and gas operating properties. The 1996 increase was also due to increases in 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).
Interest Expense and Other Interest expense increased $9.6 million and $4.1 million during 1997 and 1996, respectively, primarily due to increases in the average amount of debt outstanding.
Miscellaneous, net reflects comparative increases or (decreases) in income of $6.4 million and ($6.1) million during 1997 and 1996, respectively. The change in both periods was primarily due to approximately $7.8 million in costs incurred relating to the successful defense of the hostile takeover attempt by MAEC in 1996.
Federal and State Income Taxes The effective income tax rates were 37.4%, 43.8% and 39.8% in 1997, 1996 and 1995, respectively. Refer to Note 7 of the Notes to Consolidated Financial Statements for a discussion of the changes.
LIQUIDITY AND CAPITAL RESOURCES
Industries' capital requirements are primarily attributable to Utilities' construction and acquisition programs, its debt maturities and the level of Diversified's business opportunities. Industries anticipates that future capital requirements will be met by cash generated from operations and external financing. The level of cash generated from operations is partially dependent upon economic conditions, legislative activities, environmental matters and timely regulatory recovery of utility costs. Industries' liquidity and capital resources will be affected by environmental and regulatory issues. Emerging competition in the utility industry could also impact Industries' liquidity and capital resources, as discussed previously in the "Utility Industry Outlook" section.
Industries has interests in the international arena. At December 31, 1997, Industries had approximately $57 million of investments in foreign entities. Industries continues to explore additional international investment opportunities. Such investments may carry a higher level of risk than Industries' traditional domestic utility investments or Diversified's domestic investments. Such risks could include foreign government actions, foreign economic and currency risks and others.
Industries is engaged in pursuing various potential business development opportunities, including international as well as domestic investments, and is devoting resources to such efforts. Industries is striving to select investments where the international and other risks are both understood and manageable.
At December 31, 1997, Industries had an investment in the stock of McLeodUSA Inc. (McLeod), a telecommunications company, valued at $327 million (as compared to a cost basis of $29 million). Pursuant to the applicable accounting rules, the carrying value of the investment is adjusted to the estimated fair value each quarter based on the closing price at the end of the quarter. The adjustment does not impact earnings as the unrealized gains or losses, net of taxes, are recorded directly to the common equity section of the balance sheet. In addition, any such gains or losses are reflected in current earnings only at the time they are realized through a sale. Industries has entered into an agreement with McLeod which restricts the sale or disposal of its shares without the consent of the McLeod Board of Directors until September 1998.
Industries has financial guarantees amounting to approximately $19 million outstanding at December 31, 1997, which are not reflected in its Consolidated Financial Statements. Such guarantees were generally issued to support third-party borrowing arrangements and similar transactions. Management believes the possibility of Industries having to make any material cash payments under these agreements is remote.
Cash flows generated from operating activities increased to $247 million in 1997 compared with $183 million in 1996 and $200 million in 1995 primarily due to expenditures during 1996 and 1995 related to refueling outages at the DAEC, expenditures incurred defending against the hostile takeover attempt by MAEC in 1996 and other changes in working capital. Cash flows from financing activities were significantly lower in 1997 as compared with 1996 and 1995 due to a net reduction in the amount of long-term and short-term debt issuances. Cash flows used for investing activities were significantly lower in 1997 as compared with 1996 and 1995 due to a reduction in the amount of construction and acquisition expenditures. Times interest earned before income taxes for Industries for 1997, 1996 and 1995 was 2.66, 2.99 and 3.12, respectively.
Financing and Capital Structure
Access to the long-term and short-term capital and credit markets, and costs of external financing, are dependent on Industries' creditworthiness. The debt ratings of Industries are as follows:
Standard & Moody's Poor's (As of 3/26/98) (As of 3/2/98)
Utilities - Secured long-term debt A2 A+ - Corporate credit rating (a) N/A A+ - Unsecured long-term debt A3 A
Diversified - Commercial paper P2 A2
(a) The "Corporate credit rating" is the overall rating of the parent and is used by Standard & Poor's but not by Moody's.
Subsequent to the consummation of the Merger, Utilities expects to participate in a utility money pool which will be funded, as needed, by the Merged Company through the issuance of commercial paper. This utility money pool is expected to replace the commercial paper program currently in place at Utilities.
Industries had the following material long-term debt financing activities in 1997 -
- In October 1997, Diversified entered into a 3-Year Credit Agreement with various banking institutions which replaced its variable rate credit facility. The agreement extends through October 2000, with one- year extensions available upon agreement by the parties. Unused borrowing availability under this agreement is also used to support Diversified's commercial paper program. A combined maximum of $450 million of borrowings under this agreement and the commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing. The rates are based upon quoted market prices and the maturities are less than one year. At December 31, 1997, Diversified had $182 million of borrowings outstanding under this facility with interest rates ranging from 6.05%- 7.30%. Diversified intends to continue borrowing under the renewal options of this facility and no conditions exist at December 31, 1997 that would prevent such borrowings. Accordingly, this debt is classified as long-term. In addition, Diversified also entered into a $150 million 364-Day Credit Agreement as discussed later.
- In August 1997, Utilities issued $135 million of 6.625% Senior Debentures, due 2009. The proceeds from these debentures were used to reduce Utilities' short-term borrowings.
- Utilities repaid at maturity $8 million of 6.125% First Mortgage Bonds during the second quarter of 1997.
- Also in the second quarter of 1997, Utilities issued $55 million of Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to have their Collateral Trust Bonds redeemed, in whole but not in part, on May 1, 2002, at 100% of the principal amount thereof, plus accrued interest. The proceeds from the Collateral Trust Bonds were used to refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30 million of Series M, 7.625% First Mortgage Bonds and $10 million of 7.375% First Mortgage Bonds.
Other than Utilities' periodic sinking fund requirements, which Utilities intends to meet by pledging additional property, $378 million of Industries' long-term debt will mature prior to December 31, 2002. Depending upon market conditions, it is currently anticipated that a majority of the maturing debt will be refinanced with the issuance of long-term securities.
Utilities currently has no authority from FERC or the SEC to issue additional long-term debt. Utilities is evaluating its future financing needs and will make the necessary regulatory filings as needed. Under the most restrictive terms of its indentures, Utilities could have issued at least $234 million of long-term debt at December 31, 1997.
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, 1997, Utilities could have issued an additional 700,000 shares of Cumulative Preference Stock and no additional shares of Cumulative Preferred Stock. In addition, Industries had 5,000,000 shares of Cumulative Preferred Stock, no par value, authorized for issuance, none of which were outstanding at December 31, 1997.
Industries' capitalization ratios at year-end were as follows:
1997 1996 Common equity 49% 47% Preferred stock 1 1 Long-term debt 50 52 ---- ---- 100% 100% ==== ====
For interim financing, Utilities is authorized by the FERC to issue up to $200 million of short-term debt. Utilities had no short-term debt outstanding at December 31, 1997. 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. The level of short-term borrowing fluctuates based on seasonal corporate needs, the timing of long-term financing, and capital market conditions. To maintain flexibility in its capital structure and to take advantage of favorable short-term rates, Utilities also uses proceeds from the sales of accounts receivable and unbilled revenues to finance a portion of its long-term cash needs. Utilities anticipates that short-term debt will continue to be available at reasonable costs due to current ratings by independent utility analysts and rating services.
Utilities had $41 million in bank lines of credit at December 31, 1997 available to support its borrowings ($11 million of which was utilized). Commitment fees are paid to maintain these lines and there are no conditions which restrict the unused lines of credit. From time to time, Industries may borrow from banks and other financial institutions in lieu of commercial paper, and has agreements with several financial institutions for such borrowings. There are no commitment fees associated with these agreements and there were no borrowings outstanding under these agreements at December 31, 1997.
In October 1997, Diversified entered into a 364-Day Credit Agreement with various banking institutions. The agreement extends through October 20, 1998, with 364 day extensions available upon agreement by the parties. The unborrowed portion of this agreement is also used to support Diversified's commercial paper program. A combined maximum of $150 million of borrowings under this agreement and the commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing. The rates are based upon quoted market prices and the maturities are less than one year. There were no borrowings under this facility at December 31, 1997.
Given the above financing flexibility available to Industries, management believes it has the necessary financing capabilities in place to adequately finance its capital requirements for the foreseeable future.
Capital Requirements
Capital expenditure and investment and financing plans are subject to continual review and change. The capital expenditure and investment programs may be revised significantly as a result of many considerations, including changes in economic conditions, variations in actual sales and load growth compared to forecasts, requirements of environmental, nuclear and other regulatory authorities, acquisition opportunities, the availability of alternate energy and purchased power sources, the ability to obtain adequate and timely rate relief, escalations in construction costs and conservation and energy efficiency programs.
Utilities' construction and acquisition program anticipates expenditures of approximately $124 million for 1998, of which 46% represents expenditures for electric transmission and distribution facilities, 17% represents electric generation expenditures, 12% represents information technology expenditures and 7% represents gas utility expenditures. The remaining 18% represents miscellaneous electric, steam and general expenditures. Utilities' levels of utility construction and acquisition expenditures are projected to be $129 million in 1999, $103 million in 2000, $98 million in 2001 and $99 million in 2002. Diversified's construction and acquisition program anticipates expenditures of approximately $245 million for 1998, of which approximately $239 million represents domestic and international energy- related construction and acquisition expenditures. Industries is currently finalizing its strategy related to the construction and acquisition program for Diversifed for 1999 - 2002. Industries anticipates funding the large majority of its utility construction and acquisition expenditures during 1998-2002 through internally generated funds, supplemented by external financings as needed. Industries anticipates funding a majority of Diversified's construction and acquisition expenditures with external financings.
DAEC, a 520-megawatt boiling water reactor plant, is operated by Utilities and Utilities has a 70% ownership interest in the plant. The DAEC operating license expires in 2014. Pursuant to the most recent electric rate case order, the IUB allows Utilities to recover $6.0 million annually for the cost to decommission the DAEC. The current recovery figures are based on an assumed cost to decommission the DAEC of $252.8 million, which is Utilities' 70% portion in 1993 dollars, based on the Nuclear Regulatory Commission (NRC) minimum formula (which exceeds the amount in the current site-specific study completed in 1994). At December 31, 1997, Utilities had $77.9 million invested in external decommissioning trust funds and also had an internal decommissioning reserve of $21.7 million recorded as accumulated depreciation.
Refer to the "Other Matters-Environmental" section for a discussion of various issues that may impact Industries' future capital requirements.
Rates and Regulatory Matters
Refer to Note 3 of the Notes to Consolidated Financial Statements for a discussion of Utilities' Rates and Regulatory Matters.
OTHER MATTERS
Year 2000
Industries utilizes software, embedded systems and related technologies throughout its businesses that will be affected by the date change in the Year 2000. An internal task force has been assembled to review and develop the full scope, work plan and cost estimates to ensure that Industries' systems continue to meet its internal and customer needs.
Phase I of the project, which encompassed a review of the necessary software modifications that will need to be made to Industries' financial and customer systems, has been completed. Industries currently estimates that the remaining costs to be incurred on this phase of the project will be approximately $2 million to $3 million in the aggregate.
The task force has also begun Phase II of the project which is an extensive review of Industries' embedded systems for Year 2000 conversion issues. The task force has inventoried critical embedded operating systems and is working with the system vendors to ascertain Year 2000 compliance of the systems. The task force is also developing detailed plans for testing and remediating critical systems (i.e., systems whose failure could affect employee safety or business operations).
As part of an awareness effort, Utilities has also notified its utility customers of its Year 2000 project efforts. Key suppliers are also being contacted to confirm their Year 2000 readiness plans. Efforts are also underway to develop contingency plans for critical embedded operating systems. Industries is currently unable to estimate the costs to be incurred on this phase of the project but does believe that the costs will be significant. An estimate of the expenses to be incurred on this phase of the project is expected to be available by the third quarter of 1998.
The goal of Industries is to have all the material Year 2000 conversions made sufficiently in advance of December 31, 1999 to allow for unanticipated issues. At this time, management is unable to determine if the Year 2000 issue will have a material adverse effect on Industries' financial position or results of operations.
