-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LDk9h+r2jWZ2ONMnKmtkVvIJVn8KPxAVEMX0ePDt/SwLFL2BuMUDmmhvyGAW0Q51 kqAb1i+yXWyqgkEezW0XeQ== 0000789943-97-000005.txt : 19970317 0000789943-97-000005.hdr.sgml : 19970317 ACCESSION NUMBER: 0000789943-97-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IES INDUSTRIES INC CENTRAL INDEX KEY: 0000789943 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 421271452 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09187 FILM NUMBER: 97556734 BUSINESS ADDRESS: STREET 1: 200 FIRST ST SE CITY: CEDAR RAPIDS STATE: IA ZIP: 52401 BUSINESS PHONE: 3193984411 FORMER COMPANY: FORMER CONFORMED NAME: IE INDUSTRIES INC DATE OF NAME CHANGE: 19910707 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IES UTILITIES INC CENTRAL INDEX KEY: 0000052485 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 420331370 STATE OF INCORPORATION: IA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04117 FILM NUMBER: 97556735 BUSINESS ADDRESS: STREET 1: 200 FIRST ST SE STREET 2: IES TOWER CITY: CEDAR RAPIDS STATE: IA ZIP: 52401 BUSINESS PHONE: 3193984411 FORMER COMPANY: FORMER CONFORMED NAME: IOWA ELECTRIC LIGHT & POWER CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: IOWA RAILWAY & LIGHT CORP DATE OF NAME CHANGE: 19670629 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission Registrant; State of Incorporation; Address; IRS Employer File Number and Telephone Number Identification No. 1-9187 IES INDUSTRIES INC. (an Iowa Corporation) 42-1271452 IES Tower, Cedar Rapids, Iowa 52401 319-398-4411 0-4117-1 IES UTILITIES INC. (an Iowa Corporation) 42-0331370 IES Tower, Cedar Rapids, Iowa 52401 319-398-4411 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Registrant Title of Each Class Which Registered IES Industries Inc. Common Stock, no par value New York Stock Exchange IES Utilities Inc. 7-7/8% Quarterly Debt Capital Securities New York Stock Exchange (Subordinated Deferrable Interest Debentures) Securities registered pursuant to Section 12(g) of the Act: Registrant Title of Class IES Industries Inc. None IES Utilities Inc. Cumulative Preferred Stock Par Value $50 per share 4.80% Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ______ The aggregate market value of the voting stock of IES Industries Inc. held by non-affiliates, as of January 31, 1997 was approximately $918,961,374 based upon the Composite Tape closing price as reported in The Wall Street Journal. (For this purpose only, the individuals listed under "Security Ownership of Management" in the Definitive Proxy Statement incorporated herein by reference are considered to be affiliates.) The aggregate market value of the voting stock of IES Utilities Inc. held by non-affiliates, as of January 31, 1997 was $0. Indicate the number of shares outstanding of each of the registrants' classes of Common Stock, as of January 31, 1997. IES Industries Inc. Common Stock, no par value - 30,162,731 shares IES Utilities Inc. Common Stock, $2.50 par value - 13,370,788 shares DOCUMENTS INCORPORATED BY REFERENCE Part of this Form 10-K into Document Which Document is Incorporated Definitive proxy statement of IES Industries Inc. to be filed within 120 days of December 31, 1996 III IES INDUSTRIES INC. and IES UTILITIES INC. Form 10-K for the Year Ended December 31, 1996 TABLE OF CONTENTS PART I Page No. Item 1. Business 3 Proposed Merger of the Company 6 Construction and Acquisition Program and Financing 7 Regulation 8 Employees 9 Environmental Matters 9 Competition 11 Rate Matters 13 Electric Operations 13 Gas Operations 20 Item 2. Properties 23 Item 3. Legal Proceedings 24 Item 4. Submission of Matters to a Vote of Security Holders 25 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters 26 Item 6. Selected Consolidated Financial Data 27 Item 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition 30 Selected Consolidated Quarterly Financial Data (unaudited) 43 Item 8. Financial Statements and Supplementary Data IES Industries Inc. Consolidated Financial Statements 44 IES Industries Inc. Notes to Consolidated Financial Statements 50 IES Utilities Inc. Consolidated Financial Statements 73 IES Utilities Inc. Notes to Consolidated Financial Statements 79 Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure 84 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant 85 Item 11. Executive Compensation 86 Item 12. Security Ownership of Certain Beneficial Owners and Management 87 Item 13. Certain Relationships and Related Transactions 87 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 88 Schedule II - Valuation and Qualifying Accounts and Reserves 95 Unaudited Pro Forma Combined Financial Information of Interstate Energy Corporation 96 Signatures 105 This document contains the Annual Reports on Form 10-K for the fiscal year ended December 31, 1996 for each of IES Industries Inc. and IES Utilities Inc. Information contained herein relating to an individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, IES Utilities Inc. makes no representation as to information relating to IES Industries Inc. or to any other companies affiliated with IES Industries Inc. IES Industries Inc. and its consolidated subsidiaries may collectively be referred to as "the Company". From time to time, the Company may make forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of the Company. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of the Company's expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance of the Company and that such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include weather effects on sales and revenues, competitive factors, general economic conditions in the Company's service territory, federal and state regulatory and government actions, the operating of a nuclear facility and changes in the rate of inflation. PART I Item 1. Business IES Industries Inc. IES Industries Inc. (Industries) is a holding company which is incorporated under the laws of Iowa. Industries' wholly-owned subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc. (Diversified). Utilities is primarily an electric and natural gas utility company operating in the State of Iowa and serving approximately 336,000 electric and 176,000 natural gas retail customers as well as 30 electric resale customers in more than 550 Iowa communities. Diversified is a holding company for non-utility subsidiaries which are primarily engaged in the energy-related, transportation and real estate development businesses. Industries' consolidated assets and earnings are predominantly those of Utilities. Utilities Utilities is primarily a public utility operating company engaged in providing electric energy, natural gas and, to a limited extent, steam used for industrial and heating purposes, in the State of Iowa. Utilities' only wholly-owned subsidiary as of December 31, 1996, was IES Ventures Inc. (Ventures), which is a holding company for unregulated investments. Ventures' wholly-owned subsidiary at December 31, 1996, was IES Midland Development Inc. (Midland), which owns and operates a landfill in Ottumwa, Iowa. Ventures also has a 35% equity investment in Aqua Ventures L.C., which is an aquaculture facility formed to raise fish for human consumption. Utilities' sales of electricity (in Kwh), excluding off-system sales, increased 1.7%, 5.3% and 4.3%, during the years 1996-1994, respectively. Under historically normal weather conditions, total sales (excluding off-system sales) would have increased 3.5%, 3.6% and 4.8% during 1996-1994, respectively. Total gas delivered by Utilities, including transported volumes, increased or (decreased) 5.9%, 4.8% and (2.7)% during the years 1996-1994, respectively. Under historically normal weather conditions, Utilities' gas sales and transported volumes would have increased 1.9%, 3.5% and 0.7% during 1996-1994, respectively. There are seasonal variations in Utilities' electric and gas businesses, which are principally related to the use of energy for air conditioning and heating. In 1996, 39.8% of Utilities' electric revenues were earned in June through September, reflecting the use of electricity for cooling, and 72.0% of Utilities' gas revenues were earned in the months of January - March, November and December, reflecting the use of gas for heating. The approximate percentages of Utilities' revenue and operating income derived from the sale of electricity and gas during the years 1996-1994 are as follows: 1996 1995 1994 Revenues: Electric 76% 79% 78% Gas 21% 19 20 Operating income: Electric 86% 92% 93% Gas 11% 6 6 The relationships between the electric and gas percentages presented above are influenced by changes in energy sales, timing of regulatory price proceedings and changes in the costs of fuel or purchased gas billed to customers through related adjustment clauses. For additional information concerning electric and gas operations, see Item 1. "Other Information Relating to Utilities Only", Item 7. "Management's Discussion and Analysis of the Results of Operations and Financial Condition" and the "Electric Operations" and "Gas Operations" sections of Item 1. Diversified Other than Utilities' unregulated investments, the non-utility operations of the Company are organized under Diversified. Diversified is a holding company whose wholly-owned subsidiaries include IES Transportation Inc. (IES Transportation), IES Energy Inc. (IES Energy), IES Investments Inc. (IES Investments) and IES International Inc. (IES International). IES Transportation is a holding company whose wholly-owned subsidiaries at December 31, 1996, included the Cedar Rapids and Iowa City Railway Company (CRANDIC) and IES Transfer Services Inc. (Transfer). CRANDIC is a short-line railway which renders freight service between Cedar Rapids and Iowa City. Transfer's operations include transloading and storage services. IES Transportation also has a 75% equity investment in IEI Barge Services, Inc. (Barge) which provides barge terminal and hauling service on the Mississippi River. In addition, IES Transportation has investments in two Iowa railroad companies. IES Transportation's 1996 operating revenues and assets at December 31, 1996 were as follows: Operating Revenues Assets (in 000s) CRANDIC $ 17,375 $ 39,162 Barge 1,872 8,112 Transfer 415 838 Other (including eliminations) - 286 $ 19,662 $ 48,398 IES Energy is a holding company whose wholly-owned subsidiaries at December 31, 1996, included Industrial Energy Applications, Inc. (IEA) and Whiting Petroleum Corporation (Whiting). IEA offers commodities- based and facilities-based energy services for customers, including purchasing energy, standby generation, cogeneration, steam production and propane air systems. Whiting is organized to purchase, develop and produce crude oil and natural gas. IES Energy's 1996 operating revenues and assets at December 31, 1996 were as follows: Operating Revenues Assets (in 000s) IEA $ 126,932 $ 52,204 Whiting 65,724 129,227 Other (including eliminations) (1,670) (1,255) $ 190,986 $ 180,176 IES Investments is a holding company whose primary wholly-owned subsidiaries at December 31, 1996, included Iowa Land and Building Company (Iowa Land), IES Investco Inc. (Investco) and Village Lakeshares, Inc. (Lakeshares). Iowa Land is organized to pursue real estate and economic development activities in Utilities' service territory. Investco is a holding company for certain equity investments and currently has no operating revenues. The gains and losses on the sale of such investments are recorded in "Miscellaneous, net" in Industries' Consolidated Statements of Income. Lakeshares is a holding company for resort properties in Iowa. IES Investments had a $29.2 million investment in McLeod, Inc. (McLeod), a holding company for various telecommunications businesses, at December 31, 1996. The McLeod investment is not consolidated, therefore Industries does not include any of McLeod's operating revenues in its consolidated results. IES Investments also has direct and indirect equity interests in various real estate ventures, primarily concentrated in Cedar Rapids, and holds other passive investments. IES Investments' 1996 operating revenues and assets, other than the international investments noted below, at December 31, 1996, were as follows: Operating Revenues Assets (in 000s) Iowa Land $ 1,570 $ 11,969 Investco - 2,941 Lakeshares 4,313 11,230 Real estate ventures 3,863 24,893 Investment in McLeod - 29,200 Other (including eliminations) - 13,535 $ 9,746 $ 93,768 IES International is a holding company whose wholly-owned subsidiaries are IES New Zealand Limited (IES New Zealand) and Interstate Energy Corporation Pte Ltd. (IECP). IES New Zealand has equity investments in two New Zealand electric distribution entities. IECP has a 50% equity investment in JIES Heat and Power Ltd., a cogeneration facility in China. None of the investments under IES International are consolidated, therefore IES International has no operating revenues. (IES Investments also has several investments in foreign entities, including a loan to a New Zealand company and an investment in an international venture capital fund. These investments are considered international investments for management purposes and therefore are included in the following schedule.) IES International's assets at December 31, 1996, were as follows: Assets (in 000s) IES New Zealand $ 19,819 Investment in JIES Heat and Power Ltd. 13,598 IES Investments' foreign investments 11,665 Other (including eliminations) (136) $ 44,946 Refer to Note 15 of Industries' Notes to Consolidated Financial Statements for a further discussion of the Company's segments of business. Other Information Relating to the Company PROPOSED MERGER OF THE COMPANY. Industries, WPL Holdings, Inc. (WPLH) and Interstate Power Company (IPC) have entered into an Agreement and Plan of Merger, as amended (Merger Agreement), dated November 10, 1995, which provides for the combination of all three companies (Proposed Merger). The new company will be named Interstate Energy Corporation (IEC). WPLH is a holding company headquartered in Madison, Wisconsin, and is the parent company of Wisconsin Power and Light Company (WP&L) and Heartland Development Corporation (HDC). WP&L supplies electric and gas service to approximately 385,000 and 150,000 customers, respectively, in south and central Wisconsin. HDC and its principal subsidiaries are engaged in businesses in three major areas: environmental engineering and consulting, affordable housing and energy services. IPC, a public utility headquartered in Dubuque, Iowa, supplies electric and gas service to approximately 165,000 and 49,000 customers, respectively, in northeast Iowa, northwest Illinois and southern Minnesota. The Proposed Merger, which will be accounted for as a pooling of interests, has been approved by the respective Boards of Directors and shareholders. The merger is conditioned on the receipt of approvals of several federal and state regulatory agencies. The status of these approvals is as follows: On January 15, 1997, the Federal Energy Regulatory Commission (FERC) issued an order in which it accepted several provisions of the IEC merger application without the need for public hearings. The FERC has set limited issues for hearing, including generation market power in the transmission-constrained Wisconsin Upper Michigan System (WUMS) subregion in Wisconsin. The FERC has also ordered the merger partners to attempt to negotiate a wholesale customer protection mechanism with those intervenors who are not satisfied with the four year rate freeze proposed in the application. If an agreement between the merger partners and the intervenors is not reached, the FERC will decide the issue. A final decision on the merger is expected to be issued by the FERC by the end of the third quarter of 1997. Utilities and IPC announced in 1996 their intentions to hold retail electric prices to their current levels until at least January 1, 2000. The companies made the proposal as part of their testimony in the IEC merger application filed with the Iowa Utilities Board (IUB). The proposal excludes price changes due to government-mandated programs, such as energy efficiency cost recovery, or unforeseen dramatic changes in operations. Hearings before the IUB are expected to be held in the summer of 1997 with a decision expected by the end of the third quarter of 1997. In March of 1996, an application requesting approval of the merger was filed with the Public Service Commission of Wisconsin (PSCW). Hearings are currently scheduled for June 4, 1997, with a decision anticipated in the third quarter of 1997. Legislation was introduced in the Wisconsin State Senate in February 1997 which could delay the PSCW approval of the merger. Industries cannot predict the outcome of such legislation. In March of 1996, an application requesting approval of the merger was also submitted to the Illinois Commerce Commission (ICC). The ICC conducted hearings on November 12, 1996 and final briefs were filed on December 23, 1996. A decision is pending. On January 15, 1997, the Minnesota Public Utilities Commission (MPUC) announced that it had approved the IEC merger without hearings, subject to a number of technical conditions, which Industries anticipates will not be opposed by the merger partners. Included in these conditions is a four year rate freeze for IEC's electric and gas customers in the state of Minnesota. An application to establish IEC as a registered holding company under the Public Utility Holding Company Act of 1935 (1935 Act) was submitted to the Securities and Exchange Commission (SEC). The period for comments by interested parties closed on November 5, 1996. A decision on the application is expected at the end of the third quarter of 1997. The SEC historically has interpreted the 1935 Act to preclude registered holding companies, with limited exceptions, from owning both electric and gas utility systems. In addition, the SEC could also require that IEC divest certain non-utility ventures of Industries and WPLH. As part of the application, IEC has requested permission to retain its existing gas utility properties and non-utility ventures. An impact review of the merger on market power, which is required by the Hart-Scott-Rodino Antitrust Improvements Act, was completed by the U.S. Department of Justice (DOJ). All requirements of this review have been satisfied. If the merger is not consummated before July 7, 1997, the merger partners will be required to submit new information to the DOJ. The merger partners do not believe that any such resubmission would cause a material delay in approval. An application was filed with the Nuclear Regulatory Commission (NRC) to approve the transfer of indirect control over the licenses of Utilities and WP&L for the Duane Arnold Energy Center (DAEC) nuclear facility and Kewaunee Nuclear Power Plant, respectively, to IEC. Both plants are jointly owned with other companies. The application, which was filed on October 1, 1996, is pending. See Note 2 of Industries' Notes to Consolidated Financial Statements and Item 14 for further information and the unaudited pro forma financial statements of IEC, respectively. CONSTRUCTION AND ACQUISITION PROGRAM AND FINANCING. The Company's construction and acquisition program anticipates expenditures of approximately $225 million for 1997, of which approximately $147 million represents expenditures at Utilities and approximately $78 million represents expenditures at Diversified. Of the $147 million of Utilities' expenditures, 39% represents expenditures for electric transmission and distribution facilities, 21% represents electric generation expenditures, 21% represents information technology expenditures and 5% represents gas expenditures. The remaining 14% represents miscellaneous electric, steam and general expenditures. Diversified's anticipated expenditures include approximately $75 million for domestic and international energy-related construction and acquisition expenditures. The Company's levels of construction and acquisition expenditures are projected to be $208 million in 1998, $212 million in 1999, $182 million in 2000 and $198 million in 2001. It is estimated that virtually all of Utilities' construction and acquisition expenditures will be provided by cash from operating activities (after payment of dividends) for the five-year period 1997 - 2001. Financing plans for Diversified's construction and acquisition program will vary, depending primarily on the level of energy-related acquisitions. Capital expenditure and investment and financing plans are subject to continual review and change. The capital expenditure and investment programs may be revised significantly as a result of many considerations including changes in economic conditions, variations in actual sales and load growth compared to forecasts, requirements of environmental, nuclear and other regulatory authorities, acquisition and business combination opportunities, the availability of alternate energy and purchased power sources, the ability to obtain adequate and timely rate relief, escalations in construction costs and conservation and energy efficiency programs. Under provisions of the Merger Agreement, there are restrictions on the amount of construction and acquisition expenditures the Company can make pending the merger. The Company does not expect the restrictions to have a material effect on its ability to implement its anticipated construction and acquisition program. Other than Utilities' periodic sinking fund requirements, which Utilities intends to meet by pledging additional property, the following long-term debt will mature prior to December 31, 2001: (in millions) Utilities $207.2 Diversified's credit facility 172.1 Other subsidiaries' debt 11.2 $390.5 The Company intends to refinance the majority of the debt maturities with long-term securities. For a discussion regarding the Company's assumptions in financing future capital requirements, see the "Liquidity and Capital Resources" section of Item 7. "Management's Discussion and Analysis of the Results of Operations and Financial Condition." REGULATION. Because of its ownership of Utilities, Industries is a "holding company" as defined by the 1935 Act. However, Industries claims exemption from regulation under the 1935 Act (except for Section 9(a)2 thereof, which requires that any acquisition of securities of a utility company by Industries be approved by the SEC) on the basis that Industries and Utilities are both organized in the same state and Utilities conducts its business in that state. Congress began examining repeal of PUHCA during 1995 and is expected to continue reviewing this issue. No assurance can be given as to when or if such legislation will be considered or enacted. Utilities operates pursuant to the laws of the State of Iowa and is thereby subject to the jurisdiction of the IUB. The IUB has authority to regulate rates and standards of service, to prescribe accounting requirements and to approve the location and construction of electric generating facilities having a capacity in excess of 25,000 Kw. The IUB is comprised of three Commissioners appointed by the Governor and ratified by the State Senate. Requests for price relief are based on historical test periods, adjusted for certain known and measurable changes. The IUB must decide on requests for price relief within 10 months of the date of the application for which relief is filed or the interim prices granted become permanent. Interim prices, if allowed, are permitted to become effective, subject to refund, no later than 90 days after the price increase application is filed. In Iowa, non-exclusive franchises, which cover the use of streets and alleys for public utility facilities in incorporated communities, are granted for a maximum of twenty-five years by a majority vote of local qualified residents. In addition, the IUB defines the boundaries of mutually exclusive service territories for all electric utilities. The IUB has jurisdiction and grants franchises for the use of public highway rights-of-way for electric and gas facilities outside corporate limits. Utilities is subject to the jurisdiction of the FERC with respect to wholesale electric sales, its accounting practices and the issuance of securities. Revenues derived from Utilities' wholesale and off- system sales amounted to 6.5%, 6.3% and 6.9% of electric revenues for 1996-1994, respectively. Utilities' consolidated subsidiaries are not subject to regulation by the IUB or the FERC. Following consummation of the Proposed Merger, Interstate Energy will be subject to regulation by the PSCW, as WPLH and WP&L are currently. The PSCW regulates, among otherthings, the type and amount of investments in non-utility businesses. The Company does not expect such regulation to have a materially adverse effect upon Interstate Energy following the Proposed Merger. See the "Environmental Matters", "Competition", "Electric Operations" and "Gas Operations" sections of Item 1 for a discussion of various other regulatory issues. EMPLOYEES. At December 31, 1996, the Company had a total of 2,406 (2,016 at Utilities) regular full-time employees. At December 31, 1996, Utilities had 1,081 employees subject to 6 collective bargaining agreements (776 of these employees were part of one agreement), CRANDIC had 71 employees subject to 4 collective bargaining agreements and Barge had 6 employees subject to 1 collective bargaining agreement. None of Utilities' bargaining agreements expires in 1997. ENVIRONMENTAL MATTERS. The Company is regulated in environmental protection matters by a number of federal, state and local agencies. Such regulations are the result of a number of environmental protection laws passed by the U. S. Congress, state legislature and local governments and enforced by federal, state and county agencies. The laws impacting the Company's operations include the Clean Water Act; Clean Air Act, as amended by the Clean Air Act Amendments of 1990; National Environmental Policy Act; Resource Conservation and Recovery Act; Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986; Occupational Safety and Health Act; National Energy Policy Act of 1992 and a number of others. The Company regularly secures and renews federal, state and local permits to comply with the environmental protection laws and regulations. Costs associated with such compliances have increased in recent years and are expected to increase moderately in the future. Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 Former Manufactured Gas Plant (FMGP) sites. Utilities has recorded environmental liabilities related to the FMGP sites of approximately $36 million (including $4.7 million as current liabilities) at December 31, 1996. Regulatory assets of approximately $36 million, which reflect the future recovery that is being provided through Utilities' rates, have been recorded in the Consolidated Balance Sheets. Considering the current rate treatment allowed by the IUB, management believes that the clean-up costs incurred by Utilities for these FMGP sites will not have a material adverse effect on its financial position or results of operations. Refer to Note 13(f) of Industries' Notes to Consolidated Financial Statements for a further discussion, including a discussion of a lawsuit filed by Utilities seeking recovery of FMGP-related costs from its insurance carriers. The Clean Air Act Amendments of 1990 (Act) requires emission reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve reductions of atmospheric chemicals believed to cause acid rain. The Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to NOx, ozone transport, mercury and particulate control; toxic release inventories and modifications to the PCB rules. In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the National Ambient Air Quality Standards established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences. Pursuant to a routine review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Refer to Note 13(g) of Industries' Notes to Consolidated Financial Statements for a further discussion of the above mentioned air quality issues. The National Energy Policy Act of 1992 requires owners of nuclear power plants to pay a special assessment into a "Uranium Enrichment Decontamination and Decommissioning Fund." Refer to Note 13(f) of Industries' Notes to Consolidated Financial Statements for a further discussion. The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such a contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The DOE, however, has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities has been storing spent nuclear fuel on- site since plant operations began in 1974 and has current on-site capability to store spent fuel until 2001. Utilities is aggressively reviewing options for expanding on-site storage. Utilities has been formally notified by the DOE that they anticipate being unable to begin acceptance of spent nuclear fuel by January 31, 1998. Utilities is evaluating courses of action to protect the interests of its customers and its rights under the DOE contract. Utilities is also evaluating legislation proposed to the Congress addressing this issue. In July 1996, the IUB initiated a Notice of Inquiry (NOI) on spent nuclear fuel. One purpose of the NOI was to evaluate whether the current collection of money from Utilities' customers for payment to the NWF should be placed in an escrow account in lieu of being paid to the NWF. Utilities believes that the issue of using an escrow account should be decided at the federal level rather than the state level. Utilities cannot predict the outcome of this NOI. The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that each state must take responsibility for the storage of low- level radioactive waste produced within its borders. The State of Iowa has joined the Midwest Interstate Low-Level Radioactive Waste Compact Commission (Compact), which is planning a storage facility to be located in Ohio to store waste generated by the Compact's six member states. At December 31, 1996, Utilities has prepaid costs of approximately $1.1 million to the Compact for the building of such a facility. A Compact disposal facility is anticipated to be in operation in approximately ten years after approval of new enabling legislation by the member states. Such legislation was approved in 1996 by all six states that are members of the Compact. Final approval by the U.S. Congress is now required. On-site storage capability currently exists for low-level radioactive waste expected to be generated until the Compact facility is able to accept waste materials. In addition, the Barnwell, South Carolina disposal facility has reopened for an indefinite time period and Utilities is in the process of shipping to Barnwell the majority of the low-level radioactive waste it has accumulated on-site, and currently intends to ship the waste it produces in the future as long as the Barnwell site remains open, thereby minimizing the amount of low-level waste stored on-site. However, management of the Barnwell site has modified its fee schedule to emphasize total radioactivity content and weight, instead of the historical volume related fees. Utilities is evaluating the outcome of these changes on its potential future disposal costs at the Barnwell site; such changes could result in a revision to Utilities' future disposal plans. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental, industry and media attention. A recent study completed by the National Research Council concluded that the current body of evidence does not support the notion that exposure to these fields may result in adverse health effects. Utilities will continue to monitor the events in this area, including future scientific research. Whiting is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties. Refer to Note 13(f) of Industries' Notes to Consolidated Financial Statements for a further discussion. Utilities was notified in 1986 that it was designated by the EPA as a PRP (there are 832 in total) for the investigation and cleanup of the Maxey Flats Nuclear Disposal site at Morehead, Kentucky. The EPA notice encouraged all PRPs to undertake voluntary clean up activities at the site. A Steering Committee was organized and Utilities is participating in its activities. The Steering Committee has reached settlement of the issues with the EPA, the State of Kentucky and deminimis parties. Consent Decrees have been finalized and Utilities' share of the cost is estimated at $250,000, which is included in the $53 million of environmental liabilities the Company has recorded at December 31, 1996. Refer to Note 13 of Industries' Notes to Consolidated Financial Statements for further discussion of environmental matters. Other Information Relating to Utilities Only COMPETITION. Utilities and its predominant business, electric energy generation, transmission and distribution, are in a period of fundamental change in the manner in which customers obtain, and energy suppliers provide, energy services. As legislative, regulatory, economic and technological changes occur, electric utilities are faced with increasing pressure to become more competitive. Such competitive pressures could result in loss of customers and an incurrence of stranded costs (i.e., the cost of assets rendered unrecoverable as the result of competitive pricing). To the extent stranded costs cannot be recovered from customers, they would be borne by security holders. The National Energy Policy Act of 1992 addresses several matters designed to promote competition in the electric wholesale power generation market. In April 1996, the FERC issued final rules (FERC Orders 888 and 889), largely confirming earlier proposals, requiring electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. The rules became effective on July 9, 1996. Utilities filed conforming pro-forma open access transmission tariffs with the FERC which became effective October 1, 1995. In response to FERC Order 888, Utilities filed its final pro-forma tariffs with FERC on July 9, 1996. The non-rate provisions of the tariffs were approved on November 13, 1996. FERC has not yet ruled on the rate provisions of the tariffs. The geographic position of Utilities' transmission system could provide revenue opportunities in the open access environment. The Company cannot predict the long-term consequences of these rules on its results ofoperations or financial condition. FERC does not have jurisdiction over the retail jurisdiction, and thus the final FERC rules do not provide for the recovery of stranded costs resulting from retail competition. The various states retain jurisdiction over the question of whether to permit retail competition, the terms of such retail competition and the recovery of any portion of stranded costs that are ultimately determined by FERC and the states to have resulted from retail competition. The IUB initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging Competition in the Electric Utility Industry" to address all forms of competition in the electric utility industry and to gather information and perspectives on electric competition from all persons or entities with an interest or stake in the issues. In January 1996, the IUB created its own timeline for evaluating industry restructuring in Iowa. Included in the IUB's process was the creation of a 22-member advisory panel, of which Utilities is a member. The IUB conducted public information meetings around the State of Iowa. A draft report was created by the IUB staff and is expected to be finalized in the first quarter of 1997. The draft report indicated that the IUB is of the opinion that there is no compelling reason to move quickly into restructuring the electric utility industry in Iowa. However, they will continue the analysis and debate on restructuring and retail competition in Iowa. As part of Utilities' strategy for the emerging and competitive power markets, Utilities, IPC, WP&L and a number of other utilities have proposed the creation of an independent system operator (ISO) for the companies' power transmission grid. The companies would retain ownership and control of the facilities, but the ISO would set rates for access and assure fair treatment for all companies seeking access. The proposal requires approval from state regulators and the FERC. Various other proposals for ISO's have been made by other companies and Utilities is monitoring all such proposals. Membership in an ISO could become a condition of merger approval by the various regulatory bodies. Utilities is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). If a portion of Utilities' operations become no longer subject to the provisions of SFAS 71, as a result of competitive restructurings or otherwise, a write-down of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. In addition, the Company would be required to determine any impairment to other assets and write-down such assets to their fair value. Utilities believes that it still meets the requirements of SFAS 71. The Company cannot predict the long-term consequences of these competitive issues on its results of operations or financial condition. The Company's strategy for dealing with these emerging issues includes seeking growth opportunities, continuing to offer quality customer service, ongoing cost reductions and productivity enhancements, the major objective of which is to allow Utilities to better prepare for a competitive, deregulated electric utility industry. In this connection, Utilities is in the final stages of a significant process improvement program to improve its service levels, reduce its cost structure and become more market-focused and customer oriented. (The Company's continuous improvement efforts, in general, will be an ongoing effort, however). Examples of the process improvement changes being implemented are, but are not limited to: managing the business in business unit form, rather than functionally; formation of alliances with vendors of certain types of material and/or services rather than opening most purchases to a bidding process; changing standards and construction practices in transmission and distribution areas; changing certain work practices in power plants; making investments in information technology upgrades; and improving the method by which service is delivered to customers in all customer classes. The specific changes range from simple improvements in current operations to radical changes in the way work is performed and service is delivered. Some of the changes are currently in the pilot stage thus the results from this evaluation period or the potential effects of the pending merger could prove that some of the changes are not efficient or effective and must be revised or eliminated. Subject to delays caused by implementing any such revisions, implementation of the changes began in 1996 and will continue into 1997; however, certain results will not be realized until 1997. In addition, the Company must give consideration to the potential effects of the pending merger as part of the implementation process so that duplication of efforts are avoided. RATE MATTERS. Refer to Note 3 of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' rate matters, including its electric price freeze proposals. ELECTRIC OPERATIONS - General Utilities' net peak load (60 minutes integrated) of 1,833,203 kilowatts occurred on August 6, 1996, and represented a new energy peak demand record. At the time of the peak load, 75 interruptible customers were interrupted representing approximately 206,000 kilowatts of a possible 382,259 kilowatts available for interruption. Utilities' additional reserve obligation at the time of the peak was 262,980 kilowatts and the net capability of Utilities' generating stations was 1,864,390 kilowatts, with an additional 232,000 kilowatts being available under purchase contracts, thereby providing an aggregate capability of 2,096,390 kilowatts. Utilities projects an electric sales growth rate of approximately 2 to 3 percent per year over the next five years, which will be met by a mix of its existing generation, capacity purchases and new construction. The construction activities will be undertaken in a fashion that best meets the needs of individual customers and the system as a whole. See Note 13(b) of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' firm contracts for the purchase of capacity. Utilities' electric facilities are interconnected with certain Iowa and neighboring utilities. Also, Utilities is a member of the Mid-Continent Area Power Pool (MAPP). This pool is comprised of 18 utilities which are Transmission Owning Members (TOMs) and 58 energy- related companies providing services in the upper midwest region of the United States, and operates pursuant to an agreement which provides for the interchange of electric energy, the sharing of responsibilities for production capacity and reserve and the supply of electric energy. Utilities is a party to the Twin Cities-Iowa-St. Louis 345 Kv Interconnection Coordinating Agreement (the Coordinating Agreement) with five other midwestern utilities, three of which operate in the State of Iowa. The Coordinating Agreement provides for the interconnection of the respective systems of the companies through a 345 Kv transmission line and for the interchange of power on various bases. The rates under the Coordinating Agreement are primarily determined by agreement between the delivering and receiving companies. Utilities maintains and operates transmission and substation facilities connecting with its high voltage transmission systems pursuant to a non-cancelable operating agreement (the Operating Agreement) with Central Iowa Power Cooperative (CIPCO). The Operating Agreement, which will terminate on December 31, 2035, provides for the joint use of certain transmission facilities of Utilities and CIPCO. The Resale Power Group of Iowa (RPGI), consisting of virtually all of Utilities' wholesale customers, has notified Utilities that it will not purchase its power supply from Utilities after December 31, 1998. It is possible that certain RPGI customers will drop out of RPGI in order to remain as Utilities' customers. RPGI will continue to purchase transmission services from Utilities after December 31, 1998. While the Company cannot determine the outcome of this issue at this time, the result will not have a material adverse effect on its financial position or results of operations given 1) Utilities' wholesale sales only accounted for approximately 5% of Utilities' total 1996 electric sales, excluding off-system sales; 2) Utilities currently has to supplement its generating capability with purchased power to meet its sales load; and 3) Utilities' annual electric sales growth rate continues to be strong. Upon consummation of the Proposed Merger, Utilities expects to realize reduced electric production costs through the joint dispatch of systems and increased marketing opportunities in the wholesale and interchange markets through electric interconnections with other utilities. For comments relating to agreements between Utilities and its partners for the joint ownership of the DAEC, the Ottumwa Generating Station (OGS) and Neal Unit No. 3, see Item 2. "Properties" and Note 14 of Industries' Notes to Consolidated Financial Statements. Fuel Supply The following table details the sources of the electricity sold by Utilities during 1996 and expected sources for the following three years: Actual /------------ Expected ------------/ 1996 1997 1998 1999 Fossil, primarily coal 42% 63% 64% 63% Nuclear 23 26 23 23 Purchases 35 11 13 14 100% 100% 100% 100% The 1996 fossil percentage was lower than anticipated because of several maintenance outages at the various fossil-fueled generating facilities. Utilities expects its off-system sales in 1997-1999 to be significantly lower than they were in 1996 as the result of the implementation of FERC Order 888. This results in a significant reduction in the purchases figures in 1997-1999. Utilities is currently on an eighteen-month cycle for nuclear refueling outages and the above percentages assume outages will occur during both 1998 and 1999. There was also a refueling outage in 1996. Utilities' primary fuel source is coal and the generation mix is influenced directly by refueling outages at the DAEC. The average cost of fuel used for generation by Utilities for the years 1996-1994 is presented below: 1996 1995 1994 Average cost of fuel: Nuclear, per million Btu's $ .73 $ .76 $ .67 Coal, per million Btu's .95 .97 .97 Average for all fuels, per million Btu's .94 .95 .89 The decrease in the average cost of coal during 1996 was primarily due to a decline in Wyoming coal prices and burning more lower priced Wyoming coal and less higher priced Illinois Basin coal. The increase in the average cost of nuclear fuel during 1995 was the result of compounded interest charges on uranium acquired during the mid-1980's. Utilities used the last of this uranium during the 1996 refueling outage. Utilities has entered into a contract to meet its nuclear fuel needs beyond 1996 and the average cost of such fuel is expected to be significantly lower than the prior periods. The following table summarizes Utilities' minimum coal contract commitments at December 31, 1996:
Average Annual Maximum estimated base price Quantity Termination Sulfur per ton of coal delivered (000s Tons) Date Content 1997 1998 1999 Cordero Mining Co. (OGS) (1) 774 12/31/01 0.6% $ 18.86 $ 19.40 $ 19.99 Koch Carbon Inc. (Sutherland) 100 12/31/99 6.2% $ 19.77 $ 20.07 $ 20.37 Powder River Coal Co. (OGS or BGS) (2) 1,200 12/31/97 0.4% $ 13.19 $ N/A $ N/A Caballo Coal Co. (Sutherland) 450 12/31/97 0.5% $ 12.66 $ N/A $ N/A Caballo Rojo / Ft. Union (BGS) (3) 714 12/31/97 0.3% $ 14.83 $ N/A $ N/A Caballo Rojo / Ft. Union (Prairie Creek) (3) 986 12/31/97 0.3% $ 16.43 $ N/A $ N/A Franklin Coal Sales Co. (OGS) 225 9/30/97 0.5% $ 12.68 $ N/A $ N/A
(1) Cost under the contract is comprised of base contract prices plus specifically contracted periodic adjustments for increases in certain specific costs of producing the coal. The effect of such adjustments to the base contract prices of future coal cannot currently be predicted with any certainty. (2) The contract covers 1,200,000 annual tons delivered to either the OGS or the Burlington Generating Station (BGS). Utilities anticipates that 100% of the total 1997 contract tons will be delivered to OGS. The price listed in the table is for OGS, with the BGS price being $16.04 per ton. (3) The contract covers 1,700,000 annual tons to be delivered to either the Prairie Creek Generating Station (PC) or the BGS, from either Caballo Rojo or Ft. Union. The price listed in the table for BGS is for Ft. Union coal and the price listed in the table for PC is for Caballo Rojo coal. Utilities anticipates that 100% of PC's shipments will be Caballo Rojo coal, with BGS shipments being 35% from Caballo Rojo and the remaining 65% from Ft. Union. The price for Caballo Rojo coal to BGS is $15.39 per ton. During 1996, Utilities purchased a total of 3,518,000 tons of coal for its generating plants. At December 31, 1996, Utilities had a weighted average of approximately 60 days' usage of coal inventory at its principal generating stations based upon the 1997 expected usage. Utilities estimates that its existing coal fired generating units will require approximately 12,837,000 tons of coal to operate during the period 1997-1999. The average annual quantities listed in the preceding table represent Utilities' minimum commitments. Many of the contracts contain provisions allowing Utilities to purchase additional tons of coal. Utilities estimates that it has the capability to purchase almost 50% of its 1997-1999 coal requirements under these contracts and will meet the remainder of its requirements from either future contracts or purchases in the spot market. Utilities believes that an ample supply of coal is available in the spot market to meet its needs. Some of Utilities' contracted coal supply is provided by surface mining operations which are regulated by the Federal Strip Mine Act. Most of the surface mining coal contracts contain clauses which pass reclamation and royalty costs through to the respective utility; such costs billed to Utilities are recoverable through its Energy Adjustment Clauses (EAC). See Note 1(k) of Industries' Notes to Consolidated Financial Statements for discussion of the EAC. A contract for enrichment services and enriched uranium product was signed with the United States Enrichment Corporation (USEC) in 1995, which will reduce Utilities' enrichment and uranium costs. This contract will be effective through 2001 and may extend beyond 2001 if certain conditions occur. Fabrication of the nuclear fuel is being performed by General Electric Company for fuel through the 2008 refueling of the DAEC. Utilities believes that an ample supply of uranium and enrichment services will be available in the future and intends to purchase such uranium and enrichment services as necessary on the spot market and/or via medium length (less than five years) contracts to supplement its current contracts and meet its generation requirements. See Note 13(f) of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' assessment under the National Energy Policy Act of 1992 for the "Uranium Enrichment Decontamination and Decommissioning Fund," which is based upon prior nuclear fuel purchases. Refer to Item 1. "Environmental Matters" for a discussion of nuclear waste disposal issues. Nuclear As an owner and the operator of a nuclear generating unit at the DAEC, Utilities is subject to the jurisdiction of the NRC. The NRC has broad supervisory and regulatory jurisdiction over the construction and operation of nuclear reactors, particularly with regard to public health, safety and environmental considerations. Utilities' current NRC license for DAEC expires in 2014. The operation and design of nuclear power plants is under constant review by the NRC. Utilities has complied with and is currently complying with all NRC requests for data relating to these reviews. As a result of such reviews, further changes in operations or modifications of equipment may be required, the cost of which cannot currently be estimated. Utilities' anticipated nuclear- related construction expenditures for 1997-2001 are approximately $33 million. The DAEC received the highest ratings in its history in the NRC's last Systematic Assessment of Licensee Performance (SALP) report by earning the highest score possible (1 on a 3-point scale) in the areas of plant operations, engineering and plant support and a "good" rating (2) in the area of maintenance. The SALP evaluation process is being reviewed along with an overall rebaselining of regulatory strategy and initiatives by the NRC. The results of this NRC effort appear to include an overall reduction in SALP scores across the nuclear industry. The effect on the DAEC will be clearer after the current evaluation period closes in the second quarter of 1997. Utilities conducted an inspection during the 1996 refueling outage of the DAEC reactor core internals. No cracks were identified and no related repairs were required. Utilities continues its efforts to monitor and maintain the reactor core internals. The large number of design documents, drawings, specifications, license documents, analyses, evaluations, reports, procedures, instructions and other documents related to nuclear plant design and operation present a particular challenge to Utilities to make sure all affected plant documents are updated when changes are made to a nuclear plant's design or operating practice. The NRC is currently applying new, and more exacting, interpretations to existing regulations that result in increased expectations relating to the level of detail and the scope of the information to be documented. Utilities has made significant efforts through its configuration management and design basis programs, and expects to continue such efforts in the future, to meet the NRC's expectations. Under the Price-Anderson Amendments Act of 1988 (1988 Act), Utilities currently has the benefit of $8.9 billion of public liability coverage which would compensate the public in the event of an accident at a commercial nuclear power plant. The 1988 Act permits such coverage to rise with increased availability of nuclear insurance and the changing number of operating nuclear plants subject to retroactive premium assessments. The 1988 Act provides for inflation indexing (Consumer Price Index every fifth year) of the retroactive premium assessments. As an outgrowth of the Three Mile Island Nuclear Power Plant (TMI) experience, nuclear plant owners have initiated a cooperative insurance program designed to help cover business interruption expenses for participating utilities arising from a possible nuclear plant event. Utilities is a participant in this program. This type of insurance is an industry response intended to lessen the cost burden on customers in the event of a lengthy plant shutdown. To provide this coverage, a nuclear utility mutual insurance company known as Nuclear Electric Insurance Limited (NEIL) was formed. Under Utilities' policy, following a 21 week waiting period from the time of an accident, coverage of up to 100% of estimated replacement power costs for an ensuing one year period is provided and up to 80% of that amount will be provided for a second and third year. The annual premium cost to Utilities is estimated to be less than the cost of replacement power for one week. Utilities currently carries primary property insurance coverage on the DAEC facility of $500 million with Nuclear Mutual Limited (NML). Following the TMI incident, it became apparent to nuclear plant owners that the commercially available property insurance was inadequate considering the cost of decontamination. Consequently, Utilities obtained excess property insurance through NEIL, providing an additional $1.4 billion of coverage after losses exceed $500 million. These policies bring the total property coverage to $1.9 billion. For information concerning the potential assessment of retroactive premiums relating to the above described public liability, replacement power and excess property insurance coverages, refer to Note 13(e) of Industries' Notes to Consolidated Financial Statements. The NRC established requirements with respect to guaranteeing the ability of owners to make such retroactive payments on the public liability policy. Of the various alternatives available, Utilities elected to submit certified financial statements showing that sufficient cash flow could be generated and would be available for payment of the required assessments within a three month period. The maximum of the annual retroactive premiums was approximately $7 million at December 31, 1996. In the unlikely event of catastrophic loss at DAEC, the amount of insurance available may not be adequate to cover property damage, decontamination and premature decommissioning. Uninsured losses, to the extent not recovered through rates, would be borne by Utilities and could have a material adverse effect on Utilities' financial position and results of operations. Refer to Item 1. "Environmental Matters" for a discussion of nuclear waste disposal issues and Note 1(g) of Industries' Notes to Consolidated Financial Statements for a discussion of the decommissioning of the DAEC. ELECTRIC OPERATING COMPARISON
1996 1995 1994 1993 1992 1986 Operating revenues (000's): Residential and rural $ 212,799 $ 216,270 $ 199,587 $ 203,870 $ 176,811 $ 160,267 General service 98,196 97,496 97,454 99,221 87,202 75,649 Large general service 213,223 199,840 191,601 184,657 140,496 127,034 Street lighting 8,778 8,810 8,521 8,404 7,241 7,194 Total from ultimate consumers 532,996 522,416 497,163 496,152 411,750 370,144 Sales for resale 17,894 17,554 19,195 20,254 18,602 14,963 Off-system 19,490 17,802 18,077 29,400 28,304 34,397 Other 3,893 2,699 2,892 4,715 4,343 2,091 $ 574,273 $ 560,471 $ 537,327 $ 550,521 $ 462,999 $ 421,595 Energy sales (000's Kwh): Residential and rural 2,633,704 2,680,340 2,484,089 2,518,580 2,146,079 2,122,204 General service 1,231,115 1,242,373 1,170,923 1,166,072 1,061,444 914,665 Large general service 5,500,606 5,283,694 4,990,890 4,581,590 3,320,439 2,629,046 Street lighting 73,381 77,388 77,952 78,004 75,957 78,754 Total to ultimate consumers 9,438,806 9,283,795 8,723,854 8,344,246 6,603,919 5,744,669 Sales for resale 514,398 499,719 567,721 561,276 528,752 411,043 Sales of electricity to customers 9,953,204 9,783,514 9,291,575 8,905,522 7,132,671 6,155,712 Off-system 1,231,298 1,086,121 1,137,219 2,068,015 2,275,616 2,349,985 11,184,502 10,869,635 10,428,794 10,973,537 9,408,287 8,505,697 Sources of electric energy (000's Kwh): Generation: Fossil, primarily coal 4,972,736 5,775,002 5,522,966 5,356,930 4,317,154 3,983,607 Nuclear (1) 2,753,542 2,610,979 2,875,867 2,264,507 2,402,501 2,095,334 Hydro 7,081 7,690 8,205 7,201 7,579 5,595 7,733,359 8,393,671 8,407,038 7,628,638 6,727,234 6,084,536 Purchases 4,176,700 3,012,934 2,646,673 3,949,296 3,322,182 2,930,845 11,910,059 11,406,605 11,053,711 11,577,934 10,049,416 9,015,381 Net capability at time of peak load (Kw): Generating capability 1,864,390 1,873,300 1,741,100 1,733,700 1,718,600 1,626,600 Purchase capability 232,000 207,100 280,000 248,000 207,000 100,000 2,096,390 2,080,400 2,021,100 1,981,700 1,925,600 1,726,600 Net peak load (Kw) (2) 1,833,203 1,824,100 1,779,627 1,716,380 1,425,441 1,380,391 Cooling degree days as percentage of normal 89% 128% 99% 89% 72% 106% Number of customers at year-end 336,048 333,489 330,405 327,265 325,172 299,506 Revenue per Kwh (excluding off-system) in cents 5.57 5.55 5.59 5.85 6.09 6.29 (1) Represents IES Utilities' 70% undivided interest in the Duane Arnold Energy Center, which is operated by IES Utilities Inc. (2) 60 minutes integrated.