Labor Issues
Utilities has six collective bargaining agreements, covering approximately 53% of its workforce. Two of the agreements, covering less than 5% of Utilities' workforce, will expire in 1998.
Financial Instruments
Industries has a policy that financial derivatives are to be used only to mitigate business risk and not for speculative purposes. Derivative financial instruments have been used by Industries on a very limited basis. At December 31, 1997, Industries did not have any material derivatives outstanding.
Accounting Pronouncements
Statement of Financial Accounting Standards 130 (SFAS 130), Reporting Comprehensive Income, was issued by the Financial Accounting Standards Board (FASB) in the second quarter of 1997. SFAS 130 establishes standards for reporting of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 will require reporting a total for comprehensive income which includes: (a) unrealized holding gains / losses on securities classified as available-for-sale under SFAS 115, (b) foreign currency translation adjustments accounted for under SFAS 52, and (c) minimum pension liability adjustments made pursuant to SFAS 87. SFAS 130 is effective for periods beginning after December 15, 1997.
Statement of Financial Accounting Standards 131 (SFAS 131), Disclosures About Segments of an Enterprise and Related Information, was issued by the FASB in the second quarter of 1997. SFAS 131 requires disclosures for each business segment in a manner consistent with how management disaggregates and evaluates the company, with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. SFAS 131 is effective for periods beginning after December 15, 1997.
Accounting for Obligations Associated with the Retirement of Long-Lived Assets
The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, including Utilities, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the FASB is reviewing the accounting for closure and removal costs, including decommissioning of nuclear power plants. If current electric utility industry accounting practices for nuclear power plant decommissioning are changed, the annual provision for decommissioning could increase relative to 1997, and the estimated cost for decommissioning could be recorded as a liability (rather than as accumulated depreciation), with recognition of an increase in the cost of the related nuclear power plant. Assuming no significant regulatory shift, Industries does not believe that such changes, if required, would have an adverse effect on its financial position or results of operations due to its ability to recover decommissioning costs through rates.
Inflation
Industries does not expect the effects of inflation at current levels to have a significant effect on its financial position or results of operations.
Environmental
The pollution abatement program of Industries is subject to continuing review and is revised from time to time due to changes in environmental regulations, changes in construction plans and escalation of construction costs. While Industries cannot precisely forecast the effect of future environmental regulations on its operations, it has taken steps to anticipate the future while also meeting the requirements of current environmental regulations.
The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that each state must take responsibility for the storage of low- level radioactive waste produced within its borders. The State of Iowa is a member of the six-state Midwest Interstate Low-Level Radioactive Waste Compact (Compact) which is responsible for development of any new disposal capability within the Compact member states. In June 1997, the Compact commissioners voted to discontinue work on a proposed waste disposal facility in the State of Ohio because the expected cost of such a facility was comparably higher than other options currently available. Dwindling waste volumes and continued access to existing disposal facilities were also reasons cited for the decision. A disposal facility located near Barnwell, South Carolina continues to accept the low-level waste and Utilities currently ships the waste it produces to such site, thereby minimizing the amount of low-level waste stored on-site. In addition, given technological advances, waste compaction and the reduction in the amount of waste generated, DAEC has on-site storage capability sufficient to store low-level waste expected to be generated over at least the next ten years, with continuing access to the Barnwell disposal facility extending that on-site storage capability indefinitely.
A global treaty has been negotiated that could require reductions of greenhouse gas emissions from utility plants. Negotiators left significant implementation and compliance questions open to resolution at meetings to be held starting in November 1998. At this time, Industries is unable to predict whether Congress will ratify the treaty. Given the uncertainty of the treaty ratification and the ultimate terms of the final regulations, Industries cannot currently estimate the impact the implementation of the treaty would have on its operations.
See Notes 13(f), 13(g) and 13(h) of the Notes to Consolidated Financial Statements for a further discussion of Industries' environmental issues.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following unaudited consolidated quarterly data, in the opinion of Industries, includes adjustments, which are normal and recurring in nature, necessary for the fair presentation of the results of operations and financial position. 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 of Industries by MidAmerican Energy Company in third quarter of 1996. Refer to the "Results of Operations" section 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.
Quarter Ended March 31 June 30 September 30 December 31 (in thousands) Operating revenues $ 257,687 $ 195,133 $ 233,822 $ 244,057 Operating income 36,146 29,552 67,895 33,544 Net income 12,315 8,350 31,746 13,926 Earnings per average common share 0.41 0.28 1.04 0.45
Operating revenues $ 243,197 $ 210,648 $ 233,907 $ 286,160 Operating income 37,268 27,343 56,347 45,608 Net income 14,095 8,056 20,889 17,867 Earnings per average common share 0.48 0.27 0.70 0.59
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements required by Item 8. begin on page 36. The supplementary data required by Item 8. are set forth under the caption "Selected Consolidated Quarterly Financial Data (unaudited)" in Item 7. "MD&A".
ARTHUR ANDERSEN LLP
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, 1997 and 1996, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois January 30, 1998
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 1997 1996 1995 (in thousands, except per share amounts) Operating revenues: Electric utility $604,270 $574,273 $560,471 Gas utility 183,517 160,864 137,292 Gas marketing, oil and gas and other 142,912 238,775 153,247 -------- -------- -------- 930,699 973,912 851,010 -------- -------- --------
Operating expenses: Fuel for production 108,344 84,579 96,256 Purchased power 74,098 88,350 66,874 Gas purchased for resale 126,631 103,877 91,198 Other operating and gas marketing expenses 231,481 325,975 250,286 Maintenance 57,185 49,001 46,093 Depreciation and amortization 114,122 107,393 97,958 Taxes other than income taxes 51,701 48,171 49,011 -------- -------- -------- 763,562 807,346 697,676 -------- -------- -------- Operating income 167,137 166,566 153,334 -------- -------- --------
Interest expense and other: Interest expense 64,383 54,822 50,727 Allowance for funds used during construction (2,309) (2,103) (3,424) Preferred dividend requirements of IES Utilities Inc. 914 914 914 Miscellaneous, net (1,850) 4,591 (1,548) -------- -------- -------- 61,138 58,224 46,669 -------- -------- -------- Income before income taxes 105,999 108,342 106,665 -------- -------- --------
Federal and state income taxes 39,662 47,435 42,489 -------- -------- --------
Net income $66,337 $60,907 $64,176 ======== ======== ========
Average number of common shares outstanding 30,380 29,861 29,202 ======== ======== ========
Earnings per average common share (basic and diluted) $2.18 $2.04 $2.20 ====== ====== ======
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31 1997 1996 1995 (in thousands)
Balance at beginning of year $219,246 $221,077 $218,293
Net income 66,337 60,907 64,176 Cash dividends declared on common stock, at a per share rate of $2.10 for all years (63,844) (62,738) (61,392) -------- -------- -------- Balance at end of year $221,739 $219,246 $221,077 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS
December 31 ASSETS (in thousands) 1997 1996
Property, plant and equipment: Utility - Plant in service - Electric $2,072,866 $2,007,839 Gas 187,098 175,472 Other 145,716 126,850 --------- ---------- 2,405,680 2,310,161 Less - Accumulated depreciation 1,115,261 1,030,390 --------- ----------- 1,290,419 1,279,771 Leased nuclear fuel, net of amortization 36,731 34,725 Construction work in progress 38,923 43,719 --------- ----------- 1,366,073 1,358,215 Other, net of accumulated depreciation and amortization of $92,705 and $70,031, respectively 243,439 223,805 --------- ---------- 1,609,512 1,582,020 --------- ----------
Current assets: Cash and temporary cash investments 10,143 8,675 Accounts receivable - Customer, less allowance for doubtful accounts of $829 and $1,087, respectively 42,607 50,821 Other 9,688 12,040 Income tax refunds receivable 1,816 8,890 Production fuel, at average cost 10,579 13,323 Materials and supplies, at average cost 24,274 22,842 Adjustment clause balances 5,398 10,752 Regulatory assets 36,330 26,539 Prepayments and other 26,376 24,169 --------- -------- 167,211 178,051 --------- ---------
Investments: Investment in McLeodUSA Inc. 326,582 29,200 Nuclear decommissioning trust funds 77,882 59,325 Investment in foreign entities 57,072 44,946 Cash surrender value of life insurance policies 12,683 11,217 Other 6,463 4,903 --------- --------- 480,682 149,591 --------- ---------
Other assets: Regulatory assets 181,162 201,129 Deferred charges and other 18,652 14,771 --------- --------- 199,814 215,900 --------- --------- $2,457,219 $2,125,562 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
December 31 CAPITALIZATION AND LIABILITIES (in thousands) 1997 1996
Capitalization (See Consolidated Statements of Capitalization): Common stock $422,513 $407,635 Retained earnings 221,739 219,246 Unrealized security gains (net of taxes) 173,901 - Cumulative foreign currency translation adjustments (20) - -------- ---------- Total common equity 818,133 626,881 Cumulative preferred stock of IES Utilities Inc. 18,320 18,320 Long-term debt (excluding current portion) 845,189 701,100 --------- --------- 1,681,642 1,346,301 --------- ----------
Current liabilities: Short-term borrowings - 135,000 Capital lease obligations 13,183 15,125 Maturities and sinking funds 501 8,473 Accounts payable 78,702 99,861 Dividends payable 16,686 16,431 Accrued interest 12,244 8,985 Accrued taxes 62,432 43,926 Accumulated refueling outage provision 10,606 1,316 Environmental liabilities 4,097 5,679 Other 23,541 22,087 -------- --------- 221,992 356,883 --------- ---------
Long-term liabilities: Pension and other benefit obligations 51,865 39,643 Capital lease obligations 23,548 19,600 Environmental liabilities 46,989 47,502 Other 26,508 18,488 -------- -------- 148,910 125,233 -------- --------
Deferred credits: Accumulated deferred income taxes 372,837 262,675 Accumulated deferred investment tax credits 31,838 34,470 -------- -------- 404,675 297,145 --------- ---------
Commitments and contingencies (Note 13)
$2,457,219 $2,125,562 ========== ==========
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31 1997 1996 (in thousands) Common equity: Common stock - no par value - authorized 48,000,000 shares; outstanding 30,577,191 and 30,077,212 shares, respectively $422,513 $407,635 Retained earnings 221,739 219,246 Unrealized security gains (net of taxes) 173,901 - Cumulative foreign currency translation adjustments (20) - -------- -------- 818,133 626,881 --------- --------
Cumulative preferred stock of IES Utilities Inc. 18,320 18,320 ---------- ---------
Long-term debt: IES Utilities Inc. - Collateral Trust Bonds - 7.65% series, due 2000 50,000 50,000 7.25% series, due 2006 60,000 60,000 6-7/8% series, due 2007 55,000 - 6% series, due 2008 50,000 50,000 7% series, due 2023 50,000 50,000 5.5% series, due 2023 19,400 19,400 -------- -------- 284,400 229,400
First Mortgage Bonds - Series L, 7-7/8%, retired in 1997 - 15,000 Series M, 7-5/8%, retired in 1997 - 30,000 Series Y, 8-5/8%, due 2001 60,000 60,000 Series Z, 7.60%, due 1999 50,000 50,000 6-1/8% series, retired in 1997 - 8,000 9-1/8% series, due 2001 21,000 21,000 7-3/8% series, retired in 1997 - 10,000 7-1/4% series, due 2007 30,000 30,000 -------- -------- 161,000 224,000
Pollution control obligations - 5.75%, due serially 1998 to 2003 3,276 3,416 5.95%, due serially 2000 to 2007, secured by First Mortgage Bonds 10,000 10,000 Variable rate (3.85% - 3.90% at December 31, 1997), due 2000 to 2010 11,100 11,100 -------- -------- 24,376 24,516
Subordinated Deferrable Interest Debentures, 7-7/8%, due 2025 50,000 50,000 Senior Debentures, 6-5/8%, due 2009 135,000 - --------- -------- Total IES Utilities Inc. 654,776 527,916 --------- --------- IES Diversified Inc. - Credit facility (6.05% - 7.30% at December 31, 1997) 182,013 172,105 Other subsidiaries' debt maturing through 2013 11,689 11,994 --------- --------- 848,478 712,015 Unamortized debt premium and (discount), net (2,788) (2,442) ---------- ---------- 845,690 709,573 Less - Amount due within one year 501 8,473 ---------- ----------- 845,189 701,100 --------- --------- $1,681,642 $1,346,301 ========== ==========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 1997 1996 1995 (in thousands) Cash flows from operating activities: Net income $66,337 $60,907 $64,176 Adjustments to reconcile net income to net cash flows from operating activities - Depreciation and amortization 114,122 107,393 97,958 Amortization of principal under capital lease obligations 14,774 16,491 15,714 Deferred taxes and investment tax credits (11,814) 9,189 7,757 Refueling outage provision 9,290 (6,374) (7,506) Amortization of other assets 15,372 9,828 7,391 Other 1,745 856 712 Other changes in assets and liabilities - Accounts receivable 10,566 (22,154) (15,221) Sale of utility accounts receivable - 7,000 4,000 Production fuel, materials and supplies 2,156 650 4,050 Accounts payable (21,707) 20,934 2,902 Accrued taxes 25,580 (17,965) 9,434 Adjustment clause balances 5,354 (13,900) 4,581 Gas in storage (3,137) (1,154) 3,245 Other 18,270 11,658 638 -------- -------- -------- Net cash flows from operating activities 246,908 183,359 199,831 -------- -------- --------
Cash flows from financing activities: Dividends declared on common stock (63,844) (62,738) (61,392) Proceeds from issuance of common stock 12,841 14,164 15,616 Purchase of treasury stock (83) (269) - Net change in IES Diversified Inc. credit facility 9,908 47,860 43,745 Proceeds from issuance of other long-term debt 190,000 60,000 100,007 Reductions in other long-term debt (63,444) (15,454) (100,424) Net change in short-term borrowings (135,000) 34,000 64,000 Principal payments under capital lease obligations (12,964) (19,108) (14,463) Other (2,116) (458) (1,438) -------- -------- -------- Net cash flows from financing activities (64,702) 57,997 45,651 -------- -------- ---------
Cash flows from investing activities: Construction and acquisition expenditures - Utility (108,640) (142,259) (125,558) Other (62,485) (96,119) (92,541) Oil and gas properties held for resale - 9,843 (9,843) Deferred energy efficiency expenditures (8,450) (16,857) (18,029) Nuclear decommissioning trust funds (6,008) (6,008) (6,100) Proceeds from disposition of assets 6,289 8,295 14,271 Other (1,444) 3,482 (5,733) -------- -------- -------- Net cash flows from investing activities (180,738) (239,623) (243,533) -------- -------- -------- Net increase in cash and temporary cash investments 1,468 1,733 1,949
Cash and temporary cash investments at beginning of year 8,675 6,942 4,993 -------- -------- --------
Cash and temporary cash investments at end of year $10,143 $8,675 $6,942 ======== ======== ========
Supplemental cash flow information: Cash paid during the year for - Interest $57,207 $53,046 $50,877 ======== ======== ======== Income taxes $28,400 $54,881 $26,478 ======== ======== ======== Noncash investing and financing activities - Capital lease obligations incurred $16,781 $14,281 $2,918 ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) General -
The Consolidated Financial Statements include the accounts of IES Industries Inc. and its consolidated subsidiaries (Industries). IES Industries Inc. 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, the purchase, distribution, transportation and sale of natural gas and to provide steam for industrial and heating purposes. Industries' principal markets are located in the state of Iowa. IES Industries Inc. also has various non-utility subsidiaries which are primarily engaged in the energy-related, transportation and real estate development businesses, as well as an investment in an Iowa-based telecommunications company, among other miscellaneous investments.
All subsidiaries for which Industries owns directly or indirectly more than 50% of the voting stock are included as consolidated subsidiaries. IES Industries Inc.'s 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.
Unconsolidated investments for which Industries 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 Industries' equity in net income or loss, which is included in "Miscellaneous, net" in the Consolidated Statements of Income and decreased for any dividends received. Investments that do not meet the criteria for consolidation or the equity method 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 1997 presentation.
(b) Regulation -
Because of its ownership of Utilities, IES Industries Inc. 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 involving Industries.
(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:
1997 1996 (in millions)
Deferred income taxes (Note 1(d)) $ 80.3 $ 84.7 Energy efficiency program costs (Note 3(b)) 59.4 61.1 Environmental liabilities (Note 13(f)) 42.9 46.3 Employee pension and benefit costs (Note 8) 27.4 22.9 Other 7.5 12.7 ----- ----- 217.5 227.7 Classified as "Current assets - regulatory assets" 36.3 26.6 ----- ----- Classified as "Other assets - regulatory assets" $ 181.2 $ 201.1 ===== =====
Refer to the individual notes referenced above for a further discussion of certain items reflected in regulatory assets.
If a portion of Utilities' operations becomes no longer subject to the provisions of SFAS 71, as a result of competitive restructuring 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 that would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. In addition, Utilities would be required to determine any impairment to other assets and write- down such assets to their fair value.
(d) Income Taxes -
Industries follows the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax assets and liabilities, 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. The remaining life of the Duane Arnold Energy Center (DAEC), Utilities' nuclear generating facility, 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:
1997 1996 1995
Electric 3.5% 3.5% 3.4% Gas 3.5% 3.5% 3.5%
(g) Property, Plant and Equipment -
Utility plant (other than acquisition adjustments of $28.1 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 1997, 1996 and 1995 were 6.7%, 5.5% and 6.5%, 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 original 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.
(h) 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, 1997, 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 prices at December 31, 1997); 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.
(i) Operating Revenues -
Industries accrues revenues for services rendered but unbilled at month-end in order to more properly match revenues with expenses.
(j) 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.
(k) 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 INDUSTRIES:
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 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) and Industries will cease to exist. The new holding company will be named Interstate Energy Corporation (Merged Company). 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, shareowners, state regulatory agencies and most of the federal regulatory agencies. It is still subject to approval by the Securities and Exchange Commission (SEC). The companies expect to receive SEC approval in the second quarter of 1998.
The summary below contains selected unaudited pro forma financial data for the year ended December 31, 1997. The pro forma combined earnings per share reflect the issuance of shares associated with the exchange ratios discussed below.
Under the terms of the Merger Agreement, the outstanding shares of WPLH's common stock will remain unchanged and outstanding as shares of the Merged Company's common stock, each outstanding share of Industries' common stock will be converted to 1.14 shares of the Merged Company's common stock, and each share of IPC common stock will be converted to 1.11 shares of the Merged Company's common stock. It is anticipated that the Merged Company will retain WPLH's common share dividend payment level as of the effective time of the Proposed Merger. On January 16, 1998, the Board of Directors of WPLH declared a quarterly dividend of $0.50 per share. This represents an 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 393,000 and 155,000 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 166,000 and 50,000 customers, respectively, in northeast Iowa, northwest Illinois and southern Minnesota.
The Merged Company 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 after the effective date of the Proposed Merger. In addition, the non-utility operations of Industries and WPLH will be combined shortly after the effective date of the Proposed Merger under one entity to manage the diversified operations of the Merged Company. The corporate headquarters of the Merged Company will be in Madison, Wisconsin.
(3) RATE MATTERS:
(a) Electric Price Announcements -
In September 1997, Utilities agreed with the IUB to provide Iowa customers a four-year retail electric and gas price freeze commencing on the effective date of the Proposed Merger. The agreement excluded price changes due to government-mandated programs, such as energy efficiency cost recovery, or unforeseen dramatic changes in operations. In addition, the price freeze does not preclude a review by either the IUB or Office of Consumer Advocate (OCA) into whether Utilities is exceeding a reasonable return on common equity. In November 1997, as part of its approval of the Proposed Merger, FERC accepted a proposal by Utilities, WP&L, and IPC, which provides for a four-year freeze on wholesale electric prices beginning with the effective date of the Proposed Merger. Assuming capture of the anticipated merger-related synergies and no significant legislative or regulatory changes affecting Industries, Industries does not expect the merger-related electric and gas price freezes to have a material adverse effect on its financial position or results of operations.
(b) Energy Efficiency Cost Recovery -
Under provisions of the IUB rules, Utilities is currently recovering the costs it has incurred for its energy efficiency programs. There have been several cost recovery filings made and approved by the IUB over the course of the last few years. Generally, the costs incurred through July 1997 are being recovered over various four-year periods. The IUB commenced a rulemaking in January 1997 to implement statutory changes allowing concurrent recovery and a final order in this proceeding was issued in April 1997. The new rules allowed Utilities to begin concurrent recovery of its prospective expenditures on August 1, 1997. The implementation of these changes will gradually eliminate the regulatory asset that was created under the prior rate making mechanism as these costs are recovered.
The following amounts of energy efficiency costs are included in regulatory assets on the Consolidated Balance Sheets (in thousands):
Four-Year Recovery December 31, December 31, Beginning 1997 1996 Costs incurred through 1993 6/95 $7,779 $12,834 Costs incurred in 1994-1995 8/97 30,924 33,161 Costs incurred from 1/1/96 - 7/31/97 8/97 19,847 15,087 Under collection of concurrent recovery N/A 850 - ------ ------ $59,400 $61,082 ====== ======
(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 1997, 1996 and 1995 were $16.6 million, $18.2 million and $18.0 million, respectively.
Industries' operating lease rental expenses for 1997, 1996 and 1995 were $9.2 million, $8.3 million and $10.4 million, respectively.
Industries' future minimum lease payments by year are as follows:
Capital Operating Year Lease Leases (in thousands)
1998 $ 13,472 $ 6,958 1999 13,431 5,141 2000 8,646 3,160 2001 3,232 1,768 2002 1,582 38 Thereafter 52 618 ------ ------ 40,415 $ 17,683 ====== Less: Amount representing interest 3,684 ------ Present value of net minimum capital lease payments $ 36,731 ======
(5) UTILITY ACCOUNTS RECEIVABLE:
Customer accounts receivable, including unbilled revenues, arise primarily from the sale of electricity and natural gas. At December 31, 1997, Utilities was serving a diversified base of residential, commercial and industrial customers consisting of approximately 339,000 electric and 178,000 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 5.96% annual rate during 1997. During 1997 and 1996, the monthly proceeds from the sale of accounts receivable averaged $65.0 million and $62.9 million, respectively. At December 31, 1997, $65.0 million of accounts receivable had been sold under the agreement.
SFAS 125, issued by the FASB in 1996 and effective for 1997, provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. The accounting for Utilities' sale of accounts receivable agreement is impacted by this standard. As a result, the agreement was modified in the first quarter of 1997 to comply with the SFAS 125 requirements and thus the accounting and reporting for the sale of Utilities' receivables remains unchanged.
(6) INVESTMENTS:
(a) McLeodUSA Inc. (McLeod) -
At December 31, 1997, Industries had the following investment in McLeod, a telecommunications company (all figures are in millions):
Fair Shares Cost Market Value
Class A Common Stock 9.0 $ 29.0 $ 287.3 Unexercised Vested Options 1.3 - 41.6 Cost to Exercise Vested Options N/A N/A (2.3) ----- ----- ----- 10.3 $ 29.0 $ 326.6 ===== ===== =====
During the second quarter of 1997, Industries converted its investment in Class B Common Stock into shares of Class A Common Stock and contributed 300,000 shares of its McLeod Class A shares to the IES Industries Charitable Foundation.
Pursuant to the applicable accounting rules, the carrying value of the investment is adjusted to the estimated fair value each quarter based on the closing price at the end of the quarter. The adjustment does not impact earnings as the unrealized gains or losses, net of taxes, are recorded directly to the common equity section of the balance sheet. In addition, any such gains or losses are reflected in current earnings only at the time they are realized through a sale. Industries has entered into an agreement with McLeod which restricts the sale or disposal of its shares without the consent of the McLeod Board of Directors until September 1998.