GAS OPERATIONS. With the advent of FERC Order 636 (Order 636), issued in 1992, the nature of Utilities' gas supply portfolio has changed. Order 636, among other things, eliminated the interstate pipelines' obligation to serve and now requires Utilities to purchase virtually 100% of its gas supply requirements from non-pipeline suppliers. Utilities has enhanced access to competitively priced gas supply and more flexible transportation services as a result of Order 636. However, under Order 636, Utilities is required to pay certain transition costs incurred and billed by its pipeline suppliers. Utilities began paying the transition costs in 1993 and at December 31, 1996, has recorded a liability of $4.2 million for those transition costs that have been incurred, but not yet billed, by the pipelines to date, including $2.1 million expected to be billed through 1997. Utilities is currently recovering the transition costs from its customers through its Purchased Gas Adjustment Clauses as such costs are billed by the pipelines. Transition costs, in addition to the recorded liability, that may ultimately be charged to Utilities could approximate $3.8 million. The ultimate level of costs to be billed to Utilities depends on the pipelines' future filings with the FERC and other future events, including the market price of natural gas. However, Utilities believes any transition costs that the FERC would allow the pipelines to collect from Utilities would be recovered from its customers, based upon regulatory treatment of these costs currently and similar past costs by the IUB. Accordingly, regulatory assets, in amounts corresponding to the recorded liabilities, have been recorded to reflect the anticipated recovery. Contracts with the pipelines subsequent to Order 636 are comprised primarily of firm transportation, firm storage and no-notice service. Firm transportation contracts grant Utilities access to firm pipeline capacity which is used to transport gas supplies from non-pipeline suppliers on peak day. Firm storage service allows Utilities to purchase gas during off-peak periods and place this gas in an account with the pipelines. When the gas is needed for peak day deliveries, Utilities requests and the pipelines deliver the gas back on a firm basis. No-notice service grants Utilities the right to take more or less gas than is actually scheduled up to the level of no-notice service. No-notice service takes the form of transportation balancing or storage service depending on the pipeline. Utilities' portfolio of firm transportation, firm storage and no- notice service from pipelines is as follows: Firm Firm Transportation Storage No-Notice Northern: Volume (Dekatherm/day) 142,996 48,218 10,000 Expiration date 10/31/97 10/31/97 10/31/97 Natural: Volume (Dekatherm/day) 28,605 34,014 996 Expiration date 11/30/2000 11/30/98 11/30/98 ANR: Volume (Dekatherm/day) 60,737 19,180 5,000 Expiration date 10/31/2003 10/31/2003 10/31/2003 In addition to firm storage with pipelines, Utilities also contracts for firm storage from Llano, Inc. This contract calls for peak day deliveries of 18,667 Dekatherm(Dth)/day and expires May 31, 1997. Gas supply is purchased from a variety of non-pipeline suppliers located in the United States and Canada having access to virtually all major natural gas producing regions. For the calendar year 1996, Utilities' maximum daily load occurred on February 2, 1996 with total system flow of approximately 290,987 dekatherms, including transported volumes, and a total contract availability of approximately 276,352 dekatherms. As a result of Order 636, Utilities accepted assignment of certain gas supply contracts previously held by Northern. Accepting assignment of these contracts resulted in lower costs to Utilities than would have been incurred had Northern bought out the agreements and billed Utilities for its share of such costs. Contracts assigned to Utilities from Northern have maximum delivery requirements of 13,631 Dth, and minimum take requirements of 2,726 Dth. Additional firm gas supply agreements were independently negotiated by Utilities with various non-pipeline suppliers. These gas supply agreements have maximum and minimum obligations and will be delivered through gas transmission pipelines as follows: Maximum Minimum Daily Quantity Daily Quantity (Dth/day) (Dth/day) Northern 57,569 28,358 Natural 26,575 18,575 ANR 41,000 25,500 These gas supply contracts have expiration dates ranging from a few months to almost seven years. Rates charged by Utilities' suppliers are subject to regulation by the FERC. Utilities' tariffs provide for subsequent adjustments to its natural gas rates for changes in the cost of natural gas purchased for resale. See Note 1(k) of Industries' Notes to Consolidated Financial Statements for discussion of the PGA. GAS OPERATING COMPARISON
1996 1995 1994 1993 1992 1986 Operating revenues (000's): IES Utilities Inc.: Residential $ 97,708 $ 84,562 $ 82,795 $ 90,462 $ 78,685 $ 79,176 Commercial 46,966 40,390 40,912 45,528 39,780 42,608 Industrial 12,256 8,790 12,515 15,593 18,649 39,485 156,930 133,742 136,222 151,583 137,114 161,269 Other 3,934 3,550 2,811 2,735 2,341 881 Total revenues 160,864 137,292 139,033 154,318 139,455 162,150 Industrial Energy Applications, Inc. 113,115 53,047 26,536 27,605 27,627 0 $ 273,979 $ 190,339 $ 165,569 $ 181,923 $ 167,082 $ 162,150 Energy sales (000's dekatherms): IES Utilities Inc.: Residential 17,680 16,302 15,766 16,971 15,098 15,825 Commercial 10,323 9,534 9,298 10,133 8,479 9,707 Industrial 3,796 3,098 4,010 4,618 6,175 11,722 31,799 28,934 29,074 31,722 29,752 37,254 Industrial - transported volumes * 10,341 10,871 8,901 7,284 7,283 1,031 Total volumes delivered 42,140 39,805 37,975 39,006 37,035 38,285 Industrial Energy Applications, Inc. * 43,055 31,916 14,443 12,493 14,830 0 85,195 71,721 52,418 51,499 51,865 38,285 *IEA energy sales that are also included as transported volumes of IES Utilities Inc. 4,383 4,232 3,134 2,883 2,955 0 Operating statistics for IES Utilities Inc.: Cost per dekatherm of gas purchased for resale $ 3.29 $ 3.13 $ 3.31 $ 3.49 $ 3.36 $ 3.62 Peak daily sendout in dekatherms 290,987 269,545 288,352 268,419 254,989 282,956 Heating degree days as percentage of normal 109% 101% 96% 103% 93% 94% Number of customers at year-end 176,238 174,470 172,829 170,719 167,813 164,670 Revenue per dekatherm sold for IES Utilities Inc. (excluding transported volumes) $ 4.94 $ 4.62 $ 4.69 $ 4.78 $ 4.61 $ 4.33
Item 2. Properties Industries has no significant properties other than common stock of affiliates, temporary cash investments and cash surrender value of corporate life insurance policies. Utilities' principal electric generating stations at December 31, 1996, are as follows:
Name and Location Major Fuel Minimum Net Kilowatts Accredited of Station Type Generating Capability Duane Arnold Energy Center, Palo, Iowa Nuclear 364,000 (1) Ottumwa Generating Station, Ottumwa, Iowa Coal 343,440 (2) Prairie Creek Station, Cedar Rapids, Iowa Coal 205,500 Sutherland Station, Marshalltown, Iowa Coal 143,000 Sixth Street Station, Cedar Rapids, Iowa Coal 65,000 Burlington Generating Station, Burlington, Iowa Coal 211,800 George Neal Unit 3, Sioux City, Iowa Coal 144,200 (3) Total Coal 1,112,940 Peaking Turbines, Marshalltown, Iowa Oil 162,500 Centerville Combustion Turbines, Centerville, Iowa Oil 48,600 Diesel Stations, all in Iowa Oil 12,200 Total Oil 223,300 Grinnell Station, Grinnell, Iowa Gas 45,300 Agency Street Combustion Turbines, West Burlington, Iowa Gas 57,700 Burlington Combustion Turbines, Burlington, Iowa Gas 63,100 (4) Red Cedar Combustion Turbine, Cedar Rapids, Iowa Gas 18,800 (5) Total Gas 184,900 Total generating capability 1,885,140
(1) Represents Utilities' 70% ownership interest in this 520,000 Kw generating station. The plant is operated by Utilities. (2) Represents Utilities' 48% ownership interest in this 715,500 Kw generating station. The plant is operated by Utilities. (3) Represents Utilities' 28% ownership interest in this 515,000 Kw generating station which is operated by an unaffiliated utility. (4) Burlington Combustion Turbine Unit 3 became operational June 28, 1996. (5) Red Cedar Cogeneration Station became operational December 13, 1996. At December 31, 1996, the transmission lines of Utilities, operating from 34,000 to 345,000 volts, approximated 4,436 circuit miles (substantially all located in Iowa). Utilities owned 108 transmission substations (all located in Iowa) with a total installed capacity of 8,647 MVa and 468 distribution substations (all located in Iowa) with a total installed capacity of 2,626 MVa. Subsidiaries other than Utilities also own property which primarily represents investments in transportation, energy-related, telecommunications and real estate properties. The Company's principal properties are suitable for their intended use. Utilities' principal properties are held subject to liens of indentures relating to its bonds. Item 3. Legal Proceedings On April 30, 1996, Utilities filed suit, IES Utilities Inc. v. Home Ins. Co., et al., No. 4-96-CV-10343 (S.D. Iowa filed Apr. 30, 1996), against various insurers who had sold comprehensive general liability policies to Iowa Southern Utilities Company (ISU) and Iowa Electric Light and Power Company (IE) (Utilities was formed as the result of a merger of ISU and IE). The suit seeks judicial determination of the respective rights of the parties, a judgment that each defendant is obligated under its respective insurance policies to pay in full all sums that Utilities has become or may become obligated to pay in connection with its defense against allegations of liability for property damage at and around FMGP sites, and indemnification for all sums that it has or may become obligated to pay for the investigation, mitigation, prevention, remediation and monitoring of damage to property, including damage to natural resources like groundwater, at and around the FMGP sites. Settlement discussions are proceeding between Utilities and its insurance carriers regarding the recovery of these FMGP-related costs. Settlement has been reached with two carriers and an agreement in principle has been reached with three other carriers thus far. Any amounts received from insurance carriers will be deferred pending a determination of the regulatory treatment of such recoveries. Industries, Diversified, IES Energy, MicroFuel Corporation (the Corporation) now known as Ely, Inc. in which IES Energy has a 69.40% equity ownership, and other parties have been sued in Linn County District Court in Cedar Rapids, Iowa, by Allen C. Wiley. Mr. Wiley claims money damages on various tort and contract theories arising out of the 1992 sale of the assets of the Corporation, of which Mr. Wiley was a director and shareholder. All of the defendants in Mr. Wiley's suit answered the complaint and denied liability. Industries and Diversified were dismissed from the suit in a motion for summary judgment. In addition, a grant of summary judgment has reduced Mr. Wiley's claims against the remaining parties to breach of fiduciary duty. A separate motion for summary judgment, which was filed seeking dismissal of the remaining claims against the remaining parties, was overruled on September 20, 1996, and the trial has been set for May 1998. All of the defendants are vigorously contesting the claims. The Corporation commenced a separate suit to determine the fair value of Mr. Wiley's shares under Iowa Code section 490. A decision was issued on August 31, 1994, by the Linn County District Court ruling that the value of Mr. Wiley's shares was $377,600 based on a 40 cent per share valuation. The Corporation contended that the value of Mr. Wiley's shares was 2.5 cents per share. The Decision was appealed to the Iowa Supreme Court by the Corporation on a number of issues, including the Corporation's position that the trial court erred as a matter of law in discounting the testimony of the Corporation's expert witness. The Iowa Supreme Court assigned the case to the Iowa Court of Appeals. On February 2, 1996, the Iowa Court of Appeals reversed the District Court ruling after determining the District Court erred in discounting the expert testimony. The case was remanded back to the District Court for consideration of the expert testimony, but with no additional evidence taken. The District Court re-affirmed its original decision on August 28, 1996, and the Corporation has again appealed to the Iowa Supreme Court. On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda) filed a request with the IUB that the IUB initiate formal complaint proceedings against Utilities. Lambda alleges that Utilities is discriminating against it by refusing to enter into contracts with it for remote displacement service and by favoring IEA in such matters. On October 17, 1996, Utilities filed a Response which denied the allegations, and alleged, inter alia, that Lambda is unlawfully attempting to provide retail electrical services in Utilities' exclusive service territory. The IUB has set the matter for hearing on March 17, 1997. A decision is expected in the second quarter of 1997. On October 9, 1996, the Company filed a civil suit in the Iowa District Court in and for Linn County against Lambda, Robert Latham, Louie Ervin, and David Charles (collectively the "Defendants", including three former employees of the Company and/or its subsidiaries) alleging, inter alia, violations of Iowa's trade secret act and interference with existing and prospective business advantage. On November 1, 1996, the Defendants filed their Answer and Counterclaims alleging, inter alia, violation of Iowa competition law, tortious interference and commercial disparagement. The Defendants therewith also filed a Third-Party Petition against Utilities, IEA and Lee Liu, Chairman of the Board & Chief Executive Officer of Industries and Utilities, alleging, inter alia, tortious interference and commercial disparagement. Reference is made to Notes 3 and 13 of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' rate proceedings and the Company's environmental matters, respectively. Also see Item 1. "Business - Environmental Matters" and Item 7. "Management's Discussion and Analysis of the Results of Operations and Financial Condition - Environmental Matters." Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters IES Industries Inc. (a) Price Range of Industries' Common Stock and Dividends Declared Industries' Common Stock is listed on the New York Stock Exchange (NYSE) under the symbol "IES." The table below sets forth, for the calendar quarters indicated, the reported high and low sales prices of Industries' Common Stock as reported on the NYSE Composite Tape based on published financial sources, and the dividends declared per share on Industries' Common Stock. Industries' Common stock High Sale Low Sale Dividend (i) 1996 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 1995 First Quarter $ 27 5/8 $ 24 5/8 $ .525 Second Quarter 26 3/8 20 3/8 .525 Third Quarter 26 3/4 21 3/8 .525 Fourth Quarter 28 1/2 25 7/8 .525 Year $ 28 1/2 $ 20 3/8 $ 2.10 The closing price of Industries' common stock on December 31, 1996 was $29 7/8. (i) Industries has paid regular quarterly dividends on its common stock since April 1, 1950. Although Industries' practice has been to pay dividends quarterly, the timing of payment and amount of future dividends are necessarily dependent upon earnings, financial requirements and other factors. (b) Approximate Number of Equity Security Holders of Industries Approximate Number of Record Title of Class Holders (as of December 31, 1996) Common Stock, no par value 27,468 (c) Restriction on Payment of Dividends by Industries Under provisions of the Merger Agreement, Industries' annual dividend payment cannot exceed $2.10 per share, the current annual payment level, pending the Proposed Merger. See Item 1, "Proposed Merger of the Company" for a further discussion of Industries' pending merger. IES Utilities Inc. (a) Price Range of Utilities' Common Stock and Dividends Declared All outstanding common stock of Utilities is held by its parent (Industries), and is not traded. (b) Approximate Number of Equity Security Holders of Utilities All outstanding common stock of Utilities is held by its parent (Industries). (c) Restriction on Payment of Dividends by Utilities Utilities has the right under the terms of the Subordinated Deferrable Interest Debentures, so long as an Event of Default has not occurred and is not continuing, to extend the interest payment period at any time and from time to time on the Subordinated Deferrable Interest Debentures to a period not exceeding 20 consecutive quarters. If Utilities exercises its right to extend the interest payment period, Utilities may not, during any such extended interest payment period, declare or pay dividends on, or redeem, purchase or acquire, or make any liquidation payment with respect to, any of its capital stock or make any guarantee payment with respect to the foregoing. Utilities does not intend to exercise its right to extend the interest payment period. Item 6. Selected Consolidated Financial Data The following selected consolidated financial data, in the opinion of the Company, includes adjustments, which are normal and recurring in nature, necessary for the fair presentation of the results of operations and financial position. See Item 7. "Management's Discussion and Analysis of the Results of Operations and Financial Condition" for a discussion of transactions that affect the comparability of the years 1996-1994. The 1996 results were affected by costs incurred relating to the successful defense of the hostile takeover attempt mounted by MidAmerican Energy Company. The 1995 results were affected by the impact of the IUB price reduction order in Utilities' last electric rate case and significantly warmer than normal weather. The 1993 results were affected by the acquisition of the Iowa service territory from Union Electric Company on December 31, 1992. The Selected Consolidated Financial Data should be read in conjunction with the Consolidated Financial Statements, the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of the Results of Operations and Financial Condition contained elsewhere in this report. IES INDUSTRIES INC. SELECTED CONSOLIDATED FINANCIAL DATA
1996 1995 1994 1993 1992 Income statement data (000's): Operating revenues $ 973,912 $ 851,010 $ 785,864 $ 801,266 $ 678,296 Operating income 164,308 151,712 147,933 151,269 109,024 Net income 60,907 64,176 66,818 67,938 48,711 Common stock data (per share except percentages): Earnings $ 2.04 $ 2.20 $ 2.34 $ 2.45 $ 1.92 Dividends declared 2.10 2.10 2.10 2.10 2.10 Return on average common equity 9.9% 10.7% 11.5% 12.4% 10.3% Market price at year-end $ 29.88 $ 26.50 $ 25.25 $ 31.25 $ 29.50 Book value at year-end 20.84 20.75 20.56 20.21 18.89 Ratio of market price to book value at year-end 143% 128% 123% 155% 156% Capitalization: Common equity 47% 49% 50% 51% 48% Preferred and preference stock 1 2 2 2 2 Long-term debt 52 49 48 47 50 100% 100% 100% 100% 100% Other selected financial data: Total assets (000's) $ 2,125,562 $ 1,985,591 $ 1,849,093 $ 1,699,819 $ 1,594,382 Non-utility assets (000's) (1) 352,824 282,433 206,411 153,853 153,491 Long-term obligations, net (000's) 744,298 654,090 623,359 574,488 551,335 Construction and acquisition expenditures (000's) 238,378 218,099 206,548 169,017 192,520 (2) Times interest earned before income taxes 2.99 3.12 3.38 3.38 2.63 Selected financial data for IES Utilities Inc.: Utility plant in service (000's) $ 2,310,161 $ 2,172,378 $ 2,042,179 $ 1,932,558 $ 1,852,733 Accumulated depreciation of utility plant in service (000's) 1,030,390 950,324 880,888 813,312 759,754 Construction and acquisition expenditures (000's) (3) 143,648 129,444 148,103 113,212 171,013 (2) Times interest earned before income taxes 3.44 3.26 3.39 3.64 2.67 Electric Kwh sales (excluding off-system) (000's) 9,953,204 9,783,514 9,291,575 8,905,522 7,132,671 Gas Dth sales (including transported volumes) (000's) 42,140 39,805 37,975 39,006 37,035 (1) Includes non-utility assets of IES Utilities Inc. (2) Includes $61 million for the acquisition of the Iowa service territory from Union Electric Company. (3) Includes acquisitions from affiliated companies and Utilities' non-utility expenditures.