(b) Foreign Entities -
At December 31, 1997, Industries had $57.1 million of investments in foreign entities on its Consolidated Balance Sheet that included 1) investments in two New Zealand electric distribution entities, 2) a loan to a New Zealand company, 3) investments in two cogeneration facilities in China, and 4) an investment in an international venture capital fund. Industries accounts for the China investments under the equity method and the other investments under the cost method. The geographic concentration of Industries' investments in foreign entities at December 31, 1997, included investments of approximately $34.1 million in New Zealand, $22.5 million in China and $0.5 million in other countries.
(7) INCOME TAXES:
The components of federal and state income taxes for the years ended December 31, were as follows:
1997 1996 1995 (in millions)
Current tax expense $ 51.5 $ 38.2 $ 34.7 Deferred tax expense (9.2) 11.8 10.5 Amortization and adjustment of investment tax credits (2.6) (2.6) (2.7) ----- ----- ----- $ 39.7 $ 47.4 $ 42.5 ===== ===== =====
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.
1997 1996 1995
Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefits 5.5 6.6 5.5 Effect of rate making on property related differences 3.3 2.8 2.6 Amortization of investment tax credits (2.5) (2.4) (2.5) Adjustment of prior period taxes (1.6) 1.4 (0.4) Donation of McLeodUSA Inc. common stock (2.2) - - Other items, net (0.1) 0.4 (0.4) ----- ----- ----- Overall effective income tax rate 37.4% 43.8% 39.8% ===== ===== =====
The accumulated deferred income taxes as set forth below in the Consolidated Balance Sheets at December 31, arise from the following temporary differences:
1997 1996 (in millions)
Property related $ 292 $ 293 McLeod investment related 124 - Investment tax credit related (23) (24) Decommissioning related (16) (15) Other (4) 9 ----- ----- $ 373 $ 263 ===== =====
(8) BENEFIT PLANS:
(a) Pension Plans -
Industries 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. The projected unit credit actuarial cost method was used to compute pension cost and the accumulated and projected benefit obligations. Payments made from the pension funds to retired employees and beneficiaries during 1997 totaled $13.1 million.
Industries' 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. Industries 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, 1997, the plans' 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:
1997 1996 1995 (in thousands)
Service cost $ 5,870 $ 5,997 $ 5,215 Interest cost on projected benefit obligation 14,543 12,711 11,811 Assumed return on plans' assets (15,538) (14,976) (12,567) Early retirement benefits 3,814 4,713 - Net amortization 1,528 906 268 ------ ------ ------ Pension cost 10,217 9,351 4,727 Adjustment to funding level (10,217) (9,351) (4,727) ------ ------ ------ Total pension costs paid to the Trustee $ - $ - $ -
Actual return on plans' assets $ 34,238 $ 26,297 $ 36,614 ====== ====== ======
During 1997 and 1996, Industries incurred charges of $3.8 million and $4.7 million, respectively, related to early retirement programs. Of such costs, $3.8 million and $0.2 million, respectively, were charged to expense and the remaining amount in 1996 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:
1997 1996 (in thousands)
Fair market value of plans' assets $ 233,104 $ 212,394 ------- ------- Actuarial present value of benefits rendered to date - Accumulated benefits based on compensation to date, including vested benefits of $155,984,000 and $130,334,000, respectively 168,615 142,515 Additional benefits based on estimated future salary levels 44,253 42,940 ------- ------- Projected benefit obligation 212,868 185,455 ------- ------- Plans' assets in excess of projected benefit obligation 20,236 26,939 Remaining unrecognized net asset existing at January 1, 1997, being amortized over 20 years (2,688) (3,179) Unrecognized prior service cost 20,738 15,523 Unrecognized net gain (63,958) (54,442) ------- ------- Accrued pension cost recognized in the Consolidated Balance Sheets $ (25,672) $ (15,159) ======= ======= Assumed rate of return, all plans 9.00% 9.00% ======= ======= Weighted average discount rate of projected benefit obligation, all plans 7.25% 7.50% ======= ======= Assumed rate of increase in future compensation levels for the plans 4.75% 4.75% ======= =======
Industries also sponsors defined contribution pension plans (401(k) plans) covering substantially all employees. Industries' contributions to the plans, which are based on the participants' level of contribution, were $1.3 million, $1.7 million and $1.5 million in 1997, 1996 and 1995, respectively.
(b) Other Postemployment Benefit Plans -
Industries 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 Utilities, 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' deferred costs were fully amortized at December 31, 1997.
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:
1997 1996 1995 (in thousands)
Service cost $ 1,627 $ 1,888 $ 1,387 Interest cost on accumulated postretirement benefit obligation 3,639 3,726 3,175 Assumed return on plans' assets (689) (388) (56) Net amortization of transition obligation and other 1,904 1,970 1,813 Amortized postretirement benefit costs 1,506 1,863 2,220 Regulatory recognition of incurred cost 744 49 1,162 ------ ------ ------
Net postretirement benefit costs $ 8,731 $ 9,108 $ 9,701 ====== ====== ====== Actual return on plans' assets $ 2,601 $ 945 $ 273 ====== ====== ======
A reconciliation of the funded status of the plans to the amounts recognized in the Consolidated Balance Sheets at December 31, is presented below:
1997 1996 (in thousands)
Fair market value of plans' assets $ 19,934 $ 12,312 ------ ------ Accumulated postretirement benefit obligation - Active employees not yet eligible 22,594 19,056 Active employees eligible 5,261 4,866 Retirees 25,160 25,992 ------ ------ Total accumulated postretirement benefit obligation 53,015 49,914 ------ ------ Accumulated postretirement benefit obligation in excess of plans' assets (33,081) (37,602) Unrecognized transition obligation 29,082 31,020 Unrecognized net gain (4,171) (2,505) Unrecognized prior service cost (394) (427) ------ ------ Accrued postretirement benefit cost in the Consolidated Balance Sheets $ (8,564) $ (9,514) ====== ====== Assumed rate of return 9.00% 9.00% ====== ====== Weighted average discount rate of accumulated postretirement benefit obligation 7.25% 7.50% ====== ====== Medical trend on paid charges: Initial trend rate 8.00% 9.00% ====== ====== 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 1997 service and interest cost by $1.1 million (21%) and the accumulated postretirement benefit obligation at December 31, 1997, by $9.0 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, 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 ---------- ------- Purchases of treasury stock (2,875) (83) Stock plan issuances* 502,854 14,961 ---------- ------- Balance, December 31, 1997 30,577,191 $ 422,513 ========== ======= Shares reserved for issuance pursuant to the Company's stock plans at December 31, 1997* 1,132,890 ==========
* 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 1997, Industries reacquired 2,875 shares of its common stock on the open market, at an average price of $28.90 per share, which were subsequently issued to various Company Directors and employees. 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. At December 31, 1997, 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, 1997, 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, 1997 and 1996. 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, 1997.
(10) DEBT:
(a) Long-Term Debt -
In August 1997, Utilities issued $135 million of 6.625% Senior Debentures, due 2009. The proceeds from these debentures were used to reduce Utilities' short-term borrowings.
Utilities repaid at maturity $8 million of 6.125% First Mortgage Bonds during the second quarter of 1997.
Also in the second quarter of 1997, Utilities issued $55 million of Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to have their Collateral Trust Bonds redeemed, in whole but not in part, on May 1, 2002, at 100% of the principal amount thereof, plus accrued interest. The proceeds from the Collateral Trust Bonds were used to refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30 million of Series M, 7.625% First Mortgage Bonds and $10 million of 7.375% First Mortgage Bonds.
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.
In October 1997, Diversified entered into a 3-Year Credit Agreement with various banking institutions which replaced its variable rate credit facility. The new agreement will provide Diversified the ability to finance additional business development opportunities, as needed. The agreement extends through October 20, 2000, with one-year extensions available upon agreement by the parties. The agreement will terminate on September 1, 1998, however, if the proposed merger discussed in Note 2 is not consummated on or prior to May 10, 1998. The unborrowed portion of this agreement is also used to support Diversified's commercial paper program. A combined maximum of $450 million of borrowings under this agreement and the commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing for direct borrowings under this agreement and for issuances of commercial paper. The interest rate options are based upon quoted market rates and the maturities are less than one year.
At December 31, 1997, there were no borrowings outstanding under the variable rate credit facility. Diversified had $182.0 million of commercial paper outstanding at December 31, 1997, with interest rates ranging from 6.05% to 7.30% and maturity dates in the first quarter of 1998. Diversified intends to continue borrowing under the renewal options of this facility and the new agreement and no conditions exist at December 31, 1997, that would prevent such borrowings. Accordingly, this debt is classified as long-term in the Consolidated Balance Sheets.
Debt maturities (excluding sinking fund requirements, which Utilities intends to meet by pledging additional property under the terms of its Indentures and Deeds of Trust) for 1998 - 2002 are $0.5 million, $60.5 million, $233.7 million, $82.1 million and $1.1 million, respectively. Depending on market conditions, it is currently anticipated that a majority of the maturing debt will be refinanced with the issuance of long-term securities.
(b) Short-Term Debt -
In October 1997, Diversified also entered into a 364-Day Credit Agreement with various banking institutions. This agreement will also provide Diversified the ability to finance additional business development opportunities, as needed. The agreement extends through October 20, 1998, with 364 day extensions available upon agreement by the parties. The agreement will terminate on September 1, 1998, however, if the proposed merger discussed in Note 2 is not consummated on or prior to May 10, 1998. The unborrowed portion of this agreement is also used to support Diversified's commercial paper program. A combined maximum of $150 million of borrowings under this agreement and the commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing for direct borrowings under this agreement and for issuances of commercial paper. The interest rate options are based upon quoted market rates and the maturities are less than one year.
At December 31, 1997, Utilities had bank lines of credit aggregating $41.1 million. Utilities was using $11.1 million to support certain pollution control obligations. Commitment fees are paid to maintain these lines and there are no conditions which restrict the unused lines of credit. From time to time, Industries may borrow from banks and other financial institutions in lieu of commercial paper, and has agreements with several financial institutions for such borrowings. There are no commitment fees associated with these agreements and there were no borrowings outstanding under these agreements at December 31, 1997. Information regarding short-term debt (all issued by Utilities) is as follows (dollars in thousands):
1997 1996 1995
As of end of year - Commercial paper outstanding $ - $ 110,000 $ 101,000 Notes payable outstanding - 25,000 - Weighted average interest rate on commercial paper N/A 5.70% 5.81% Weighted average interest rate on notes payable N/A 6.28% N/A
For the year ended - Maximum month-end amount of short-term debt $ 158,000 $ 145,000 $ 132,000 Average daily amount outstanding 88,419 120,112 79,159 Weighted average interest rate 5.58% 5.52% 5.97%
(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 $19.3 million and $9.4 million of unrealized gains at December 31, 1997 and December 31, 1996, respectively, 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. Investment in McLeodUSA Inc. - Pursuant to the provisions of SFAS No. 115, the carrying value of the McLeod investment was adjusted to estimated fair value in 1997 for the first time given that such shares are now qualified for sale within a one year period. Investments carried at cost - 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, Industries 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 Industries 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):
1997 1996 Carrying Fair Carrying Fair Value Value Value Value
Nuclear decommissioning trust funds $ 78 $ 78 $ 59 $ 59 Cumulative preferred stock of Utilities 18 13 18 12 Long-term debt, including current portion 848 871 712 722 Investment in McLeodUSA Inc. (Note 6(a)) 327 327 29 267 Investments carried at cost - Investments in New Zealand (Note 6(b)) 34 33 31 45 Other 2 3 3 4
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 Industries' shareowners.
(12) DERIVATIVE FINANCIAL INSTRUMENTS:
Industries 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 Industries 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 was for two years with an additional one-year option available to the counterparty and the agreement included quarterly settlement dates. The counterparty did not extend the swap period. Diversified realized approximately $1.0 million and $0.7 million in interest expense savings in 1997 and 1996, respectively, under the agreement.
(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). The notional amount at December 31, 1997 was not material.
(13) COMMITMENTS AND CONTINGENCIES:
(a) Construction and Acquisition Program -
Industries' construction and acquisition program anticipates expenditures of approximately $369 million for 1998, which includes $124 million at Utilities and $245 million at Diversified. Commitments have been made in connection with a portion of 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 in millions and tons in thousands):
Purchased Power Coal Dollars Mw's Dollars Tons
1998 $ 4.3 82 - 184 $ 62.6 4,176 1999 3.3 1 - 101 15.5 874 2000 0.3 1 13.6 762 2001 0.3 1 13.6 751 2002 0.3 1 - -
Utilities 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. Utilities 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 1998-2002 are 20,250, 8,341, 5,742, 3,574 and 3,574, respectively. The minimum transportation and storage commitments for 1998-2002, in thousands, are $29,604, $27,111, $14,650, $10,550 and $10,550, respectively. Utilities expects to supplement its natural gas supply with spot market purchases as needed.
(c) Information Technology Services -
Industries entered into an agreement, expiring in 2004, with Electronic Data Systems Corporation (EDS) for information technology services. Industries' anticipated operating and capital expenditures under the agreement for 1998 are estimated to total approximately $15.6 million. Future costs under the agreement are variable and are dependent upon Industries' level of usage of technological services from EDS.
(d) Financial Guarantees -
Industries has financial guarantees amounting to $18.6 million outstanding at December 31, 1997, which are not reflected in the consolidated financial statements. Such guarantees were generally issued to support third-party borrowing arrangements and similar transactions. Industries believes that the likelihood of material cash payments by Industries 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 Electric Insurance Limited (NEIL). NEIL provides $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 additional expense incurred during certain outages. Owners of nuclear generating stations insured through NEIL are subject to retroactive premium adjustments if losses exceed accumulated reserve funds. 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 additional expense coverages. However, Utilities could be assessed annually a maximum of $2.9 million for NEIL primary property, $4.3 million for NEIL excess property and $0.9 million for NEIL additional expenses 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 Industries and could have a material adverse effect on Industries' financial position and results of operations.
(f) Environmental Liabilities -
Industries has recorded environmental liabilities of approximately $51 million in its Consolidated Balance Sheets at December 31, 1997. Industries' significant environmental liabilities are discussed below.
Manufactured Gas Plant (MGP) Sites
Utilities has current or previous ownership interest in properties previously associated with the production of gas at 34 MGP sites for which they may be liable for investigation, remediation and monitoring costs relating to the sites. Utilities is working pursuant to the requirements of various federal and state agencies to investigate, mitigate, prevent and remediate, where necessary, the environmental impacts to property, including natural resources, at and around the sites in order to protect public health and the environment. Utilities believes that it has completed the remediaton at various sites, although it is still in the process of obtaining final approval from the applicable environmental agencies for these sites.
Utilities has recorded an environmental liability of $33.2 million at December 31, 1997, related to the MGP sites; such amounts are based on the best current estimate of the amount to be incurred for investigation, remediation and monitoring costs for those sites where the investigation process has been or is substantially completed and the minimum of the estimated cost range for those sites where the investigation is in its earlier stages. Utilities currently estimates the range of additional costs to be incurred for the investigation, remediation and monitoring of the sites to be approximately $23 million to $51 million. It is possible that future cost estimates will be greater than the current estimates as the investigation process proceeds and as additional facts become known.
While the IUB does not allow for the deferral of MGP-related costs, it has permitted Utilities to recover its prudently incurred costs. As a result, a regulatory asset of $33.2 million has been recorded by Utilities at December 31, 1997 which reflects the probable future rate recovery. Considering the current rate treatment, and assuming no material change therein, Industries believes that the clean-up costs incurred for these MGP sites will not have a material adverse effect on its financial position or results of operations.
In April 1996, Utilities filed a lawsuit against certain of its insurance carriers seeking reimbursement for its MGP-related costs. Settlement discussions are proceeding with its insurance carriers regarding the recovery of these costs. Settlement has been reached with sixteen carriers. Utilities is continuing its pursuit of additional recoveries. Amounts received from insurance carriers are being deferred by Utilities pending a determination of the regulatory treatment of such recoveries. Utilities is unable to predict the amount of any additional insurance recoveries it may realize.
National Energy Policy Act of 1992
The National Energy Policy Act of 1992 require 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. Utilities is recovering the costs associated with this assessment through its electric fuel adjustment clauses over the period the costs are assessed. Utilities' 70% share of the future assessment at December 31, 1997, was $8.9 million and has been recorded as a liability 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 platforms (and related onshore plants and equipment), the most significant of which is located off the coast of California. Industries estimates the total costs for these properties to be approximately $14 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 $8.6 million at December 31, 1997, in the Consolidated Balance Sheets.
(g) Air Quality Issues -
The Clean Air Act Amendments of 1990 (Act) require emission reductions of sulfur dioxide (SO2), nitrogen oxides (NOx) and other air pollutants to achieve reductions of atmospheric chemicals believed to cause acid rain. Utilities has met the provisions of Phase I of the Act and is in the process of meeting the requirements of Phase II of the Act (effective in the year 2000). The Act also governs SO2 allowances, which are defined as an authorization for an owner to emit one ton of SO2 into the atmosphere. Utilities is reviewing its options to ensure it will have sufficient allowances to offset its emissions in the future. Industries believes that the potential costs of complying with these provisions of Title IV of the Act will not have a material adverse impact on its financial position or results of operations.
The Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to ozone transport, mercury and particulate control as well as modifications to the polychlorinated biphenyl (PCB) rules. In July 1997, the EPA issued final rules that would tighten the National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter emissions. Industries is currently reviewing the rules to determine what impact they may have on its operations.
In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggested that the Cedar Rapids area could be classified as "nonattainment" for the NAAQS standards established for SO2. The worst-case modeling suggested that two of Utilities' generating facilities contributed to the modeled exceedences. As a result of exceedences at a monitor near one of Utilities' generating facilities, the EPA issued a letter to the Iowa Governor's office directing the state to develop a plan of action. In this regard, Utilities entered into a consent order with the Iowa Department of Natural Resources (IDNR) in the third quarter of 1997 on this issue. Utilities agreed to limit the SO2 emissions from the two noted generating facilities and to install a new stack (potential aggregate capital cost of up to $2.5 million over the next two years) at one of the facilities. The IDNR approved the consent order in the fourth quarter of 1997 and it is expected to be approved by the EPA in the second quarter of 1998.
Pursuant to a routine internal review of documents, Utilities determined that certain changes undertaken during previous years at one of its generating facilities may have required a federal Prevention of Significant Deterioration (PSD) permit. Utilities initiated discussions with its regulators on the matter, resulting in the submittal of a PSD permit application in February 1997. Utilities expects to receive the permit in the second quarter of 1998. Utilities may be subject to a penalty for not having obtained the permit previously; however, Industries believes that any likely actions resulting from this matter will not have a material adverse effect on its financial position or results of operation.
Pursuant to a separate routine internal review of plant operations, Utilities determined that certain permit limits were exceeded in 1997 at one of its generating facilities in Cedar Rapids. Utilities has initiated discussions with its regulators on the matter and has proposed a compliance plan which contemplates operational changes. In addition, Utilities will be submitting a PSD permit application in the second quarter of 1998. Utilities may be subject to a penalty for exceeding permit limits established for this facility; however, management believes that any likely actions resulting from this matter will not have a material adverse effect on Industries' financial position or results of operations.
(h) Spent Nuclear Fuel -
The Nuclear Waste Policy Act of 1982 (NWPA) assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. Utilities has since been notified by the DOE that it was not able to begin acceptance of spent nuclear fuel by January 31, 1998. Furthermore, DOE has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities is evaluating and pursuing multiple options including litigation and legislation to protect its customers and its contractual and statutory rights that are diminished by delays in the DOE program.
The NWPA assigns responsibility for interim storage of spent nuclear fuel to generators of such spent nuclear fuel, such as Utilities. In accordance with this responsibility, Utilities has been storing spent nuclear fuel on site at DAEC since plant operations began. DAEC has current on-site capability to store spent fuel until 2001. Utilities is currently reviewing its options to expand on-site storage capability. To provide assurance that both the operating and post-shutdown storage needs are satisfied, a combination of expanding the capacity of the existing fuel pool and construction of a dry cask modular facility are being contemplated. Legislation is being considered on the federal level to provide for the establishment of an interim storage facility as early as 2002.
(i) 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, 1997, Utilities had $77.9 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 $2.7 million in 1997, are recorded as interest income and a corresponding interest expense payable to the funds is recorded. The earnings accumulate in the external trust fund balances and in accumulated depreciation on utility plant. See the section "Other Matters-Accounting for Obligations Associated with the Retirement of Long- Lived Assets" in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of potential changes in current electric utility industry accounting practices for nuclear power plant decommissioning.
(j) Legal Proceedings -
Industries is involved in legal and administrative proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Although unable to predict the outcome of these matters, Industries believes that appropriate liabilities have been established and final disposition of these actions will not have a material adverse effect on its financial position or results of operations.
(14) JOINTLY-OWNED ELECTRIC UTILITY PLANT:
Under joint ownership agreements with other Iowa utilities, Utilities has undivided ownership interests in jointly-owned electric generating stations and related transmission facilities. Each of the respective owners is responsible for the financing of its portion of the construction costs. Kilowatt-hour generation and operating expenses are divided on the same basis as ownership with each owner reflecting its respective costs in its Statements of Income. Information relative to Utilities' ownership interest in these facilities at December 31, 1997 is as follows:
Ottumwa Neal DAEC Unit 1 Unit 3 (Nuclear) (Coal) (Coal) ($ in millions)
Utility plant in service $ 500.6 $ 191.6 $ 60.8 Accumulated depreciation $ 230.8 $ 96.6 $ 30.6 Construction work in progress $ 2.8 $ - $ 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 Utilities' generation, transmission, distribution and sale of electric energy and purchase, distribution, transportation and sale of natural gas. Certain financial information relating to Industries' significant segments of business is presented below:
Year Ended December 31 1997 1996 1995 (in thousands) Operating results: Revenues - Electric $ 604,270 $ 574,273 $ 560,471 Gas 183,517 160,864 137,292
Operating income - Electric 138,151 133,768 131,505 Gas 12,961 17,526 9,509
Other information: Depreciation and amortization - Electric 81,129 77,578 72,487 Gas 7,018 6,200 6,176
Construction and acquisition expenditures - Electric 89,400 115,929 108,902 Gas 15,293 12,981 9,368
Assets - Identifiable assets - Electric 1,441,940 1,438,370 1,395,666 Gas 211,659 205,680 192,045 --------- --------- --------- 1,653,599 1,644,050 1,587,711 Investment in McLeodUSA, Inc. 326,582 29,200 9,200 Other corporate assets 477,038 452,312 388,680 --------- --------- --------- Total consolidated assets $ 2,457,219 $ 2,125,562 $ 1,985,591 ========= ========= =========
The gas revenues and cost of gas sold of Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, for 1996 and 1995 have been reclassed into "Gas marketing, oil and gas and other revenues" and "Other operating and gas marketing expenses", respectively, consistent with the 1997 presentation.
Item 9.
Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information regarding the directors and executive officers of IES Industries Inc. (Industries) as of March 1, 1998 is set forth below.
Directors of IES Industries Inc.
C.R.S. Anderson Principal Occupation: Director of Industries. Age: 70 Served as director of Industries since 1991 and was first elected to the Iowa Southern Utilities Company board in 1978. Other Information: Mr. Anderson is the retired Chairman of the Board of Industries after serving in that position following the merger of IE Industries Inc. (IEI) and Iowa Southern Inc. (ISI). Prior to the merger of IEI and ISI, Mr. Anderson was Chairman and President of Iowa Southern Inc., and had served in various positions at Iowa Southern Utilities Company since 1956. He is a past chairman of the Missouri Valley Electric Association and the Iowa Association of Business and Industry; and a former director of IMG Bond Accumulation Fund, IMG Stock Accumulation Fund, Midwest Gas Association and the Iowa Business Development Credit Corporation.
J. Wayne Bevis Principal Occupation: Retired as Vice Chairman of Pella Corporation (a window and door manufacturing company), Pella, Iowa on December 31, 1997. Age: 63 Served as director of Industries since 1991 and was first elected to the IE Industries Inc. and Iowa Electric Light and Power Company (IELP) boards in 1987. Other Information: He had served in various positions at Pella Corporation since 1973 and had been a director of Pella Corporation since 1975.