IES UTILITIES INC. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31 1996 1995 1994 1993 1992 ($ in thousands) Operating revenues $ 754,979 $ 709,826 $ 685,366 $ 713,750 $ 610,262 Operating income 153,725 142,265 135,591 143,329 100,361 Net income 63,729 59,278 61,210 67,970 45,291 Net income available for common stock 62,815 58,364 60,296 67,056 43,562 Cash dividends declared on common stock 44,000 43,000 52,000 31,300 24,721 Total assets 1,778,610 1,708,635 1,645,368 1,546,978 1,440,891 Long-term obligations 560,199 517,538 530,275 531,979 490,251 Times interest earned before income taxes 3.44 3.26 3.39 3.64 2.67 Capitalization ratios: Common equity 50% 51% 50% 50% 48% Preferred and preference stock 2 2 2 2 2 Long-term debt 48 47 48 48 50 100% 100% 100% 100% 100%
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION IES Industries Inc.'s Consolidated Financial Statements include the accounts of IES Industries Inc. (Industries) and its consolidated subsidiaries (collectively the Company). Industries' wholly-owned subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc. (Diversified). The information presented in this management's discussion and analysis addresses the financial statements of Industries and Utilities as presented in this joint filing. Information related to Utilities also relates to Industries' Consolidated Financial Statements. Information related to Diversified does not pertain to the discussion of the financial condition and results of operations of Utilities. The references to various Notes to Consolidated Financial Statements are all to Industries' Notes to Consolidated Financial Statements. COMPETITION Utilities and its predominant business, electric energy generation, transmission and distribution, are in a period of fundamental change in the manner in which customers obtain, and energy suppliers provide, energy services. As legislative, regulatory, economic and technological changes occur, electric utilities are faced with increasing pressure to become more competitive. Such competitive pressures could result in loss of customers and an incurrence of stranded costs (i.e., the cost of assets rendered unrecoverable as the result of competitive pricing). To the extent stranded costs cannot be recovered from customers, they would be borne by security holders. The National Energy Policy Act of 1992 addresses several matters designed to promote competition in the electric wholesale power generation market. In April 1996, the Federal Energy Regulatory Commission (FERC) issued final rules (FERC Orders 888 and 889), largely confirming earlier proposals, requiring electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. The rules became effective on July 9, 1996. Utilities filed conforming pro-forma open access transmission tariffs with the FERC which became effective October 1, 1995. In response to FERC Order 888, Utilities filed its final pro-forma tariffs with FERC on July 9, 1996. The non- rate provisions of the tariffs were approved on November 13, 1996. FERC has not yet ruled on the rate provisions of the tariffs. The geographic position of Utilities' transmission system could provide revenue opportunities in the open access environment. Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, received approval in the 1995 FERC proceeding to market electric power at market based rates. The Company cannot predict the long-term consequences of these rules on its results of operations or financial condition. FERC does not have jurisdiction over the retail jurisdiction, and thus the final FERC rules do not provide for the recovery of stranded costs resulting from retail competition. The various states retain jurisdiction over the question of whether to permit retail competition, the terms of such retail competition and the recovery of any portion of stranded costs that are ultimately determined by FERC and the states to have resulted from retail competition. The Iowa Utilities Board (IUB) initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging Competition in the Electric Utility Industry" to address all forms of competition in the electric utility industry and to gather information and perspectives on electric competition from all persons or entities with an interest or stake in the issues. In January 1996, the IUB created its own timeline for evaluating industry restructuring in Iowa. Included in the IUB's process was the creation of a 22-member advisory panel, of which Utilities is a member. The IUB conducted public information meetings around the State of Iowa. A draft report was created by the IUB staff and is expected to be finalized in the first quarter of 1997. The draft report indicated that the IUB is of the opinion that there is no compelling reason to move quickly into restructuring the electric utility industry in Iowa. However, they will continue the analysis and debate on restructuring and retail competition in Iowa. As part of Utilities' strategy for the emerging and competitive power markets, Utilities, Interstate Power Company (IPC) and Wisconsin Power and Light Company (the utility subsidiary of WPL Holdings, Inc. (WPLH)), and a number of other utilities have proposed the creation of an independent system operator (ISO) for the companies' power transmission grid. (The Company, WPLH and IPC have entered into a merger agreement, as discussed later). The companies would retain ownership and control of the facilities, but the ISO would set rates for access and assure fair treatment for all companies seeking access. The proposal requires approval from state regulators and the FERC. Various other proposals for ISO's have been made by other companies and Utilities is monitoring all such proposals. Membership in an ISO could become a condition of merger approval by the various regulatory bodies. Utilities is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). If a portion of Utilities' operations become no longer subject to the provisions of SFAS 71, as a result of competitive restructurings or otherwise, a write-down of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. In addition, the Company would be required to determine any impairment to other assets and write-down such assets to their fair value. Utilities believes that it still meets the requirements of SFAS 71. The Company cannot predict the long-term consequences of these competitive issues on its results of operations or financial condition. The Company's strategy for dealing with these emerging issues includes seeking growth opportunities, continuing to offer quality customer service, ongoing cost reductions and productivity enhancements, the major objective of which is to allow Utilities to better prepare for a competitive, deregulated electric utility industry. In this connection, Utilities is in the final stages of a significant process improvement program to improve its service levels, reduce its cost structure and become more market-focused and customer oriented. (The Company's continuous improvement efforts, in general, will be an ongoing effort, however). Examples of the process improvement changes being implemented are, but are not limited to: managing the business in business unit form, rather than functionally; formation of alliances with vendors of certain types of material and/or services rather than opening most purchases to a bidding process; changing standards and construction practices in transmission and distribution areas; changing certain work practices in power plants; making investments in information technology upgrades; and improving the method by which service is delivered to customers in all customer classes. The specific changes range from simple improvements in current operations to radical changes in the way work is performed and service is delivered. Some of the changes are currently in the pilot stage thus the results from this evaluation period or the potential effects of the pending merger could prove that some of the changes are not efficient or effective and must be revised or eliminated. Subject to delays caused by implementing any such revisions, implementation of the changes began in 1996 and will continue into 1997; however, certain results will not be realized until 1997. In addition, the Company must give consideration to the potential effects of the pending merger as part of the implementation process so that duplication of efforts are avoided. PROPOSED MERGER OF THE COMPANY The Company, WPLH and IPC have entered into an Agreement and Plan of Merger, as amended (Merger Agreement), dated November 10, 1995. As a result of the transactions contemplated by the Merger Agreement, the combined company, Interstate Energy Corporation (Interstate Energy), anticipates cost savings of approximately $749 million over a ten-year period, net of transaction costs and costs to achieve the savings of approximately $14 million and $64 million, respectively. The estimate of potential cost savings constitutes a forward-looking statement and actual results may differ materially from this estimate. The estimate is necessarily based upon various assumptions that involve judgments with respect to, among other things, future national and regional economic and competitive conditions, technological developments, inflation rates, regulatory treatments, weather conditions, financial market conditions, future business decisions and other uncertainties. No assurance can be given that the estimated cost savings will actually be realized. The merger, which is conditioned upon, among other things, receipt of certain regulatory and governmental approvals, is expected to close by the end of the third quarter of 1997. As part of the approval process, management has proposed retail and wholesale price freezes to be implemented in certain jurisdictions. Refer to Notes 2 and 3 of the Notes to Consolidated Financial Statements for additional information regarding the proposed merger and the proposed price freezes. RESULTS OF OPERATIONS OF THE COMPANY The following discussion analyzes significant changes in the components of net income and financial condition from the prior periods for the Company. The Company's net income decreased ($3.3) million and ($2.6) million during 1996 and 1995, respectively. Earnings per average common share declined to $2.04 in 1996 from $2.20 in 1995. The 1996 decrease in earnings was primarily due to costs incurred relating to the successful defense of the hostile takeover attempt mounted by MidAmerican Energy Company (MAEC) and preparing for the Company's pending three-way merger. The Company estimates that the hostile takeover defense and merger costs reduced 1996 earnings by $0.15 per share and $0.11 per share, respectively. The 1996 earnings benefited from increased electric, gas and steam sales at Utilities, the impact of a natural gas pricing increase implemented in the fourth quarter of 1995 and increased earnings at the Company's oil and gas subsidiary, Whiting Petroleum Corporation (Whiting). Increased operating expenses, higher interest expense and a higher effective income tax rate also contributed to the decrease in earnings in 1996. The 1995 results reflect the impact of the IUB price reduction order in Utilities' latest electric rate case. The effect of the lower electric prices, including the required refund, reduced the 1995 net income by approximately $9.7 million ($0.33 per share). Warmer than normal weather conditions during the summer months, which added $0.18 to earnings, and an aggressive cost containment program partially offset the negative effects of the IUB order. The 1994 results were affected by milder than normal weather, particularly during the summer months. The Company's operating income increased $12.6 million and $3.8 million during 1996 and 1995, respectively. The contrasting relationship between the change in operating income and net income for 1996 was due to the hostile takeover defense costs of $7.8 million, which are included in "Miscellaneous, net" in the Consolidated Statements of Income, higher interest expense and a higher effective income tax rate. The 1995 difference was also due to increased interest expense and a higher effective income tax rate. Reasons for the changes in the results of operations are explained in the following discussion. Electric Operations Electric margins and Kwh sales for Utilities were as follows:
Revenues and Costs Kwhs Sold (In thousands) (In thousands) 1996 1995 1994 1996 1995 1994 Residential and rural $ 212,799 $ 216,270 $ 199,587 $ 2,633,704 $ 2,680,340 $ 2,484,089 General service 98,196 97,496 97,454 1,231,115 1,242,373 1,170,923 Large general service 213,223 199,840 191,601 5,500,606 5,283,694 4,990,890 Sales for resale and other 30,565 29,063 30,608 587,779 577,107 645,673 Total, excluding off- system sales 554,783 542,669 519,250 9,953,204 9,783,514 9,291,575 Off-system sales 19,490 17,802 18,077 1,231,298 1,086,121 1,137,219 Total 574,273 560,471 537,327 11,184,502 10,869,635 10,428,794 Fuel for production (excluding steam) 74,608 90,558 81,567 Purchased power 88,350 66,874 68,794 Margin $ 411,315 $ 403,039 $ 386,966
Electric margins increased $8.3 million and $16.1 million during 1996 and 1995, respectively. The increase during 1996 was primarily due to higher sales relating to continuing sales growth in Utilities' service territory, lower purchased power capacity costs and increased revenues due to the recovery of previously deferred energy efficiency expenditures. These increases were partially offset by a true-up adjustment to Utilities' unbilled sales recorded in 1995 and lower sales to residential and rural customers during 1996, primarily due to cooler weather conditions during the summer of 1996 as compared to the summer of 1995. The 1995 electric margin increase was primarily due to higher sales due to a significantly warmer summer in 1995 as compared to 1994, sales growth, the unbilled sales adjustment, lower purchased power capacity costs and the recovery of energy efficiency costs. These increases were partially offset by a reduction in revenues of approximately $17 million as a result of the IUB price reduction order, of which approximately $3.5 million related to revenues collected in the fourth quarter of 1994. Refer to Notes 3(a) and 3(b) of the Notes to Consolidated Financial Statements for a discussion of merger-related retail and wholesale electric price proposals that Utilities has announced and the energy efficiency cost recoveries, respectively. Under historically normal weather conditions, total sales (excluding off-system sales) during 1996 and 1995 would have increased 3.5% and 3.6%, as compared to actual increases of 1.7% and 5.3%, respectively. Utilities' electric tariffs include energy adjustment clauses (EAC) that are designed to currently recover the costs of fuel and the energy portion of purchased power billings to customers. See Note 1(k) of the Notes to Consolidated Financial Statements for discussion of the EAC. Gas Operations Gas margins and dekatherm sales for Utilities and IEA were as follows: Revenues and Costs Dths Sold (In thousands) (In thousands) 1996 1995 1994 1996 1995 1994 Utilities - Residential $ 97,708 $ 84,562 $ 82,795 17,680 16,302 15,766 Commercial 46,966 40,390 40,912 10,323 9,534 9,298 Industrial 12,256 8,790 12,515 3,796 3,098 4,010 Transportation and other 3,934 3,550 2,811 10,341 10,871 8,901 Total Utilities 160,864 137,292 139,033 42,140 39,805 37,975 IEA 113,115 53,047 26,536 43,055 31,916 14,443 Total 273,979 190,339 165,569 85,195 71,721 52,418 Gas purchased for resale 217,351 141,716 120,795 Margin $ 56,628 $ 48,623 $ 44,774 Total gas margins increased $8.0 million and $3.8 million during 1996 and 1995, respectively. The 1996 increase was primarily due to an annual increase of $6.3 million in Utilities' gas rates that was implemented in the fourth quarter of 1995, recovery of Utilities' previously deferred energy efficiency expenditures and the increased sales, largely the result of more favorable weather conditions in 1996. While IEA's gas sales were up significantly in 1996, their margins actually decreased due to fluctuations in gas prices and the competitiveness of the gas marketing business. Therefore, this decrease partially offset the increase in Utilities' margin. The 1995 margin increase was primarily due to the price increase at Utilities mentioned above, recovery of Utilities' previously deferred energy efficiency expenditures and higher IEA gas margins resulting from increased volumes sold due to heightened marketing efforts as well as expanding into additional regional markets. Under historically normal weather conditions, Utilities' gas sales and transported volumes would have increased 1.9% and 3.5% in 1996 and 1995, as compared to actual increases of 5.9% and 4.8%, respectively. Utilities' gas tariffs include purchased gas adjustment clauses (PGA) that are designed to currently recover the cost of gas sold. See Note 1(k) of the Notes to Consolidated Financial Statements for discussion of the PGA. Other Revenues Other revenues increased $25.5 million and $17.2 million during 1996 and 1995, respectively, primarily because of increased revenues at Whiting due to increases in oil and gas prices and increased gas volumes sold during 1996, and increases in oil and gas volumes sold in 1995. An increase in Utilities' steam revenues also contributed to the increase in both years. The steam volumes sold increased significantly during 1996 and 1995 primarily due to the addition of a new industrial customer. The 1995 increase was partially offset as a result of the sale of several of Diversified's subsidiaries during 1995 and 1994. The operations of the subsidiaries that were sold were not significant to the results of operations or financial position of the Company. Operating Expenses Other operating expenses increased $13.4 million and $24.5 million in 1996 and 1995, respectively. Contributing to the increase in both periods were increased operating activities at Whiting and IEA, increased labor and benefits costs at Utilities, increases in the amortization of previously deferred energy efficiency expenditures at Utilities (which are currently being recovered through rates) and costs relating to the pending merger. The 1996 increase was partially offset by decreased operating expenses at the Duane Arnold Energy Center (DAEC), Utilities' nuclear generating facility. The 1995 increase was also due to costs relating to the Company's process improvement program, partially offset by lower nuclear operating and insurance costs at Utilities, decreased costs resulting from the sale of the Diversified subsidiaries and a cost-cutting effort implemented after the receipt of the IUB electric price reduction order earlier in 1995. Maintenance expenses increased or (decreased) $2.9 million and ($6.7) million during 1996 and 1995, respectively. The 1996 increase was due to increased maintenance activities at Utilities' fossil-fueled generating stations, partially offset by lower maintenance expenses at the DAEC. The 1995 decrease was due to lower maintenance expenses at the DAEC and at Utilities' fossil-fueled generating stations as well as the cost containment actions discussed above. Depreciation and amortization increased $9.4 million and $11.6 million in 1996 and 1995, respectively, because of increases in utility plant in service, the acquisition of oil and gas operating properties and amortization costs relating to the future dismantlement and abandonment of Whiting's offshore oil and gas properties. (See Note 13(f) of the Notes to Consolidated Financial Statements for a further discussion of the dismantlement and abandonment costs). The 1995 increase was partially offset by lower depreciation rates implemented at Utilities as a result of the IUB electric price reduction order. Depreciation and amortization expenses for all periods include a provision for decommissioning the DAEC, which is collected through rates. The current annual recovery level is $6.0 million. During the first quarter of 1996, the Financial Accounting Standards Board (FASB) issued an Exposure Draft on Accounting for Liabilities Related to Closure and Removal of Long-Lived Assets which deals with, among other issues, the accounting for decommissioning costs. If current electric utility industry accounting practices for such decommissioning are changed: (1) annual provisions for decommissioning could increase relative to 1996 and, (2) the estimated cost for decommissioning could be recorded as a liability, rather than as accumulated depreciation, with recognition of an increase in the recorded amount of the related DAEC plant. If such changes are required, Utilities believes that there would not be an adverse effect on its financial position or results of operations based on current rate making practices. See Note 1(g) of the Notes to Consolidated Financial Statements for a discussion of the recovery of decommissioning costs allowed in Utilities' most recent rate case. Taxes other than income taxes increased or (decreased) ($0.8) million and $2.7 million during 1996 and 1995, respectively, largely due to changes in property taxes at Utilities caused by fluctuations in assessed property values. The 1996 decrease was partially offset by an increase in production taxes at Whiting. Interest Expense and Other Interest expense increased $4.1 million and $4.7 million in 1996 and 1995, respectively, primarily because of increases in the average amount of short-term debt outstanding at Utilities and the average amount of borrowings under Diversified's credit facility. Lower average interest rates, partially attributable to refinancing long-term debt at lower rates and the mix of long-term and short-term debt, partially offset the increases for both periods. The increase in interest expense during 1996 was also due to a higher amount of long-term debt outstanding at Utilities, partially offset by rate refund interest recorded in 1995 at Utilities and the effects of the interest rate swap agreement discussed in Note 12(a) of the Notes to Consolidated Financial Statements. Miscellaneous, net reflects comparative decreases in income of ($5.5) million and ($0.3) million during 1996 and 1995, respectively. The 1996 decrease was primarily due to approximately $7.8 million in costs incurred relating to the successful defense of the hostile takeover attempt mounted by MAEC and certain property write-downs at Diversified. The decrease was partially offset by dividends received from the two New Zealand entities in which the company has equity investments and various gains realized on the disposition of assets. The 1995 decrease was primarily because of higher fees associated with an increase in the average amount of utility accounts receivable sold, partially offset by various gains realized on the sale of several investments by Diversified. Federal and State Income Taxes Federal and state income taxes increased $4.9 million and $0.9 million in 1996 and 1995, respectively. The increase for both periods was due to a higher effective tax rate resulting from: 1) the effect of property related temporary differences for which deferred taxes had not previously been provided in rates, pursuant to rate making principles, that are now becoming payable and are being recovered from ratepayers and 2) adjustments to tax reserves. The 1996 increase in effective tax rate was also due to recording the impacts of a tentative Internal Revenue Service audit settlement for tax years 1991-1993 as well as the incurrence of certain merger-related expenses, which are not tax deductible. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily attributable to Utilities' construction programs, its debt maturities and the level of Diversified's business opportunities. The Company's pretax ratio of times interest earned was 2.99, 3.12 and 3.38 in 1996-1994, respectively. Cash flows from operating activities were $183 million, $200 million and $217 million in 1996-1994, respectively. The 1996 decrease was primarily due to the timing of income tax payments and other changes in working capital. The 1995 decrease was primarily due to expenditures related to the 1995 DAEC refueling outage and other changes in working capital. The Company anticipates that future capital requirements will be met by cash generated from operations and external financing. The level of cash generated from operations is partially dependent upon economic conditions, legislative activities, environmental matters and timely regulatory recovery of Utilities' costs. See Notes 3 and 13 of the Notes to Consolidated Financial Statements. Access to the long-term and short-term capital and credit markets, and costs of external financing, are dependent on the Company's creditworthiness. The Company's debt ratings are as follows: Moody's Standard & Poor's Utilities - Long-term debt A2 A - Commercial paper P1 A1 Diversified - Commercial paper P2 A2 Utilities' credit ratings are under review for potential upgrade related to the pending merger. The Company's liquidity and capital resources will be affected by environmental, regulatory and competitive issues, including the ultimate disposition of remediation issues surrounding the Company's environmental liabilities and the Clean Air Act as amended, as discussed in Note 13 of the Notes to Consolidated Financial Statements, and emerging competition in the electric utility industry as discussed in the Competition section. Consistent with rate making principles of the IUB, management believes that the costs incurred for the above matters will not have a material adverse effect on the financial position or results of operations of the Company. At December 31, 1996, Utilities had approximately $61 million of energy efficiency program costs recorded as regulatory assets. See Note 3(b) of the Notes to Consolidated Financial Statements for a discussion of the timing of the filings for the recovery of these costs under IUB rules and Iowa statutory changes recently enacted relating to these programs. At December 31, 1996, the Company had a $20.0 million investment in Class A common stock of McLeod, Inc. (McLeod), a $9.2 million investment in Class B common stock and vested options that, if exercised, would represent an additional investment of approximately $2.3 million. McLeod provides local, long-distance and other telecommunications services. See Notes 6(b) and 11 of the Notes to Consolidated Financial Statements for further information on the Company's investment in McLeod. The Company has financial guarantees amounting to $22.9 million outstanding at December 31, 1996, which are not reflected in the consolidated financial statements. Such guarantees are generally issued to support third-party borrowing arrangements and similar transactions. The Company believes that the likelihood of material cash payments by the Company under these agreements is remote. The Company increased its investments in foreign entities by approximately $20 million in 1996 (see Note 6(a) of the Notes to Consolidated Financial Statements for a further discussion). The Company also continues to explore other international investment opportunities. Such investments carry a higher level of risk than the Company's traditional utility investments or Diversified's domestic investments. Such risks could include foreign government actions, foreign economic and currency risks and others. The Company may also incur business development expenses for potential projects pursued by the Company that may never materialize. The Company is striving to select international investments where these risks are both understood and minimized. The Resale Power Group of Iowa (RPGI), consisting of virtually all of Utilities' wholesale customers, has notified Utilities that it will not purchase its power supply from Utilities after December 31, 1998. It is possible that certain RPGI customers will drop out of RPGI in order to remain as Utilities' customers. RPGI will continue to purchase transmission services from Utilities after December 31, 1998. While the Company cannot determine the outcome of this issue at this time, the result will not have a material adverse effect on its financial position or results of operations given 1) Utilities' wholesale sales only accounted for approximately 5% of Utilities' total 1996 electric sales, excluding off-system sales; 2) Utilities currently has to supplement its generating capability with purchased power to meet its sales load; and 3) Utilities' annual electric sales growth rate continues to be strong. Under provisions of the Merger Agreement, there are restrictions on the amount of common stock and long-term debt the Company can issue pending the merger. The Company does not expect the restrictions to have a material effect on its ability to meet its future capital requirements. CONSTRUCTION AND ACQUISITION PROGRAM The Company's construction and acquisition program anticipates expenditures of approximately $225 million for 1997, of which approximately $147 million represents expenditures at Utilities and approximately $78 million represents expenditures at Diversified. Of the $147 million of Utilities' expenditures, 39% represents expenditures for electric transmission and distribution facilities, 21% represents electric generation expenditures, 21% represents information technology expenditures and 5% represents gas expenditures. The remaining 14% represents miscellaneous electric, steam and general expenditures. Diversified's anticipated expenditures include approximately $75 million for domestic and international energy-related construction and acquisition expenditures. The Company's levels of construction and acquisition expenditures are projected to be $208 million in 1998, $212 million in 1999, $182 million in 2000 and $198 million in 2001. It is estimated that virtually all of Utilities' construction and acquisition expenditures will be provided by cash from operating activities (after payment of dividends) for the five-year period 1997-2001. Financing plans for Diversified's construction and acquisition program will vary, depending primarily on the level of energy-related acquisitions. Capital expenditure and investment and financing plans are subject to continual review and change. The capital expenditure and investment programs may be revised significantly as a result of many considerations including changes in economic conditions, variations in actual sales and load growth compared to forecasts, requirements of environmental, nuclear and other regulatory authorities, acquisition and business combination opportunities, the availability of alternate energy and purchased power sources, the ability to obtain adequate and timely rate relief, escalations in construction costs and conservation and energy efficiency programs. Under provisions of the Merger Agreement, there are restrictions on the amount of construction and acquisition expenditures the Company can make pending the merger. The Company does not expect the restrictions to have a material effect on its ability to implement its anticipated construction and acquisition program. LONG-TERM FINANCING Other than Utilities' periodic sinking fund requirements, which Utilities intends to meet by pledging additional property, the following long-term debt will mature prior to December 31, 2001: (in millions) Utilities $ 207.2 Diversified's credit facility 172.1 Other subsidiaries' debt 11.2 $ 390.5 The Company intends to refinance the majority of the debt maturities with long-term securities. In September 1996, Utilities repaid at maturity $15 million of Series J, 6.25% First Mortgage Bonds and, in a separate transaction, issued $60 million of Collateral Trust Bonds, 7.25%, due 2006. Utilities has entered into an Indenture of Mortgage and Deed of Trust dated September 1, 1993 (New Mortgage). The New Mortgage provides for, among other things, the issuance of Collateral Trust Bonds upon the basis of First Mortgage Bonds being issued by Utilities. The lien of the New Mortgage is subordinate to the lien of Utilities' first mortgages until such time as all bonds issued under the first mortgages have been retired and such mortgages satisfied. Accordingly, to the extent that Utilities issues Collateral Trust Bonds on the basis of First Mortgage Bonds, it must comply with the requirements for the issuance of First Mortgage Bonds under Utilities' first mortgages. Under the terms of the New Mortgage, Utilities has covenanted not to issue any additional First Mortgage Bonds under its first mortgages except to provide the basis for issuance of Collateral Trust Bonds. The indentures pursuant to which Utilities issues First Mortgage Bonds constitute direct first mortgage liens upon substantially all tangible public utility property and contain covenants which restrict the amount of additional bonds which may be issued. At December 31, 1996, such restrictions would have allowed Utilities to issue at least $241 million of additional First Mortgage Bonds. In order to provide an instrument for the issuance of unsecured subordinated debt securities, Utilities entered into an Indenture dated December 1, 1995 (Subordinated Indenture). The Subordinated Indenture provides for, among other things, the issuance of unsecured subordinated debt securities. Any debt securities issued under the Subordinated Indenture are subordinate to all senior indebtedness of Utilities, including First Mortgage Bonds and Collateral Trust Bonds. Utilities has received authority from the FERC and the SEC to issue up to $250 million of long-term debt, and has $190 million of remaining authority under the current FERC docket through April 1998, and $140 million of remaining authority under the current SEC shelf registration. Diversified has a variable rate credit facility that extends through November 20, 1999, with two one-year extensions potentially available to Diversified. Refer to Note 10(a) of the Notes to Consolidated Financial Statements for a further discussion of this credit facility. The Articles of Incorporation of Utilities authorize and limit the aggregate amount of additional shares of Cumulative Preference Stock and Cumulative Preferred Stock that may be issued. At December 31, 1996, Utilities could have issued an additional 700,000 shares of Cumulative Preference Stock and 100,000 additional shares of Cumulative Preferred Stock. In addition, Industries had 5,000,000 shares of Cumulative Preferred Stock, no par value, authorized for issuance, none of which were outstanding at December 31, 1996. The Company's capitalization ratios at year-end were as follows: 1996 1995 Long-term debt 52% 49% Preferred stock 1 2 Common equity 47 49 100% 100% Under provisions of the Merger Agreement, there are restrictions on the amount of common stock and long-term debt the Company can issue pending the merger. The Company does not expect the restrictions to have a material effect on its ability to meet its future capital requirements. SHORT-TERM FINANCING For interim financing, Utilities is authorized by the FERC to issue, through 1998, up to $200 million of short-term notes. In addition to providing for ongoing working capital needs, this availability of short-term financing provides Utilities flexibility in the issuance of long-term securities. At December 31, 1996, Utilities had outstanding short-term borrowings of $135 million. Utilities has an agreement, which expires in 1999, with a financial institution to sell, with limited recourse, an undivided fractional interest of up to $65 million in its pool of utility accounts receivable. At December 31, 1996, Utilities had sold $65 million under the agreement. Refer to Note 5 of the Notes to Consolidated Financial Statements for a further discussion of this agreement, including the issuance of a new accounting standard which impacts the accounting for the sales. At December 31, 1996, the Company had bank lines of credit aggregating $136.1 million. Utilities was using $110 million to support commercial paper (weighted average interest rate of 5.70%) and $11.1 million to support certain pollution control obligations. Commitment fees are paid to maintain these lines and there are no conditions which restrict the unused lines of credit. In addition to the above, Utilities has an uncommitted credit facility with a financial institution whereby it can borrow up to $40 million. Rates are set at the time of borrowing and no fees are paid to maintain this facility. At December 31, 1996, there was $25 million outstanding under this facility (weighted average interest rate of 6.28%). ENVIRONMENTAL MATTERS Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 Former Manufactured Gas Plant (FMGP) sites. Utilities has recorded environmental liabilities related to the FMGP sites of approximately $36 million (including $4.7 million as current liabilities) at December 31, 1996. Regulatory assets of approximately $36 million, which reflect the future recovery that is being provided through Utilities' rates, have been recorded in the Consolidated Balance Sheets. Considering the current rate treatment allowed by the IUB, management believes that the clean-up costs incurred by Utilities for these FMGP sites will not have a material adverse effect on its financial position or results of operations. Refer to Note 13(f) of the Notes to Consolidated Financial Statements for a further discussion, including a discussion of a lawsuit filed by Utilities seeking recovery of FMGP-related costs from its insurance carriers. The Clean Air Act Amendments of 1990 (Act) requires emission reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve reductions of atmospheric chemicals believed to cause acid rain. The acid rain program under the Act also governs SO2 allowances. The Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to NOx, ozone transport, mercury and particulate control; toxic release inventories and modifications to the PCB rules. In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the National Ambient Air Quality Standards established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences. Pursuant to a routine review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Refer to Note 13(g) of the Notes to Consolidated Financial Statements for a further discussion of the above mentioned air quality issues. The National Energy Policy Act of 1992 requires owners of nuclear power plants to pay a special assessment into a "Uranium Enrichment Decontamination and Decommissioning Fund." Refer to Note 13(f) of the Notes to Consolidated Financial Statements for a further discussion. The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such a contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The DOE, however, has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities has been storing spent nuclear fuel on- site since plant operations began in 1974 and has current on-site capability to store spent fuel until 2001. Utilities is aggressively reviewing options for expanding on-site storage. Utilities has been formally notified by the DOE that they anticipate being unable to begin acceptance of spent nuclear fuel by January 31, 1998. Utilities is evaluating courses of action to protect the interests of its customers and its rights under the DOE contract. Utilities is also evaluating legislation proposed to the Congress addressing this issue. In July 1996, the IUB initiated a Notice of Inquiry (NOI) on spent nuclear fuel. One purpose of the NOI was to evaluate whether the current collection of money from Utilities' customers for payment to the NWF should be placed in an escrow account in lieu of being paid to the NWF. Utilities believes that the issue of using an escrow account should be decided at the federal level rather than the state level. Utilities cannot predict the outcome of this NOI. The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that each state must take responsibility for the storage of low- level radioactive waste produced within its borders. The State of Iowa has joined the Midwest Interstate Low-Level Radioactive Waste Compact Commission (Compact), which is planning a storage facility to be located in Ohio to store waste generated by the Compact's six member states. At December 31, 1996, Utilities has prepaid costs of approximately $1.1 million to the Compact for the building of such a facility. A Compact disposal facility is anticipated to be in operation in approximately ten years after approval of new enabling legislation by the member states. Such legislation was approved in 1996 by all six states that are members of the Compact. Final approval by the U.S. Congress is now required. On-site storage capability currently exists for low-level radioactive waste expected to be generated until the Compact facility is able to accept waste materials. In addition, the Barnwell, South Carolina disposal facility has reopened for an indefinite time period and Utilities is in the process of shipping to Barnwell the majority of the low-level radioactive waste it has accumulated on-site, and currently intends to ship the waste it produces in the future as long as the Barnwell site remains open, thereby minimizing the amount of low-level waste stored on-site. However, management of the Barnwell site has modified its fee schedule to emphasize total radioactivity content and weight, instead of the historical volume related fees. Utilities is evaluating the outcome of these changes on its potential future disposal costs at the Barnwell site; such changes could result in a revision to Utilities' future disposal plans. The possibility that exposure to electric and magnetic fields (EMF) emanating from power lines, household appliances and other electric sources may result in adverse health effects has been the subject of increased public, governmental, industry and media attention. A recent study completed by the National Research Council concluded that the current body of evidence does not support the notion that exposure to these fields may result in adverse health effects. Utilities will continue to monitor the events in this area, including future scientific research. Whiting is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties. Refer to Note 13(f) of the Notes to Consolidated Financial Statements for a further discussion. OTHER MATTERS Labor Issues Utilities has six collective bargaining agreements, covering approximately 54% of its workforce. None of the agreements expires in 1997. Financial Derivatives The Company has a policy that financial derivatives are to be used only to mitigate business risks and not for speculative purposes. Derivatives have been used by the Company on a very limited basis. At December 31, 1996, the only material financial derivatives outstanding for the Company were the interest rate swap agreement and gas futures contracts described in Note 12 of the Notes to Consolidated Financial Statements. Inflation The Company does not expect the effects of inflation at current levels to have a significant effect on its financial position or results of operations. Selected Consolidated Quarterly Financial Data (unaudited) The following unaudited consolidated quarterly data, in the opinion of the Company, includes adjustments, which are normal and recurring in nature, necessary for the fair presentation of the results of operations and financial position. Utilities' results of operations are a significant portion of Industries' consolidated results. The quarterly amounts were affected by, among other items, Utilities' rate activities, seasonal weather conditions, changes in sales and operating expenses and costs incurred relating to the successful defense of the hostile takeover attempt mounted by MidAmerican Energy Company. Refer to Management's Discussion and Analysis of the Results of Operations and Financial Condition for a discussion of these items. The fourth quarter of 1996 net income benefited from lower than anticipated costs for a refueling outage at Utilities' nuclear power plant. IES INDUSTRIES INC. Quarter Ended March 31 June 30 September 30 December 31 (in thousands, except per share amounts) 1996 Operating revenues $ 243,197 $ 210,648 $ 233,907 $ 286,160 Operating income 36,995 26,770 55,701 44,842 Net income 14,095 8,056 20,889 17,867 Earnings per average common share 0.48 0.27 0.70 0.59 1995 Operating revenues $ 206,392 $ 189,447 $ 238,467 $ 216,704 Operating income 22,115 33,456 63,710 32,431 Net income 6,740 12,508 31,120 13,808 Earnings per average common share 0.23 0.43 1.06 0.48 IES UTILITIES INC. Quarter Ended March 31 June 30 September 30 December 31 (in thousands) 1996 Operating revenues $ 198,768 $ 164,240 $ 190,170 $ 201,801 Operating income 34,204 23,009 53,253 43,259 Net income 14,128 7,230 20,013 22,358 Net income available for common stock 13,899 7,001 19,784 22,131 1995 Operating revenues $ 172,839 $ 157,671 $ 200,448 $ 178,868 Operating income 19,896 30,444 61,360 30,565 Net income 6,161 11,067 29,842 12,208 Net income available for common stock 5,932 10,838 29,613 11,981 Item 8. Financial Statements and Supplementary Data Information required by Item 8. begins on page 44 for Industries and page 73 for Utilities. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of IES Industries Inc.: We have audited the accompanying consolidated balance sheets and statements of capitalization of IES Industries Inc. (an Iowa corporation) and subsidiary companies as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the financial statement schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IES Industries Inc. and subsidiary companies as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 31, 1997 IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 1996 1995 1994 (in thousands, except per share amounts) Operating revenues: Electric $ 574,273 $ 560,471 $ 537,327 Gas 273,979 190,339 165,569 Other 125,660 100,200 82,968 973,912 851,010 785,864 Operating expenses: Fuel for production 84,579 96,256 85,952 Purchased power 88,350 66,874 68,794 Gas purchased for resale 217,351 141,716 120,795 Other operating expenses 214,759 201,390 176,863 Maintenance 49,001 46,093 52,841 Depreciation and amortization 107,393 97,958 86,378 Taxes other than income taxes 48,171 49,011 46,308 809,604 699,298 637,931 Operating income 164,308 151,712 147,933 Interest expense and other: Interest expense 54,822 50,727 46,010 Allowance for funds used during construction -2,103 -3,424 -3,910 Preferred dividend requirements of IES Utilities Inc. 914 914 914 Miscellaneous, net 2,333 -3,170 -3,472 55,966 45,047 39,542 Income before income taxes 108,342 106,665 108,391 Federal and state income taxes 47,435 42,489 41,573 Net income $ 60,907 $ 64,176 $ 66,818 Average number of common shares outstanding 29,861 29,202 28,560 Earnings per average common share $ 2.04 $ 2.20 $ 2.34
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31 1996 1995 1994 (in thousands) Balance at beginning of year $ 221,077 $ 218,293 $ 211,750 Net income 60,907 64,176 66,818 Cash dividends declared on common stock, at a per share rate of $2.10 for all years -62,738 -61,392 -60,065 Other 0 0 -210 Balance at end of year $ 219,246 $ 221,077 $ 218,293 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) 1996 1995 Property, plant and equipment: Utility - Plant in service - Electric $ 2,007,839 $ 1,900,157 Gas 175,472 165,825 Other 126,850 106,396 2,310,161 2,172,378 Less - Accumulated depreciation 1,030,390 950,324 1,279,771 1,222,054 Leased nuclear fuel, net of amortization 34,725 36,935 Construction work in progress 43,719 52,772 1,358,215 1,311,761 Other, net of accumulated depreciation and amortization of $70,031 and $53,026, respectively 223,805 193,215 1,582,020 1,504,976 Current assets: Cash and temporary cash investments 8,675 6,942 Accounts receivable - Customer, less allowance for doubtful accounts of $1,087 and $1,145, respectively 50,821 37,214 Other 12,040 10,493 Income tax refunds receivable 8,890 982 Production fuel, at average cost 13,323 12,155 Materials and supplies, at average cost 22,842 28,354 Adjustment clause balances 10,752 0 Regulatory assets 26,539 22,791 Oil and gas properties held for resale 0 9,843 Prepayments and other 24,169 23,099 178,051 151,873 Investments: Nuclear decommissioning trust funds 59,325 47,028 Investment in foreign entities 44,946 24,770 Investment in McLeod, Inc. 29,200 9,200 Cash surrender value of life insurance policies 11,217 9,838 Other 4,903 3,897 149,591 94,733 Other assets: Regulatory assets 201,129 207,202 Deferred charges and other 14,771 26,807 215,900 234,009 $ 2,125,562 $ 1,985,591 December 31 CAPITALIZATION AND LIABILITIES (in thousands) 1996 1995 Capitalization (See Consolidated Statements of Capitalization): Common stock $ 407,635 $ 391,269 Retained earnings 219,246 221,077 Total common equity 626,881 612,346 Cumulative preferred stock of IES Utilities Inc. 18,320 18,320 Long-term debt (excluding current portion) 701,100 601,708 1,346,301 1,232,374 Current liabilities: Short-term borrowings 135,000 101,000 Capital lease obligations 15,125 15,717 Maturities and sinking funds 8,473 15,447 Accounts payable 99,861 80,089 Dividends payable 16,431 16,244 Accrued interest 8,985 8,051 Accrued taxes 43,926 53,983 Accumulated refueling outage provision 1,316 7,690 Adjustment clause balances 0 3,148 Environmental liabilities 5,679 5,634 Other 22,087 21,800 356,883 328,803 Long-term liabilities: Pension and other benefit obligations 39,643 52,677 Capital lease obligations 19,600 21,218 Environmental liabilities 47,502 43,087 Other 18,488 13,039 125,233 130,021 Deferred credits: Accumulated deferred income taxes 262,675 257,278 Accumulated deferred investment tax credits 34,470 37,115 297,145 294,393 Commitments and contingencies (Note 13) $ 2,125,562 $ 1,985,591 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31 1996 1995 (in thousands) Common equity: Common stock - no par value - authorized 48,000,000 shares; outstanding 30,077,212 and 29,508,415 shares, respectively $ 407,635 $ 391,269 Retained earnings 219,246 221,077 626,881 612,346 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 0 6% series, due 2008 50,000 50,000 7% series, due 2023 50,000 50,000 5.5% series, due 2023 19,400 19,400 229,400 169,400 First Mortgage Bonds - Series J, 6-1/4%, retired in 1996 0 15,000 Series L, 7-7/8%, due 2000 15,000 15,000 Series M, 7-5/8%, due 2002 30,000 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, due 1997 8,000 8,000 9-1/8% series, due 2001 21,000 21,000 7-3/8% series, due 2003 10,000 10,000 7-1/4% series, due 2007 30,000 30,000 224,000 239,000 Pollution control obligations - 5.75%, due serially 1997 to 2003 3,416 3,556 5.95%, due serially 2000 to 2007, secured by First Mortgage Bonds 10,000 10,000 Variable rate (4.25% - 4.35% at December 31, 1996), due 2000 to 2010 11,100 11,100 24,516 24,656 Subordinated Deferrable Interest Debentures, 7-7/8%, due 2025 50,000 50,000 Total IES Utilities Inc. 527,916 483,056 IES Diversified Inc. - Credit facility 172,105 124,245 Other subsidiaries' debt maturing through 2013 11,994 12,307 712,015 619,608 Unamortized debt premium and (discount), net -2,442 -2,453 709,573 617,155 Less - Amount due within one year 8,473 15,447 701,100 601,708 $ 1,346,301 $ 1,232,374 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 1996 1995 1994 (in thousands) Cash flows from operating activities: Net income $ 60,907 $ 64,176 $ 66,818 Adjustments to reconcile net income to net cash flows from operating activities - Depreciation and amortization 107,393 97,958 86,378 Amortization of principal under capital lease obligations 16,491 15,714 16,246 Deferred taxes and investment tax credits 9,189 7,757 4,050 Refueling outage provision -6,374 -7,506 12,536 Amortization of other assets 9,828 7,391 2,228 Other 856 712 387 Other changes in assets and liabilities - Accounts receivable -22,154 -15,221 6,777 Sale of utility accounts receivable 7,000 4,000 800 Production fuel, materials and supplies 650 4,050 -1,184 Accounts payable 20,934 2,902 21,871 Accrued taxes -17,965 9,434 4,575 Provision for rate refunds -106 106 -8,670 Adjustment clause balances -13,900 4,581 -6,582 Gas in storage -1,154 3,245 1,135 Other 11,764 532 9,340 Net cash flows from operating activities 183,359 199,831 216,705 Cash flows from financing activities: Dividends declared on common stock -62,738 -61,392 -60,065 Proceeds from issuance of common stock 14,164 15,616 16,426 Purchase of treasury stock -269 0 -6,233 Net change in IES Diversified Inc. credit facility 47,860 43,745 48,500 Proceeds from issuance of other long-term debt 60,000 100,007 11,640 Reductions in other long-term debt -15,454 -100,424 -9,790 Net change in short-term borrowings 34,000 64,000 13,000 Principal payments under capital lease obligations -19,108 -14,463 -16,304 Other -458 -1,438 -46 Net cash flows from financing activities 57,997 45,651 -2,872 Cash flows from investing activities: Construction and acquisition expenditures - Utility -142,259 -125,558 -138,829 Other -96,119 -92,541 -67,719 Oil and gas properties held for resale 9,843 -9,843 0 Deferred energy efficiency expenditures -16,857 -18,029 -16,157 Nuclear decommissioning trust funds -6,008 -6,100 -5,532 Proceeds from disposition of assets 8,295 14,271 8,803 Other 3,482 -5,733 3,129 Net cash flows from investing activities -239,623 -243,533 -216,305 Net increase (decrease) in cash and temporary cash investments 1,733 1,949 -2,472 Cash and temporary cash investments at beginning of year 6,942 4,993 7,465 Cash and temporary cash investments at end of year $ 8,675 $ 6,942 $ 4,993 Supplemental cash flow information: Cash paid during the year for - Interest $ 53,046 $ 50,877 $ 44,421 Income taxes $ 54,881 $ 26,478 $ 36,097 Noncash investing and financing activities - Capital lease obligations incurred $ 14,281 $ 2,918 $ 14,297 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) Basis of Consolidation - The Consolidated Financial Statements include the accounts of IES Industries Inc. (Industries) and its consolidated subsidiaries (collectively the Company). Industries is an investor-owned holding company whose primary operating company, IES Utilities Inc. (Utilities), is engaged principally in the generation, transmission, distribution and sale of electric energy and the purchase, distribution, transportation and sale of natural gas. The Company's principal markets are located in the state of Iowa. The Company also has various non-utility subsidiaries which are primarily engaged in the energy-related, transportation and real estate development businesses. All subsidiaries for which Industries owns directly or indirectly more than 50% of the voting stock are included as consolidated subsidiaries. Industries' wholly-owned subsidiaries are Utilities and IES Diversified Inc. (Diversified). All significant intercompany balances and transactions, other than energy-related transactions affecting Utilities, have been eliminated from the Consolidated Financial Statements. Such energy-related transactions are made at prices that approximate market value and the associated costs are recoverable from Utilities' customers through the rate making process. Investments for which the Company has at least a 20% voting interest are generally accounted for under the equity method of accounting. These investments are stated at acquisition cost, increased or decreased for the Company's equity in undistributed net income or loss, which is included in "Miscellaneous, net" in the Consolidated Statements of Income. Investments that do not meet the criteria for the consolidating or equity methods of accounting are accounted for under the cost method. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect: 1) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and 2) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified on a basis consistent with the 1996 presentation. (b) Regulation - Because of its ownership of Utilities, Industries is a holding company under the Public Utility Holding Company Act of 1935, but claims an exemption from all provisions thereof except Section 9(a)(2), which applies to the purchase of stock of other utility companies. Utilities is subject to regulation by the Iowa Utilities Board (IUB) and the Federal Energy Regulatory Commission (FERC). Refer to Note 2 for a discussion of the proposed merger of the Company. (c) Regulatory Assets - Utilities is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). The regulatory assets represent probable future revenue to Utilities associated with certain incurred costs as these costs are recovered through the rate making process. At December 31, regulatory assets as reflected in the Consolidated Balance Sheets were comprised of the following items: 1996 1995 (in millions) Deferred income taxes (Note 1(d)) $ 84.7 $ 91.1 Energy efficiency program costs (Note 3(b)) 61.1 49.7 Environmental liabilities (Note 13(f)) 46.3 46.9 Employee pension and benefit costs (Note 8) 22.9 27.5 Other 12.7 14.8 227.7 230.0 Classified as "Current assets - regulatory assets" 26.6 22.8 Classified as "Other assets - regulatory assets" $ 201.1 $ 207.2 Refer to the individual notes referenced above for a further discussion of certain items reflected in regulatory assets. If a portion of Utilities' operations become no longer subject to the provisions of SFAS 71, a write-off of related regulatory assets would be required, unless some form of transition cost recovery is established by the appropriate regulatory body. In addition, the Company would be required to determine any impairment to other assets and write-down such assets to their fair value. Effective January 1, 1996, the Company adopted SFAS 121 which established accounting standards for the impairment of long-lived assets. This standard also requires that regulatory assets that are no longer probable of recovery through future revenues be charged to earnings. There was no impact on the Company's financial position or results of operations upon adoption of SFAS 121. (d) Income Taxes - The Company follows the liability method of accounting for deferred income taxes, which requires the establishment of deferred tax liabilities and assets, as appropriate, for all temporary differences between the tax basis of assets and liabilities and the amounts reported in the financial statements. Deferred taxes are recorded using currently enacted tax rates. Except as noted below, income tax expense includes provisions for deferred taxes to reflect the tax effects of temporary differences between the time when certain costs are recorded in the accounts and when they are deducted for tax return purposes. As temporary differences reverse, the related accumulated deferred income taxes are reversed to income. Investment tax credits for Utilities have been deferred and are subsequently credited to income over the average lives of the related property. Consistent with rate making practices for Utilities, deferred tax expense is not recorded for certain temporary differences (primarily related to utility property, plant and equipment). As the deferred taxes become payable, over periods exceeding 30 years for some generating plant differences, they are recovered through rates. Accordingly, Utilities has recorded deferred tax liabilities and regulatory assets, as identified in Note 1(c). (e) Temporary Cash Investments - Temporary cash investments are stated at cost, which approximates market value, and are considered cash equivalents for the Consolidated Statements of Cash Flows. These investments consist of short-term liquid investments that have maturities of less than 90 days from the date of acquisition. (f) Depreciation of Utility Property, Plant and Equipment - Utilities uses the remaining life method of depreciation for its nuclear generating facility, the Duane Arnold Energy Center (DAEC), and the straight-line method for all other utility property. The remaining life of the DAEC is based on the Nuclear Regulatory Commission (NRC) license life of 2014. The average rates of depreciation for electric and gas properties of Utilities, consistent with current rate making practices, were as follows: 1996 1995 1994 Electric 3.5% 3.4% 3.6% Gas 3.5% 3.5% 3.8% The electric and gas depreciation rates declined in 1995 from 1994 because of revised depreciation rates approved in rate proceedings of Utilities. (g) Decommissioning of the DAEC - Pursuant to the most recent electric rate case order, the IUB allows Utilities to recover $6.0 million annually for the cost to decommission the DAEC. Decommissioning expense is included in "Depreciation and amortization" in the Consolidated Statements of Income and the cumulative amount is included in "Accumulated depreciation" in the Consolidated Balance Sheets to the extent recovered through rates. The current recovery figures are based on the following assumptions: 1) cost to decommission the DAEC of $252.8 million, which is Utilities' 70% portion in 1993 dollars, based on the NRC minimum formula (which exceeds the amount in the current site-specific study completed in 1994); 2) inflation of 4.91% annually through 1997; 3) the prompt dismantling and removal method of decommissioning, which is assumed to begin in the year 2014; 4) monthly funding of all future collections into external trust funds and funded on a tax-qualified basis to the extent possible; and 5) an average after-tax return of 6.82% for all external investments. All of these assumptions are subject to change in future regulatory proceedings. At December 31, 1996, Utilities had $59.3 million invested in external decommissioning trust funds as indicated in the Consolidated Balance Sheets, and also had an internal decommissioning reserve of $21.7 million recorded as accumulated depreciation. Earnings on the external trust funds, which were $2.2 million in 1996, are recorded as interest income and a corresponding interest expense payable to the funds is recorded. The earnings accumulate in the external trust fund balances and in accumulated depreciation on utility plant. See "Management's Discussion and Analysis of the Results of Operations and Financial Condition" for a discussion of the Exposure Draft on Accounting for Liabilities Related to Closure and Removal of Long-Lived Assets, issued by the Financial Accounting Standards Board (FASB) in the first quarter of 1996, which deals with, among other issues, the accounting for decommissioning costs. (h) Property, Plant and Equipment - Utility plant (other than acquisition adjustments of $29.4 million, net of accumulated amortization, recorded at cost) is recorded at original cost, which includes overhead and administrative costs and an allowance for funds used during construction (AFC). The AFC, which represents the cost during the construction period of funds used for construction purposes, is capitalized by Utilities as a component of the cost of utility plant. The amount of AFC applicable to debt funds and to other (equity) funds, a non-cash item, is computed in accordance with the prescribed FERC formula. The aggregate gross rates used by Utilities for 1996-1994 were 5.5%, 6.5% and 9.3%, respectively. These capitalized costs are recovered by Utilities in rates as the cost of the utility plant is depreciated. Other property, plant and equipment is recorded at cost. Upon retirement or sale of other property and equipment, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in "Miscellaneous, net" in the Consolidated Statements of Income. Normal repairs, maintenance and minor items of utility plant and other property, plant and equipment are expensed. Ordinary retirements of utility plant, including removal costs less salvage value, are charged to accumulated depreciation upon removal from utility plant accounts, and no gain or loss is recognized. (i) Oil and Gas Properties - Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary under Diversified, uses the full cost method of accounting for its oil and gas properties. Accordingly, all costs of acquisition, exploration and development of properties are capitalized. Amortization of proved oil and gas properties is calculated using the units of production method. At December 31, 1996, capitalized costs less related accumulated amortization did not exceed the sum of 1) the present value of future net revenue from estimated production of proved oil and gas reserves (calculated using current prices); plus 2) the cost of properties not being amortized, if any; plus 3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less 4) income tax effects related to differences in the book and tax basis of oil and gas properties. The Company had $9.8 million on its Consolidated Balance Sheet at December 31, 1995, relating to specific oil and gas properties purchased by Whiting in the fourth quarter of 1995 that it intended to sell during 1996. The Company subsequently decided not to sell these properties and, accordingly, the balance at December 31, 1996 is included in "Other property, plant and equipment" on the Consolidated Balance Sheet. (j) Operating Revenues - The Company accrues revenues for services rendered but unbilled at month-end in order to more properly match revenues with expenses. (k) Adjustment Clauses - Utilities' tariffs provide for subsequent adjustments to its electric and natural gas rates for changes in the cost of fuel and purchased energy and in the cost of natural gas purchased for resale. Changes in the under/over collection of these costs are reflected in "Fuel for production" and "Gas purchased for resale" in the Consolidated Statements of Income. The cumulative effects are reflected in the Consolidated Balance Sheets as a current asset or current liability, pending automatic reflection in future billings to customers. (l) Accumulated Refueling Outage Provision - The IUB allows Utilities to collect, as part of its base revenues, funds to offset other operating and maintenance expenditures incurred during refueling outages at the DAEC. As these revenues are collected, an equivalent amount is charged to other operating and maintenance expenses with a corresponding credit to a reserve. During a refueling outage, the reserve is reversed to offset the refueling outage expenditures. (2) PROPOSED MERGER OF THE COMPANY: On November 10, 1995, Industries, WPL Holdings, Inc. (WPLH) and Interstate Power Company (IPC) entered into an Agreement and Plan of Merger, as amended (Merger Agreement), providing for: a) IPC becoming a wholly-owned subsidiary of WPLH, and b) the merger of Industries with and into WPLH, which merger will result in the combination of Industries and WPLH as a single holding company (collectively, the Proposed Merger). The new holding company will be named Interstate Energy Corporation (Interstate Energy) and Industries will cease to exist. The Proposed Merger, which will be accounted for as a pooling of interests and is intended to be tax-free for federal income tax purposes, has been approved by the respective Boards of Directors and shareholders. It is still subject to approval by several federal and state regulatory agencies. The companies expect to receive such regulatory approvals by the end of the third quarter of 1997. The summary below contains selected unaudited pro forma financial data for the year ended December 31, 1996. The financial data should be read in conjunction with the historical consolidated financial statements and related notes of the Company, WPLH, and IPC and in conjunction with the unaudited pro forma combined financial statements and related notes of Interstate Energy included in Item 14. The pro forma combined earnings per share reflect the issuance of shares associated with the exchange ratios discussed below. PRO FORMA IES COMBINED INDUSTRIES WPLH IPC (Unaudited) (in thousands, except per share amounts) Operating revenues $ 973,912 $ 932,844 $ 326,084 $ 2,232,840 Net income from continuing operations 60,907 73,205 25,860 159,972 Earnings per share from continuing operations 2.04 2.38 2.69 2.12 Assets at December 31, 1996 2,125,562 1,900,531 639,200 4,665,293 Long-term obligations at December 31, 1996 744,298 430,190 188,731 1,363,219 Under the terms of the Merger Agreement, the outstanding shares of WPLH's common stock will remain unchanged and outstanding as shares of Interstate Energy. Each outstanding share of the Company's common stock will be converted to 1.14 shares of Interstate Energy's common stock. Each share of IPC's common stock will be converted to 1.11 shares of Interstate Energy's common stock. It is anticipated that Interstate Energy will retain WPLH's common share dividend payment level as of the effective time of the merger. On January 22, 1997, the Board of Directors of WPLH declared a quarterly dividend of $0.50 per share. This represents an equivalent annual rate of $2.00 per share. WPLH is a holding company headquartered in Madison, Wisconsin, and is the parent company of Wisconsin Power and Light Company (WP&L) and Heartland Development Corporation (HDC). WP&L supplies electric and gas service to approximately 385,000 and 150,000 customers, respectively, in south and central Wisconsin. HDC and its principal subsidiaries are engaged in businesses in three major areas: environmental engineering and consulting, affordable housing and energy services. IPC, an operating public utility headquartered in Dubuque, Iowa, supplies electric and gas service to approximately 165,000 and 49,000 customers, respectively, in northeast Iowa, northwest Illinois and southern Minnesota. Interstate Energy will be the parent company of Utilities, WP&L and IPC and will be registered under the Public Utility Holding Company Act of 1935, as amended (1935 Act). The Merger Agreement provides that these operating utility companies will continue to operate as separate entities for a minimum of three years beyond the effective date of the merger. In addition, the non-utility operations of the Company and WPLH will be combined shortly after the effective date of the merger under one entity to manage the diversified operations of Interstate Energy. The corporate headquarters of Interstate Energy will be in Madison. The SEC historically has interpreted the 1935 Act to preclude registered holding companies, with limited exceptions, from owning both electric and gas utility systems. Although the SEC has recommended that registered holding companies be allowed to hold both gas and electric utility operations if the affected states agree, it remains possible that the SEC may require as a condition to its approval of the Proposed Merger that the Company, WPLH and IPC divest their gas utility properties, and possibly certain non-utility ventures of the Company and WPLH, within a reasonable time after the effective date of the Proposed Merger. (3) RATE MATTERS: (a) Electric Price Announcements - Utilities and its Iowa-based proposed merger partner, IPC, announced in 1996 their intentions to hold retail electric prices to their current levels until at least January 1, 2000. The companies made the proposal as part of their testimony in the merger-related application filed with the IUB; the application was later withdrawn and was resubmitted in January 1997 and the companies included the same proposal in the resubmittal of the filing. The proposal excludes price changes due to government-mandated programs, such as energy efficiency cost recovery, or unforeseen dramatic changes in operations. Utilities, WP&L and IPC also proposed to freeze their wholesale electric prices for four years from the effective date of the merger as part of their merger filing with the FERC. The Company does not expect the merger-related electric price proposals to have a material adverse effect on its financial position or results of operations. (b) Energy Efficiency Cost Recovery - Current IUB rules mandate Utilities to spend 2% of electric and 1.5% of gas gross retail operating revenues for energy efficiency programs. Under provisions of the IUB rules, Utilities is currently recovering the energy efficiency costs incurred through 1993 for such programs, including its direct expenditures, carrying costs, a return on its expenditures and a reward. These costs are being recovered over a four-year period and the recovery began on June 1, 1995. In December 1996, under provisions of the IUB rules, the Company filed for recovery of the costs relating to its 1994 and 1995 programs. Utilities' proposed recovery was for approximately $53 million ($42 million electric and $11 million gas) and was composed of $34 million for direct expenditures and carrying costs, $10 million for a return on the expenditures over the recovery period and $9 million for a reward based on a sharing of the benefits of such programs. The Company expects to receive the final order in the proceeding in June 1997 with recovery of the allowed costs to commence in the third quarter of 1997. Iowa statutory changes enacted in 1996, and applicable to future programs once the legislation is implemented by the IUB, have eliminated: 1) the 2% and 1.5% spending requirements described above in favor of IUB-determined energy savings targets, 2) the delay in recovery of energy efficiency costs by allowing recovery which is concurrent with spending and 3) the recovery of a sharing reward. The IUB commenced a rulemaking in January 1997 to implement the statutory change and a final order in this proceeding is expected in the second quarter of 1997. The proposed rules provide that the Company would begin to recover its 1996 expenditures, and the 1997 expenditures incurred at such time, during the summer of 1997 over a likely four-year recovery period. The Company would also begin concurrent recovery of its prospective expenditures at such time. The implementation of these changes will gradually eliminate the regulatory asset which exists under the current rate making mechanism as these costs are recovered. The Company has the following amounts of energy efficiency costs included in regulatory assets on its Consolidated Balance Sheets at December 31 (in thousands): 1996 1995 Costs incurred through 1993 $ 12,834 $ 18,287 Costs incurred in 1994-1995 33,161 31,393 Costs incurred in 1996 15,087 - $ 61,082 $ 49,680 The above amounts include the direct expenditures and carrying costs incurred by the Company but do not include any amounts for a return on its expenditures over the recovery period or for a reward. (4) LEASES: Utilities has a capital lease covering its 70% undivided interest in nuclear fuel purchased for the DAEC. Future purchases of fuel may also be added to the fuel lease. This lease provides for annual one-year extensions and Utilities intends to continue exercising such extensions. Interest costs under the lease are based on commercial paper costs incurred by the lessor. Utilities is responsible for the payment of taxes, maintenance, operating cost, risk of loss and insurance relating to the leased fuel. The lessor has a $45 million credit agreement with a bank supporting the nuclear fuel lease. The agreement continues on a year-to- year basis, unless either party provides at least a three-year notice of termination; no such notice of termination has been provided by either party. Annual nuclear fuel lease expenses include the cost of fuel, based on the quantity of heat produced for the generation of electric energy, plus the lessor's interest costs related to fuel in the reactor and administrative expenses. These expenses (included in "Fuel for production" in the Consolidated Statements of Income) for 1996-1994 were $18.2 million, $18.0 million and $17.8 million, respectively. The Company's operating lease rental expenses for 1996-1994 were $8.3 million, $10.4 million and $11.1 million, respectively. The Company's future minimum lease payments by year are as follows: Capital Operating Year Lease Leases (in thousands) 1997 $ 16,808 $ 6,891 1998 9,889 6,565 1999 6,969 4,741 2000 3,004 2,510 2001 861 1,370 Thereafter 307 197 37,838 $ 22,274 Less: Amount representing interest 3,113 Present value of net minimum capital lease payments $ 34,725 (5) UTILITY ACCOUNTS RECEIVABLE: Customer accounts receivable, including unbilled revenues, arise primarily from the sale of electricity and natural gas. At December 31, 1996, Utilities was serving a diversified base of residential, commercial and industrial customers consisting of approximately 336,000 electric and 176,000 gas customers and did not have any significant concentrations of credit risk. Utilities has entered into an agreement, which expires in 1999, with a financial institution to sell, with limited recourse, an undivided fractional interest of up to $65 million in its pool of utility accounts receivable. Expenses related to the sale of receivables are paid to the financial organization under this contract and approximated a 5.86% annual rate during 1996. During 1996 and 1995, the monthly proceeds from the sale of accounts receivable averaged $62.9 million and $61.9 million, respectively. At December 31, 1996, $65 million was sold under the agreement. SFAS 125, issued by the FASB in 1996 and effective for 1997, provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. The accounting for Utilities' sale of accounts receivable agreement is impacted by this standard. As a result, the agreement is being modified to comply with the SFAS 125 requirements and thus the accounting and reporting for the sale of Utilities' receivables will remain unchanged. (6) INVESTMENTS: (a) Foreign Entities - At December 31, 1996, the Company had $44.9 million of investments in foreign entities on its Consolidated Balance Sheet that included 1) investments in two New Zealand electric distribution entities, 2) a loan to a New Zealand company, 3) an investment in a cogeneration facility in China, and 4) an investment in an international venture capital fund. The Company accounts for the China investment under the equity method and the other investments under the cost method. The geographic concentration of the Company's investments in foreign entities at December 31, 1996, included investments of approximately $30.9 million in New Zealand, $13.6 in China and $0.4 million in other countries. (b) McLeod, Inc. (McLeod) - At December 31, 1996, the Company had a $20.0 million investment in Class A common stock of McLeod, a $9.2 million investment in Class B common stock and vested options that, if exercised, would represent an additional investment of approximately $2.3 million. McLeod provides local, long-distance and other telecommunications services. McLeod completed an Initial Public Offering (IPO) of its Class A common stock in June 1996 and a secondary offering in November 1996. As of December 31, 1996, the Company is the beneficial owner of approximately 10.6 million total shares on a fully diluted basis. Class B shares are convertible at the option of the Company into Class A shares at any time on a one-for-one basis. The rights of McLeod Class A common stock and Class B common stock are substantially identical except that Class A common stock has 1 vote per share and Class B common stock has 0.40 vote per share. The Company currently accounts for this investment under the cost method. The Company has entered into an agreement with McLeod which provides that for two years commencing on June 10, 1996, the Company cannot sell or otherwise dispose of any of its securities of McLeod without the consent of the McLeod Board of Directors. This contractual sale restriction results in restricted stock under the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain Investments in Debt and Equity Securities, until such time as the restrictions lapse and such shares became qualified for sale within a one year period. As a result, the Company currently carries this investment at cost. The closing price of the McLeod Class A common stock on December 31, 1996, on the Nasdaq National Market, was $25.50 per share. The current market value of the shares the Company beneficially owns (approximately 10.6 million shares) is currently impacted by, among other things, the fact that the shares cannot be sold for a period of time and it is not possible to estimate what the market value of the shares will be at the point in time such sale restrictions are lifted. In addition, any gain upon an eventual sale of this investment would likely be subject to a tax. Under the provisions of SFAS No. 115, the carrying value of the McLeod investment will be adjusted to estimated fair value at the time such shares become qualified for sale within a one year period; this will occur on June 10, 1997, which is one year before the contractual restrictions on sale are lifted. At that time, the adjustment to reflect the estimated fair value of this investment will be reflected as an increase in the investment carrying value with the unrealized gain reported as a net of tax amount in other common shareholders equity until realized (i.e., sold by the Company). (7) INCOME TAXES: The components of federal and state income taxes for the years ended December 31, were as follows: 1996 1995 1994 (in millions) Current tax expense $ 38.2 $ 34.7 $ 37.5 Deferred tax expense 11.8 10.5 6.7 Amortization and adjustment of investment tax credits (2.6) (2.7) (2.6) $ 47.4 $ 42.5 $ 41.6 The overall effective income tax rates shown below for the years ended December 31, were computed by dividing total income tax expense by income before income taxes. 1996 1995 1994 Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefits 6.6 5.5 5.9 Effect of rate making on property related differences 2.8 2.6 1.6 Amortization of investment tax credits (2.4) (2.5) (2.5) Adjustment of prior period taxes 1.4 (0.4) (1.6) Other items, net 0.4 (0.4) - Overall effective income tax rate 43.8% 39.8% 38.4% The accumulated deferred income taxes as set forth below in the Consolidated Balance Sheets at December 31, arise from the following temporary differences: 1996 1995 (in millions) Property related $ 293 $ 296 Investment tax credit related (24) (26) Decommissioning related (15) (14) Other 9 1 $ 263 $ 257 (8) BENEFIT PLANS: (a) Pension Plans - The Company has two non-contributory pension plans that, collectively, cover substantially all of its employees. Plan benefits are generally based on years of service and compensation during the employees' latter years of employment. Payments made from the pension funds to retired employees and beneficiaries during 1996 totaled $10.7 million. The Company's policy is to fund the pension cost at an amount that is at least equal to the minimum funding requirements mandated by the Employee Retirement Income Security Act (ERISA) and that does not exceed the maximum tax deductible amount for the year. The Company has an investment policy governing asset allocation guidelines for its pension plans. The target ranges are as follows: 1) 37%-43% in large and mid- sized domestic company equity securities, 2) 7%-13% in foreign equity securities, 3) 7%-13% in small domestic company equity securities, 4) 0- 5% in real estate, and 5) the remainder in fixed income securities. As of December 31, 1996, the plan's investment mix was consistent with the policy guidelines. Pursuant to the provisions of SFAS 71, certain adjustments to Utilities' pension provision are necessary to reflect the accounting for pension costs allowed in its most recent rate cases. The components of the pension provision for the years ended December 31, were as follows: 1996 1995 1994 (in thousands) Service cost $ 5,997 $ 5,215 $ 5,863 Interest cost on projected benefit obligation 12,711 11,811 11,431 Assumed return on plans' assets (14,976) (12,567) (12,593) Early retirement benefits 4,713 - - Net amortization 906 268 841 Pension cost 9,351 4,727 5,542 Adjustment to funding level (9,351) (4,727) (5,431) Total pension costs paid to the Trustee $ - $ - $ 111 Actual return on plans' assets $ 26,297 $ 36,614 $ (97) During 1996, the Company incurred a one-time charge of $4.7 million related to an early retirement program. Of such costs, $0.2 million was charged to expense and the remaining amount was deferred for future recovery through the regulatory process. A reconciliation of the funded status of the plans to the amounts recognized in the Consolidated Balance Sheets at December 31, is presented below: 1996 1995 (in thousands) Fair market value of plans' assets $ 212,394 $ 195,329 Actuarial present value of benefits rendered to date - Accumulated benefits based on compensation to date, including vested benefits of $130,334,000 and $119,996,000, respectively 142,515 131,274 Additional benefits based on estimated future salary levels 42,940 41,581 Projected benefit obligation 185,455 172,855 Plans' assets in excess of projected benefit obligation 26,939 22,474 Remaining unrecognized net asset existing at January 1, 1987, being amortized over 20 years (3,179) (3,511) Unrecognized prior service cost 15,523 16,905 Unrecognized net gain (54,442) (41,795) Accrued pension cost recognized in the Consolidated Balance Sheets $ (15,159) $ (5,927) Assumed rate of return, all plans 9.00% 8.00% Weighted average discount rate of projected benefit obligation, all plans 7.50% 7.50% Assumed rate of increase in future compensation levels for the plans 4.75% 4.75% The assumed rate of return was increased to 9.00% in 1996 based on actual historical performance of the previously stated investment mix. The Company also sponsors defined contribution pension plans (401(k) plans) covering substantially all employees. The Company's contributions to the plans, which are based on the participants' level of contribution and cannot exceed 2.8% of the participants' salaries or wages, were $1.7 million, $1.5 million and $1.8 million in 1996, 1995 and 1994, respectively. (b) Other Postemployment Benefit Plans - The Company provides certain benefits to retirees (primarily health care benefits). The IUB adopted rules stating that postretirement benefits other than pensions will be included in Utilities' rates pursuant to the provisions of SFAS 106. The rules permit Utilities to amortize the transition obligation as of January 1, 1993, over 20 years and require that all amounts collected are to be funded into an external trust to pay benefits as they become due. The gas and electric portions of these costs are being recovered through rates beginning in 1993 and 1995, respectively, including amounts that were deferred by the Company, pursuant to IUB rules, between when SFAS 106 was adopted and when recovery through rates began. The amounts deferred are being amortized as they are collected through rates over a three-year period. Utilities' unamortized balance of these deferred costs was $1.5 million at December 31, 1996. Pursuant to the provisions of SFAS 71, certain adjustments to Utilities' other postretirement benefit provisions are necessary to reflect the accounting for other postretirement benefit costs allowed in its most recent rate cases. The components of postretirement benefit costs for the years ended December 31, were as follows: 1996 1995 1994 (in thousands) Service cost $ 1,888 $ 1,387 $ 1,838 Interest cost on accumulated postretirement benefit obligation 3,726 3,175 3,275 Assumed return on plans' assets (388) (56) (60) Net amortization of transition obligation and other 1,970 1,813 2,037 Amortized/(deferred) postretirement benefit costs 1,863 2,220 (2,732) Regulatory recognition of incurred cost 49 1,162 - Net postretirement benefit costs $ 9,108 $ 9,701 $ 4,358 Actual return on plans' assets $ 945 $ 273 $ 47 A reconciliation of the funded status of the plans to the amounts recognized in the Consolidated Balance Sheets at December 31, is presented below: 1996 1995 (in thousands) Fair market value of plans' assets $ 12,312 $ 6,515 Accumulated postretirement benefit obligation - Active employees not yet eligible 19,056 22,254 Active employees eligible 4,866 6,282 Retirees 25,992 22,575 Total accumulated postretirement benefit obligation 49,914 51,111 Accumulated postretirement benefit obligation in excess of plans' assets (37,602) (44,596) Unrecognized transition obligation 31,020 34,415 Unrecognized net (gain)/loss (2,505) 349 Unrecognized prior service cost (427) 151 Accrued postretirement benefit cost in the Consolidated Balance Sheets $ (9,514) $ (9,681) Assumed rate of return 9.00% 8.00% Weighted average discount rate of accumulated postretirement benefit obligation 7.50% 7.50% Medical trend on paid charges: Initial trend rate 9.00% 10.00% Ultimate trend rate 6.50% 6.50% The assumed rate of return was increased to 9.00% in 1996 based on actual historical performance of investments of a similar nature. The assumed medical trend rates are critical assumptions in determining the service and interest cost and accumulated postretirement benefit obligation related to postretirement benefit costs. A 1% change in the medical trend rates, holding all other assumptions constant, would have changed the 1996 service and interest cost by $1.2 million (21%) and the accumulated postretirement benefit obligation at December 31, 1996, by $8.5 million (17%). (9) COMMON, PREFERRED AND PREFERENCE STOCK: (a) Common Stock - The following table presents information relating to the changes in common stock. Common Stock Number of Shares Outstanding Amount (in thousands) Balance, December 31, 1993 28,304,188 $ 360,301 Shares issued in connection with acquisition of oil and gas companies 139,102 4,027 Purchases of treasury stock (213,300) (6,233) Stock plan issuances* 547,056 15,395 Balance, December 31, 1994 28,777,046 373,490 Shares issued in connection with acquisition of oil and gas companies 75,638 1,925 Stock plan issuances* 655,731 15,854 Balance, December 31, 1995 29,508,415 391,269 Purchases of treasury stock (9,448) (269) Stock plan issuances* 578,245 16,635 Balance, December 31, 1996 30,077,212 $ 407,635 Shares reserved for issuance pursuant to the Company's stock plans at December 31, 1996* 1,632,869 * Dividend Reinvestment and Stock Purchase Plan, Employee Stock Purchase Plan, Employee Savings Plan, Long-Term Incentive Plan, IES Bonus Stock Ownership Plan and Whiting Stock Option Plans During 1996, Industries reacquired 9,448 shares of its common stock on the open market, at an average price of $28.44 per share, which were subsequently issued to various Company Directors and employees. During 1994, Industries reacquired 213,300 shares of its common stock on the open market, at an average price of $29.22 per share, which were subsequently issued to the Dividend Reinvestment Plan and certain of its benefit plans. At December 31, 1996, no shares remained held as treasury stock. (b) Preferred and Preference Stock: Utilities has 466,406 shares of Cumulative Preferred Stock, $50 par value, authorized for issuance at December 31, 1996, of which the 6.10%, 4.80% and 4.30% Series had 100,000, 146,406 and 120,000 shares, respectively, outstanding at both December 31, 1996 and 1995. These shares are redeemable at the option of Utilities upon 30 days notice at $51.00, $50.25 and $51.00 per share, respectively, plus accrued dividends. There are 5,000,000 shares of Industries Cumulative Preferred Stock (no par value) and 700,000 shares of Utilities Cumulative Preference Stock ($100 par value) authorized for issuance, of which none were outstanding at December 31, 1996. (10) DEBT: (a) Long-Term Debt - In September 1996, Utilities repaid at maturity $15 million of Series J, 6.25% First Mortgage Bonds and, in a separate transaction, issued $60 million of Collateral Trust Bonds, 7.25%, due 2006. Utilities' Indentures and Deeds of Trust securing its First Mortgage Bonds constitute direct first mortgage liens upon substantially all tangible public utility property. Utilities' Indenture and Deed of Trust securing its Collateral Trust Bonds constitutes a second lien on substantially all tangible public utility property while First Mortgage Bonds remain outstanding. Diversified has a variable rate credit facility that extends through November 20, 1999, with two one-year extensions potentially available to Diversified. The unborrowed portion of the agreement is also used to support Diversified's commercial paper program. A combined maximum of $300 million of borrowings under the agreement and commercial paper program may be outstanding at any one time. Interest rates and maturities are set at the time of borrowing for direct borrowings under the agreement and for issuances of commercial paper. The interest rate options are based upon quoted market rates and the maturities are less than one year. At December 31, 1996, $23 million was borrowed under this facility, bearing an interest rate of 5.75%, maturing in the first quarter of 1997. Diversified had $149.1 million of commercial paper outstanding at December 31, 1996, with interest rates ranging from 5.50% to 7.10% and maturity dates in the first quarter of 1997. Diversified intends to continue borrowing under the renewal options of the facility and no conditions exist at December 31, 1996, that would prevent such borrowings. Accordingly, this debt is classified as long-term in the Consolidated Balance Sheets. Refer to Note 12(a) for a discussion of an interest rate swap agreement Diversified entered into relating to this facility. Total sinking fund requirements, which Utilities intends to meet by pledging additional property under the terms of its Indentures and Deeds of Trust, and debt maturities for 1997-2001 are $9 million, $1 million, $61 million, $67 million and $255 million, respectively. The Company intends to refinance the majority of the debt maturities with long-term securities. (b) Short-Term Debt - At December 31, 1996, the Company had bank lines of credit aggregating $136.1 million. Utilities was using $110 million to support commercial paper and $11.1 million to support certain pollution control obligations. Commitment fees are paid to maintain these lines and there are no conditions which restrict the unused lines of credit. In addition to the above, Utilities has an uncommitted credit facility with a financial institution whereby it can borrow up to $40 million. Rates are set at the time of borrowing and no fees are paid to maintain this facility. Information regarding short-term debt (all issued by Utilities) is as follows (dollars in thousands): 1996 1995 1994 As of end of year - Commercial paper outstanding $ 110,000 $ 101,000 $ 37,000 Notes payable outstanding 25,000 - - Weighted average interest rate on commercial paper 5.70% 5.81% 6.13% Weighted average interest rate on notes payable 6.28% - - For the year ended - Maximum month-end amount of short-term debt $ 145,000 $ 132,000 $ 37,000 Average daily amount outstanding 120,112 79,159 5,269 Weighted average interest rate 5.52% 5.97% 5.31% (11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Current Assets and Current Liabilities - The carrying amount approximates fair value because of the short maturity of such financial instruments. Nuclear Decommissioning Trust Funds - The carrying amount represents the fair value of these trust funds, as reported by the trustee. The balance of the "Nuclear decommissioning trust funds" as shown in the Consolidated Balance Sheets included $9.4 million of unrealized gains at December 31, 1996, and $5.3 million of unrealized gains at December 31, 1995, on the investments held in the trust funds. The accumulated reserve for decommissioning costs was adjusted by a corresponding amount. Cumulative Preferred Stock of Utilities - Based upon the market yield of similar securities and quoted market prices. Long-Term Debt - Based upon the market yield of similar securities and quoted market prices. Investments carried at cost - Fair value of the McLeod investment is based on quoted market prices at December 31, 1996 (including an assumed exercise of the Company's options at the December 31, 1996 market price less the exercise price); the 1995 fair value is based on the carrying value as there was no quoted market price prior to the 1996 IPO. Fair value of the New Zealand investments is based on quoted market prices; while the market is not of a breadth and scope comparable to a U.S. market as required for SFAS 115 accounting purposes, the Company does believe it produces a reasonable representation of the fair market value of the investment. Fair value of the other investments is based on quoted market prices where available, and cost when not available as the Company believes the carrying value approximates fair value for such investments. The following table presents the carrying amount and estimated fair value of certain financial instruments as of December 31 (in millions): 1996 1995 Carrying Fair Carrying Fair Value Value Value Value Cumulative preferred stock of Utilities $ 18 $ 12 $ 18 $ 11 Long-term debt, including current portion 712 722 620 644 Investments carried at cost - Investment in McLeod, Inc. (Note 6(b)) 29 267 9 9 Investments in New Zealand (Note 6(a)) 31 45 25 22 Other 3 4 3 5 Since Utilities is subject to regulation, any gains or losses related to the difference between the carrying amount and the fair value of its financial instruments may not be realized by the Company's shareholders. (12) DERIVATIVE FINANCIAL INSTRUMENTS: The Company has a policy that financial derivatives are to be used only to mitigate business risks and not for speculative