Lee Liu Principal Occupation: Chairman of the Board and Chief Executive Officer of Industries and IES Utilities Inc. (Utilities). Age: 64 Served as director of Industries since 1991 and was first elected to the Iowa Electric Light and Power Company board in 1981. Other Information: Mr. Liu has held a number of professional, management and executive positions after joining Iowa Electric Light and Power Company (IELP) (later known as Utilities) in 1957. He is a director of HON Industries Inc., an office equipment manufacturer in Muscatine, Iowa; McLeodUSA Inc., a telecommunications company in Cedar Rapids, Iowa; Principal Financial Group, an insurance company in Des Moines, Iowa; and Eastman Chemical Company, a diversified chemical company in Kingsport, Tennessee. He also serves as a trustee for Mercy Medical Center, a hospital in Cedar Rapids, Iowa and is a member of University of Iowa College of Business Board of Visitors.
Jack R. Newman Principal Occupation: Partner of Morgan, Lewis & Bockius, an international law firm based in Washington, D.C. Age: 64 Served as director of Industries and Utilities since 1994. Other Information: Mr. Newman has been engaged in private practice since 1967 and has been a partner of Morgan, Lewis & Bockius since December 1, 1994. Prior to joining Morgan, Lewis & Bockius, he was a partner in the law firms Newman & Holtzinger and Newman, Bouknight & Edgar. He has served as nuclear legal counsel to Utilities since 1968. He advises a number of utility companies on nuclear power matters, including many European and Asian companies. Mr. Newman is a member of the Bar of the State of New York, the Bar Association of the District of Columbia, the Association of the Bar of the City of New York, the Federal Bar Association and the Lawyers Committee of the Edison Electric Institute.
Robert D. Ray Principal Occupation: Retired President and Chief Executive Officer of IASD Health Services Inc. (formerly Blue Cross and Blue Shield of Iowa, Western Iowa and South Dakota), an insurance firm in Des Moines, Iowa. Age: 69 Served as director of Industries since 1991 and was first elected to the IE Industries Inc. and IELP boards in 1987. Other Information: Mr. Ray served as Governor of the State of Iowa for fourteen years, and was the United States Delegate to the United Nations in 1984. He is a director of the Maytag Company, an appliance manufacturer in Newton, Iowa. He also serves as Chairman of the National Leadership Commission on Health Care Reform and the National Advisory Committee on Rural Health Care. Mr. Ray is Chairman of the Board of Governors, Drake University, Des Moines, Iowa, and a member of the Iowa Business Council. Mr. Ray served as Interim Mayor of Des Moines, Iowa in 1997.
David Q. Reed Principal Occupation: Independent practitioner of law in Kansas City, Missouri. Age: 66 Served as director of Industries since 1991 and was first elected to the Iowa Electric Light and Power Company board in 1967. Other Information: Mr. Reed has been engaged in the private practice of law since 1960. He is a member of the American Bar Association, the Association of Trial Lawyers of America, the Missouri Association of Trial Lawyers, the Missouri Bar and the Kansas City Metropolitan Bar Association.
Henry Royer Principal Occupation: Resigned as President and Chief Executive Officer of River City Bank in Sacramento, California on December 31, 1997. Age: 66 Served as director of Industries since 1991 and was first elected to the Iowa Electric Light and Power Company board in 1984. Other Information: Mr. Royer is a director of CRST, Inc., a trucking company in Cedar Rapids, Iowa, a trustee of Berthel Investment Trust and has served on numerous Cedar Rapids community organization boards.
Robert W. Schlutz Principal Occupation: President of Schlutz Enterprises, a diversified farming and retailing business in Columbus Junction, Iowa. Age: 62 Served as director of Industries since 1991 and was first elected to the Iowa Southern Inc. board in 1989. Other Information: Mr. Schlutz is a director of PM Agri-Nutritional Group Inc., an animal health business in St. Louis, Missouri, and the Iowa Foundation for Agricultural Advancement. Mr. Schlutz is President of the Iowa State Fair Board and member of various community organizations. He also served on the National Advisory Council for the Kentucky Fried Chicken Corporation. He is a past Chairman of the Environmental Protection Commission for the State of Iowa.
Anthony R. Weiler Principal Occupation: Senior Vice President, Merchandising, for Heilig-Meyers Company, a national furniture retailer in Richmond, Virginia. Age: 61 Served as director of Industries since 1991 and was first elected to the Iowa Southern Utilities Company board in 1979. Other Information: Mr. Weiler was previously Chairman and Chief Executive Officer of Chittenden & Eastman Company, a national manufacturer of mattresses in Burlington, Iowa. He was employed by Chittenden & Eastman in various management positions from 1960 to 1995. Mr. Weiler is Chairman of the National Home Furnishings Association and a director of the Retail Home Furnishings Foundation. He is a trustee of NHFA Insurance and a past director of the Burlington Area Development Corporation, the Burlington Area Chamber of Commerce and various community organizations.
FUNCTIONING OF THE BOARD OF DIRECTORS AND COMMITTEES
The Board has an Executive Committee, an Audit Committee, a Nominating Committee and a Compensation Committee.
The current members of the Executive Committee are Lee Liu, Chairman; C.R.S. Anderson; David Q. Reed and Henry Royer. The current members served on this Committee during 1997. The Committee met six times during 1997. It is empowered with all of the authority vested in the Board, subject to certain limitations, and may act when the Board is not in session.
Current members of the Audit Committee are C.R.S. Anderson, Chairman; J. Wayne Bevis; Jack R. Newman; Robert D. Ray and Robert W. Schlutz. The current members served on this Committee during 1997. The Committee met twice during 1997. The principal functions of the Committee are to review internal audit activities, including reviews of the internal control procedures; to oversee the corporate compliance process; to recommend to the Board an independent public accounting firm to be auditors; and to approve the audit arrangements and audit results. Both the internal and independent auditors have direct and independent access to the Audit Committee.
Current members of the Nominating Committee are David Q. Reed, Chairman; Lee Liu; Robert D. Ray; Robert W. Schlutz and Anthony R. Weiler. The current members served on this Committee during 1997. The Committee met once during 1997. Its principal function is to review and recommend to the Board nominees to serve on the Board and its committees. While there are no formal procedures, the Committee considers nominees brought to its attention by other members of the Board, members of management and Shareholders.
Current members of the Compensation Committee are Henry Royer, Chairman; J. Wayne Bevis; Jack R. Newman and Anthony R. Weiler. The current members served on this Committee during 1997. The Committee met five times during 1997. The principal functions of the Committee are to review and make recommendations to the Board on the salaries and other compensation and benefits of the elected officers of Industries and its subsidiaries, and to review and administer incentive compensation or similar plans for officers and other key employees of Industries and its subsidiaries.
The Board met seven times in 1997. The various committees of the Board met an aggregate of fourteen times in 1997. All of the directors attended 80% or more of these meetings.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Industries' directors, its executive officers, and certain other officers are required to report their ownership of Industries' common stock and any changes in that ownership to the Securities and Exchange Commission and the New York Stock Exchange. From October of 1994 to October of 1997, Mr. Schlutz did not file on a timely basis 11 reports for a total of 195 shares of Industries' Common Stock acquired in 11 transactions through a brokerage dividend reinvestment plan. These shares were reported in February 1998. All other required filings in 1997 were properly made in a timely fashion. In making the above statements, Industries has relied on the representations of the persons involved and on copies of their reports filed with the Securities and Exchange Commission.
Executive Officers of IES Industries Inc. (figures following the names represent the officer's age as of December 31, 1997)
Lee Liu, 64, Chairman of the Board & Chief Executive Officer. First elected officer in 1975.
Larry D. Root, 61, President & Chief Operating Officer. Re-elected officer in 1996. (i)
James E. Hoffman, 44, Executive Vice President. First elected officer in 1996. (ii)
Thomas M. Walker, 50, Executive Vice President & Chief Financial Officer. First elected officer in 1996. (iii)
Dean E. Ekstrom, 50, Vice President, Administration. First elected officer in 1991.
Stephen W. Southwick, 51, Vice President, General Counsel & Secretary. First elected officer in 1982.
John E. Ebright, 54, Controller & Chief Accounting Officer. First elected officer in 1996. (iv)
Dennis B. Vass, 48, 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 as an officer or in other responsible positions at such company 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 Industries effective November 6, 1996. Mr. Root was first elected as an officer in 1979.
(ii) James E. Hoffman was elected Executive Vice President of Industries effective November 6, 1996. Prior to his appointment as Executive Vice President, Customer Service & Energy Delivery of Utilities 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 Industries effective December 16, 1996. Prior to joining Industries 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 Industries effective July 8, 1996. Prior to joining Industries 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
Executive Officers' Compensation Table
The following Executive Officers' Compensation Table sets forth the total compensation paid by Industries for all services rendered during 1997, 1996, and 1995 to the Chief Executive Officer and the four other most highly compensated executive officers of Industries or its subsidiaries at December 31, 1997.
Compensation of Directors
In 1997, non-employee directors of Industries received fees of $12,000 per year, 300 shares of common stock of Industries plus $700 per Board meeting or Committee meeting attended. If a Committee meeting is the same day as a meeting of the Board of Directors as a whole or if a Committee meeting is held by telephone conference, each participating non- employee director receives $350, one-half the regular Committee meeting fee. In addition, non-employee directors serving as chairman of a Committee receive an annual fee of $1,500 for serving in such capacity. Directors who are officers do not receive any fees for attendance at Board meetings or meetings of Committees of which they are members.
Under the Director Retirement Plan, a retirement or death benefit is provided to directors, including directors who are employees, in an amount equal to 80% of the annual director's fee. Such amount is payable annually, based upon length of service, to directors who have served at least four years, for a maximum period of eight years.
Compensation Committee Interlocks and Insider Participation: See Item 13. "Certain Relationships and Related Transactions" regarding services provided by Mr. Newman's legal firm, Morgan, Lewis & Bockius.
A business travel accident insurance policy is provided to the Board of Directors at an annual cost of $10 per director. No director received any payments under such policy in 1997.
PLANS
Pension Plans: Industries, Utilities and the Cedar Rapids and Iowa City Railway Company have non-contributory retirement plans covering employees who have at least one year of accredited service. Directors who are not officers do not participate in the plan. Maximum annual benefits payable at age 65 to participants who retire at age 65, calculated on the basis of straight life annuity, are illustrated in the following table:
PENSION PLAN TABLE
Average of Highest Annual Estimated Maximum Annual Retirement Benefits Salary (Remuneration) Based on Service Years of Service for 3 Consecutive Years of the last 10 15 20 25 30 35 125,000 26,869 35,828 44,784 53,741 62,697 150,000 32,683 43,576 54,471 65,366 76,259 175,000 35,913 48,282 60,650 73,019 85,388 200,000 40,038 54,282 68,525 82,769 97,013 225,000 44,163 60,282 76,400 92,519 108,638 250,000 44,818 61,235 77,652 94,068 110,485 300,000 44,818 61,235 77,652 94,068 110,485 400,000 44,818 61,235 77,652 94,068 110,485 450,000 44,818 61,235 77,652 94,068 110,485 500,000 44,818 61,235 77,652 94,068 110,485
For 1997, $125,000 was the maximum benefits allowable under the retirement plans prescribed by Section 415 of the Internal Revenue Code.
With respect to the officers named in the Executive Officer's Compensation Table, the remuneration for retirement plan purposes would be substantially the same as that shown as "Salary." As of December 31, 1997, the officers had accredited years of service for the retirement plan as follows: Lee Liu, 40 years; Larry D. Root, 27 years; James E. Hoffman, 2 years; Thomas M. Walker, 1 year; John F. Franz, Jr., 6 years; Harold W. Rehrauer, 25 years.