purposes. Derivatives have been used by the Company on a very limited basis. (a) Interest Rate Swap Agreement - In February 1996, Diversified entered into an interest rate swap agreement on a variable rate borrowing of $100 million converting this debt into a fixed-rate borrowing at a rate of 4.7 percent. The swap period is for two years with an additional one-year option available to the counterparty and the agreement includes quarterly settlement dates. Diversified realized approximately $0.7 million in interest expense savings in 1996 under the agreement. The fair value of this financial instrument is based on the amounts estimated to terminate or settle the agreement. At December 31, 1996, the agreement, if settled on that date, would have required the counterparty to pay the Company approximately $1.2 million. Such value is based on the difference in the interest rates as well as the amount of time remaining in the agreement. The Company has no intention of terminating the agreement at this time. (b) Gas Futures Contracts - Industrial Energy Applications, Inc. (IEA), a wholly-owned subsidiary under Diversified, has entered into natural gas contracts on the New York Mercantile Exchange (NYMEX) in the notional amount of $6.4 million at December 31, 1996. The original contract terms range from one to seventeen months. The contracts are intended to mitigate risk from fluctuations in the price of natural gas that will be required to satisfy sales commitments for future deliveries to customers and for sales from storage. Gains and losses on these hedging contracts are deferred and recognized in income when the transactions being hedged are finalized. (13) COMMITMENTS AND CONTINGENCIES: (a) Construction Program - The Company's construction and acquisition program anticipates expenditures of approximately $225 million for 1997, which includes $147 million at Utilities and $78 million at Diversified. Substantial commitments have been made in connection with these expenditures. (b) Purchased Power, Coal and Natural Gas Contracts - Utilities has entered into purchased power capacity and coal contracts and its minimum commitments are as follows (dollars and tons in thousands): Purchased Power Coal Dollars Mw's Dollars Tons 1997 $ 11,175 69 - 144 $ 68,323 4,472 1998 3,415 9 - 109 17,250 886 1999 3,283 1 - 101 17,509 874 2000 283 1 15,696 762 2001 283 1 15,913 751 The Company has several purchased power contracts for the annual six-month summer season and thus the minimum and maximum of the noted range represent the power purchased during the winter and summer seasons, respectively. The Company expects to supplement its coal contracts with spot market purchases to fulfill its future fossil fuel needs. Utilities also has various natural gas supply, transportation and storage contracts outstanding. The gas supply commitments are all index based and the minimum dekatherm commitments, in thousands, for 1997-2001 are 10,699, 5,074, 5,074, 3,574 and 3,574, respectively. The minimum transportation and storage commitments for 1997-2001, in thousands, are $32,080, $31,842, $29,220, $27,050 and $24,008, respectively. The Company expects to supplement its natural gas supply with spot market purchases as needed. (c) Information Technology Services - The Company entered into an agreement, expiring in 2004, with Electronic Data Systems Corporation (EDS) for information technology services. The contract is subject to declining termination fees. The Company's anticipated operating and capital expenditures under the agreement for 1997 are estimated to total approximately $12.5 million. Future costs under the agreement are variable and are dependent upon the Company's level of usage of technological services from EDS. (d) Financial Guarantees - The Company has financial guarantees amounting to $22.9 million outstanding at December 31, 1996, which are not reflected in the consolidated financial statements. Such guarantees are generally issued to support third-party borrowing arrangements and similar transactions. The Company believes that the likelihood of material cash payments by the Company under these agreements is remote. (e) Nuclear Insurance Programs - Public liability for nuclear accidents is governed by the Price Anderson Act of 1988 which sets a statutory limit of $8.9 billion for liability to the public for a single nuclear power plant incident and requires nuclear power plant operators to provide financial protection for this amount. As required, Utilities provides this financial protection for a nuclear incident at the DAEC through a combination of liability insurance ($200 million) and industry-wide retrospective payment plans ($8.7 billion). Under the industry-wide plan, each operating licensed nuclear reactor in the United States is subject to an assessment in the event of a nuclear incident at any nuclear plant in the United States. Based on its ownership of the DAEC, Utilities could be assessed a maximum of $79.3 million per nuclear incident, with a maximum of $10 million per incident per year (of which Utilities' 70% ownership portion would be approximately $55 million and $7 million, respectively) if losses relating to the incident exceeded $200 million. These limits are subject to adjustments for changes in the number of participants and inflation in future years. Utilities is a member of Nuclear Mutual Limited (NML) and Nuclear Electric Insurance Limited (NEIL). These companies provide $1.9 billion of insurance coverage on certain property losses at DAEC for property damage, decontamination and premature decommissioning. The proceeds from such insurance, however, must first be used for reactor stabilization and site decontamination before they can be used for plant repair and premature decommissioning. NEIL also provides separate coverage for the cost of replacement power during certain outages. Owners of nuclear generating stations insured through NML and NEIL are subject to retroactive premium adjustments if losses exceed accumulated reserve funds. NML and NEIL's accumulated reserve funds are currently sufficient to more than cover its exposure in the event of a single incident under the primary and excess property damage or replacement power coverages. However, Utilities could be assessed annually a maximum of $3.0 million under NML, $6.4 million for NEIL property and $0.7 million for NEIL replacement power if losses exceed the accumulated reserve funds. Utilities is not aware of any losses that it believes are likely to result in an assessment. In the unlikely event of a catastrophic loss at DAEC, the amount of insurance available may not be adequate to cover property damage, decontamination and premature decommissioning. Uninsured losses, to the extent not recovered through rates, would be borne by Utilities and could have a material adverse effect on Utilities' financial position and results of operations. (f) Environmental Liabilities - The Company has recorded environmental liabilities of approximately $53 million in its Consolidated Balance Sheets at December 31, 1996. The Company's significant environmental liabilities are discussed below. Former Manufactured Gas Plant (FMGP) Sites Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 FMGP sites, but believes it is not responsible for two of these sites based on extensive reviews of the ownership records and historical information available for the two sites. Utilities has notified the appropriate regulatory agency that it believes it does not have any responsibility as relates to these two sites, but no response has been received from the agency on this issue. Utilities is also aware of six other sites that it may have owned or operated in the past and for which, as a result, it may be designated as a PRP in the future in the event that environmental concerns arise at these sites. Utilities is working pursuant to the requirements of the various agencies to investigate, mitigate, prevent and remediate, where necessary, damage to property, including damage to natural resources, at and around the sites in order to protect public health and the environment. Utilities believes it has completed the remediation of ten sites although it is in the process of obtaining final approval from the applicable environmental agencies on this issue for each site. Utilities is in various stages of the investigation and/or remediation processes for the remaining 16 sites and estimates the range of additional costs to be incurred for investigation, remediation and monitoring of the sites to be approximately $24 million to $54 million. Utilities has recorded environmental liabilities related to the FMGP sites of approximately $36 million (including $4.7 million as current liabilities) at December 31, 1996. These amounts are based upon Utilities' best current estimate of the amount to be incurred for investigation, remediation and monitoring costs for those sites where the investigation process has been or is substantially completed, and the minimum of the estimated cost range for those sites where the investigation is in its earlier stages. It is possible that future cost estimates will be greater than the current estimates as the investigation process proceeds and as additional facts become known. Regulatory assets of approximately $36 million, which reflect the future recovery that is being provided through Utilities' rates, have been recorded in the Consolidated Balance Sheets. Considering the current rate treatment allowed by the IUB, management believes that the clean-up costs incurred by Utilities for these FMGP sites will not have a material adverse effect on its financial position or results of operations. In April 1996, Utilities filed a lawsuit against certain of its insurance carriers seeking reimbursement for investigation, mitigation, prevention, remediation and monitoring costs associated with the FMGP sites. Settlement discussions are proceeding between Utilities and its insurance carriers regarding the recovery of these FMGP-related costs. Settlement has been reached with two carriers and an agreement in principle has been reached with three other carriers thus far. Any amounts received from insurance carriers will be deferred pending a determination of the regulatory treatment of such recoveries. National Energy Policy Act of 1992 The National Energy Policy Act of 1992 requires owners of nuclear power plants to pay a special assessment into a "Uranium Enrichment Decontamination and Decommissioning Fund." The assessment is based upon prior nuclear fuel purchases and, for the DAEC, averages $1.4 million annually through 2007, of which Utilities' 70% share is $1.0 million. Utilities is recovering the costs associated with this assessment through its electric fuel adjustment clauses over the period the costs are assessed. Utilities' 70% share of the future assessment, $9.9 million payable through 2007, has been recorded as a liability in the Consolidated Balance Sheets, including $0.9 million included in "Current liabilities - Environmental liabilities," with a related regulatory asset for the unrecovered amount. Oil and Gas Properties Dismantlement and Abandonment Costs Whiting is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties, the most significant of which is located off the coast of California. The Company estimates the total costs for these properties to be approximately $16 million and the expenditures are not expected to be incurred for approximately five years. Whiting accrues these costs as reserves are extracted and such costs are included in "Depreciation and amortization" in the Consolidated Statements of Income, resulting in a liability of $7.0 million at December 31, 1996, in the Consolidated Balance Sheets. The Company adopted the provisions of Statement of Position 96-1 (SOP-96-1), Environmental Remediation Liabilities, in 1996. This statement provides authoritative guidance for recognition, measurement and disclosure of environmental remediation liabilities in financial statements. Upon adoption of SOP-96-1, the Company's estimated liability increased by approximately $2.2 million, primarily resulting from the recording of Utilities' anticipated FMGP postremediation monitoring costs, and a related increase to regulatory assets was also recorded. (g) Air Quality Issues - The Clean Air Act Amendments of 1990 (Act) requires emission reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve reductions of atmospheric chemicals believed to cause acid rain. The provisions of the Act are being implemented in two phases; the Phase I requirements have been met and the Phase II requirements affect eleven other fossil units beginning in the year 2000. Utilities expects to meet the requirements of Phase II by switching to lower sulfur fuels, capital expenditures primarily related to fuel burning equipment and boiler modifications, and the possible purchase of SO2 allowances. Utilities estimates capital expenditures at approximately $12.9 million, including $0.6 million in 1997, in order to meet the acid rain requirements of the Act. The acid rain program under the Act also governs SO2 allowances. An allowance is defined as an authorization for an owner to emit one ton of SO2 into the atmosphere. Currently, Utilities receives a sufficient number of allowances annually to offset its emissions of SO2 from its Phase I units. It is anticipated that in the year 2000, Utilities may have an insufficient number of allowances annually to offset its estimated emissions and may have to purchase additional allowances, or make modifications to the plants or limit operations to reduce emissions. Utilities is reviewing its options to ensure that it will have sufficient allowances to offset its emissions in the future. Utilities believes that the potential cost of ensuring sufficient allowances will not have a material adverse effect on its financial position or results of operations. The Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to NOx, ozone transport, mercury and particulate control; toxic release inventories and modifications to the PCB rules. In December 1996, the EPA issued proposed rules that would tighten the National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter emissions. Also in the fourth quarter of 1996, the EPA announced that it would issue a notice in March 1997 requiring the 37 states in the Ozone Transport Assessment Group (OTAG), which includes Iowa, to implement further controls on NOx. These proposals could result in the Company having to incur additional capital expenditures to further reduce its emissions of NOx, ozone and particulate matter. Currently, the impacts of these potential regulations are too speculative to quantify. In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the NAAQS established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences and recommended that additional monitors be located near Utilities' sources to assess actual ambient air quality. As a result of these exceedences, Utilities is entering into a Consent Agreement with the Iowa Department of Natural Resources. The intent of this agreement, as currently proposed, is to develop a three-year plan for a process to explore and implement options to modify one of Utilities fossil generating facilities to reduce SO2 emissions. In addition, Utilities is proposing to resolve the remainder of EPA's nonattainment concerns by either modifying the current stack or installing a new stack at the other generating facility contributing to the modeled exceedences at a potential aggregate capital cost of up to $4.5 million over the next two years. Pursuant to a routine internal review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Utilities initiated discussions with its regulators on the matter and is preparing the PSD permit application for filing in the first quarter of 1997. Utilities may be required to accept operational limits or to install additional controls and may be subject to liability for not having obtained the permit previously; however, Utilities believes that any likely actions resulting from this matter will not have a material adverse effect on its financial position or results of operations. (h) Spent Nuclear Fuel - The Nuclear Waste Policy Act of 1982 assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such a contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The DOE, however, has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities has been storing spent nuclear fuel on- site since plant operations began in 1974 and has current on-site capability to store spent fuel until 2001. Utilities is aggressively reviewing options for expanding on-site storage. Utilities has been formally notified by the DOE that they anticipate being unable to begin acceptance of spent nuclear fuel by January 31, 1998. Utilities is evaluating courses of action to protect the interests of its customers and its rights under the DOE contract. Utilities is also evaluating legislation proposed to the Congress addressing this issue. (i) Legal Proceedings - The Company is involved in other legal and administrative proceedings before various courts and agencies with respect to matters arising in the ordinary course of business. Although unable to predict the outcome of these matters, the Company believes that appropriate liabilities have been established and final disposition of these actions will not have a material adverse effect on its financial position or results of operations. (14) JOINTLY-OWNED ELECTRIC UTILITY PLANT: Under joint ownership agreements with other Iowa utilities, Utilities has undivided ownership interests in jointly-owned electric generating stations and related transmission facilities. Each of the respective owners is responsible for the financing of its portion of the construction costs. Kilowatt-hour generation and operating expenses are divided on the same basis as ownership with each owner reflecting its respective costs in its Statements of Income. Information relative to Utilities' ownership interest in these facilities at December 31, 1996 is as follows: Ottumwa Neal DAEC Unit 1 Unit 3 (Nuclear) (Coal) (Coal) ($ in millions) Utility plant in service $ 501.0 $ 190.2 $ 60.7 Accumulated depreciation $ 217.2 $ 91.0 $ 28.8 Construction work in progress $ 1.2 $ 0.1 $ 0.1 Plant capacity - Mw 520 716 515 Percent ownership 70% 48% 28% In-service date 1974 1981 1975 (15) SEGMENTS OF BUSINESS: The principal business segments of Industries are the generation, transmission, distribution and sale of electric energy by Utilities and the purchase, distribution, transportation and sale of natural gas by Utilities and IEA. Certain financial information relating to Industries' significant segments of business is presented below: Year Ended December 31 1996 1995 1994 (in thousands) Operating results: Revenues - Electric $ 574,273 $ 560,471 $ 537,327 Gas 273,979 190,339 165,569 Operating income - Electric 132,278 130,390 125,487 Gas 14,978 11,056 8,762 Other information: Depreciation and amortization - Electric 77,578 72,487 68,640 Gas 6,200 6,176 6,214 Construction and acquisition expenditures - * Electric 115,810 108,356 112,773 Gas 20,980 9,368 10,066 Assets - Identifiable assets - Electric 1,438,370 1,395,666 1,347,024 Gas 228,780 199,050 192,397 1,667,150 1,594,716 1,539,421 Other corporate assets 458,412 390,875 309,672 Total consolidated assets $ 2,125,562 $ 1,985,591 $ 1,849,093 * Excludes intercompany acquisitions which are eliminated for consolidated financial statement purposes. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of IES Utilities Inc.: We have audited the accompanying consolidated balance sheets and statements of capitalization of IES Utilities Inc. (an Iowa corporation) and subsidiary companies as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. These financial statements and the financial statement schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IES Utilities Inc. and subsidiary companies as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedule listed in Item 14(a)2 is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 31, 1997 IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 1996 1995 1994 (in thousands) Operating revenues: Electric $ 574,273 $ 560,471 $ 537,327 Gas 160,864 137,292 139,033 Other 19,842 12,063 9,006 754,979 709,826 685,366 Operating expenses: Fuel for production 84,579 96,256 85,952 Purchased power 88,350 66,874 68,794 Gas purchased for resale 103,877 91,198 95,340 Other operating expenses 150,001 145,250 132,281 Maintenance 45,869 43,586 49,542 Depreciation and amortization 84,975 79,384 75,316 Taxes other than income taxes 43,603 45,013 42,550 601,254 567,561 549,775 Operating income 153,725 142,265 135,591 Interest expense and other: Interest expense 43,714 44,460 41,572 Allowance for funds used during construction -2,103 -3,424 -3,910 Miscellaneous, net 5,293 856 -1,247 46,904 41,892 36,415 Income before income taxes 106,821 100,373 99,176 Federal and state income taxes 43,092 41,095 37,966 Net income 63,729 59,278 61,210 Preferred dividend requirements 914 914 914 Net income available for common stock $ 62,815 $ 58,364 $ 60,296
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
Year Ended December 31 1996 1995 1994 (in thousands) Balance at beginning of year $ 212,522 $ 197,158 $ 188,862 Net income 63,729 59,278 61,210 Cash dividends declared - Common stock -44,000 -43,000 -52,000 Preferred stock, at stated rates -914 -914 -914 Balance at end of year $ 231,337 $ 212,522 $ 197,158 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS
December 31 ASSETS (in thousands) 1996 1995 Property, plant and equipment: Utility - Plant in service - Electric $ 2,007,839 $ 1,900,157 Gas 175,472 165,825 Other 126,850 106,396 2,310,161 2,172,378 Less - Accumulated depreciation 1,030,390 950,324 1,279,771 1,222,054 Leased nuclear fuel, net of amortization 34,725 36,935 Construction work in progress 43,719 52,772 1,358,215 1,311,761 Other, net of accumulated depreciation and amortization of $1,438 and $1,166, respectively 5,872 5,477 1,364,087 1,317,238 Current assets: Cash and temporary cash investments 11,608 2,734 Accounts receivable - Customer, less allowance for doubtful accounts of $546 and $676, respectively 22,461 18,619 Other 11,270 8,912 Income tax refunds receivable 2,664 846 Production fuel, at average cost 13,323 12,155 Materials and supplies, at average cost 21,716 27,229 Adjustment clause balances 10,752 0 Regulatory assets 26,539 22,791 Prepayments and other 18,705 18,556 139,038 111,842 Investments: Nuclear decommissioning trust funds 59,325 47,028 Cash surrender value of life insurance policies 4,281 3,582 Other 313 475 63,919 51,085 Other assets: Regulatory assets 201,129 207,202 Deferred charges and other 10,437 21,268 211,566 228,470 $ 1,778,610 $ 1,708,635 December 31 CAPITALIZATION AND LIABILITIES (in thousands) 1996 1995 Capitalization (See Consolidated Statements of Capitalization): Common stock $ 33,427 $ 33,427 Paid-in surplus 279,042 279,042 Retained earnings 231,337 212,522 Total common equity 543,806 524,991 Cumulative preferred stock 18,320 18,320 Long-term debt (excluding current portion) 517,334 465,463 1,079,460 1,008,774 Current liabilities: Notes payable to associated companies 0 8,888 Other short-term borrowings 135,000 101,000 Capital lease obligations 15,125 15,717 Maturities and sinking funds 8,140 15,140 Accounts payable 76,287 64,564 Accrued interest 8,839 8,038 Accrued taxes 40,953 50,369 Accumulated refueling outage provision 1,316 7,690 Adjustment clause balances 0 3,148 Environmental liabilities 5,517 5,521 Other 17,114 17,300 308,291 297,375 Long-term liabilities: Pension and other benefit obligations 25,826 41,866 Capital lease obligations 19,600 21,218 Environmental liabilities 40,299 40,905 Other 14,030 8,719 99,755 112,708 Deferred credits: Accumulated deferred income taxes 256,634 252,663 Accumulated deferred investment tax credits 34,470 37,115 291,104 289,778 Commitments and contingencies (Note 13) $ 1,778,610 $ 1,708,635 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31 1996 1995 (in thousands) Common equity: Common stock - par value $2.50 per share - authorized 24,000,000 shares; outstanding 13,370,788 shares $ 33,427 $ 33,427 Paid-in surplus 279,042 279,042 Retained earnings 231,337 212,522 543,806 524,991 Cumulative preferred stock 18,320 18,320 Long-term debt: Collateral Trust Bonds - 7.65% series, due 2000 50,000 50,000 7.25% series, due 2006 60,000 0 6% series, due 2008 50,000 50,000 7% series, due 2023 50,000 50,000 5.5% series, due 2023 19,400 19,400 229,400 169,400 First Mortgage Bonds - Series J, 6-1/4%, retired in 1996 0 15,000 Series L, 7-7/8%, due 2000 15,000 15,000 Series M, 7-5/8%, due 2002 30,000 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, due 1997 8,000 8,000 9-1/8% series, due 2001 21,000 21,000 7-3/8% series, due 2003 10,000 10,000 7-1/4% series, due 2007 30,000 30,000 224,000 239,000 Pollution control obligations - 5.75%, due serially 1997 to 2003 3,416 3,556 5.95%, due serially 2000 to 2007, secured by First Mortgage Bonds 10,000 10,000 Variable rate (4.25%-4.35% at December 31, 1996), due 2000 to 2010 11,100 11,100 24,516 24,656 Subordinated Deferrable Interest Debentures, 7-7/8%, due 2025 50,000 50,000 Unamortized debt premium and (discount), net -2,442 -2,453 525,474 480,603 Less - Amount due within one year 8,140 15,140 517,334 465,463 $ 1,079,460 $ 1,008,774 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31 1996 1995 1994 (in thousands) Cash flows from operating activities: Net income $ 63,729 $ 59,278 $ 61,210 Adjustments to reconcile net income to net cash flows from operating activities - Depreciation and amortization 84,975 79,384 75,316 Amortization of principal under capital lease obligations 16,491 15,714 16,246 Deferred taxes and investment tax credits 7,763 7,628 -410 Refueling outage provision -6,374 -7,506 12,536 Amortization of other assets 9,776 7,391 2,228 Other 279 184 -1,232 Other changes in assets and liabilities - Accounts receivable -13,200 -9,717 10,395 Sale of utility accounts receivable 7,000 4,000 800 Production fuel, materials and supplies 651 1,658 404 Accounts payable 12,885 -4,395 20,444 Accrued taxes -11,234 5,785 7,057 Provision for rate refunds -106 106 -8,670 Adjustment clause balances -13,900 4,581 -6,582 Gas in storage -551 2,429 1,919 Other 7,322 -1,085 4,171 Net cash flows from operating activities 165,506 165,435 195,832 Cash flows from financing activities: Dividends declared on common stock -44,000 -43,000 -52,000 Dividends declared on preferred stock -914 -914 -914 Proceeds from issuance of long-term debt 60,000 100,000 0 Reductions in long-term debt -15,140 -100,140 -224 Net change in short-term borrowings 25,112 54,393 31,495 Principal payments under capital lease obligations -19,108 -14,463 -16,304 Other -420 -1,831 -5,144 Net cash flows from financing activities 5,530 -5,955 -43,091 Cash flows from investing activities: Construction and acquisition expenditures - Utility -142,381 -126,104 -146,240 Other -1,267 -3,340 -1,863 Deferred energy efficiency expenditures -16,857 -18,029 -16,157 Nuclear decommissioning trust funds -6,008 -6,100 -5,532 Other 4,351 -5,308 873 Net cash flows from investing activities -162,162 -158,881 -168,919 Net increase (decrease) in cash and temporary cash investments 8,874 599 -16,178 Cash and temporary cash investments at beginning of year 2,734 2,135 18,313 Cash and temporary cash investments at end of year $ 11,608 $ 2,734 $ 2,135 Supplemental cash flow information: Cash paid during the year for - Interest $ 42,072 $ 44,569 $ 40,005 Income taxes $ 45,383 $ 29,083 $ 34,479 Noncash investing and financing activities - Capital lease obligations incurred $ 14,281 $ 2,918 $ 14,297 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Except as modified below, the IES Industries Inc. (Industries) Notes to Consolidated Financial Statements are incorporated by reference insofar as they relate to IES Utilities Inc. (Utilities). Industries' Notes 1(i), 6, 9(a) and 12 do not relate to Utilities and, therefore, are not incorporated by reference. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (a) Basis of Consolidation - Utilities is a wholly-owned subsidiary of Industries. The Consolidated Financial Statements include the accounts of Utilities and its consolidated subsidiaries. Utilities is engaged principally in the generation, transmission, distribution and sale of electric energy, the purchase, distribution, transportation and sale of natural gas and to provide steam for industrial and heating purposes. Utilities' markets are located in the state of Iowa. All subsidiaries for which Utilities owns directly or indirectly more than 50% of the voting stock are included as consolidated subsidiaries. Utilities' only wholly-owned subsidiary at December 31, 1996 was IES Ventures Inc. (Ventures). Ventures' wholly-owned subsidiary at December 31, 1996 was IES Midland Development Inc. All significant intercompany balances and transactions have been eliminated from the Consolidated Financial Statements. (4) LEASES: Utilities' operating lease rental expenses for 1996-1994 were $7.1 million, $9.0 million and $9.8 million, respectively. Utilities' future minimum lease payments by year are as follows: Capital Operating Year Lease Leases (in thousands) 1997 $ 16,808 $ 5,601 1998 9,889 5,374 1999 6,969 3,658 2000 3,004 1,654 2001 861 1,329 Thereafter 307 19 37,838 $ 17,635 Less: Amount representing interest 3,113 Present value of net minimum capital lease payments $ 34,725 (7) INCOME TAXES: The components of federal and state income taxes for the years ended December 31, were as follows: 1996 1995 1994 (in millions) Current tax expense $ 35.3 $ 33.5 $ 38.4 Deferred tax expense 10.4 10.3 2.2 Amortization and adjustment of investment tax credits (2.6) (2.7) (2.6) $ 43.1 $ 41.1 $ 38.0 Utilities' overall effective income tax rates shown below for the years ended December 31, were computed by dividing total income tax expense by income before income taxes. 1996 1995 1994 Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefits 6.9 5.9 6.1 Effect of rate making on property related differences 2.9 2.8 1.7 Amortization of investment tax credits (2.5) (2.7) (2.7) Adjustment of prior period taxes (3.3) (0.1) (1.9) Other items, net 1.3 - 0.1 Overall effective income tax rate 40.3% 40.9% 38.3% Utilities' accumulated deferred income taxes as set forth below in the Consolidated Balance Sheets at December 31, arise from the following temporary differences: 1996 1995 (in millions) Property related $ 275 $ 282 Investment tax credit related (24) (26) Decommissioning related (15) (14) Other 21 11 $ 257 $ 253 (8) BENEFIT PLANS: (a) Pension Plans - Payments made from the pension funds to retired employees and beneficiaries during 1996 totaled $10.4 million for Utilities. The components of the pension provision for the years ended December 31, were as follows: 1996 1995 1994 (in thousands) Service cost $ 5,439 $ 4,721 $ 5,786 Interest cost on projected benefit obligation 12,435 11,577 11,265 Assumed return on plans' assets (14,653) (12,340) (12,426) Early retirement benefits 4,498 - - Net amortization 885 260 826 Pension cost 8,604 4,218 5,451 Adjustment to funding level (8,604) (4,218) (5,340) Total pension costs paid to the Trustee $ - $ - $ 111 Actual return on plans' assets $ 25,727 $ 35,947 $ (101) During 1996, Utilities incurred a one-time charge of $4.5 million related to an early retirement program. These costs were deferred for future recovery through the regulatory process. A reconciliation of the funded status of the plans to the amounts recognized in Utilities' Consolidated Balance Sheets at December 31, is presented below: 1996 1995 (in thousands) Fair market value of plans' assets $ 205,699 $ 191,782 Actuarial present value of benefits rendered to date - Accumulated benefits based on compensation to date, including vested benefits of $125,983,000 and $117,624,000, respectively 137,772 128,674 Additional benefits based on estimated future salary levels 41,589 40,790 Projected benefit obligation 179,361 169,464 Plans' assets in excess of projected benefit obligation 26,338 22,318 Remaining unrecognized net asset existing at January 1, 1987, being amortized over 20 years (3,124) (3,451) Unrecognized prior service cost 15,195 16,564 Unrecognized net gain (50,818) (40,707) Accrued pension cost recognized in the Consolidated Balance Sheets $ (12,409) $ (5,276) Assumed rate of return, all plans 9.00% 8.00% Weighted average discount rate of projected benefit obligation, all plans 7.50% 7.50% Assumed rate of increase in future compensation levels for the plans 4.75% 4.75% Utilities' employees also participate in defined contribution pension plans (401(k) plans) covering substantially all employees. Utilities' contributions to the plans, which are based on the participants' level of contribution and cannot exceed 2.8% of the participants' salaries or wages, were $1.5 million, $1.4 million and $1.6 million in 1996, 1995 and 1994, respectively. (b) Other Postemployment Benefit Plans - The components of postretirement benefit costs for the years ended December 31, were as follows: 1996 1995 1994 (in thousands) Service cost $ 1,714 $ 1,227 $ 1,785 Interest cost on accumulated postretirement benefit obligation 3,577 3,049 3,175 Assumed return on plans' assets (388) (56) (60) Net amortization of transition obligation and other 1,987 1,822 2,039 Amortized/(deferred) postretirement benefit costs 1,863 2,220 (2,732) Costs billed to affiliate - (265) - Regulatory recognition of incurred cost 49 1,162 - Net postretirement benefit costs $ 8,802 $ 9,159 $ 4,207 Actual return on plans' assets $ 945 $ 273 $ 47 A reconciliation of the funded status of the plans to the amounts recognized in Utilities' Consolidated Balance Sheets at December 31, is presented below: 1996 1995 (in thousands) Fair market value of plans' assets $ 12,312 $ 6,515 Accumulated postretirement benefit obligation - Active employees not yet eligible 17,990 20,936 Active employees eligible 4,675 6,148 Retirees 25,300 21,846 Total accumulated postretirement benefit obligation 47,965 48,930 Accumulated postretirement benefit obligation in excess of plans' assets (35,653) (42,415) Unrecognized transition obligation 31,020 34,415 Unrecognized net (gain)/loss (2,571) 268 Unrecognized prior service cost - 151 Accrued postretirement benefit cost in the Consolidated Balance Sheets $ (7,204) $ (7,581) Assumed rate of return 9.00% 8.00% Weighted average discount rate of accumulated postretirement benefit obligation 7.50% 7.50% Medical trend on paid charges: Initial trend rate 9.00% 10.00% Ultimate trend rate 6.50% 6.50% The assumed medical trend rates are critical assumptions in determining the service and interest cost and accumulated postretirement benefit obligation related to postretirement benefit costs. A 1% change in the medical trend rates, holding all other assumptions constant, would have changed the 1996 service and interest cost for Utilities by $1.1 million (21%) and the accumulated postretirement benefit obligation for Utilities at December 31, 1996, by $8.1 million (17%). (11) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS: Long-Term Debt - The estimated fair value is based upon the market yield of similar securities and quoted market prices. At December 31, 1996, and December 31, 1995, the carrying amount of Utilities' long-term debt was $528 million and $483 million, compared to estimated fair values of $538 million and $507 million, respectively. (13) COMMITMENTS AND CONTINGENCIES: (c) Information Technology Services - Industries entered into an agreement, expiring in 2004, with Electronic Data Systems Corporation (EDS) for information technology services. The contract is subject to declining termination fees. Utilities' anticipated operating and capital expenditures under the agreement for 1997 are estimated to total approximately $12.1 million. Future costs under the agreement are variable and are dependent upon Utilities' level of usage of technological services from EDS. (d) Financial Guarantees - Utilities' has financial guarantees amounting to $22.6 million outstanding at December 31, 1996, which are not reflected in Utilities' consolidated financial statements. Such guarantees are generally issued to support third-party borrowing arrangements and similar transactions. Utilities believes that the likelihood of material cash payments by Utilities under these agreements is remote. (15) SEGMENTS OF BUSINESS: The principal business segments of Utilities are the generation, transmission, distribution and sale of electric energy and the purchase, distribution, transportation and sale of natural gas. Certain financial information relating to Utilities' significant segments of business is presented below: Year Ended December 31 1996 1995 1994 (in thousands) Operating results: Revenues - Electric $ 574,273 $ 560,471 $ 537,327 Gas 160,864 137,292 139,033 Operating income - Electric 132,278 130,390 125,487 Gas 17,088 9,208 8,135 Other information: Depreciation and amortization - Electric 77,578 72,487 68,640 Gas 6,200 6,176 6,214 Construction and acquisition expenditures - Electric 115,929 108,902 120,180 Gas 12,981 9,368 10,066 Assets - Identifiable assets - Electric 1,438,370 1,395,666 1,347,024 Gas 205,680 192,045 186,911 1,644,050 1,587,711 1,533,935 Other corporate assets 134,560 120,924 111,433 Total consolidated assets $ 1,778,610 $ 1,708,635 $ 1,645,368 Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors, Executive Officers, Promoters and Control Persons of the Registrant Information regarding the identification of directors of IES Industries Inc. and IES Utilities Inc. and compliance with Section 16(a) reporting requirements of the Securities and Exchange Commission is included in Industries' definitive proxy statement (Proxy Statement) prepared for the 1997 annual meeting of stockholders, which will be filed within 120 days of December 31, 1996, (Proxy Statement under the captions "Proposal - Nomination and Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. The executive officers of the registrants as of December 31, 1996 are as follows: (Figures following the names represent the officer's age as of December 31, 1996). Executive Officers of IES Industries Inc. Lee Liu, 63, Chairman of the Board & Chief Executive Officer. First elected officer in 1975. Larry D. Root, 60, President & Chief Operating Officer. Re-elected officer in 1996. (i) James E. Hoffman, 43, Executive Vice President. First elected officer in 1996. (ii) Thomas M. Walker, 49, Executive Vice President & Chief Financial Officer. First elected officer in 1996. (iii) Peter W. Dietrich, 57, Vice President, Corporate Development. First elected officer in 1988. Dean E. Ekstrom, 49, Vice President, Administration. First elected officer in 1991. Stephen W. Southwick, 50, Vice President, General Counsel & Secretary. First elected officer in 1982. John E. Ebright, 53, Controller & Chief Accounting Officer. First elected officer in 1996. (iv) Dennis B. Vass, 47, Treasurer. First elected officer in 1995. Executive Officers of IES Utilities Inc. Lee Liu, 63, Chairman of the Board & Chief Executive Officer. First elected officer in 1975. Larry D. Root, 60, President & Chief Operating Officer. Re-elected officer in 1996. (i) James E. Hoffman, 43, Executive Vice President, Customer Service & Energy Delivery. First elected officer in 1995. (ii) Thomas M. Walker, 49, Executive Vice President & Chief Financial Officer. First elected officer in 1996. (iii) John F. Franz, Jr., 57, Vice President, Nuclear. First elected officer in 1992. Harold W. Rehrauer, 59, Vice President, Field Operations. First elected officer in 1987. Stephen W. Southwick, 50, Vice President, General Counsel & Secretary. First elected officer in 1982. Philip D. Ward, 56, Vice President, Generation. First elected officer in 1990. John E. Ebright, 53, Controller & Chief Accounting Officer. First elected officer in 1996. (iv) Dennis B. Vass, 47, Treasurer. First elected officer in 1995. Officers are elected annually by the Board of Directors and each of the officers named above, except Larry D. Root, James E. Hoffman, Thomas M. Walker and John E. Ebright, has been employed by Industries or one of its significant subsidiaries as an officer or in other responsible positions at such companies for at least five years. There are no family relationships among these officers or among the officers and directors. There are no arrangements or understandings with respect to election of any person as an officer. (i) Larry D. Root, who retired in 1995, was re-elected as President & Chief Operating Officer of both IES Industries Inc. and IES Utilities Inc. effective November 6, 1996. Mr. Root was first elected as an officer in 1979. (ii) James E. Hoffman was elected Executive Vice President of IES Industries Inc. effective November 6, 1996. Prior to his appointment as Executive Vice President, Customer Service & Energy Delivery of IES Utilities Inc. in 1995, he was employed by MCI Communications as Chief Information Officer from 1990 to 1995. (iii) Thomas M. Walker was elected Executive Vice President & Chief Financial Officer of both IES Industries Inc. and IES Utilities Inc. effective December 16, 1996. Prior to joining the Company in December 1996, he was employed from 1990 - 1995 by Information Resources, Inc. as Executive Vice President, Chief Financial and Administrative Officer and Member of the Board of Directors. (iv) John E. Ebright was elected Controller & Chief Accounting Officer of both IES Industries Inc. and IES Utilities Inc. effective July 8, 1996. Prior to joining the Company in July 1996, he was employed by MidCon Corp., a subsidiary of Occidental Petroleum Corporation, as Vice President and Controller from 1987 to 1996. Item 11. Executive Compensation Information regarding executive compensation and transactions is included in the Proxy Statement under the captions "Compensation of Directors", "Summary Compensation Table" and "IES Industries Plans" and is incorporated herein by reference, except for the "Report of the Compensation Committee on Executive Compensation" and the "Performance Graph", which are not incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of December 31, 1996. Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding security ownership of certain beneficial owners and management is included in the Proxy Statement under the captions "Security Ownership of Beneficial Owners" and "Security Ownership of Management" and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of December 31, 1996. Item 13. Certain Relationships and Related Transactions Information regarding certain relationships and related transactions is included in the Proxy Statement under the captions "Other Transactions" and "Compensation of Directors" and is incorporated herein by reference. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of December 31, 1996. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements (Included in Part II of this report) - Page No. IES IES Description Industries Utilities Inc. Inc. Report of Independent Public Accountants 44 73 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994 45 74 Consolidated Statements of Retained Earnings for the years ended December 31, 1996, 1995 and 1994 45 74 Consolidated Balance Sheets at December 31, 1996 and 1995 46 - 47 75 - 76 Consolidated Statements of Capitalization at December 31, 1996 and 1995 48 77 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 49 78 Notes to Consolidated Financial Statements 50 - 72 79 - 84 (a) 2. Financial Statement Schedules (Included in Part IV of this report) - Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1996, 1995 and 1994 95 Other schedules are omitted as not required under Rules of Regulation S-X (a) 3. Exhibits Required by Securities and Exchange Commission Regulation S-K - The Exhibits designated by an asterisk are filed herewith and all other Exhibits as stated to be filed are incorporated herein by reference. Exhibit 2(a) Agreement and Plan of Merger, dated as of November 10, 1995, as amended, by and among WPL Holdings, Inc., IES Industries Inc., Interstate Power Company, WPLH Acquisition Co. and Interstate Power Company (Filed as Exhibit 2.1 to Industries' Joint Proxy Statement, dated July 11, 1996). 2(b) Amendment No. 2 to Agreement and Plan of Merger, as amended, dated August 16, 1996, by and among IES Industries Inc., WPL Holdings, Inc., Interstate Power Company, WPLH Acquisition Co. and Interstate Power Company (Filed as Annex 1 to the Supplement to the Joint Proxy Statement of WPL Holdings, Inc., IES Industries Inc. and Interstate Power Company, dated August 21, 1996). 2(c) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among WPL Holdings, Inc. and IES Industries Inc. (Filed as Exhibit 2.2 to Industries' Current Report on Form 8-K, dated November 10, 1995). 2(d) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among WPL Holdings, Inc. and Interstate Power Company. (Filed as Exhibit 2.3 to Industries' Current Report on Form 8-K, dated November 10, 1995). 2(e) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among IES Industries Inc. and WPL Holdings, Inc. (Filed as Exhibit 2.4 to Industries' Current Report on Form 8-K, dated November 10, 1995). 2(f) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among IES Industries Inc. and Interstate Power Company. (Filed as Exhibit 2.5 to Industries' Current Report on Form 8-K, dated November 10, 1995). 2(g) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among Interstate Power Company and WPL Holdings, Inc. (Filed as Exhibit 2.6 to Industries' Current Report on Form 8-K, dated November 10, 1995). 2(h) Option Grantor/Option Holder Stock Option and Trigger Payment Agreement, dated as of November 10, 1995, by and among Interstate Power Company and IES Industries Inc. (Filed as Exhibit 2.7 to Industries' Current Report on Form 8-K, dated November 10, 1995). 3(a) Articles of Incorporation of IES Industries Inc. (Industries), Amended and Restated as of May 4, 1993 (Filed as Exhibit 3(a) to Industries' Form 10-K for the year 1993). 3(b) Articles of Incorporation of IES Utilities Inc. (Utilities), Amended and Restated as of January 6, 1994 (Filed as Exhibit 4(b) to Utilities' Current Report on Form 8-K, dated January 7, 1994). * 3(c) Bylaws of Industries, as amended February 4, 1997. * 3(d) Bylaws of Utilities, as amended February 4, 1997. 4(a) Indenture of Mortgage and Deed of Trust, dated as of September 1, 1993, between Utilities (formerly Iowa Electric Light and Power Company (IE)) and The First National Bank of Chicago, as Trustee (Mortgage) (Filed as Exhibit 4(c) to IE's Form 10-Q for the quarter ended September 30, 1993). 4(b) Supplemental Indentures to the Mortgage: Number Dated as of IE/Utilities File Reference Exhibit First October 1, 1993 Form 10-Q, 11/12/93 4(d) Second November 1, 1993 Form 10-Q, 11/12/93 4(e) Third March 1, 1995 Form 10-Q, 5/12/95 4(b) Fourth September 1, 1996 Form 8-K, 9/19/96 4(c)(i) 4(c) Indenture of Mortgage and Deed of Trust, dated as of August 1, 1940, between Utilities (formerly IE) and The First National Bank of Chicago, Trustee (1940 Indenture) (Filed as Exhibit 2(a) to IE's Registration Statement, File No. 2-25347). 