Supplemental Retirement Plan: Industries has a non-qualified Supplemental Retirement Plan (SRP) for eligible officers of Industries and Utilities, including Messrs. Liu, Hoffman, Walker, Franz and Rehrauer. The plan provides for payment of supplemental retirement benefits equal to 69% of the officer's base salary in effect at the date of retirement, reduced by benefits receivable under the qualified retirement plan, for a period not to exceed 18 years following the date of retirement. In the event of the death of the officer following retirement, similar payments reduced by the joint and survivor annuity of the qualified retirement plan will be made to his or her designated beneficiary (surviving spouse or dependent children), if any, for a period not to exceed 12 years from the date of the officer's retirement. Thus, if an officer died 12 years after retirement, no payment to the beneficiary would be made. Death benefits are provided on the same basis to a designated beneficiary for a period not to exceed 12 years from the date of death should the officer die prior to retirement. The Supplemental Retirement Plan further provides that if, at the time of the death of an officer, the officer is entitled to receive, is receiving, or has received supplemental retirement benefits by virtue of having taken retirement, a death benefit shall be paid to the officer's designated beneficiary or to the officer's estate in an amount equal to 100% of the officer's annual salary in effect at the date of retirement. Under certain circumstances, an officer who takes early retirement will be entitled to reduced benefits under the Supplemental Retirement Plan. The Supplemental Retirement Plan also provides for benefits in the event an officer becomes disabled under the terms of the qualified retirement plan. Life insurance policies on the participants have been purchased sufficient in amount to finance actuarially all future liabilities under the Supplemental Retirement Plan. The Supplemental Retirement Plan has been designed so that if the assumptions made as to mortality, experience, policy dividends, tax credits and other factors are realized, all life insurance premium payments will be recovered over the life of the Supplemental Retirement Plan.
The following table shows the estimated annual benefits payable under the Supplemental Retirement Plan equal to 69% of the officer's base salary in effect at the date of retirement:
Supplemental Retirement Plan Payments 69% SRP Benefit
Years of Service Annual Salary 15 20 25 30 35 125,000 59,381 50,422 41,466 32,509 23,553 150,000 70,817 59,924 49,029 38,134 27,241 175,000 84,837 72,468 60,100 47,731 35,362 200,000 97,962 83,718 69,475 55,231 40,987 225,000 111,087 94,968 78,850 62,731 46,612 250,000 127,682 111,265 94,848 78,432 62,015 300,000 162,182 145,765 129,348 112,932 96,515 400,000 231,182 214,765 198,348 181,932 165,515 450,000 265,682 249,265 232,848 216,432 200,015 500,000 300,182 283,765 267,348 250,932 234,515
Mr. Liu has elected to continue under the supplemental retirement agreement previously provided to him which provides for payment of benefits equal to 75% of his base salary, for a period not to exceed 15 years following the date of retirement, and payment to the surviving spouse or dependent children for a period not to exceed 15 years following the date of retirement.
The following table shows the estimated annual benefits payable under the Supplemental Retirement Plan equal to 75% of the officer's base salary in effect at the date of retirement:
Supplemental Retirement Plan Payments 75% SRP Benefit
Years of Service Annual Salary 15 20 25 30 35 125,000 66,881 57,922 48,966 40,009 31,053 150,000 79,817 68,924 58,029 47,134 36,241 175,000 95,337 82,968 70,600 58,231 45,862 200,000 109,962 95,718 81,475 67,231 52,987 225,000 124,587 108,468 92,350 76,231 60,112 250,000 142,682 126,265 109,848 93,432 77,015 300,000 180,182 163,765 147,348 130,932 114,515 400,000 255,182 238,765 222,348 205,932 189,515 450,000 292,682 276,265 259,848 243,432 227,015 500,000 330,182 313,765 297,348 280,932 264,515
Executive Guaranty Plan: The Board has approved an Executive Guaranty Plan (the Guarantee Plan) for officers of Industries and its principal subsidiary, Utilities. The purpose of the Guaranty Plan is to promote flexibility in financial planning of participating officers and to provide an inducement to new officers in order to retain and attract the best possible executive management team. Under the Guaranty Plan, loans are guaranteed within defined limits, based on salary level and years of service made to participating officers for various specified purposes, including real estate acquisitions and purchases of Industries' Common Stock. As of December 31, 1997, there were no guarantees outstanding.
Executive Change of Control Agreements: Fourteen executives, including Messrs. Liu, Hoffman, Walker, Franz and Rehrauer have severance agreements with Industries. The severance agreements run for terms of one year (three years in the case of Mr. Liu), subject to automatic renewal unless either party gives notice of non-renewal to the other party at least 60 days prior to the annual renewal date. Each agreement provides for salary continuation and certain other benefits in the event the covered executive is terminated within a three-year period following a change of control. For these purposes, a change of control is as described in Restated Articles of Incorporation of Industries and, in addition, will be deemed to have occurred, if following a merger, consolidation or reorganization, the owners of the capital stock entitled to vote in the election of directors prior to the transaction own less than 75% of the resulting entity's voting stock or during any period of two consecutive years, individuals who, at the beginning of such period constitute the Board of Directors of the parent company, cease for any reason to constitute at least a majority of the Board of Directors of any successor organization. Accordingly, the merger involving Industries, WPL Holdings, Inc. and Interstate Power Company (the "Proposed Merger") will constitute a change of control for purposes of each of the severance agreements. Specifically, the agreements provide that following termination of a covered executive's employment except for just cause, death, retirement, disability or voluntary resignation (other than resignation for "good cause"), the executive's salary will be continued, at a level equal to his/her salary just prior to termination for a period ranging from eighteen to thirty-six months (depending upon the executive involved and, in certain cases, his/her length of service). Additionally, certain benefits will be continued during the applicable severance period, including life and health insurance, and the executive will continue to receive annual incentive award payments equal to the average annual incentive awards paid to executives of the same or comparable designation during the three years prior to the change of control. In the event the executive dies during the severance period, the salary and benefit payments described above shall be payable during the remainder of the term to the executive's surviving spouse or his/her estate. The executive will also become immediately vested and entitled to receive awards of restricted stock or other rights granted to the executive under the Long- Term Incentive Plan. With respect to a covered executive who is age 56 or older at the time of the change of control or under age 56 and has ten or more full years of service at the time of the Change of Control, the severance agreement further provides that the change of control will cause the executive to become fully vested in his/her Supplemental Retirement Plan benefit, and that if the executive is terminated within three years following the change of control, he/she will be able to commence his/her Supplemental Retirement Plan benefit payments on the earlier of the date he/she attains age 65 or the date salary continuation payments cease under his/her severance agreements. Certain amendments were made to the existing severance agreements in 1996. The amendments to the severance agreement for Mr. Liu provide, among other things, that during the applicable severance period Mr. Liu will be entitled to receive payments equal to the average value of both the long-term and the annual incentive awards received by executives of the same or comparable designation during the three years prior to the change of control. In addition, the amendments for all covered executives provide reimbursement, in an amount not to exceed 15% of the executive's base salary, for outplacement services and legal fees incurred by the executive in connection with his/her termination, and also provide severance benefits in the event of certain employment terminations within 180 days prior to a change of control.
The provisions of the severance agreement covering Mr. Liu have been incorporated into the employment agreement to be executed between Mr. Liu and Interstate Energy Corporation in connection with the Proposed Merger ("Merger Employment Agreement"). After the effective time of the Proposed Merger, Mr. Liu's Merger Employment Agreement will supersede his existing severance agreement.
These agreements are intended to employ key executives who can approach major business decisions objectively and without concern for their personal situations.
EMPLOYMENT AGREEMENT
IE Industries Inc. and Iowa Electric Light and Power Company, the predecessor companies of Industries and Utilities, entered into an employment agreement ("Employment Agreement") with Lee Liu, which became effective July 1, 1991. The Employment Agreement provides that Mr. Liu shall be employed as President, Chief Executive Officer and Chairman of the Executive Committee of Industries and as Chief Executive Officer and Chairman of Utilities from July 1, 1991 until April 1995, which period shall be automatically extended unless at least six months prior to any expiration thereof either Industries or Utilities or Mr. Liu shall give notice that they do not wish to extend such time (the "Period of Employment"). To date, neither party has given such notice. The Employment Agreement also provides that he shall become Chairman of the Board at such time as C.R.S. Anderson ceases to serve in such position. This occurred on July 1, 1993. The Employment Agreement provides that Mr. Liu shall provide consulting services for three years (the "Period of Consulting") after the conclusion of the Period of Employment.
During the Period of Employment, Mr. Liu will be paid a base annual salary of at least $275,000, and will be entitled to participate in all incentive compensation plans applicable to the positions he holds and all retirement and employee welfare benefit plans. During the Period of Employment, Mr. Liu's incentive compensation shall be at least equal to that paid to the Chairman of the Board of Industries.
If Mr. Liu's employment is terminated without his consent during the Period of Employment for other than an unremedied material breach or just cause or by his resignation if such resignation occurs after Industries fails to cause him to be employed in or elected to the positions specified in the Employment Agreement or after a material diminution in his duties, responsibilities or status, then Mr. Liu shall be entitled to an amount equal to the sum of his base annual salary as of the date of termination plus his average incentive compensation during the three years immediately preceding the date of termination multiplied by the number of years (and fractions thereof) then remaining in the Period of Employment. Mr. Liu also would be entitled to continued insurance coverages and an amount equal to the then present value of the actuarially determined difference between the aggregate retirement benefits actually to be received by him as of the date of termination and those that would have been received by him had he continued to be employed at the base salary in effect at termination through the expiration of the Period of Employment. All his shares of restricted stock would also vest at that time.
During the Period of Consulting, Mr. Liu will make himself available for up to 30 days per year, report to the Chief Executive Officers of Industries and will earn an annual consulting fee equal to 13.33% of his highest annual base salary during his Period of Employment. If Mr. Liu's consulting services are terminated for reasons other than material breach or just cause, he will be entitled to a lump sum payment equal to the amount of the consulting fee he would otherwise have earned during the Period of Consulting.
The Merger Employment Agreement which Mr. Liu will enter into with Interstate Energy in connection with the Proposed Merger will supersede the Employment Agreement described above.
Industries entered into an Employment Agreement (Agreement) with Larry D. Root on November 6, 1996. The Agreement provides that Mr. Root shall be employed as President of Industries and Utilities from November 7, 1996 to the earlier of the effective date of the Proposed Merger or May 5, 1998. During the period of employment, Mr. Root will be paid a base salary of $28,000 per month.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Beneficial Owners
Set forth below is certain information with respect to beneficial ownership of Common Stock by each person know by Industries, as of March 1, 1998, to own 5% or more of the outstanding Common Stock of Industries.
Amount and Nature of Percent of Name of Beneficial Owner Beneficial Ownership(1) Class(1)
WPL Holdings, Inc........... 5,861,115 16.0% Interstate Power Company.... 5,861,115 16.0%
(1) By reason of the Stock Option Agreements, executed concurrently with the Merger Agreement, each of WPLH and IPC may be deemed to have sole voting and dispositive power with respect to the shares listed above which are subject to their respective options from Industries and, accordingly, each of WPLH and IPC may be deemed to beneficially own all of such shares (assuming exercise of its option and the nontriggering of the other party's right to exercise its option for Common Stock). However, each of WPLH and IPC expressly disclaim any beneficial ownership of such shares because such options are exercisable only in certain circumstances.
Management
Set forth below is certain information with respect to beneficial ownership of the Common Stock of Industries as of March 1, 1998, by each current director, certain executive officers and by all current directors and executive officers of Industries and Utilities as a group.
Amount and Nature of Percent of Name of Beneficial Owner Beneficial Ownership(1) Class(1)
C.R.S. Anderson............ 20,300 * J. Wayne Bevis............. 1,800 * John F. Franz, Jr.......... 17,068 * James E. Hoffman........... 10,265 * Lee Liu.................... 43,515 * Jack R. Newman............. 1,300 * Robert D. Ray.............. 2,800 * David Q. Reed.............. 5,302 * Harold W. Rehrauer......... 9,953 * Larry D. Root.............. 17,733 * Henry Royer................ 8,887 * Robert W. Schlutz.......... 3,135 * Thomas M. Walker........... 1,000 * Anthony R. Weiler.......... 4,037 * All Executive Officers and Directors of Industries and Utilities as a group (19 persons).............. 170,272 * __________________________
* Less than one percent of the total outstanding shares of Industries' Common Stock.
(1) Includes ownership of shares by family members even though beneficial ownership of such shares may be disclaimed.
Item 13.
Item 13. Certain Relationships and Related Transactions
Director Jack R. Newman serves as legal counsel to Utilities on nuclear issues. Mr. Newman's firm, Morgan, Lewis & Bockius, has also provided legal services to Industries and Utilities related to the Proposed Merger.
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 Description Number
Report of Independent Public Accountants 36
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 37
Consolidated Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995 37
Consolidated Balance Sheets at December 31, 1997 and 1996 38 - 39
Consolidated Statements of Capitalization at December 31, 1997 and 1996 40
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 41
Notes to Consolidated Financial Statements 42 - 62
(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, 1997, 1996 and 1995 81
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) Bylaws of Industries, as amended February 4, 1997. (Filed as Exhibit 3(c) to Industries' Form 10-K for the year 1997 (File No. 1-9187)).
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:
IE/Utilities/Industries Number Dated as of 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) Fifth April 1, 1997 Form 10-Q, 5/14/97 4(a)
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/Utilities File Exhibit Reference
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) Sixty-third April 1, 1997 Form 10-Q, 5/14/97 4(b)
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) 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).
4(h) Indenture (For Senior Unsecured Debt Securities), dated as of August 1, 1997, between Utilities and The First National Bank of Chicago, as Trustee. (Filed as Exhibit 4(j) to Utilities' Registration Statement, File No. 333-32097).
4(i) Commercial Paper Dealer Agreement, dated as of November 9, 1994, between IES Diversified Inc. and Citicorp Securities, Inc. (Filed as Exhibit 4(c) to Industries' Form 10-Q for the quarter ended March 31, 1997 (File No. 1-9187)).
4(j) First Amendment, dated as of March 24, 1997, to the Commercial Paper Dealer Agreement, dated as of November 9, 1994, between IES Diversified Inc. and Citicorp Securities, Inc. (Filed as Exhibit 4(d) to Industries' Form 10-Q for the quarter ended March 31, 1997 (File No. 1-9187)).
4(k) 3-Year Credit Agreement dated as of October 20, 1997 among IES Diversified Inc. as Borrower, certain banks, First Chicago Capital Markets, Inc. as Syndication Agent and Citibank, N.A. as Agent. (Filed as Exhibit 4(f) to Industries' Form 10-Q for the quarter ended September 30, 1997 (File No. 1-9187)).
4(l) 364-Day Credit Agreement dated as of October 20, 1997 among IES Diversified Inc. as Borrower, certain banks, First Chicago Capital Markets, Inc. as Syndication Agent and Citibank, N.A. as Agent. (Filed as Exhibit 4(g) to Industries' Form 10-Q for the quarter ended September 30, 1997 (File No. 1-9187)).
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(x))
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. (Filed as Exhibit 10(b) to Industries' Form 10-Q for the quarter ended June 30, 1997 (File No. 1-9187)).
10(t) IES Industries Inc. Grantor Trust for Director Retirement Plan. (Filed as Exhibit 10(c) to Industries' Form 10-Q for the quarter ended September 30, 1997 (File No. 1-9187)).
10(u) IES Industries Inc. Grantor Trust for Deferred Compensation Agreements. (Filed as Exhibit 10(d) to Industries' Form 10-Q for the quarter ended September 30, 1997 (File No. 1-9187)).
10(v) IES Industries Inc. Grantor Trust for Supplemental Retirement Agreements. (Filed as Exhibit 10(e) to Industries' Form 10-Q for the quarter ended September 30, 1997 (File No. 1-9187)).
10(w) IES Utilities Inc. Grantor Trust for Deferred Compensation Agreements. (Filed as Exhibit 10(f) to Industries' Form 10-Q for the quarter ended September 30, 1997 (File No. 1-9187)).
10(x) IES Utilities Inc. Grantor Trust for Supplemental Retirement Agreements. (Filed as Exhibit 10(g) to Industries' Form 10-Q for the quarter ended September 30, 1997 (File No. 1-9187)).
10(y) IES Industries Inc. Shareholders' Rights Plan. (Filed as Exhibit I-2 to Industries' Registration Statement on Form 8-A filed November 13, 1991).
10(z) 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(aa) Receivables Purchase and Sale Agreement dated as of June 30, 1989, as Amended and Restated as of February 28, 1997, among IES Utilities Inc. (as Seller) and CIESCO L.P. (as the Investor) and Citicorp North America, Inc. (as Agent). (Filed as Exhibit 10(a) to Industries' Form 10-Q for the quarter ended March 31, 1997 (File No. 1-9187)).
10(ab) 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(ac) 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).
*21 Subsidiaries of the Registrant
*23 Consent of Independent Public Accountants
*27 Financial Data Schedule
Note: Pursuant to (b)(4)(iii)(A) of Item 601 of Regulation S-K, Industries 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 Industries 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, 1997 83 - 84
Unaudited Pro Forma Combined Statements of Income for the years ended December 31, 1997, 1996 and 1995 85 - 87
Notes to Unaudited Pro Forma Combined Financial Statements 88 - 91
(b) Reports on Form 8-K for IES Industries Inc. -
Financial Items Reported Statements Date of Report
5* None October 30, 1997
* Reporting that the Board of Directors authorized management to pursue and propose additional foreign investments, not to exceed $300,000,000, in Brazil, which is undergoing a privatization of its electric companies.
IES INDUSTRIES INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
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, 1997 $ 757 $ 854 ====== ====== Year ended December 31, 1996 $ 676 $ 757 ====== ====== Year ended December 31, 1995 $ 650 $ 676 ====== ====== Non-utility Subsidiaries: Accumulated Provision for Uncollectible Accounts: Year ended December 31, 1997 $ 774 $ 199 ====== ====== Year ended December 31, 1996 $ 685 $ 774 ====== ====== Year ended December 31, 1995 $ 372 $ 685 ====== ======
Note: The above provisions relate to various customer, notes and other receivable balances included in several line items on Industries' Consolidated Balance Sheets.
OTHER RESERVES:
IES Utilities Inc.: Accumulated Provision for Rate Refunds Year ended December 31, 1997 $ - $ - ====== ====== Year ended December 31, 1996 $ 106 $ - ====== ====== Year ended December 31, 1995 $ - $ 106 ====== ======
IES Utilities Inc.: Accumulated Provision for Merchandise Warranty, Property Insurance, Injuries and Damages, Workmen's Compensation and Other Miscellaneous Claims Year ended December 31, 1997 $ 2,694 $ 3,508 ====== ====== Year ended December 31, 1996 $ 2,876 $ 2,694 ====== ====== Year ended December 31, 1995 $ 2,516 $ 2,876 ====== ======
INTERSTATE ENERGY CORPORATION (doing business as Alliant Corporation)
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements for Interstate Energy Corporation (Merged Company) combine the historical consolidated balance sheets and statements of income of IES Industries Inc. (IES), Interstate Power Company (IPC) and WPL Holdings, Inc. (WPLH) as adjusted by various pro forma adjustments identified in Note 1. All material adjustments known at this time which impact the reporting periods shown have been included. The combination of WPLH, IES and IPC is referred to herein as the "Merger."
These pro forma combined financial statements set forth the restated combined financial data that will be presented for future comparative financial data for the Merged Company. The pro forma balance sheet that will be filed with the Securities and Exchange Commission following consummation of the Merger will also include an additional pro forma adjustment for certain merger-related costs to be recorded upon completion of the Merger.
These statements are prepared on the basis of accounting for the Merger as a pooling of interests and are based on the assumptions set forth in the notes thereto. The historical data for WPLH have been adjusted to reflect the restatement of such data to account for certain discontinued operations as discussed in Note 6.
The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Merger been consummated on the date, or at the beginning of the periods, for which the Merger is being given effect nor is it necessarily indicative of future operating results or financial position.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. Pro Forma Adjustments
(a) Consolidation of IEA-HES L.L.C. In January 1997, IES and WPLH formed a gas marketing joint venture named IEA-HES L.L.C. Pursuant to the applicable accounting rules, IES and WPLH each accounted for this joint venture in 1997 under the equity method of accounting with their investment recorded on the balance sheet in "Other Property, Plant and Equipment -- Net and Other Investments" and their allocated portion of earnings on the income statement in "Other Income and Deductions, Net". This pro forma adjustment reflects the financial results of IEA-HES L.L.C. as a consolidated subsidiary. (b) Eliminations for IEA-HES L.L.C. This pro forma adjustment reflects the elimination of intercompany balances of IEA-HES L.L.C. and also eliminates the equity investments of IES and WPLH and their allocated portion of revenues and expenses. (c) Merged Company Common Stock Adjustment 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 Merged Company Common Stock ($.01 par value) and the conversion of each share of IPC Common Stock ($3.50 par value) into 1.11 shares of Merged Company Common Stock ($.01 par value), and the continuation of each share of WPLH Common Stock ($.01 par value) outstanding as one share of Merged Company Common Stock, as provided in the Merger Agreement. The pro forma adjustment to common stock equity restates the common stock account to equal par value for all shares to be issued ($.01 par value per share of Merged Company Common Stock) and reclassifies the excess to other stockholders' equity. The average number of shares of common stock used for calculating per share amounts is based on the exchange ratios shown below.
The number of shares of common stock at December 31, 1997 used for calculating the par value of common stock is based on the exchange ratios shown below.
Exchange As reported Pro forma Ratio 12/31/97 12/31/97
WPLH N/A 30,789 30,789 IES 1.14 30,577 34,858 IPC 1.11 9,761 10,835
(d) IPC Unbilled Revenues The financial results of IPC do not include accrued revenues for services rendered but unbilled at month-end. The pro forma adjustment reflects the impact of adopting unbilled revenues, including the tax impact of the adoption. The change is being implemented to conform to the method currently utilized by WPLH and IES. (e) IES Pension Liability The accrued pension liability (and offsetting regulatory asset), included in the financial results of IES, was calculated using a five-year smoothed method of recognizing deferred asset gains. The pro forma adjustment reflects a change to the straight market value method which recognizes deferred asset gains sooner. The change is being implemented to conform to the method currently utilized by WPLH and IPC. (f) IEA Gas Activity The gas revenues and cost of gas sold of Industrial Energy Applications, Inc. (IEA), a subsidiary of IES, for 1996 and 1995 have been reclassed into "Other" revenues and "Other operation" expenses, respectively, consistent with the 1997 presentation.
2. Preferred Stock Dividends of IPC The Preferred Stock Dividends of IPC have been reclassified in the unaudited pro forma combined statements as "Preferred Dividends of Subsidiaries" and deducted in the determination of income from continuing operations which reflects the holding company structure of the Merged Company.
3. Nonrecurring Material Items Included in Historical Financial Results 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.
4. Estimated Costs and Cost Savings of Proposed Merger 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 merger, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. Costs arising from the Merger are currently estimated to be approximately $78 million. Approximately $22 million of these costs had been incurred through December 31, 1997 and are reflected in results of operations. 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 treatment, 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. None of the estimated cost savings, or costs to be incurred subsequent to December 31, 1997 to achieve such savings, have been reflected in the unaudited pro forma combined financial statements.
5. Intercompany Transactions 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/or were not material. Accordingly, no pro forma adjustments were made to eliminate such transactions.
6. Discontinued Operations 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.
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 3rd day of April 1998.
IES INDUSTRIES INC.
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 the 3rd day of April 1998.
/s/ Lee Liu Chairman of the Board & Chief Executive Lee Liu Officer (Principal Executive Officer)
/s/ Thomas M. Walker Executive Vice President & Chief Financial Thomas M. Walker Officer (Principal Financial Officer)
/s/ John E. Ebright Controller & Chief Accounting Officer John E. Ebright (Principal Accounting Officer)
Director Director C.R.S. Anderson J. Wayne Bevis
/s/ Jack R. Newman Director /s/ Robert D. Ray Director Jack R. Newman Robert D. Ray
/s/ David Q. Reed Director Director David Q. Reed Henry Royer
/s/ Robert W. Schlutz Director /s/ Anthony R. Weiler Director Robert W. Schlutz Anthony R. Weiler