4(d) Supplemental Indentures to the 1940 Indenture: Number Dated as of IE/Utiliites File Reference Exhibit First March 1, 1941 2-25347 2(a) Second July 15, 1942 2-25347 2(a) Third August 2, 1943 2-25347 2(a) Fourth August 10, 1944 2-25347 2(a) Fifth November 10, 1944 2-25347 2(a) Sixth August 8, 1945 2-25347 2(a) Seventh July 1, 1946 2-25347 2(a) Eighth July 1, 1947 2-25347 2(a) Ninth December 15, 1948 2-25347 2(a) Tenth November 1, 1949 2-25347 2(a) Eleventh November 10, 1950 2-25347 2(a) Twelfth October 1, 1951 2-25347 2(a) Thirteenth March 1, 1952 2-25347 2(a) Fourteenth November 5, 1952 2-25347 2(a) Fifteenth February 1, 1953 2-25347 2(a) Sixteenth May 1, 1953 2-25347 2(a) Seventeenth November 3, 1953 2-25347 2(a) Eighteenth November 8, 1954 2-25347 2(a) Nineteenth January 1, 1955 2-25347 2(a) Twentieth November 1, 1955 2-25347 2(a) Twenty-first November 9, 1956 2-25347 2(a) Twenty-second November 6, 1957 2-25347 2(a) Twenty-third November 4, 1958 2-25347 2(a) Twenty-fourth November 3, 1959 2-25347 2(a) Twenty-fifth November 1, 1960 2-25347 2(a) Twenty-sixth January 1, 1961 2-25347 2(a) Twenty-seventh November 7, 1961 2-25347 2(a) Twenty-eighth November 6, 1962 2-25347 2(a) Twenty-ninth November 5, 1963 2-25347 2(a) Thirtieth November 4, 1964 2-25347 2(a) Thirty-first November 2, 1965 2-25347 2(a) Thirty-second September 1, 1966 Form 10-K, 1966 4.10 Thirty-third November 30, 1966 Form 10-K, 1966 4.10 Thirty-fourth November 7, 1967 Form 10-K, 1967 4.10 Thirty-fifth November 5, 1968 Form 10-K, 1968 4.10 Thirty-sixth November 1, 1969 Form 10-K, 1969 4.10 Thirty-seventh December 1, 1970 Form 8-K, 12/70 1 Thirty-eighth November 2, 1971 2-43131 2(g) Thirty-ninth May 1, 1972 Form 8-K, 5/72 1 Fortieth November 7, 1972 2-56078 2(i) Forty-first November 7, 1973 2-56078 2(j) Forty-second September 10, 1974 2-56078 2(k) Forty-third November 5, 1975 2-56078 2(l) Forty-fourth July 1, 1976 Form 8-K, 7/76 1 Forty-fifth November 1, 1976 Form 8-K, 12/76 1 Forty-sixth December 1, 1977 2-60040 2(o) Forty-seventh November 1, 1978 Form 10-Q, 6/30/79 1 Forty-eighth December 1, 1979 Form S-16, 2-65996 2(q) Forty-ninth November 1, 1981 Form 10-Q, 3/31/82 2 Fiftieth December 1, 1980 Form 10-K, 1981 4(s) Fifty-first December 1, 1982 Form 10-K, 1982 4(t) Fifty-second December 1, 1983 Form 10-K, 1983 4(u) Fifty-third December 1, 1984 Form 10-K, 1984 4(v) Fifty-fourth March 1, 1985 Form 10-K, 1984 4(w) Fifty-fifth March 1, 1988 Form 10-Q, 5/12/88 4(b) Fifty-sixth October 1, 1988 Form 10-Q, 11/10/88 4(c) Fifty-seventh May 1, 1991 Form 10-Q, 8/13/91 4(d) Fifty-eighth March 1, 1992 Form 10-K, 1991 4(c) Fifty-ninth October 1, 1993 Form 10-Q, 11/12/93 4(a) Sixtieth November 1, 1993 Form 10-Q, 11/12/93 4(b) Sixty-first March 1, 1995 Form 10-Q, 5/12/95 4(a) Sixty-second September 1, 1996 Form 8-K, 9/19/96 4(f) 4(e) Indenture or Deed of Trust dated as of February 1, 1923, between Utilities (successor to Iowa Southern Utilities Company (IS) as result of merger of IS and IE) and The Northern Trust Company (The First National Bank of Chicago, successor) and Harold H. Rockwell (Richard D. Manella, successor), as Trustees (1923 Indenture) (Filed as Exhibit B-1 to File No. 2-1719). 4(f) Supplemental Indentures to the 1923 Indenture: Dated as of File Reference Exhibit May 1, 1940 2-4921 B-1-k May 2, 1940 2-4921 B-1-l October 1, 1945 2-8053 7(m) October 2, 1945 2-8053 7(n) January 1, 1948 2-8053 7(o) September 1, 1950 33-3995 4(e) February 1, 1953 2-10543 4(b) October 2, 1953 2-10543 4(q) August 1, 1957 2-13496 2(b) September 1, 1962 2-20667 2(b) June 1, 1967 2-26478 2(b) February 1, 1973 2-46530 2(b) February 1, 1975 2-53860 2(aa) July 1, 1975 2-54285 2(bb) September 2, 1975 2-57510 2(bb) March 10, 1976 2-57510 2(cc) February 1, 1977 2-60276 2(ee) January 1, 1978 0-849 2 March 1, 1979 0-849 2 March 1, 1980 0-849 2 May 31, 1986 33-3995 4(g) July 1, 1991 0-849 4(h) September 1, 1992 0-849 4(m) December 1, 1994 0-4117-1 4(f) * 4(g) Third Amended and Restated Credit Agreement dated as of November 20, 1996 among IES Diversified Inc. as Borrower, certain banks and Citibank, N.A., as Agent. 4(h) Indenture (For Unsecured Subordinated Debt Securities), dated as of December 1, 1995, between Utilities and The First National Bank of Chicago, as Trustee (Subordinated Indenture) (Filed as Exhibit 4(i) to Utilities' Amendment No. 1 to Registration Statement, File No. 33-62259). 10(a) Operating and Transmission Agreement between Central Iowa Power Cooperative and IE (Filed as Exhibit 10(q) to IE's Form 10-K for the year 1990). 10(b) Duane Arnold Energy Center Ownership Participation Agreement dated June 1, 1970 between Central Iowa Power Cooperative, Corn Belt Power Cooperative and IE. (Filed as Exhibit 5(kk) to IE's Registration Statement, File No. 2-38674). 10(c) Duane Arnold Energy Center Operating Agreement dated June 1, 1970 between Central Iowa Power Cooperative, Corn Belt Power Cooperative and IE. (Filed as Exhibit 5(ll) to IE's Registration Statement, File No. 2-38674). 10(d) Duane Arnold Energy Center Agreement for Transmission, Transformation, Switching, and Related Facilities dated June 1, 1970 between Central Iowa Power Cooperative, Corn Belt Power Cooperative and IE. (Filed as Exhibit 5(mm) to IE's Registration Statement, File No. 2-38674). 10(e) Basic Generating Agreement dated April 16, 1975 between Iowa Public Service Company, Iowa Power and Light Company, Iowa-Illinois Gas and Electric Company and IS for the joint ownership of Ottumwa Generating Station-Unit 1 (OGS-1). (Filed as Exhibit 1 to IE's Form 10-K for the year 1977). 10(f) Addendum Agreement to the Basic Generating Agreement for OGS-1 dated December 7, 1977 between Iowa Public Service Company, Iowa-Illinois Gas and Electric Company, Iowa Power and Light Company, IS and IE for the purchase of 15% ownership in OGS-1. (Filed as Exhibit 3 to IE's Form 10-K for the year 1977). 10(g) Second Amended and Restated Credit Agreement dated as of September 17, 1987 between Arnold Fuel, Inc. and the First National Bank of Chicago and the Amended and Restated Consent and Agreement dated as of September 17, 1987 by IE. (Filed as Exhibit 10(j) to IE's Form 10-K for the year 1987). Management Contracts and/or Compensatory Plans (Exhibits 10(h) through 10(s)) 10(h) Supplemental Retirement Plan. (Filed as Exhibit 10(l) to Industries' Form 10-K for the year 1987). 10(i) Management Incentive Compensation Plan. (Filed as Exhibit 10(m) to Industries' Form 10-K for the year 1987). 10(j) Key Employee Deferred Compensation Plan. (Filed as Exhibit 10(n) to Industries' Form 10-K for the year 1987). 10(k) Long-Term Incentive Plan. (Filed as Exhibit A to Industries' Proxy Statement dated March 20, 1995). 10(l) Executive Guaranty Plan. (Filed as Exhibit 10(p) to Industries' Form 10-K for the year 1987). 10(m) Executive Change of Control Severance Agreement - CEO (Filed as Exhibit 10(a) to Industries' Form 10-Q for the quarter ended September 30, 1996 (File No. 1-9187)). 10(n) Executive Change of Control Severance Agreement - Vice Presidents (Filed as Exhibit 10(b) to Industries' Form 10-Q for the quarter ended September 30, 1996 (File No. 1-9187)). 10(o) Executive Change of Control Severance Agreement - Other Officers (Filed as Exhibit 10(c) to Industries' Form 10-Q for the quarter ended September 30, 1996 (File No. 1-9187)). 10(p) Amendments to Key Employee Deferred Compensation Agreement for Directors. (Filed as Exhibit 10(u) to Industries' Form 10-Q for the quarter ended March 31, 1990). 10(q) Amendments to Key Employee Deferred Compensation Agreement for Key Employees. (Filed as Exhibit 10(v) to Industries' Form 10-Q for the quarter ended March 31, 1990). 10(r) Amendments to Management Incentive Compensation Plan. (Filed as Exhibit 10(y) to Industries' Form 10-Q for the quarter ended March 31, 1990). *10(s) Director Retirement Plan. 10(t) Agreement and Plan of Merger, dated as of February 27, 1991, by and between IE Industries Inc. and Iowa Southern Inc. (Filed as Exhibit 2 to Industries' Form 8-K dated February 27, 1991). 10(u) IES Industries Inc. Shareholders' Rights Plan. (Filed as Exhibit I-2 to Industries' Registration Statement on Form 8-A filed November 13, 1991). 10(v) Lease and Security Agreement, dated October 1, 1993, between IES Diversified Inc., as lessee, and Sumitomo Bank Leasing and Finance, Inc., as lessor. (Filed as Exhibit 10(z) to Industries' Form 10-K for the year 1993). 10(w) Receivables Purchase and Sale Agreement dated as of June 30, 1989, as Amended and Restated as of April 15, 1994, among IES Utilities Inc. (as Seller) and CIESCO L.P. (as the Investor) and Citicorp North America, Inc. (as Agent). (Filed as Exhibit 10(a) to Utilities' Form 10-Q for the quarter ended March 31, 1994 (File No. 0-4117-1)). 10(x) Guaranty (IES Utilities Trust No. 1994-A) from IES Utilities Inc., dated as of June 29, 1994. (Filed as Exhibit 10(b) to Utilities' Form 10-Q for the quarter ended June 30, 1994 (File No. 0-4117-1)). 10(y) Copy of Coal Supply Agreement, dated July 27, 1977, between IS and Sunoco Energy Development Co. (former parent of Cordero Mining Co.), and letter memorandum thereto, dated October 29, 1984, relating to the purchase of coal supplies for the fuel requirements at the Ottumwa Generating Station. (Filed as Exhibit 10-A-4 to File No. 33-3995). *12 Ratio of Earnings to Fixed Charges (IES Utilities Inc.) *21 Subsidiaries of the Registrant (IES Industries Inc.) *23(a) Consent of Independent Public Accountants (IES Industries Inc.) *23(b) Consent of Independent Public Accountants (IES Utilities Inc.) *27(a) Financial Data Schedule (IES Industries Inc.) *27(b) Financial Data Schedule (IES Utilities Inc.) Note: Pursuant to (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Company has not filed as an exhibit to this Form 10-K certain instruments with respect to long-term debt that has not been registered if the total amount of securities authorized thereunder does not exceed 10% of total assets of the Company but hereby agrees to furnish to the Commission on request any such instruments. (a) 4. Unaudited Pro Forma Combined Financial Information of Interstate Energy Corporation: Unaudited Pro Forma Combined Balance Sheet at December 31, 1996 97 - 98 Unaudited Pro Forma Combined Statements of Income for the years ended December 31, 1996, 1995 and 1994 99 - 101 Notes to Unaudited Pro Forma Combined Financial Statements 102 - 104 (b) Reports on Form 8-K - Industries - None. Utilities - None. IES INDUSTRIES INC. AND IES UTILITIES INC. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 Column A Column B Column E Balance Balance Description January 1 December 31 (in thousands) VALUATION AND QUALIFYING ACCOUNTS WHICH ARE DEDUCTED IN THE BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY: IES Utilities Inc.: Accumulated Provision for Uncollectible Accounts: Year ended December 31, 1996 $ 676 $ 757 Year ended December 31, 1995 $ 650 $ 676 Year ended December 31, 1994 $ 409 $ 650 Non-utility Subsidiaries: Accumulated Provision for Uncollectible Accounts: Year ended December 31, 1996 $ 685 $ 774 Year ended December 31, 1995 $ 372 $ 685 Year ended December 31, 1994 $ 506 $ 372 Note: The above provisions relate to various customer, notes and other receivable balances included in several line items on the Company's Consolidated Balance Sheets. OTHER RESERVES: IES Utilities Inc.: Accumulated Provision for Rate Refunds Year ended December 31, 1996 $ 106 $ - Year ended December 31, 1995 $ - $ 106 Year ended December 31, 1994 $ 8,670 $ - IES Utilities Inc.: Accumulated Provision for Merchandise Warranty, Property Insurance, Injuries and Damages, Workmen's Compensation and Other Miscellaneous Claims Year ended December 31, 1996 $ 2,876 $ 2,694 Year ended December 31, 1995 $ 2,516 $ 2,876 Year ended December 31, 1994 $ 1,611 $ 2,516 UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF INTERSTATE ENERGY CORPORATION IES Industries Inc. (IES), WPL Holdings, Inc. (WPLH), Interstate Power Company (IPC), and certain related parties have entered into an Agreement and Plan of Merger, dated as of November 10, 1995, as amended (the Merger Agreement), providing for (a) the merger of IES with and into WPLH and (b) the merger of IPC with a subsidiary of WPLH pursuant to which IPC will become a subsidiary of WPLH (the above referenced mergers are collectively referred herein to as the Mergers). In connection with the consummation of the Mergers, WPLH will change its name to Interstate Energy Corporation. Detailed information with respect to the Merger Agreement and the proposed Mergers is contained in the Joint Proxy Statement/Prospectus, dated July 11, 1996, as supplemented by the Supplement to Joint Proxy Statement/Prospectus, dated August 21, 1996, contained in WPLH's Registration Statements on Form S-4, Registration Nos. 333-07931 and 333-10401 relating to the meetings of shareowners of WPLH, IES and IPC to vote on the Merger Agreement and related matters. The following unaudited pro forma financial information combines the historical consolidated balance sheets and statements of income of WPLH, IES and IPC, including their respective subsidiaries, after giving effect to the Mergers. The historical data for WPLH have been adjusted to reflect the restatement of such data to account for certain discontinued operations discussed in the notes hereto. The unaudited pro forma combined balance sheet at December 31, 1996 gives effect to the Mergers as if they had occurred at December 31, 1996. The unaudited pro forma combined statements of income for each of the three years in the period ended December 31, 1996 give effect to the Mergers as if they had occurred at January 1, 1994. These statements are prepared on the basis of accounting for the Mergers as a pooling of interests and are based on the assumptions set forth in the notes thereto. In addition, the pro forma financial information does not give effect to the expected synergies or the cost to be incurred to achieve such synergies. The pro forma financial information, however, does reflect the transaction costs to effect the Mergers. The following pro forma financial information has been prepared from, and should be read in conjunction with, the historical consolidated financial statements and related notes thereto of WPLH, IES and IPC. The following information is not necessarily indicative of the financial position or operating results that would have occurred had the Mergers been consummated on the date, or at the beginning of the periods, for which the Mergers are being given effect nor is it necessarily indicative of future operating results or financial position. INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET December 31, 1996 (In thousands)
ASSETS WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined UTILITY PLANT Electric $ 1,729,311 $ 2,007,839 $ 853,007 $ ---- $ 4,590,157 Gas 227,809 175,472 68,047 ---- 471,328 Other 175,998 126,850 --- ---- 302,848 Total 2,133,118 2,310,161 921,054 ---- 5,364,333 Less: Accumulated provision for depreciation 967,436 1,030,390 426,471 ---- 2,424,297 Construction work in progress 55,519 43,719 3,129 ---- 102,367 Nuclear fuel--net 19,368 34,725 --- ---- 54,093 Net utility plant 1,240,569 1,358,215 497,712 ---- 3,096,496 OTHER PROPERTY, PLANT AND EQUIPMENT ---NET AND INVESTMENTS (NOTE 8) 144,671 314,071 453 ---- 459,195 CURRENT ASSETS Cash and cash equivalents 11,070 8,675 3,072 ---- 22,817 Accounts receivable ---net 88,798 62,861 28,227 ---- 179,886 Fossil fuel inventories, at average cost 15,841 13,323 16,623 ---- 45,787 Materials and supplies, at average cost 29,907 22,842 6,214 ---- 58,963 Prepayments and other 26,786 70,350 13,497 ---- 110,633 Total current assets 172,402 178,051 67,633 ---- 418,086 EXTERNAL DECOMMISSIONING FUND 90,671 59,325 --- ---- 149,996 DEFERRED CHARGES AND OTHER 252,218 215,900 73,402 ---- 541,520 TOTAL ASSETS $ 1,900,531 $ 2,125,562 $ 639,200 $ ---- $ 4,665,293 See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued) December 31, 1996 (In thousands)
LIABILITIES AND EQUITY WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined CAPITALIZATION Common Stock Equity: Common Stock (Note 1) $ 308 $ 407,635 $ 33,848 $ -441,033 $ 758 Other stockholders' equity (Note 1) 607,047 219,246 172,210 430,033 1,428,536 Total common stock equity 607,355 626,881 206,058 -11,000 1,429,294 Preferred stock not mandatorily redeemable 59,963 18,320 10,819 ---- 89,102 Preferred stock mandatory sinking fund ---- ---- 24,147 ---- 24,147 Long-term debt ---net 362,564 701,100 171,731 ---- 1,235,395 Total capitalization 1,029,882 1,346,301 412,755 -11,000 2,777,938 CURRENT LIABILITIES Current maturities, sinking funds, and capital lease obligations 67,626 23,598 17,000 ---- 108,224 Commercial paper, notes payable and other 102,779 135,000 28,700 ---- 266,479 Variable rate demand bonds 56,975 ---- ---- ---- 56,975 Accounts payable and accruals 120,986 99,861 14,013 ---- 234,860 Taxes accrued 4,669 43,926 16,953 ---- 65,548 Other accrued liabilities 54,303 54,498 11,785 11,000 131,586 Total current liabilities 407,338 356,883 88,451 11,000 863,672 OTHER LIABILITIES Deferred income taxes 245,686 262,675 99,303 ---- 607,664 Deferred investment tax credits 36,931 34,470 17,013 ---- 88,414 Accrued environmental remediation costs 74,075 47,502 7,234 ---- 128,811 Capital lease obligations ---- 19,600 ---- ---- 19,600 Other liabilities and deferred credits 106,619 58,131 14,444 ---- 179,194 Total other liabilities 463,311 422,378 137,994 ---- 1,023,683 TOTAL CAPITALIZATION AND LIABILITIES $ 1,900,531 $ 2,125,562 $ 639,200 $ ---- $ 4,665,293 See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1996 (In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined Operating Revenues Electric $ 589,482 $ 574,273 $ 276,620 $ ----- $ 1,440,375 Gas 165,627 273,979 49,464 ----- 489,070 Other 177,735 125,660 ----- ----- 303,395 Total operating revenues 932,844 973,912 326,084 ----- 2,232,840 Operating Expenses Electric production fuels 114,470 84,579 57,560 ----- 256,609 Purchased power 81,108 88,350 61,556 ----- 231,014 Cost of gas sold 104,830 217,351 31,617 ----- 353,798 Other operation 319,154 214,759 53,134 ----- 587,047 Maintenance 46,492 49,001 16,164 ----- 111,657 Depreciation and amortization 90,683 107,393 31,087 ----- 229,163 Taxes other than income taxes 34,603 48,171 16,064 ----- 98,838 Total operating expenses 791,340 809,604 267,182 ----- 1,868,126 Operating Income 141,504 164,308 58,902 ----- 364,714 Other Income (Expense) Allowance for equity funds used during construction 2,270 -100 13 ----- 2,183 Other income and deductions ---net 15,644 -2,333 3,763 ----- 17,074 Total other income (expense) 17,914 -2,433 3,776 ----- 19,257 Interest Charges 41,089 52,619 16,222 ----- 109,930 Income from continuing operations before income taxes and preferred dividends 118,329 109,256 46,456 ----- 274,041 Income Taxes 41,814 47,435 18,133 ----- 107,382 Preferred dividends of subsidiaries (Note 2) 3,310 914 2,463 ----- 6,687 Income from continuing Operations (Notes 3 and 6) $ 73,205 $ 60,907 $ 25,860 $ ----- $ 159,972 Average Common Shares Outstanding (Note 1) 30,790 29,861 9,594 5,236 75,481 Earnings per share of Common Stock from continuing operations $ 2.38 $ 2.04 $ 2.69 $ ---- $ 2.12 See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1995 (In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined Operating Revenues Electric $ 546,324 $ 560,471 $ 274,873 $ ---- $ 1,381,668 Gas 139,165 190,339 43,669 ---- 373,173 Other 121,766 100,200 ---- ---- 221,966 Total operating revenues 807,255 851,010 318,542 ---- 1,976,807 Operating Expenses Electric production fuels 116,488 96,256 62,164 ---- 274,908 Purchased power 44,940 66,874 57,566 ---- 169,380 Cost of gas sold 84,002 141,716 25,888 ---- 251,606 Other operation 253,277 201,390 45,717 ---- 500,384 Maintenance 42,043 46,093 14,881 ---- 103,017 Depreciation and amortization 86,319 97,958 29,560 ---- 213,837 Taxes other than income taxes 34,188 49,011 15,990 ---- 99,189 Total operating expenses 661,257 699,298 251,766 ---- 1,612,321 Operating Income 145,998 151,712 66,776 ---- 364,486 Other Income (Expense) Allowance for equity funds used during construction 1,425 386 ---- ---- 1,811 Other income and deductions ---net 6,509 3,170 -2,872 ---- 6,807 Total other income (expense) 7,934 3,556 -2,872 ---- 8,618 Interest Charges 42,896 47,689 16,795 ---- 107,380 Income from continuing operations before income taxes and preferred dividends 111,036 107,579 47,109 ---- 265,724 Income Taxes 36,108 42,489 19,453 ---- 98,050 Preferred dividends of subsidiaries (Note 2) 3,310 914 2,458 ---- 6,682 Income from continuing Operations (Notes 3 and 6) $ 71,618 $ 64,176 $ 25,198 $ ---- $ 160,992 Average Common Shares Outstanding (Note 1) 30,774 29,202 9,564 5,140 74,680 Earnings per share of Common Stock from continuing operations $ 2.33 $ 2.20 $ 2.63 $ ---- $ 2.16 See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1994 (In thousands, except per share amounts)
WPLH IES IPC Pro Forma Pro Forma (As Reported) (As Reported) (As Reported) Adjustments Combined Operating Revenues Electric $ 531,747 $ 537,327 $ 261,730 $ ----- $ 1,330,804 Gas 151,931 165,569 45,920 ----- 363,420 Other 112,039 82,968 ---- ----- 195,007 Total operating revenues 795,717 785,864 307,650 ----- 1,889,231 Operating Expenses Electric production fuels 123,469 85,952 61,384 ----- 270,805 Purchased power 37,913 68,794 58,339 ----- 165,046 Cost of gas sold 100,942 120,795 30,905 ----- 252,642 Other operation 248,847 176,863 51,917 ----- 477,627 Maintenance 41,227 52,841 17,160 ----- 111,228 Depreciation and amortization 80,351 86,378 28,212 ----- 194,941 Taxes other than income taxes 33,788 46,308 16,298 ----- 96,394 Total operating expenses 666,537 637,931 264,215 ----- 1,568,683 Operating Income 129,180 147,933 43,435 ----- 320,548 Other Income (Expense) Allowance for equity funds used during construction 3,009 2,299 166 ----- 5,474 Other income and deductions ---net 10,245 3,472 3,100 ----- 16,817 Total other income (expense) 13,254 5,771 3,266 ----- 22,291 Interest Charges 36,657 44,399 16,845 ----- 97,901 Income from continuing operations before income taxes and preferred dividends 105,777 109,305 29,856 ----- 244,938 Income Taxes 36,043 41,573 9,189 ----- 86,805 Preferred dividends of subsidiaries (Note 2) 3,310 914 2,454 ---- 6,678 Income from continuing Operations (Notes 3 and 6) $ 66,424 $ 66,818 $ 18,213 $ ---- $ 151,455 Average Common Shares Outstanding (Note 1) 30,671 28,560 9,479 5,041 73,751 Earnings per share of Common Stock from continuing operations $ 2.17 $ 2.34 $ 1.92 $ ---- $ 2.05 See accompanying Notes to Unaudited Pro Forma Combined Financial Statements
INTERSTATE ENERGY CORPORATION NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS 1. The pro forma combined financial statements reflect the conversion of each share of IES Common Stock (no par value) outstanding into 1.14 shares of WPLH Common Stock ($.01 par value) and the conversion of each share of IPC Common Stock ($3.50 par value) into 1.11 shares of WPLH Common Stock ($.01 par value), and the continuation of each share of WPLH Common Stock ($.01 par value) outstanding as one share of Interstate Energy Common Stock, as provided in the Merger Agreement. The pro forma adjustment to common stock equity restates the common stock account to equal par value for all shares to be issued ($.01 par value per share of Interstate Energy Common Stock) and reclassifies the excess to other stockholders' equity. The pro forma combined statements of income are presented as if the companies were combined on January 1, 1994. The pro forma combined balance sheet gives effect to the Mergers as if they occurred at December 31, 1996. The number of shares of common stock used for calculating per share amounts is based on the exchange ratio shown below.
Exchange As reported Pro forma As reported Pro forma As reported Pro forma Ratio 12/31/96 12/31/96 12/31/95 12/31/95 12/31/94 12/31/94 IES___ 1.14 29,861 34,042 29,202 33,290 28,560 32,558 IPC___ 1.11 9,594 10,649 9,564 10,616 9,479 10,522 WPLH__ N/A 30,790 30,790 30,774 30,774 30,671 30,671
2. The Preferred Stock of IPC has been reclassified in the pro forma statements as preferred stock of subsidiary companies and deducted in the determination of income from continuing operations which reflects the holding company structure of the entity formed through the Mergers. 3. IES's income from continuing operations for the year ended December 31, 1996 included costs incurred relating to its successful defense of a hostile takeover attempt mounted by MidAmerican Energy Company. The after-tax impact on income from continuing operations was a decrease of $4.6 million. Nonrecurring items affecting WPLH's performance for the year ended December 31, 1996 included the impact of the sale of a combustion turbine and the sale of WPLH's assisted-living real estate investments. The after-tax impact of these items on continuing operations was an increase of $5.9 million. Nonrecurring items affecting WPLH's 1994 performance included the impact of early retirement and severance programs and the reversal of a coal contract penalty assessed by the Public Service Commission of Wisconsin which was charged to income in 1989. The net after-tax impact of these items on income from continuing operations for the year ended December 31, 1994 was a decrease of $8.3 million related to the early retirement and severance programs offset by an increase of $4.9 million related to the coal contract penalty reversal. 4. The allocation between WPLH, IES and IPC and their customers of the estimated cost savings of approximately $749 million over ten years resulting from the Mergers, net of the costs incurred to achieve such savings, will be subject to regulatory review and approval. Costs arising from the proposed Mergers are currently estimated to be approximately $78 million (including transaction costs of $11 million related to fees for financial advisors, attorneys, accountants and consultants). The estimate of potential cost savings constitutes a forward-looking statement and actual results may differ materially from this estimate. The estimate is necessarily based upon various assumptions that involve judgments with respect to, among other things, future national and regional economic and competitive conditions, technological developments, inflation rates, regulatory treatments, weather conditions, financial market conditions, future business decisions and other uncertainties. No assurance can be given that the estimated costs savings will actually be realized. In addition to the $11 million of remaining transaction costs, since the announcement of the Merger Agreement on November 11, 1995, IES, IPC and WPLH have collectively incurred $6 million of merger-related transaction costs through December 31, 1996, which have been expensed and are reflected in the combined income statements as presented. The remaining $11 million of transaction costs have been reflected in the pro forma balance sheet at December 31, 1996 such that shareowners' equity has been reduced by $11 million and accrued liabilities have been increased by $11 million. None of the estimated cost savings, or costs to achieve such savings, have been reflected in the pro forma combined financial statements. 5. Intercompany transactions (including purchased and exchange power transactions) between WPLH, IES and IPC during the periods presented were included in the determination of regulated rates and were not material. Accordingly, no pro forma adjustments were made to eliminate such transactions. 6. The financial statements of WPLH reflect the discontinuance of operations of its utility energy and marketing consulting business in 1995. The discontinuance of this business resulted in a pre-tax loss in the fourth quarter of 1995 of $7.7 million. The after-tax loss on disposition was $11.0 million reflecting the associated tax expense on disposition due to the non-deductibility of the carrying value of goodwill at sale. During 1996, WPLH recognized an additional loss of $1.3 million, net of applicable income tax benefit, associated with the final disposition of the business. Operating revenues, operating expenses, other income and expense and income taxes for the discontinued operations for the time periods presented have been excluded from income from continuing operations. Interest expense has been adjusted for the amounts associated with direct obligations of the discontinued operations. Operating revenues, related losses, and income tax benefits associated with the discontinued operations for the years ending December 31 were as follows: 1995 1994 Operating revenues $ 24,979 $ 34,798 Loss from discontinued operations before income tax $ 3,663 $ 1,806 Income tax benefit 1,451 632 Loss from discontinued operations $ 2,212 $ 1,174 7. Accounting principles have been consistently applied in the financial statement presentations for WPLH, IES and IPC with one exception. IPC does not include unbilled electric and gas revenues in its calculation of total revenues. The utility subsidiaries of WPLH and IES accrue unbilled revenues. The impact of this difference in accounting principles among the companies does not have a material impact on the unaudited pro forma combined financial statements as presented and, accordingly, no adjustments have been made to conform accounting principles. 8. At December 31, 1996, IES had a $20.0 million investment in Class A common stock of McLeod, Inc. (McLeod), a $9.2 million investment in Class B common stock and vested options that, if exercised, would represent an additional investment of approximately $2.3 million. McLeod provides local, long-distance and other telecommunications services. McLeod completed an Initial Public Offering (IPO) of its Class A common stock in June 1996 and a secondary offering in November 1996. As of December 31, 1996, IES is the beneficial owner of approximately 10.6 million total shares on a fully diluted basis. Class B shares are convertible at the option of IES into Class A shares at any time on a one-for-one basis. The rights of McLeod Class A common stock and Class B common stock are substantially identical except that Class A common stock has 1 vote per share and Class B common stock has 0.40 vote per share. IES currently accounts for this investment under the cost method. IES has entered into an agreement with McLeod which provides that for two years commencing on June 10, 1996, IES cannot sell or otherwise dispose of any of its securities of McLeod without the consent of the McLeod Board of Directors. This contractual sale restriction results in restricted stock under the provisions of Statement of Financial Accounting Standards No. 115 (SFAS No. 115), Accounting for Certain Investments in Debt and Equity Securities, until such time as the restrictions lapse and such shares became qualified for sale within a one year period. As a result, IES currently carries this investment at cost. The closing price of the McLeod Class A common stock on December 31, 1996, on the Nasdaq National Market, was $25.50 per share. The current market value of the shares IES beneficially owns (approximately 10.6 million shares) is currently impacted by, among other things, the fact that the shares cannot be sold for a period of time and it is not possible to estimate what the market value of the shares will be at the point in time such sale restrictions are lifted. In addition, any gain upon an eventual sale of this investment would likely be subject to a tax. Under the provisions of SFAS No. 115, the carrying value of the McLeod investment will be adjusted to estimated fair value at the time such shares become qualified for sale within a one year period; this will occur on June 10, 1997, which is one year before the contractual restrictions on sale are lifted. At that time, the adjustment to reflect the estimated fair value of this investment will be reflected as an increase in the investment carrying value with the unrealized gain reported as a net of tax amount in other common shareholders' equity until realized (i.e. until the shares are sold by IES). SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March 1997. IES INDUSTRIES INC. (Registrant) By /s/ Lee Liu Lee Liu Chairman of the Board & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 14, 1997: /s/ Lee Liu Chairman of the Board & Lee Liu Chief Executive Officer (Principal Executive Officer) /s/ Thomas M. Walker Executive Vice President & Thomas M. Walker Chief Financial Officer (Principal Financial Officer) /s/ John E. Ebright Controller & Chief Accounting Officer John E. Ebright (Principal Accounting Officer) /s/ C.R.S. Anderson Director C.R.S. Anderson J. Wayne Bevis Director J. Wayne Bevis /s/ Jack R. Newman Director Jack R. Newman /s/ Robert D. Ray Director Robert D. Ray /s/ David Q. Reed Director David Q. Reed /s/ Henry Royer Director Henry Royer /s/ Robert W. Schlutz Director Robert W. Schlutz /s/ Anthony R. Weiler Director Anthony R. Weiler SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March 1997. IES UTILITIES INC. (Registrant) By /s/ Lee Liu Lee Liu Chairman of the Board & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 14, 1997: /s/ Lee Liu Chairman of the Board & Lee Liu Chief Executive Officer (Principal Executive Officer) /s/ Thomas M. Walker Executive Vice President & Thomas M. Walker Chief Financial Officer (Principal Financial Officer) /s/ John E. Ebright Controller & Chief Accounting Officer John E. Ebright (Principal Accounting Officer) /s/ C.R.S. Anderson Director C.R.S. Anderson J. Wayne Bevis Director J. Wayne Bevis /s/ Jack R. Newman Director Jack R. Newman /s/ Robert D. Ray Director Robert D. Ray /s/ David Q. Reed Director David Q. Reed /s/ Henry Royer Director Henry Royer /s/ Robert W. Schlutz Director Robert W. Schlutz /s/ Anthony R. Weiler Director Anthony R. Weiler EX-3 2 Exhibit 3(c) BYLAWS AS AMENDED OF IES INDUSTRIES INC. (Amended as of February 4, 1997) ARTICLE I OFFICES SECTION 1.1 PRINCIPAL OFFICE. - The principal office shall be established and maintained in the ie: Tower, 200 First Street, S.E., in the City of Cedar Rapids, in the County of Linn, in the State of Iowa. SECTION 1.2. OTHER OFFICES. - The Corporation may have other offices, either within or without the State of Iowa, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. The registered office of the Corporation required by the Iowa Business Corporation Act to be maintained in the State of Iowa may be, but need not be identical with the principal office in the State of Iowa, and the address of the registered office may be changed from time to time by the Board of Directors. ARTICLE II SHAREHOLDERS SECTION 2.1. ANNUAL MEETING. - The annual meeting of shareholders for the election of directors and the transaction of other business shall be held, in each year, on the third Tuesday in May at two o'clock in the afternoon (if such day is a holiday, the annual meeting will be held at such time on the next succeeding business day) or any other date specified by the Board of Directors. SECTION 2.2. PLACE OF SHAREHOLDERS' MEETING. - The annual meeting or any special meeting of shareholders shall be held at the principal office of the Corporation or any place, within the State of Iowa, as shall be designated by the Board of Directors and stated in the notice of the meeting. SECTION 2.3. SPECIAL MEETINGS. - Special meetings of the shareholders may be called by the Chairman of the Board, the President, the Board of Directors, or the holders of not less than ten percent of all the shares entitled to vote at the meeting. SECTION 2.4. NOTICE OF MEETINGS. - WAIVER. - Written or printed notice, stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Board of Directors, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at the address appearing on the stock transfer books of the Corporation, with postage thereon prepaid. SECTION 2.5. CLOSING OF TRANSFER BOOKS; FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of, or to vote at, any special meeting of shareholders, or at any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, 60 days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case not to be more than 70 days, and in the case of a meeting of shareholders not less than 10 days, prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. SECTION 2.6. VOTING RECORD. - The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least 10 days prior to each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order with the address of and the number of shares held by each, which record shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours for a period of 10 days prior to such meeting. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence of the identity of the shareholders entitled to examine such record or transfer books or to vote at any meeting of shareholders. SECTION 2.7. QUORUM. - A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment only if a quorum is represented throughout. SECTION 2.8. CONDUCT OF MEETING. - Meetings of the shareholders shall be presided over by one of the following officers in the order of seniority if present and acting - the Chairman of the Board, the President, the Secretary, or if none of the foregoing is in office and present and acting, by a chairperson to be chosen by the shareholders. The Secretary of the Corporation, or if absent, an Assistant Secretary, shall act as secretary of the meeting, but if neither the Secretary nor an Assistant Secretary is present, or if the Secretary is presiding over the meeting and the Assistant Secretary is not present, the Chairman of the meeting shall appoint a secretary of the meeting. SECTION 2.9. PROXIES. - At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. SECTION 2.10. VOTING OF SHARES. - Each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. SECTION 2.11 VOTING OF SHARES BY CERTAIN HOLDERS. - Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the Bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by such person, either in person or by proxy, without a transfer of such shares into that person's name. Shares standing in the name of a trustee may be voted by such trustee, either in person or by proxy, without a transfer of such shares into the trustee's name. The Corporation may request evidence of such fiduciary status with respect to the vote, consent, waiver, or proxy appointment. Shares standing in the name of a receiver or trustee in bankruptcy may be voted by such receiver or trustee, and shares held by or under the control of a receiver may be voted by such receiver without the transfer of the shares into such person's name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed. A pledgee, beneficial owner, or attorney-in-fact of the shares held in the name of a shareholder shall be entitled to vote such shares. The Corporation may request evidence of such signatory's authority to sign for the shareholder with respect to the vote, consent, waiver, or proxy appointment. Neither treasury shares nor shares held by another corporation, if a majority of the shares entitled to vote for the election of Directors of such other corporation is held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. GENERAL POWERS. - The business and affairs of the Corporation shall be managed by its Board of Directors. SECTION 3.2. NUMBER, TENURE, QUALIFICATIONS AND REMOVAL. - The number of Directors of the Corporation shall be nine. Each Director shall hold office until the next annual meeting of shareholders and until the Director's successor shall have been elected and qualified, unless removed at a meeting called expressly for that purpose by a vote of the holders of a majority of the shares then entitled to vote at an election of Directors. A Director may only be removed upon a showing of cause. Directors need not be residents of the State of Iowa or shareholders of the Corporation. Not more than three Directors shall be officers or employees of the Corporation or its subsidiaries. No person who has reached the age of 70 years shall be eligible for election or re- election to the Board of Directors, unless approved by the Board of Directors upon recommendation by the Chairman of the Board and the Nominating Committee. Except for the Chief Executive Officer, any Officer or employee of the Corporation serving as a Director who retires, resigns or is removed or terminated from his or her present office or employment with the Corporation shall simultaneously resign from the Board of Directors. In the event the Chief Executive Officer resigns or retires from his or her office or employment with the Corporation, he or she shall simultaneously submit his or her resignation from the Board of Directors if requested by the Nominating Committee. In the event that the Chief Executive Officer is removed from his or her office by the Board of Directors, or is involuntarily terminated from employment with the Corporation, he or she shall simultaneously submit his or her resignation from the Board of Directors. SECTION 3.3. REGULAR MEETINGS. - An annual meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. Unless otherwise provided by resolution of the Board of Directors, regular meetings of the Board of Directors, additional to the annual meeting, shall be held on the first Tuesday of February, May, and August, and on the first Wednesday of November of each year, at the principal office or any place within or without the State of Iowa as shall be designated by the Board of Directors without notice other than such resolution. SECTION 3.4. SPECIAL MEETINGS. - Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, President or any two Directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place either within or without the State of Iowa, whether in person or by telecommunications, as the place for holding any special meeting of the Board of Directors called by them. SECTION 3.5. NOTICE. - Notice of any special meeting shall be given at least three days prior to the meeting by written notice delivered personally or mailed to each Director at the Director's business address, by telegram, or orally by telephone. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, so addressed, with postage prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 3.6. QUORUM. - A majority of the number of Directors fixed by Section 3.2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. SECTION 3.7. MANNER OF ACTING. - The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. A Director shall be considered present at a meeting of the Board of Directors or of a committee designated by the Board if the Director participates in such meeting by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. SECTION 3.8. INFORMAL ACTION. - Any action required or permitted to be taken at any meeting of the Directors of the Corporation or of any committee of the Board may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the Directors or all of the members of the committee of Directors, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting and shall be filed with the Secretary of the Corporation to be included in the official records of the Corporation. SECTION 3.9. PRESUMPTION OF ASSENT. - A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (a) the Director objects at the beginning of the meeting or promptly upon arrival to the holding of or transacting business at the meeting, (b) the Director's dissent shall be entered in the minutes of the meeting, or (c) the Director shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. SECTION 3.10. VACANCIES. - Any vacancy occurring in the Board of Directors and any directorship to be filled by reason of an increase in the number of Directors may be filled by the affirmative vote of a majority of the Directors then in office, even if less than a quorum of the Board of Directors. Failure to attend three consecutive regular meetings of the Board of Directors shall disqualify a Director from further service as a Director during the year in which the third delinquency occurs and shall make such Director ineligible for re- election, unless such failure to attend be determined by the affirmative vote of two-thirds of the remaining Directors holding office to be due to circumstances beyond the control of such Director. A resignation may be tendered by any Director at any meeting of the shareholders or of the Board of Directors, who shall at such meeting accept the same. SECTION 3.11. COMPENSATION. - The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or may receive a stated salary as Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 3.12. EXECUTIVE COMMITTEE. - The Board of Directors shall, at each annual meeting thereof, appoint from its number an Executive Committee of not less than three (3) nor more than five (5) members, including the Chairman of the Board and the Chief Executive Officer of the Corporation, to serve, subject to the pleasure of the Board, for the year next ensuing and until their successors are appointed by the Board. The Board of Directors at such time shall also fix the compensation to be paid to the members of the Executive Committee. No member of the Executive Committee shall continue to be a member after ceasing to be a Director of the Corporation. The Board of Directors shall have the power at any time to increase or decrease the number of members of the Executive Committee, to fill vacancies, to change any member, and to change the functions or terminate the Committee's existence. SECTION 3.13. POWERS OF EXECUTIVE COMMITTEE. - The Executive Committee appointed by the Board of Directors as above provided shall possess all the power and authority of the Board of Directors when said Board is not in session, but the Executive Committee shall not have the power to, (1) declare dividends or distributions, (2) approve or recommend directly to the shareholders actions required by law to be approved by shareholders, (3) fill vacancies on the Board of Directors or designate directors for purposes of proxy solicitation, (4) amend the Articles, (5) adopt, amend, or repeal Bylaws, (6) approve a plan of merger not requiring shareholders approval, (7) authorize reacquisition of shares unless pursuant to a method specified by the Board, or (8) authorize the sale or issuance of shares or designate the terms of a series of a class of shares, except pursuant to a method specified by the Board, to the extent permitted by law. SECTION 3.14. PROCEDURE: MEETINGS: QUORUM. - Regular meetings of the Executive Committee may be held at least once in each month on such day as the Committee shall elect and special meetings may be held at such other times as the Chairman of the Board or any two members of the Executive Committee may designate. Notice of special meetings of the Executive Committee shall be given by letter, telegram, or cable delivered for transmission not later than during the second day immediately preceding the day for such meeting or by word of mouth or telephone not later than the day immediately preceding the date for such meeting. No such notice need state the business to be transacted at the meeting. No notice need be given of an adjourned meeting. The Executive Committee may fix its own rules of procedure. It shall keep a record of its proceedings and shall report these proceedings to the Board of Directors at the regular meeting thereof held next after the meeting of the Executive Committee. Attendance at any meeting of the Executive Committee at a special meeting shall constitute a waiver of notice of such special meeting. At its last meeting preceding the annual meeting of the Board of Directors, the Executive Committee shall make to the Board its recommendation of officers of the Corporation to be elected by the Board for the ensuing year. The Chairman of the Board shall act as Chairman at all meetings of the Executive Committee. The Secretary of the Corporation shall act as Secretary of the meeting. In case of the absence from any meeting of the Executive Committee of the Secretary of the Corporation, the Executive Committee shall appoint a secretary of the meeting. The Executive Committee may hold its meetings within or without the State of Iowa, as it may from time to time by resolution determine. A majority of the Executive Committee shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the Executive Committee. The members of the Executive Committee shall act only as a committee, and the individual members shall have no power as such. SECTION 3.15. OTHER COMMITTEES. - The Board of Directors may appoint by resolution adopted by a majority of the full Board of Directors from among its members, other committees, temporary or permanent, and, to the extent permitted by law and these Bylaws, may designate the duties, powers, and authorities of such committees subject to the same restriction of powers as provided in Section 3.13. ARTICLE IV OFFICERS SECTION 4.1. OFFICERS. - The officers of the Corporation shall be a Chairman of the Board, a President, a Secretary, a Treasurer, Assistant Secretaries and Assistant Treasurers, and may include a General Counsel, each of whom shall be elected by the Board of Directors. Such other officers, including vice-presidents and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. Any two or more offices, other than those of Chairman of the Board and Secretary and those of President and Secretary, may be held by the same person. SECTION 4.2. ELECTION AND TERM OF OFFICE. - The officers of the Corporation to be elected by the Board of Directors shall be elected annually by the Board at its annual meeting held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. A vacancy in any office for any reason may be filled by the Board of Directors for the unexpired portion of the term. SECTION 4.3. REMOVAL OF OFFICERS. - Any officer may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer shall not of itself create contract rights. SECTION 4.4. CHAIRMAN OF THE BOARD. - The Chairman of the Board shall be the Chief Executive Officer of the Corporation. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall be a member of the Executive Committee. The Chairman of the Board shall see that all resolutions and orders of the Board of Directors or the Executive Committee are carried into effect and shall exercise such other powers and perform such other duties as may be designated by the Board of Directors and the Executive Committee. SECTION 4.5. PRESIDENT. - The President shall be the Chief Operating Officer of the Corporation and shall have general supervision of and be accountable for the control of the Corporation's business affairs, properties and management and otherwise shall have the general powers and duties usually vested with the office of President of a Corporation, subject, however, to the control of the Board of Directors, the Executive Committee, and the Chairman of the Board & Chief Executive Officer. The President shall see that all resolutions and orders of the Board of Directors or the Executive Committee are carried into effect and shall exercise such other powers and perform such other duties as may be designated by the Board of Directors, the Executive Committee, and the Chairman of the Board & Chief Executive Officer. SECTION 4.6. VICE-PRESIDENTS. - A Vice President (if one or more be elected or appointed) shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chairman of the Board or the President may from time to time delegate. SECTION 4.7 TREASURER. - The Treasurer shall have the custody of the funds and securities of the Corporation. Whenever necessary or proper, the Treasurer shall (1) endorse, on behalf of the Corporation, checks, notes or other obligations and deposit the same to the credit of the Corporation in such bank or banks or depositories as the Board of Directors may designate; (2) sign receipts or vouchers for payments made to the Corporation which shall also be signed by such other officer as may be designated by the Board of Directors- (3) disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements- and (4) render to the Board of Directors, the Executive Committee, the Chairman of the Board and the President at the regular meetings of the Board or Executive Committee, or whenever any of them may require it, an account of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond with one or more sureties satisfactory to the board, for the faithful performance of the duties of this office, and for the restoration to the Corporation, in case of death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in possession or under control of the Treasurer. SECTION 4.8. SECRETARY. - The Secretary shall record the votes and proceedings of the Shareholders, the Board of Directors and the Executive Committee in a book or books kept for that purpose, and shall serve notices of and attend all meetings of the Directors, the Executive Committee and shareholders. In the absence of the Secretary or an Assistant Secretary from any meeting of the Board of Directors, the proceedings of such meeting shall be recorded by such other person as may be appointed for that purpose. The Secretary shall keep in safe custody the seal of the Corporation, and duplicates, if any, and when requested by the Board of Directors, or when any instrument shall have been first signed by the Chairman of the Board, the President or a Vice President duly authorized to sign the same, or when necessary to attest any proceedings of the shareholders or directors, shall affix it to any instrument requiring the same, and shall attest the same. The Secretary shall, with the Chairman of the Board or the President, sign certificates of stock of the Corporation and affix a seal of the Corporation or cause such seal to be imprinted or engraved thereon, subject, however, to the provisions providing for the use of facsimile signatures on stock certificates under certain conditions. The Secretary shall have charge of such books and papers as properly belong to such office, or as may be committed to the Secretary's care by the Board of Directors or by the Executive Committee, and shall perform such other duties as pertain to such office, or as may be required by the Board of Directors, the Executive Committee or the President. SECTION 4.9. ASSISTANT TREASURERS. - Each Assistant Treasurer (if one or more Assistant Treasurers be elected or appointed) shall assist the Treasurer and shall perform such other duties as the Board of Directors may from time to time prescribe or the Chairman of the Board or the President may from time to time delegate. At the request of the Treasurer, any Assistant Treasurer may perform temporarily the duties of Treasurer in the case of the Treasurer's absence or inability to act. In the case of the death of the Treasurer, or in the case of absence or inability to act without having designated an Assistant Treasurer to perform temporarily the duties of Treasurer, an Assistant Treasurer shall be designated by the Chairman of the Board or the President to perform the duties of the Treasurer. Each Assistant Treasurer shall, if required by the Board of Directors, give the Corporation a bond with such surety or sureties as may be ordered by the Board of Directors, for the faithful performance of the duties of such office and for the restoration to the Corporation, in case of death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind belonging to the Corporation in the possession or under control of such Assistant Treasurer, SECTION 4.10. ASSISTANT SECRETARIES. - Each Assistant Secretary (if one or more Assistant secretaries be elected or appointed) shall assist the Secretary and shall perform such other duties as the Board of Directors may from time to time prescribe or the Chairman of the Board or the President may from time to time delegate. At the request of the Secretary, any Assistant Secretary may perform temporarily the duties of Secretary in the case of the Secretary's absence or inability to act. In the case of the death of the Secretary, or in the case of absence or inability to act without having designated an Assistant Secretary to perform temporarily the duties of Secretary, the Assistant Secretary to perform the duties of the Secretary shall be designated by the Chairman of the Board or the President. SECTION 4.11. GENERAL COUNSEL. - The General Counsel shall be responsible for the management of the Legal Department in its support of all other operations of the Corporation including management guidance to assure responsible decisions, information for all employees concerning the legal and judicial environment and recommended changes of law as deemed advisable. In addition, the General Counsel shall be responsible for the coordination of outside counsel activities in all instances as well as the prosecution of charges against the Corporation or other judicial or regulatory activities. This shall include full information for the management and employees of judicial, regulatory or other administrative body rulings and their impact on the Corporation. The duties shall include approval of all legal and contractual documents of the Corporation, prior to their authorization, and full support to various departments to assist in the development of these documents. The General Counsel shall perform such other duties as may be assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President. ARTICLE V CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 5.1. CERTIFICATES FOR SHARES. - Each certificate representing shares of the Corporation shall state upon the fact (a) that the Corporation is organized under the laws of the State of Iowa, (b) the name of the person to whom issued, (c) the number and class of shares, and the designation of the series, if any, which such certificate represents, and (d) the par value of each share, if any, and each such certificate shall otherwise be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman of the Board or the President and by the Secretary or an Assistant Secretary and shall be sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles. If a certificate is countersigned by a transfer agent, or registered by a registrar, the signatures of the persons signing for such transfer agent or registrar also may be facsimiles. In case any officer or other authorized person who has signed or whose facsimile signature has been placed upon such certificate for the Corporation shall have ceased to be such officer or employee or agent before such certificate is issued, it may be issued by the Corporation with the same effect as if such person where an officer or employee or agent at the date of its issue. Each certificate for shares shall be consecutively numbered or otherwise identified. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe. SECTION 5.2. TRANSFER OF SHARES. - Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by such person's legal representative, who shall furnish proper evidence of authority to transfer, or authorized attorney, by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender for cancellation of the certificate for such shares. Subject to the provisions of Section 2.11 of Article II of these Bylaws, the person in whose name shares stand on the books of the Corporation shall be treated by the Corporation as the owner thereof for all purposes, including all rights deriving from such shares, and the Corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares, on the part of any other person, including (without limitation) a purchaser, assignee or transferee of such shares, or rights deriving from such shares, unless and until such purchaser, assignee, transferee or other person becomes the record holder of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such purchaser, assignee, transferee or other person. Except as provided in said Section 2.11 hereof, no such purchaser, assignee, transferee or other person shall be entitled to receive notice of the meetings of shareholders, to vote at such meetings, to examine the complete record of the shareholders entitled to vote at meetings, or to own, enjoy or exercise any other property or rights deriving from such shares against the Corporation, until such purchaser, assignee, transferee or other person has become the record holder of such shares. ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.1. INDEMNIFICATION. - The Corporation shall indemnify its directors, officers, employees and agents to the full extent permitted by the Iowa Business Corporation Act, as amended from time to time. The Corporation shall purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this section. SECTION 6.2. FISCAL YEAR. - The fiscal year of the Corporation shall be the calendar year. SECTION 6.3. SEAL. - The corporate seal shall be circular in form and shall have inscribed thereon the name of the Corporation and the words "CORPORATE SEAL IOWA". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 6.4. CONTRACTS, CHECKS, DRAFTS, LOANS AND DEPOSITS. - All contracts, checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. The Board may authorize by resolution any officer or officers to enter into and execute any contract or instrument of indebtedness in the name of the Corporation, and such authority may be general or confined to specific instances. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks or other depositories as the Board of Directors may authorize. SECTION 6.5. DIVIDENDS. - Subject to the provisions of the Articles of Incorporation, the Board of Directors may, at any regular or special meeting, declare dividends upon the capital stock of the Corporation payable out of surplus (whether earned or paid-in) or profits as and when they deem expedient. Before declaring any dividend there may be set apart out of surplus or profits such sum or sums as the directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for such other purposes as the directors shall deem conducive to the interests of the Corporation. SECTION 6.6. WAIVER OF NOTICE. - Whenever any notice is required to be given to any shareholder or Director of the Corporation under the provisions of these Bylaws or under the provisions of the Articles of Incorporation or under the provisions of the Iowa Business Corporation Act, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. SECTION 6.7. VOTING OF SHARES OWNED BY THE CORPORATION. Subject always to the specific directions of the Board of Directors, any share or shares of stock issued by any other corporation and owned or controlled by the Corporation may be voted at any shareholders' meeting of such other corporation by the President of the Corporation if present, or if absent by any other officer of the Corporation who may be present. Whenever, in the judgment of the President, or if absent, of any officer, it is desirable for the Corporation to execute a proxy or give a shareholders' consent in respect to any share or shares of stock issued by any other corporation and owned by the Corporation, such proxy or consent shall be executed in the name of the Corporation by the President or one of the officers of the Corporation and shall be attested by the Secretary or an Assistant Secretary of the Corporation without necessity of any authorization by the Board of Directors. Any person or persons designated in the manner above stated as the proxy or proxies of the Corporation shall have full right, power and authority to vote the share or shares of stock issued by such other corporation and owned by the Corporation in the same manner as such share or shares might be voted by the Corporation. SECTION 6.8. AMENDMENTS. - These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board of Directors at any regular or special meeting of the Board of Directors. EX-3 3 Exhibit 3(d) BYLAWS AS AMENDED OF IES UTILITIES INC. (Amended as of February 4, 1997) ARTICLE I OFFICES SECTION 1.1. PRINCIPAL OFFICE. - The principal office shall be established and maintained in the ie: Tower, 200 First Street, S.E., in the City of Cedar Rapids, in the County of Linn, in the State of Iowa. SECTION 1.2. OTHER OFFICES. - The Corporation may have other offices, either within or without the State of Iowa, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. The registered office of the Corporation required by the Iowa Business Corporation Act to be maintained in the State of Iowa may be, but need not be identical with the principal office in the State of Iowa, and the address of the registered office may be changed from time to time by the Board of Directors. ARTICLE II SHAREHOLDERS SECTION 2.1. ANNUAL MEETING. - The annual meeting of shareholders for the election of directors and the transaction of other business shall be held, in each year, on the third Tuesday in May at two o'clock in the afternoon (if such day is a holiday, the annual meeting will be held at such time on the next succeeding business day) or any other date specified by the Board of Directors. SECTION 2.2. PLACE OF SHAREHOLDERS' MEETING. - The annual meeting or any special meeting of shareholders shall be held at the principal office of the Corporation or any place, within the State of Iowa, as shall be designated by the Board of Directors and stated in the notice of the meeting. SECTION 2.3. SPECIAL MEETINGS. - Special meetings of the shareholders may be called by the Chairman of the Board, the President, the Board of Directors, or the holders of not less than ten percent of all the shares entitled to vote at the meeting. SECTION 2.4. NOTICE OF MEETINGS. - WAIVER. - Written or printed notice, stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Board of Directors, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at the address appearing on the stock transfer books of the Corporation, with postage thereon prepaid. SECTION 2.5. CLOSING OF TRANSFER BOOKS; FIXING OF RECORD DATE. - For the purpose of determining shareholders entitled to notice of, or to vote at, any special meeting of shareholders, or at any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors of the Corporation may provide that the stock transfer books shall be closed for a stated period but not to exceed, in any case, 60 days. If the stock transfer books shall be closed for the purpose of determining shareholders entitled to notice of or to vote at a meeting of shareholders, such books shall be closed for at least 10 days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case not to be more than 70 days, and in the case of a meeting of shareholders not less than 10 days, prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. SECTION 2.6. VOTING RECORD. - The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least 10 days prior to each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order with the address of and the number of shares held by each, which record shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours for a period of 10 days prior to such meeting. Such record shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original stock transfer book shall be prima facie evidence of the identity of the shareholders entitled to examine such record or transfer books or to vote at any meeting of shareholders. SECTION 2.7. QUORUM. - A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment only if a quorum is represented throughout. SECTION 2.8. CONDUCT OF MEETING. - Meetings of the shareholders shall be presided over by one of the following officers in the order of seniority if present and acting - the Chairman of the Board, the President, the Secretary, or if none of the foregoing is in office and present and acting, by a chairperson to be chosen by the shareholders. The Secretary of the Corporation, or if absent, an Assistant Secretary, shall act as secretary of the meeting, but if neither the Secretary nor an Assistant Secretary is present, or if the Secretary is presiding over the meeting and the Assistant Secretary is not present, the Chairman of the meeting shall appoint a secretary of the meeting. SECTION 2.9. PROXIES. - At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. SECTION 2.10. VOTING OF SHARES. - Each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders. SECTION 2.11. VOTING OF SHARES BY CERTAIN HOLDERS. - Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the Bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by such person, either in person or by proxy, without a transfer of such shares into that person's name. Shares standing in the name of a trustee may be voted by such trustee, either in person or by proxy, without a transfer of such shares into the trustee's name. The Corporation may request evidence of such fiduciary status with respect to the vote, consent, waiver, or proxy appointment. Shares standing in the name of a receiver or trustee in bankruptcy may be voted by such receiver or trustee, and shares held by or under the control of a receiver may be voted by such receiver without the transfer of the shares into such person's name if authority so to do be contained in an appropriate order of the court by which such receiver was appointed. A pledgee, beneficial owner, or attorney-in-fact of the shares held in the name of a shareholder shall be entitled to vote such shares. The Corporation may request evidence of such signatory's authority to sign for the shareholder with respect to the vote, consent, waiver, or proxy appointment. Neither treasury shares nor shares held by another corporation, if a majority of the shares entitled to vote for the election of Directors of such other corporation is held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time. ARTICLE III BOARD OF DIRECTORS SECTION 3.1. GENERAL POWERS. - The business and affairs of the Corporation shall be managed by its Board of Directors. SECTION 3.2. NUMBER, TENURE, QUALIFICATIONS AND REMOVAL. - The number of Directors of the Corporation shall be nine. Each Director shall hold office until the next annual meeting of shareholders and until the Director's successor shall have been elected and qualified, unless removed at a meeting called expressly for that purpose by a vote of the holders of a majority of the shares then entitled to vote at an election of Directors. A Director may only be removed upon a showing of cause. Directors need not be residents of the State of Iowa or shareholders of the Corporation. Not more than three Directors shall be officers or employees of the Corporation or its subsidiaries. No person who has reached the age of 70 years shall be eligible for election or re- election to the Board of Directors, unless approved by the Board of Directors upon recommendation by the Chairman of the Board and the Nominating Committee. Except for the Chief Executive Officer, any Officer or employee of the Corporation serving as a Director who retires, resigns or is removed or terminated from his or her present office or employment with the Corporation shall simultaneously resign from the Board of Directors. In the event the Chief Executive Officer resigns or retires from his or her office or employment with the Corporation, he or she shall simultaneously submit his or her resignation from the Board of Directors if requested by the Nominating Committee. In the event that the Chief Executive Officer is removed from his or her office by the Board of Directors, or is involuntarily terminated from employment with the Corporation, he or she shall simultaneously submit his or her resignation from the Board of Directors. SECTION 3.3. REGULAR MEETINGS. - An annual meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. Unless otherwise provided by resolution of the Board of Directors, regular meetings of the Board of Directors, additional to the annual meeting, shall be held on the first Tuesday of February, May, and August, and on the first Wednesday of November of each year, at the principal office or any place within or without the State of Iowa as shall be designated by the Board of Directors without notice other than such resolution. SECTION 3.4. SPECIAL MEETINGS. - Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, President or any two Directors. The person or persons authorized to call special meetings of the Board of Directors may fix any place either within or without the State of Iowa, whether in person or by telecommunications, as the place for holding any special meeting of the Board of Directors called by them. SECTION 3.5. NOTICE. - Notice of any special meeting shall be given at least three days prior to the meeting by written notice delivered personally or mailed to each Director at the Director's business address, by telegram, or orally by telephone. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, so addressed, with postage prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 3.6. QUORUM. - A majority of the number of Directors fixed by Section 3.2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such majority is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. SECTION 3.7. MANNER OF ACTING. - The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. A Director shall be considered present at a meeting of the Board of Directors or of a committee designated by the Board if the Director participates in such meeting by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. SECTION 3.8. INFORMAL ACTION. Any action required or permitted to be taken at any meeting of the Directors of the Corporation or of any committee of the Board may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the Directors or all of the members of the committee of Directors, as the case may be. Such consent shall have the same force and effect as a unanimous vote at a meeting and shall be filed with the Secretary of the Corporation to be included in the official records of the Corporation. SECTION 3.9. PRESUMPTION OF ASSENT. - A Director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless (a) the Director objects at the beginning of the meeting or promptly upon arrival to the holding of or transacting business at the meeting, (b) the Director's dissent shall be entered in the minutes of the meeting, or (c) the Director shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered or certified mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a Director who voted in favor of such action. SECTION 3.10. VACANCIES. - Any vacancy occurring in the Board of Directors and any directorship to be filled by reason of an increase in the number of Directors may be filled by the affirmative vote of a majority of the Directors then in office, even if less than a quorum of the Board of Directors. Failure to attend three consecutive regular meetings of the Board of Directors shall disqualify a Director from further service as a Director during the year in which the third delinquency occurs and shall make such Director ineligible for re- election, unless such failure to attend be determined by the affirmative vote of two-thirds of the remaining Directors holding office to be due to circumstances beyond the control of such Director. A resignation may be tendered by any Director at any meeting of the shareholders or of the Board of Directors, who shall at such meeting accept the same. SECTION 3.11. COMPENSATION. - The Directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or may receive a stated salary as Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 3.12. EXECUTIVE COMMITTEE. - The Board of Directors shall, at each annual meeting thereof, appoint from its number an Executive Committee of not less than three (3) nor more than five (5) members, including the Chairman of the Board and the Chief Executive Officer of the Corporation, to serve, subject to the pleasure of the Board, for the year next ensuing and until their successors are appointed by the Board. The Board of Directors at such time shall also fix the compensation to be paid to the members of the Executive Committee. No member of the Executive Committee shall continue to be a member after ceasing to be a Director of the Corporation. The Board of Directors shall have the power at any time to increase or decrease the number of members of the Executive Committee, to fill vacancies, to change any member, and to change the functions or terminate the Committee's existence. SECTION 3.13. POWERS OF EXECUTIVE COMMITTEE. - The Executive Committee appointed by the Board of Directors as above provided shall possess all the power and authority of the Board of Directors when said Board is not in session, but the Executive Committee shall not have the power to: (1) declare dividends or distributions, (2) approve or recommend directly to the shareholders actions required by law to be approved by shareholders, (3) fill vacancies on the Board of Directors or designate directors for purposes of proxy solicitation, (4) amend the Articles, (5) adopt, amend, or repeal Bylaws, (6) approve a plan of merger not requiring shareholders approval, (7) authorize reacquisition of shares unless pursuant to a method specified by the Board, or (8) authorize the sale or issuance of shares or designate the terms of a series of a class of shares, except pursuant to a method specified by the Board, to the extent permitted by law. SECTION 3.14. PROCEDURE: MEETINGS: QUORUM. - Regular meetings of the Executive Committee may be held at least once in each month on such day as the Committee shall elect and special meetings may be held at such other times as the Chairman of the Board or any two members of the Executive Committee may designate. Notice of special meetings of the Executive Committee shall be given by letter, telegram, or cable delivered for transmission not later than during the second day immediately preceding the day for such meeting or by word of mouth or telephone not later than the day immediately preceding the date for such meeting. No such notice need state the business to be transacted at the meeting. No notice need be given of an adjourned meeting. The Executive Committee may fix its own rules of procedure. It shall keep a record of its proceedings and shall report these proceedings to the Board of Directors at the regular meeting thereof held next after the meeting of the Executive Committee. Attendance at any meeting of the Executive Committee at a special meeting shall constitute a waiver of notice of such special meeting. At its last meeting preceding the annual meeting of the Board of Directors, the Executive Committee shall make to the Board its recommendation of officers of the Corporation to be elected by the Board for the ensuing year. The Chairman of the Board shall act as Chairman at all meetings of the Executive Committee. The Secretary of the Corporation shall act as Secretary of the meeting. In case of the absence from any meeting of the Executive Committee of the Secretary of the Corporation, the Executive Committee shall appoint a secretary of the meeting. The Executive Committee may hold its meetings within or without the State of Iowa, as it may from time to time by resolution determine. A majority of the Executive Committee shall be necessary to constitute a quorum for the transaction of any business, and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the Executive Committee. The members of the Executive Committee shall act only as a committee, and the individual members shall have no power as such. SECTION 3.15. OTHER COMMITTEES. - The Board of Directors may appoint by resolution adopted by a majority of the full Board of Directors from among its members, other committees, temporary or permanent, and, to the extent permitted by law and these Bylaws, may designate the duties, powers, and authorities of such committees subject to the same restriction of powers as provided in Section 3.13. ARTICLE IV OFFICERS SECTION 4.1. OFFICERS. - The officers of the Corporation shall be a Chairman of the Board, a President, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. Such other officers, including vice presidents, general counsel and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. Any two or more of the offices may be held by the same person if so decided by the Board of Directors. SECTION 4.2. ELECTION AND TERM OF OFFICE. - The officers of the Corporation to be elected by the Board of Directors shall be elected annually by the Board at its annual meeting held after each annual meeting of the shareholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. A vacancy in any office for any reason may be filled by the Board of Directors for the unexpired portion of the term. SECTION 4.3. REMOVAL OF OFFICERS. - Any officer may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer shall not of itself create contract rights. SECTION 4.4. CHAIRMAN OF THE BOARD. - The Chairman of the Board shall be the Chief Executive Officer of the Corporation. The Chairman of the Board shall preside at all meetings of the Board of Directors and shall be a member of the Executive Committee. The Chairman of the Board shall see that all resolutions and orders of the Board of Directors or the Executive Committee are carried into effect and shall exercise such other powers and perform such other duties as may be designated by the Board of Directors and the Executive Committee. SECTION 4.5. PRESIDENT. - The President shall be the Chief Operating Officer of the Corporation and shall have general supervision of and be accountable for the control of the Corporation's business affairs, properties and management and otherwise shall have the general powers and duties usually vested with the office of President of a Corporation, subject, however, to the control of the Board of Directors, the Executive Committee, and the Chairman of the Board & Chief Executive Officer. The President shall see that all resolutions and orders of the Board of Directors or the Executive Committee are carried into effect and shall exercise such other powers and perform such other duties as may be designated by the Board of Directors, the Executive Committee, and the Chairman of the Board & Chief Executive Officer. SECTION 4.6. VICE-PRESIDENTS. - A Vice President (if one or more be elected or appointed) shall have such powers and perform such duties as the Board of Directors may from time to time prescribe or as the Chairman of the Board or the President may from time to time delegate. SECTION 4.7. TREASURER. - The Treasurer shall have the custody of the funds and securities of the Corporation. Whenever necessary or proper, the Treasurer shall (1) endorse, on behalf of the Corporation, checks, notes or other obligations and deposit the same to the credit of the Corporation in such bank or banks or depositories as the Board of Directors may designate; (2) sign receipts or vouchers for payments made to the Corporation which shall also be signed by such other officer as may be designated by the Board of Directors; (3) disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements; and (4) render to the Board of Directors, the Executive Committee, the Chairman of the Board and the President at the regular meetings of the Board or Executive Committee, or whenever any of them may require it, an account of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond with one or more sureties satisfactory to the board, for the faithful performance of the duties of this office, and for the restoration to the Corporation, in case of death, resigna tion, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in possession or under control of the Treasurer. SECTION 4.8. SECRETARY. - The Secretary shall record the votes and proceedings of the Shareholders, the Board of Directors and the Executive Committee in a book or books kept for that purpose, and shall serve notices of and attend all meetings of the Directors, the Executive Committee and shareholders. In the absence of the Secretary or an Assistant Secretary from any meeting of the Board of Directors, the proceedings of such meeting shall be recorded by such other person as may be appointed for that purpose. The Secretary shall keep in safe custody the seal of the Corporation, and duplicates, if any, and when requested by the Board of Directors, or when any instrument shall have been first signed by the Chairman of the Board, the President or a Vice President duly authorized to sign the same, or when necessary to attest any proceedings of the shareholders or directors, shall affix it to any instrument requiring the same, and shall attest the same. The Secretary shall, with the Chairman of the Board or the President, sign certificates of stock of the Corporation and affix a seal of the Corporation or cause such seal to be imprinted or engraved thereon, subject, however, to the provisions providing for the use of facsimile signatures on stock certificates under certain conditions. The Secretary shall have charge of such books and papers as properly belong to such office, or as may be committed to the Secretary's care by the Board of Directors or by the Executive Committee, and shall perform such other duties as pertain to such office, or as may be required by the Board of Directors, the Executive Committee or the Chairman of the Board. SECTION 4.9. ASSISTANT TREASURERS. - Each Assistant Treasurer (if one or more Assistant Treasurers be elected or appointed) shall assist the Treasurer and shall perform such other duties as the Board of Directors may from time to time prescribe or the Chairman of the Board or the President may from time to time delegate. At the request of the Treasurer, any Assistant Treasurer may perform temporarily the duties of Treasurer in the case of the Treasurer's absence or inability to act. In the case of the death of the Treasurer, or in the case of absence or inability to act without having designated an Assistant Treasurer to perform temporarily the duties of Treasurer, an Assistant Treasurer shall be designated by the Chairman of the Board or the President to perform the duties of the Treasurer. Each Assistant Treasurer shall, if required by the Board of Directors, give the Corporation a bond with such surety or sureties as may be ordered by the Board of Directors, for the faithful performance of the duties of such office and for the restoration to the Corporation, in case of death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind belonging to the Corporation in the possession or under control of such Assistant Treasurer. SECTION 4.10. ASSISTANT SECRETARIES. - Each Assistant Secretary (if one or more Assistant secretaries be elected or appointed) shall assist the Secretary and shall perform such other duties as the Board of Directors may from time to time prescribe or the Chairman of the Board or the President may from time to time delegate. At the request of the Secretary, any Assistant Secretary may perform temporarily the duties of Secretary in the case of the Secretary's absence or inability to act. In the case of the death of the Secretary, or in the case of absence or inability to act without having designated an Assistant Secretary to perform temporarily the duties of Secretary, the Assistant Secretary to perform the duties of the Secretary shall be designated by the Chairman of the Board or the President. SECTION 4.11. GENERAL COUNSEL. - The General Counsel shall be responsible for the management of the Legal Department in its support of all other operations of the Corporation including management guidance to assure responsible decisions, information for all employees concerning the legal and judicial environment and recommended changes of law as deemed advisable. In addition, the General Counsel shall be responsible for the coordination of outside counsel activities in all instances as well as the prosecution of charges against the Corporation or other judicial or regulatory activities. This shall include full information for the management and employees of judicial, regulatory or other administrative body rulings and their impact on the Corporation. The duties shall include approval of all legal and contractual documents of the Corporation, prior to their authorization, and full support to various departments to assist in the development of these documents. The General Counsel shall perform such other duties as may be assigned from time to time by the Board of Directors, the Executive Committee, the Chairman of the Board or the President. ARTICLE V CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 5.1. CERTIFICATES FOR SHARES. - Each certificate representing shares of the Corporation shall state upon the face (a) that the Corporation is organized under the laws of the State of Iowa, (b) the name of the person to whom issued, (c) the number and class of shares, and the designation of the series, if any, which such certificate represents, and (d) the par value of each share, if any, and each such certificate shall otherwise be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman of the Board or the President and by the Secretary or an Assistant Secretary and shall be sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles. If a certificate is countersigned by a transfer agent, or registered by a registrar, the signatures of the persons signing for such transfer agent or registrar also may be facsimiles. In case any officer or other authorized person who has signed or whose facsimile signature has been placed upon such certificate for the Corporation shall have ceased to be such officer or employee or agent before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer or employee or agent at the date of its issue. Each certificate for shares shall be consecutively numbered or otherwise identified. All certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe. SECTION 5.2. TRANSFER OF SHARES. - Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record thereof or by such person's legal representative, who shall furnish proper evidence of authority to transfer, or authorized attorney, by power of attorney duly executed and filed with the Secretary of the Corporation, and on surrender for cancellation of the certificate for such shares. Subject to the provisions of Section 2.11 of Article II of these Bylaws, the person in whose name shares stand on the books of the Corporation shall be treated by the Corporation as the owner thereof for all purposes, including all rights deriving from such shares, and the Corporation shall not be bound to recognize any equitable or other claim to, or interest in, such shares or rights deriving from such shares, on the part of any other person, including (without limitation) a purchaser, assignee or transferee of such shares, or rights deriving from such shares, unless and until such purchaser, assignee, transferee or other person becomes the record holder of such shares, whether or not the Corporation shall have either actual or constructive notice of the interest of such purchaser, assignee, transferee or other person. Except as provided in said Section 2.11 hereof, no such purchaser, assignee, transferee or other person shall be entitled to receive notice of the meetings of shareholders, to vote at such meetings, to examine the complete record of the shareholders entitled to vote at meetings, or to own, enjoy or exercise any other property or rights deriving from such shares against the Corporation, until such purchaser, assignee, transferee or other person has become the record holder of such shares. ARTICLE VI MISCELLANEOUS PROVISIONS SECTION 6.1. INDEMNIFICATION. - The Corporation shall indemnify its directors, officers, employees and agents to the full extent permitted by the Iowa Business Corporation Act, as amended from time to time. The Corporation shall purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise against any liability asserted against and incurred by such person in any such capacity or arising out of such person's status as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this section. SECTION 6.2. FISCAL YEAR. - The fiscal year of the Corporation shall be the calendar year. SECTION 6.3. SEAL. - The corporate seal shall be circular in form and shall have inscribed thereon the name of the Corporation and the words "CORPORATE SEAL IOWA". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. SECTION 6.4. CONTRACTS, CHECKS, DRAFTS, LOANS AND DEPOSITS. - All contracts, checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors. The Board may authorize by resolution any officer or officers to enter into and execute any contract or instrument of indebtedness in the name of the Corporation; and such authority may be general or confined to specific instances. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks or other depositories as the Board of Directors may authorize. SECTION 6.5. DIVIDENDS. - Subject to the provisions of the Articles of Incorporation, the Board of Directors may, at any regular or special meeting, declare dividends upon the capital stock of the Corporation payable out of surplus (whether earned or paid-in) or profits as and when they deem expedient. Before declaring any dividend there may be set apart out of surplus or profits such sum or sums as the directors from time to time in their discretion deem proper for working capital or as a reserve fund to meet contingencies or for such other purposes as the directors shall deem conducive to the interests of the Corporation. SECTION 6.6. WAIVER OF NOTICE. - Whenever any notice is required to be given to any shareholder or Director of the Corporation under the provisions of these Bylaws or under the provisions of the Articles of Incorporation or under the provisions of the Iowa Business Corporation Act, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. SECTION 6.7. VOTING OF SHARES OWNED BY THE CORPORATION. - Subject always to the specific directions of the Board of Directors, any share or shares of stock issued by any other corporation and owned or controlled by the Corporation may be voted at any shareholders' meeting of such other corporation by the President of the Corporation if present, or if absent by any other officer of the Corporation who may be present. Whenever, in the judgment of the President, or if absent, of any officer, it is desirable for the Corporation to execute a proxy or give a shareholders' consent in respect to any share or shares of stock issued by any other corporation and owned by the Corporation, such proxy or consent shall be executed in the name of the Corporation by the President or one of the officers of the Corporation and shall be attested by the Secretary or an Assistant Secretary of the Corporation without necessity of any authorization by the Board of Directors. Any person or persons designated in the manner above stated as the proxy or proxies of the Corporation shall have full right, power and authority to vote the share or shares of stock issued by such other corporation and owned by the Corporation in the same manner as such share or shares might be voted by the Corporation. SECTION 6.8. AMENDMENTS. - These Bylaws may be altered, amended or repealed and new Bylaws may be adopted by the Board of Directors at any regular or special meeting of the Board of Directors. EX-4 4 Exhibit 4(g) EXECUTION COPY $300,000,000 THIRD AMENDED AND RESTATED CREDIT AGREEMENT Dated as of November 20, 1996 Among IES DIVERSIFIED INC. as Borrower and THE BANKS NAMED HEREIN as Banks and CITIBANK, N.A. as Agent TABLE OF CONTENTS Section Page ARTICLE I - DEFINITIONS AND ACCOUNTING TERMS 1 SECTION 1.01. Certain Defined Terms. 1 SECTION 1.02. Computation of Time Periods 15 SECTION 1.03. Computations of Outstandings 16 SECTION 1.04. Accounting Terms 16 ARTICLE II - AMOUNTS AND TERMS OF THE ADVANCES 16 SECTION 2.01. The A Advances 16 SECTION 2.03. The B Advances 18 SECTION 2.04. Fees 21 SECTION 2.05. Reduction of the Commitments 21 SECTION 2.06. Repayment of A Advances 22 SECTION 2.07. Interest on A Advances 22 SECTION 2.08. Additional Interest on Eurodollar Rate Advances 22 SECTION 2.09. Interest Rate Determination 23 SECTION 2.10. Voluntary Conversion of A Advances 25 SECTION 2.11. Optional Prepayments of Advances 25 SECTION 2.12. Mandatory Prepayments 25 SECTION 2.13. Increased Costs 26 SECTION 2.14. Illegality 27 SECTION 2.15. Payments and Computations 28 SECTION 2.16. Taxes 29 SECTION 2.17. Sharing of Payments, Etc. 30 SECTION 2.18. Extension of Termination Date 31 ARTICLE III - CONDITIONS OF LENDING 32 SECTION 3.01. Conditions Precedent to Closing 32 SECTION 3.02. Conditions Precedent to Each A Borrowing 34 SECTION 3.03. Conditions Precedent to Each B Borrowing 35 SECTION 3.04. Reliance on Certificates 36 ARTICLE IV -REPRESENTATIONS AND WARRANTIES 36 SECTION 4.01. Representations and Warranties of the Borrower 36 ARTICLE V - COVENANTS OF THE BORROWER 38 SECTION 5.01. Affirmative Covenants 38 SECTION 5.02. Negative Covenants 42 ARTICLE VI - EVENTS OF DEFAULT 46 SECTION 6.01. Events of Default 46 ARTICLE VII - THE AGENT 48 SECTION 7.01. Authorization and Action 48 SECTION 7.02. Agent's Reliance, Etc 49 SECTION 7.03. Citibank, N.A. and Affiliates 49 SECTION 7.04. Lender Credit Decision 50 SECTION 7.05. Indemnification 50 SECTION 7.06. Successor Agent 50 ARTICLE VIII - MISCELLANEOUS 51 SECTION 8.01. Amendments, Etc 51 SECTION 8.02. Notices, Etc 51 SECTION 8.03. No Waiver; Remedies 52 SECTION 8.04. Costs, Expenses, Taxes and Indemnification 52 SECTION 8.05. Right of Set-off 53 SECTION 8.06. Binding Effect 54 SECTION 8.07. Assignments and Participations 54 SECTION 8.08. Confidentiality 57 SECTION 8.09. Waiver of Jury Trial 58 SECTION 8.10. Consent 58 SECTION 8.11. Governing Law 58 SECTION 8.12. Relation of the Parties; No Beneficiary 58 SECTION 8.13. Execution in Counterparts 58 THIRD AMENDED AND RESTATED CREDIT AGREEMENT Dated as of November 20, 1996 THIS CREDIT AGREEMENT is made by and among: (i) IES DIVERSIFIED INC., an Iowa corporation (the "Borrower"), all of whose common stock is owned on the date hereof by the Parent (as hereinafter defined), (ii) the banks (the "Banks") listed on the signature pages hereof and the other Lenders (as hereinafter defined) from time to time party hereto, and (iii) Citibank, N.A., as agent (the "Agent") for the Lenders hereunder. PRELIMINARY STATEMENTS (1) The Borrower, certain banks (the "Existing Banks") and Citibank, N.A., as agent for the Existing Banks, are parties to that certain Second Amended and Restated Credit Agreement, dated as of November 9, 1994 (the "Existing Facility"). (2) The Borrower has requested that the Existing Facility be amended and restated so as to (i) increase the Commitments (as defined therein) to $300,000,000 and (ii) effect certain other amendments and modifications as set forth herein. (3) The Banks and the Agent have agreed to such request, on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree that the Existing Facility is hereby amended and restated in its entirety to read as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "A Advance" means an advance by a Lender to the Borrower as part of an A Borrowing and refers to an Adjusted CD Rate Advance, a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of A Advance. "A Borrowing" means a borrowing consisting of simultaneous A Advances of the same Type, having the same Interest Period and ratably made or Converted on the same day by each of the Lenders pursuant to Section 2.02 or 2.10, as the case may be. All Advances of the same Type, having the same Interest Period and made or Converted on the same day shall be deemed a single Borrowing hereunder until repaid or next Converted. "A Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit 1.01A-1 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the A Advances made by such Lender. "Adjusted CD Rate" means, for any Interest Period for each Adjusted CD Rate Advance made as part of the same A Borrowing, an interest rate per annum equal to the sum of: (a) the rate per annum obtained by dividing (i) the rate of interest determined by the Agent to be the average (rounded upward to the nearest whole multiple of 1/100 of 1% per annum, if such average is not such a multiple) of the consensus bid rate determined by each of the Reference Banks for the bid rates per annum at 9:00 a.m. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period of New York certificate of deposit dealers of recognized standing selected by such Reference Bank for the purchase at face value of certificates of deposit of such Reference Bank in an amount substantially equal to such Reference Bank's Adjusted CD Rate Advance made as part of such A Borrowing and maturing on the last day of such Interest Period, by (ii) a percentage equal to 100% minus the Adjusted CD Rate Reserve Percentage (as defined below) for such Interest Period, plus (b) the Assessment Rate (as defined below) for such Interest Period. The "Adjusted CD Rate Reserve Percentage" for the Interest Period for each Adjusted CD Rate Advance comprising part of the same A Borrowing means the reserve percentage applicable on the first day of such Interest Period, as determined by the Agent, under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with deposits exceeding one billion dollars with respect to liabilities consisting of or including (among other liabilities) U.S. dollar nonpersonal time deposits in the United States with a maturity equal to such Interest Period. The "Assessment Rate" for the Interest Period for each Adjusted CD Rate Advance comprising part of the same A Borrowing means the annual assessment rate estimated by the Agent on the first day of such Interest Period for determining the then current annual assessment payable by the Agent to the Federal Deposit Insurance Corporation (or any successor) for insuring U.S. dollar deposits of the Agent in the United States. The Adjusted CD Rate for the Interest Period for each Adjusted CD Rate Advance comprising part of the same A Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks on the first day of such Interest Period, subject, however, to the provisions of Section 2.09. "Adjusted CD Rate Advance" means an A Advance which bears interest as provided in Section 2.07(b). "Advance" means an A Advance or a B Advance. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another entity if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities, by contract, or otherwise. "Alternate Base Rate" means a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the higher of: (c) the rate of interest announced publicly by Citibank, N.A. in New York, New York, from time to time, as Citibank, N.A.'s base rate; and (d) 1/2 of one percent per annum above the Federal Funds Rate. Each change in the Alternate Base Rate shall take effect concurrently with any change in such base rate or the Federal Funds Rate. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance, such Lender's CD Lending Office in the case of an Adjusted CD Rate Advance and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance and, in the case of a B Advance, the office of such Lender notified by such Lender to the Agent as its Applicable Lending Office with respect to such B Advance. "Applicable Margin" means, for a Eurodollar Rate Advance, an Adjusted CD Rate Advance or Base Rate Advance, the basis points per annum set forth, in the columns identified as Level 1, Level 2, Level 3 or Level 4 below, opposite the rate applicable to such Advance. Level 1 Level 2 Level 3 Level 4 S&P A- or better BBB+ BBB below BBB* and and and or Moody's A3 or better Baa1 Baa2 below Baa2* Basis Points Per Annum Eurodollar Rate 25.0 25.0 30.0 70.0 Adjusted CD Rate 37.5 37.5 42.5 82.5 Base Rate Advance 0 0 0 100.0 * or unrated The Applicable Margin will be based upon the Level corresponding to First Mortgage Bond (IES Utilities) Debt Rating at the time of determination. Any change in the Applicable Margin shall be effective as of the Borrowing date following the date on which the applicable rating agency announces the applicable change in ratings. "Applicable Rate" means: (i) in the case of each Base Rate Advance, a rate per annum equal at all times to the sum of the Alternate Base Rate in effect from time to time plus the Applicable Margin in effect from time to time; (ii) in the case of each Adjusted CD Rate Advance comprising part of the same A Borrowing, a rate per annum during each Interest Period equal at all times to the sum of the Adjusted CD Rate for such Interest Period plus the Applicable Margin in effect from time to time during such Interest Period; and (iii) in the case of each Eurodollar Rate Advance comprising part of the same A Borrowing, a rate per annum during each Interest Period equal at all times to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin in effect from time to time during such Interest Period. "Available Commitment" means, for each Lender at any time on any day, the unused portion of such Lender's Commitment, computed after giving effect to all Extensions of Credit theretofore made on such day and the application of proceeds therefrom. "Available Commitments" means the aggregate of the Lenders' Available Commitments hereunder. "B Advance" means an advance by a Lender to the Borrower as part of a B Borrowing resulting from the auction bidding procedure described in Section 2.03. "B Borrowing" means a borrowing consisting of simultaneous B Advances from each of the Lenders whose offer to make one or more B Advances as part of such borrowing has been accepted by the Borrower under the auction bidding procedure described in Section 2.03. "B Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit 1.01A-2 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from a B Advance(s) made by such Lender. "B Reduction" has the meaning assigned to that term in Section 2.01. "Base Rate Advance" means an A Advance that bears interest as provided in Section 2.07(a). "Borrowing" means an A Borrowing or a B Borrowing. Any A Borrowing consisting of A Advances of a particular Type may be referred to as being an A Borrowing of such "Type". "Business Day" means a day of the year on which banks are not required or authorized to close in New York City, Chicago, Illinois or Cedar Rapids, Iowa, and, if the applicable Business Day relates to any Eurodollar Rate Advance, on which dealings are carried on in the London interbank market. "CD Lending Office" means, with respect to any Lender, the office or affiliate of such Lender specified as its "CD Lending Office" opposite its name on Schedule I hereto or in the Lender Assignment pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office) or such other office or affiliate of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "Capitalized Lease Obligations" means obligations to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real and/or personal property which obligation is required to be classified and accounted for as a capital lease on a balance sheet prepared in accordance with generally accepted accounting principles, and for purposes hereof the amount of such obligations shall be the capitalized amount determined in accordance with such principles. "Cash and Cash Equivalents" means, with respect to any Person, the aggregate amount of the following, to the extent owned by such Person free and clear of all Liens, encumbrances and rights of others and not subject to any judicial, regulatory or other legal constraint: (i) cash on hand; (ii) Dollar demand deposits maintained in the United States with any commercial bank and Dollar time deposits maintained in the United States with, or certificates of deposit having a maturity of one year or less issued by, any commercial bank which has its head office in the United States and which has a combined capital and surplus of at least $100,000,000; (iii) eurodollar time deposits maintained in the United States with, or eurodollar certificates of deposit having a maturity of one year or less issued by, any commercial bank having outstanding unsecured indebtedness that is rated (on the date of acquisition thereof) A- or better by S&P or A3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured bank indebtedness); (iv) direct obligations of, or unconditionally guaranteed by, the United States and having a maturity of one year or less; (v) commercial paper rated (on the date of acquisition thereof) A-1 or P- 1 or better by S&P or Moody's, respectively (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating commercial paper), and having a maturity of one year or less; (vi) obligations with any Lender or any other commercial bank in respect of the repurchase of obligations of the type described in clause (iv), above, provided that such repurchase obligations shall be fully secured by obligations of the type described in said clause (iv) and the possession of such obligations shall be transferred to, and segregated from other obligations owned by, such Lender or such other commercial bank; and (vii) preferred stock of any Person that is rated A- or better by S&P or A3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating preferred stock of entities engaged in such businesses). "Closing" means the day upon which each of the applicable conditions precedent enumerated in Section 3.01 shall be fulfilled to the satisfaction of, or waived with the consent of, the Lenders, the Agent and the Borrower. All transactions contemplated by the Closing shall take place on a Business Day on or prior to November 20, 1996, at the offices of King & Spalding, 120 West 45th Street, New York, New York 10036, at 10:00 a.m., or such later Business Day as the parties hereto may mutually agree. "Commitment" means, for each Lender, the obligation of such Lender to make Advances to the Borrower in an amount no greater than the amount set forth on Schedule I hereto or, if such Lender has entered into one or more Lender Assignments, set forth for such Lender in the Register maintained by the Agent pursuant to Section 8.07(c), in each such case as such amount may be reduced from time to time pursuant to Section 2.05. "Commitments" means the total of the Lenders' Commitments hereunder. The Commitments shall in no event exceed $300,000,000. "Consolidated Capital" means, with respect to any Person, at any date of determination, the sum of (a) Consolidated Debt of such Person, (b) consolidated equity of the common stockholders of such Person and its Consolidated Subsidiaries, (c) consolidated equity of the preference stockholders of such Person and its Consolidated Subsidiaries and (d) consolidated equity of the preferred stockholders of such Person and its Consolidated Subsidiaries, in each case determined at such date in accordance with generally accepted accounting principles. "Consolidated Debt" means, with respect to any Person, at any date of determination, the aggregate Debt of such Person and its Consolidated Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Subsidiary" means, with respect to any Person, any Subsidiary of such Person whose accounts are or are required to be consolidated with the accounts of such Person in accordance with generally accepted accounting principles. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type, or to the selection of a new, or the renewal of the same, Interest Period for Advances, as the case may be, pursuant to Section 2.09 or 2.10. "Debt" means, for any Person, any and all indebtedness, liabilities and other monetary obligations of such Person (i) for borrowed money or evidenced by bonds, debentures, notes or other similar instruments, (ii) to pay the deferred purchase price of property or services (except trade accounts payable arising and repaid in the ordinary course of business), (iii) Capitalized Lease Obligations, (iv) under reimbursement or similar agreements with respect to letters of credit (other than trade letters of credit) issued to support indebtedness or obligations of such Person or of others of the kinds referred to in clauses (i) through (iii), above, and clause (v), below, (v) reasonably quantifiable obligations under direct guaranties or indemnities, or under support agreements, in respect of, and reasonably quantifiable obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, or to assure an obligee against failure to make payment in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (iv), above, and (vi) in respect of unfunded vested benefits under Plans. In determining Debt for any Person, there shall be included accrued interest on the principal amount thereof to the extent such interest has accrued for more than six months. "Default Rate" means a rate per annum equal at all times to 2% per annum above the Applicable Rate in effect from time to time for Base Rate Advances. "Direct Subsidiary" means, with respect to any Person, any Subsidiary directly owned by such Person. "Dollars" and the sign "$" each means lawful money of the United States. "Domestic Lending Office" means, with respect to any Lender, the office or affiliate of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Lender Assignment pursuant to which it became a Lender, or such other office or affiliate of such Lender as such Lender may from time to time specify in writing to the Borrower and the Agent. "Eligible Assignee" means (a) a commercial bank or trust company organized under the laws of the United States, or any State thereof; (b) a commercial bank organized under the laws of any other country that is a member of the OECD, or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States; (c) the central bank of any country that is a member of the OECD; and (d) any other commercial bank or other financial institution engaged generally in the business of extending credit or purchasing debt instruments; provided, however, that (A) any such Person shall also (i) have outstanding unsecured indebtedness that is rated A- or better by S&P or A3 or better by Moody's (or an equivalent rating by another nationally-recognized credit rating agency of similar standing if neither of such corporations is then in the business of rating unsecured indebtedness of entities engaged in such businesses) or (ii) have combined capital and surplus (as established in its most recent report of condition to its primary regulator) of not less than $250,000,000 (or its equivalent in foreign currency), (B) any Person described in clause (b), (c), or (d), above, shall, on the date on which it is to become a Lender hereunder, (i) be entitled to receive payments hereunder without deduction or withholding of any United States Federal income taxes (as contemplated by Section 2.16) and (ii) not be incurring any losses, costs or expenses of the type for which such Person could demand payment under Section 2.13, and (C) any Person described in clauses (b), (c) and (d), above, shall, in addition, be reasonably acceptable to the Agent and the Borrower. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means, with respect to any Person, any trade or business (whether or not incorporated) which is a member of a group of which such Person is a member and which is under common control within the meaning of the regulations under Section 414(b) or (c) of the Internal Revenue Code of 1986, as amended from time to time. "ERISA Event" means (i) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, unless the 30-day notice requirement with respect thereto has been waived by the PBGC; (ii) the provision by the administrator of any Plan of notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (iii) the cessation of operations at a facility in the circumstances described in Section 4062(e) of ERISA; (iv) the withdrawal by the Borrower or an ERISA Affiliate of the Borrower from a Multiple Employer Plan during a plan year for which it was a "substantial employer", as defined in Section 4001(a)(2) of ERISA; (v) the failure by the Borrower or an ERISA Affiliate of the Borrower to make a payment to a Plan required under Section 302(f)(1) of ERISA, which failure results in the imposition of a lien for failure to make required payments; (vi) the adoption of an amendment to a Plan requiring the provision of security to such Plan, pursuant to Section 307 of ERISA; or (vii) the institution by the PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or the occurrence of any event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, a Plan. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office or affiliate of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Lender Assignment pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office or affiliate of such Lender as such Lender may from time to time specify in writing to the Borrower and the Agent. "Eurodollar Rate" means, for each Interest Period for each Eurodollar Rate Advance made as part of the same A Borrowing, an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 a.m. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance made as part of such A Borrowing and for a period equal to such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance made as part of the same A Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.09. "Eurodollar Rate Advance" means an A Advance that bears interest as provided in Section 2.07(c). "Eurodollar Reserve Percentage" of any Lender for each Interest Period for each Eurodollar Rate Advance means the reserve percentage applicable to such Lender during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under Regulation D or other regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) then applicable to such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning assigned to that term in Section 6.01. "Existing Banks" has the meaning assigned to that term in Preliminary Statement (1) to this Agreement. "Existing Credit Agreement" has the meaning assigned to that term int he Preliminary Statements. "Existing Facility" has the meaning assigned to that term in Preliminary Statement (1) to this Agreement. "Extension of Credit" means the making of a Borrowing. For purposes of this Agreement, a Conversion shall not constitute an Extension of Credit. "External Line" means any arrangement (other than pursuant to this Agreement or the Senior Debt Documents) with any commercial bank pursuant to which such commercial bank has agreed (whether or not such agreement shall constitute a committed facility or shall otherwise be legally enforceable) to make unsecured loans or extend credit on an unsecured basis to one or more Borrowers up to a specified amount ether on a demand basis or for periods of not in excess of 270 days or any similar finance arrangement commonly known as a "line of credit". "Facility Fee" means a fee which shall be payable on the aggregate amount of the Commitments, irrespective of usage, to each Lender pro rata on the amount of their respective Commitments. As described below, the Facility Fee will be determined with reference to the basis points per annum set forth in the columns identified as Level 1, Level 2, Level 3 or Level 4 and the First Mortgage Bond (IES Utilities) Debt Rating. Level 1 Level 2 Level 3 Level 4 S&P A- or better BBB+ BBB below BBB* and and and or Moody's A3 or better Baa1 Baa2 below Baa2* Basis Points 15.0 20.0 25.0 30.0 * or unrated Any change in the Facility Fee shall be effective as of the date on which the applicable rating agency announces the applicable change of ratings. "FDIC Assessment Rate" mean, during an Interest Period for CD Rate Advances comprising a single Borrowing, the annual rate (rounded upwards, if necessary, to the next 1/100 of 1%) most recently estimated by the Administrative Agent as the then current annual assessment rate payable by the Administrative Agent to the Federal Deposit Insurance Corporation (or any successor) for insurance by such Corporation (or such successor) of time deposits made in U.S. dollars at the Administrative Agent's domestic offices. The FDIC Assessment Rate shall be the same for all CD Rate Advances comprising the same Borrowing and shall be adjusted automatically on and as of he effective date of each change in any such rate. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" means that certain letter agreement, dated October 17, 1996, among the Borrower, the Agent and Citicorp Securities, Inc. "First Mortgage Bonds (IES Utilities) Debt Rating" means the rating assigned by Moody's or S&P, as the case may be, to the senior secured non-credit enhanced long- term Debt of IES Utilities. "Governmental Approval" means any authorization, consent, approval, license, franchise, lease, ruling, tariff, rate, permit, certificate, exemption of, or filing or registration with, any governmental authority or other legal or regulatory body. "Hazardous Substance" means any waste, substance, or material identified as hazardous, dangerous or toxic by any office, agency, department, commission, board, bureau, or instrumentality of the United States or of the State or locality in which the same is located having or exercising jurisdiction over such waste, substance or material. "IES Utilities" means IES Utilities Inc., an Iowa corporation, all of whose common stock is owned on the date hereof by the Parent. "Increasing Lender" means each Existing Bank whose Commitment exceeds its "Commitment" under the Existing Facility. "Information Memorandum" means the Confidential Information Memorandum of the Parent dated October 1996 previously delivered by Citicorp Securities, Inc. at the direction of the Parent to the Lenders. "Interest Period" means, for each A Advance made as part of the same A Borrowing, the period commencing on the date of such A Advance or the date of the Conversion of any A Advance into such an A Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be 30, 60, 90 or 180 days in the case of an Adjusted CD Rate Advance, and 1, 2, 3 or 6 months in the case of a Eurodollar Rate Advance, in each case as the Borrower may, upon notice received by the Agent not later than 12:00 noon (New York City time) (a) on the third Business Day prior to the first day of such Interest Period in the case of a Eurodollar Rate Advance and (b) on the second Business Day prior to the first day of such Interest Period in the case of an Adjusted CD Rate Advance, select; provided, however, that: (i) the Borrower may not select any Interest Period that ends after the Termination Date; (ii) Interest Periods commencing on the same date for A Advances comprising part of the same A Borrowing shall be of the same duration; and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, in the case of any Interest Period for a Eurodollar Rate Advance, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. "Lenders" means the Banks listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07. "Lender Assignment" means an assignment and acceptance agreement entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit 8.07. "Lien" has the meaning assigned to that term in Section 5.02(a). "Loan Documents" means this Agreement, the Notes, the Support Agreement, the Fee Letter and all other agreements, instruments and documents now or hereafter executed and/or delivered pursuant hereto or thereto. "Majority Lenders" means, on any date of determination, Lenders that, collectively, on such date (i) hold at least 66-2/3% of the then aggregate unpaid principal amount of the A Advances owing to Lenders and (ii) if no A Advances are then outstanding, have Percentages in the aggregate of at least 66-2/3%. Any determination of those Lenders constituting the Majority Lenders shall be made by the Agent and shall be conclusive and binding on all parties absent manifest error. "Moody's" means Moody's Investors Service, Inc. or any successor thereto. "Moody's Rating" means, on any date of determination, the rating of the long-term senior secured Debt of IES Utilities most recently announced by Moody's. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, which is subject to Title IV of ERISA and to which the Borrower or any ERISA Affiliate of the Borrower is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions, such plan being maintained pursuant to one or more collective bargaining agreements. "Multiple Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, which is subject to Title IV of ERISA and which (i) is maintained for employees of the Borrower or an ERISA Affiliate of the Borrower and at least one Person other than the Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of which the Borrower or an ERISA Affiliate of the Borrower could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "New Lenders" means the Banks other than the Existing Banks. "Note" means an A Note or a B Note. "Notice of A Borrowing" has the meaning assigned to that term in Section 2.02(a). "Notice of B Borrowing" has the meaning assigned to that term in Section 2.03(a). "Notice of Conversion" has the meaning assigned to that term in Section 2.10. "OECD" means the Organization for Economic Cooperation and Development. "Parent" means IES Industries Inc., an Iowa corporation, or any successor by merger thereto that succeeds to the obligations of IES Industries Inc. under, and in accordance with Section 2(e) of, the Support Agreement. "PBGC" means the Pension Benefit Guaranty Corporation (or any successor entity) established under ERISA. "Percentage" means, for any Lender on any date of determination, the percentage obtained by dividing such Lender's Commitment on such day by the total of the Commitments on such date, and multiplying the quotient so obtained by 100%. "Person" means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. "Plan" means a Single Employer Plan or a Multiple Employer Plan. "PUHCA" means the Public Utility Holding Company Act of 1935, as amended from time to time. "Reference Banks" means Citibank, N.A., CIBC Inc. and The Sanwa Bank, Ltd., or any additional or substitute Lenders as may be selected from time to time to act as Reference Banks hereunder by the Agent, the Majority Lenders and the Borrower. "Register" has the meaning assigned to that term in Section 8.07(c). "S&P" means Standard & Poor's Corporation or any successor thereto. "S&P Rating" means, on any date of determination, the rating of the long-term senior secured Debt of IES Utilities most recently announced by S&P. "Senior Financial Officer" means the President, the Chief Executive Officer, the Chief Financial Officer or the Treasurer of the Borrower. "Significant Subsidiary" means any Subsidiary of the Borrower that, on a consolidated basis with any of its Subsidiaries as of any date of determination, accounts for more than 20% of the consolidated assets (valued at book value) of the Borrower and its Subsidiaries. "Single Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, which is subject to Title IV of ERISA and which (i) is maintained for employees of the Borrower or an ERISA Affiliate of the Borrower and no Person other than the Borrower and its ERISA Affiliates, or (ii) was so maintained and in respect of which the Borrower or an ERISA Affiliate of the Borrower could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether at the time capital stock (or comparable interest) of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by said Person (whether directly or through one of more other Subsidiaries). In the case of an unincorporated entity, a Person shall be deemed to have more than 50% of interests having ordinary voting power only if such Person's vote in respect of such interests comprises more than 50% of the total voting power of all such interests in the unincorporated entity. "Support Agreement" means the Third Amended and Restated Support Agreement, dated as of the date hereof, between the Parent and the Borrower, substantially in the form of Exhibit 1.01B. "Termination Date" means the earlier to occur of (i) November 20, 1999 or such later date to which the Termination Date is extended in accordance with Section 2.18, and (ii) the date of termination or reduction in whole of the Commitments pursuant to Section 2.05 or 6.01. "Type" has the meaning assigned to that term (i) in the definition of "A Advance" when used in such context and (ii) in the definition of "Borrowing" when used in such context. "Unmatured Default" means an event that, with the giving of notice or lapse of time, or both, would constitute an Event of Default. SECTION 1.02. Computation of Time Periods. Unless otherwise indicated, each reference in this Agreement to a specific time of day is a reference to New York City time. In the computation of periods of time under this Agreement, any period of a specified number of days or months shall be computed by including the first day or month occurring during such period and excluding the last such day or month. In the case of a period of time "from" a specified date "to" or "until" a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.03. Computations of Outstandings. Whenever reference is made in this Agreement to the "principal amount outstanding" on any date under this Agreement, such reference shall refer to the aggregate principal amount of all Advances outstanding on such date after giving effect to all Extensions of Credit to be made on such date and the application of the proceeds thereof. SECTION 1.04. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5(d) of the Support Agreement. ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The A Advances. (a) Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make A Advances to the Borrower from time to time on any Business Day during the period from the Closing until the Termination Date in an aggregate outstanding amount not to exceed at any time such Lender's Available Commitment, provided that the aggregate amount of the Commitments of the Lenders shall be deemed used from time to time to the extent of the aggregate amount of the B Advances then outstanding and such deemed use of the aggregate amount of the Commitments shall be applied to the Lenders ratably according to their respective Percentages (such deemed use of the aggregate amount of the Commitments being a "B Reduction"). Each A Borrowing shall be in an aggregate amount not less than $5,000,000 (or, if lower, the amount of the Available Commitments) or an integral multiple of $1,000,000 in excess thereof and shall consist of A Advances of the same Type made on the same day by the Lenders ratably according to their respective Percentages. Within the limits of each Lender's Commitment and as hereinabove and hereinafter provided, the Borrower may request Extensions of Credit hereunder, and repay or prepay Advances pursuant to Section 2.11 and utilize the resulting increase in the Available Commitments for further Extensions of Credit in accordance with the terms hereof. (b) In no event shall the Borrower be entitled to request or receive any Extensions of Credit that would cause the principal amount outstanding hereunder to exceed the Commitments. SECTION 2.02. Making the A Advances. (a) Each A Borrowing shall be made on notice, given not later than 12:00 noon (i) on the third Business Day prior to the date of the proposed A Borrowing, in the case of an A Borrowing comprised of Eurodollar Rate Advances, (ii) on the second Business Day prior to the date of the proposed A Borrowing, in the case of an A Borrowing comprised of Adjusted CD Rate Advances, and (iii) on the date of the proposed A Borrowing, in the case of an A Borrowing comprised of Base Rate Advances, in each case by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by telecopier, telex or cable. Each such notice of an A Borrowing (a "Notice of A Borrowing") shall be by telecopier, telex or cable, in substantially the form of Exhibit 2.02(a) hereto, specifying therein the requested (A) date of such A Borrowing, (B) Type of A Advances comprising such A Borrowing, (C) aggregate amount of such A Borrowing and (D) in the case of an A Borrowing comprised of Adjusted CD Rate Advances or Eurodollar Rate Advances, initial Interest Period for each such A Advance. Each Lender shall, before (x) 12:00 noon on the date of such A Borrowing, in the case of an A Borrowing comprised of Eurodollar Rate Advances or Adjusted CD Rate Advances, and (y) 1:00 p.m. on the date of such A Borrowing, in the case of an A Borrowing comprised of Base Rate Advances, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of such A Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will promptly make such funds available to the Borrower at the Agent's aforesaid address. (b) Each Notice of A Borrowing shall be irrevocable and binding on the Borrower. In the case of any A Borrowing which the related Notice of A Borrowing specifies is to be comprised of Adjusted CD Rate Advances or Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of A Borrowing for such A Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the A Advance to be made by such Lender as part of such A Borrowing when such A Advance, as a result of such failure, is not made on such date. (c) Unless the Agent shall have received notice from a Lender prior to the date of any A Borrowing that such Lender will not make available to the Agent such Lender's A Advance as part of such A Borrowing, the Agent may assume that such Lender has made such A Advance available to the Agent on the date of such A Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such A Advance available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount, together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to A Advances comprising such A Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's A Advance as part of such A Borrowing for purposes of this Agreement. (d) The failure of any Lender to make the A Advance to be made by it as part of any A Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its A Advance on the date of such A Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the A Advance to be made by such other Lender on the date of any A Borrowing. SECTION 2.03. The B Advances. (a) Each Lender severally agrees that the Borrower may request B Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring 30 days prior to the Termination Date in the manner, and subject to the terms and conditions, set forth below. The rates of interest offered by the Lenders and accepted by the Borrower for each B Borrowing shall be fixed rates per annum. (i) The Borrower may request a B Borrowing under this Section 2.03 by delivering to the Agent, by telecopier, telex or cable, a notice of a B Borrowing (a "Notice of B Borrowing"), in substantially the form of Exhibit 2.03(a)(i) hereto, specifying the date and aggregate amount of the proposed B Borrowing, the maturity date for repayment of each B Advance to be made as part of such B Borrowing (which maturity date may not be earlier than the date occurring 30 days after the date of such B Borrowing nor later than the earlier to occur of the then scheduled Termination Date and the date occurring 180 days following the date of such B Borrowing), the interest payment date or dates relating thereto, and any other terms to be applicable to such B Borrowing, not later than 3:00 p.m. at least one Business Day prior to the date of the proposed B Borrowing. The Agent shall in turn promptly notify each Lender of each request for a B Borrowing received by it from the Borrower by sending such Lender a copy of the related Notice of B Borrowing. (ii) Each Lender may, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more B Advances to the Borrower as part of such proposed B Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Agent (which shall give prompt notice thereof to the Borrower), before 11:00 a.m., on the date of such proposed B Borrowing, of the minimum amount and maximum amount of each B Advance which such Lender would be willing to make as part of such proposed B Borrowing (which amounts may, subject to the limitation contained in subsection (d), below, exceed such Lender's Commitment), the rate or rates of interest therefor and such Lender's Applicable Lending Office with respect to such B Advance; provided that if the Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer before 10:30 a.m. on the date on which notice of such election is to be given to the Agent by the other Lenders. If any Lender shall elect not to make such an offer, such Lender shall so notify the Agent before 11:00 a.m. on the date on which notice of such election is to be given to the Agent by the other Lenders, and such Lender shall not be obligated to, and shall not, make any B Advance as part of such B Borrowing; provided that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any B Advance as part of such proposed B Borrowing. (iii) The Borrower shall, in turn, before 12:00 noon on the date of such proposed B Borrowing either (x) cancel such B Borrowing by either giving the Agent notice to that effect or failing to accept one or more offers as provided in clause (y), below, or (y) accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii), above, in its sole discretion, by giving written notice to the Agent of the amount of each B Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Agent on behalf of such Lender for such B Advance pursuant to paragraph (ii), above) to be made by each Lender as part of such B Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii), above, by giving the Agent written notice to that effect. (iv) If the Borrower cancels such B Borrowing pursuant to paragraph (iii)(x), above, the Agent shall give prompt notice thereof to the Lenders and such B Borrowing shall not be made. (v) If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y), above, such acceptance shall be irrevocable and binding on the Borrower and, subject to the satisfaction of the applicable conditions set forth in Article III, on such Lender or Lenders. The Borrower shall indemnify each such Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill, on or before the date specified in the notice provided pursuant to paragraph (vii)(A), below, the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the B Advance to be made by such Lender as part of such B Borrowing when such B Advance, as a result of such failure, is not made on such date. (vi) Unless the Agent shall have received notice from a Lender prior to the date of any B Borrowing in which such Lender is required to participate that such Lender will not make available to the Agent such Lender's B Advance as part of such B Borrowing, the Agent may assume that such Lender has made such B Advance available to the Agent on the date of such B Borrowing in accordance with paragraph (vii), below, and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such B Advance available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable to such B Advance and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's B Advance as part of such B Borrowing for purposes of this Agreement. (vii) If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y), above, the Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii), above, of the date and aggregate amount of such B Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii), above, have been accepted by the Borrower, (B) each Lender that is to make a B Advance as part of such B Borrowing of the amount of the B Advance to be made by such Lender as part of such B Borrowing and (C) each Lender that is to make a B Advance as part of such B Borrowing, upon receipt, that the Agent has received forms of documents appearing to fulfill the applicable conditions set forth in Article III. Each Lender that is to make a B Advance as part of such B Borrowing shall, before 1:00 p.m. on the date of such B Borrowing specified in the notice received from the Agent pursuant to clause (A) of the preceding sentence or any later time when such Lender shall have received notice from the Agent pursuant to clause (C) of the preceding sentence, make available for the account of its Applicable Lending Office to the Agent at its address referred to in Section 8.02 such Lender's B Advance, in same day funds. Upon fulfillment of the applicable conditions set forth in Article III and after receipt by the Agent of such funds, the Agent will promptly make such funds available to the Borrower at the Agent's aforesaid address. Promptly after each B Borrowing the Agent will notify each Lender of the amount of the B Borrowing, the consequent B Reduction and the dates upon which such B Reduction commenced and will terminate. (b) Each B Borrowing shall be in an aggregate amount not less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof. (c) Within the limits and on the conditions set forth in this Section 2.03, the Borrower may from time to time borrow under this Section 2.03, repay pursuant to subsection (e), below, prepay pursuant to Section 2.11 and reborrow under this Section 2.03, provided that a B Borrowing shall not be made within three Business Days of the date of any other B Borrowing. (d) In no event shall the Borrower be entitled to request or receive any B Advances that would cause the principal amount outstanding hereunder to exceed the Commitments. (e) The Borrower shall repay to the Agent for the account of each Lender which has made a B Advance, or each other holder of a B Note, on the maturity date of each B Advance (such maturity date being that specified by the Borrower for repayment of such B Advance in the related Notice of B Borrowing delivered pursuant to subsection (a)(i), above, and provided in the B Note evidencing such B Advance), the then unpaid principal amount of such B Advance. (f) The Borrower shall pay interest on the unpaid principal amount of each B Advance from the date of such B Advance to the date the principal amount of such B Advance is repaid in full, at the rate of interest for such B Advance specified by the Lender making such B Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii), above, payable on the interest payment date or dates specified by the Borrower for such B Advance in the related Notice of B Borrowing delivered pursuant to subsection (a)(i), above, as provided in the B Note evidencing such B Advance. (g) The indebtedness of the Borrower resulting from each B Advance made to the Borrower as part of a B Borrowing shall be evidenced by a separate B Note of the Borrower payable to the order of the Lender making such B Advance. SECTION 2.04. Fees. (a) The Borrower agrees to pay to the Agent for the account of each Lender the Facility Fee from the date hereof, in the case of each Bank, and from the effective date specified in the Lender Assignment pursuant to which it became a Lender, in the case of each other Lender, until the Termination Date, payable quarterly in arrears on the last day of each March, June, September and December during the term of such Lender's Commitment, commencing December 31, 1996, and on the Termination Date. (b) In addition to the fee provided for in subsection (a), above, the Borrower shall pay to the Agent, for the account of the Agent, such fees as are provided for in the Fee Letter. (c) The Borrower agrees to pay to the Agent for the account of each Bank, on the date of execution and delivery of this Agreement, a participation fee equal to (i) in the case of each Increasing Lender, .10% of the amount by which such Bank's Commitment hereunder exceeds such Bank's Commitment under the Existing Facility (in each case without giving effect to any reduction in such Commitment arising as a result of any Advances being outstanding) and (ii) in the case of any New Lender, .10% of such Bank's Commitment. (d) The Borrower further agrees to pay to the Agent a competitive bid auction fee of $1,000 at the time of delivery of each Notice of B Borrowing. SECTION 2.05. Reduction of the Commitments. (a) The Borrower shall have the right, upon at least three Business Days' notice to the Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders; provided that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount which is less than the aggregate principal amount of the B Advances then outstanding; and provided, further, that each partial reduction shall be in an aggregate amount equal to the product of (A) $1,000,000 and (B) the number of Lenders on the effective date of such reduction, or an integral multiple in excess thereof. (b) On the Termination Date, the Commitments of the Lenders shall be reduced to zero. SECTION 2.06. Repayment of A Advances. The Borrower shall repay the principal amount of each A Advance made by each Lender in accordance with the A Note to the order of such Lender. SECTION 2.07. Interest on A Advances. The Borrower shall pay interest on the unpaid principal amount of each A Advance owing to each Lender from the date of such A Advance until such principal amount shall be paid in full, at the Applicable Rate for such A Advance (except as otherwise provided in this Section 2.07), payable as follows: (a) Base Rate Advances. If such A Advance is a Base Rate Advance, interest thereon shall be payable quarterly in arrears on the last day of each March, June, September and December, on the date of any Conversion of such Base Rate Advance and on the date such Base Rate Advance shall become due and payable or shall otherwise be paid in full; provided that any amount of principal that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. (b) Adjusted CD Rate Advances. If such A Advance is an Adjusted CD Rate Advance, interest thereon shall be payable on the last day of such Interest Period and, if the Interest Period for such A Advance has a duration of more than 90 days, on each day that occurs during such Interest Period every 90 days from the first day of such Interest Period; provided that any amount of principal that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. (c) Eurodollar Rate Advances. If such A Advance is a Eurodollar Rate Advance, interest thereon shall be payable on the last day of such Interest Period and, if the Interest Period for such A Advance has a duration of more than three months, on that day of each third month during such Interest Period that corresponds to the first day of such Interest Period (or, if any such month does not have a corresponding day, then on the last day of such month); provided that any amount of principal that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at a rate per annum equal at all times to the Default Rate. SECTION 2.08. Additional Interest on Eurodollar Rate Advances. The Borrower shall pay to Agent for the account of each Lender any costs actually incurred by such Lender with respect to Eurodollar Rate Advances which are attributable to such Lender's compliance with regulations of the Board of Governors of the Federal Reserve System requiring the maintenance of reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities. Such costs shall be paid to the Agent for the account of such Lender in the form of additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such A Advance until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such A Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such A Advance. Such additional interest shall be determined by such Lender and notified to the Borrower through the Agent. A certificate as to the amount of such additional interest, submitted to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error, provided that the determination thereof shall have been made by such Lender in good faith. SECTION 2.09. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Agent timely information for the purpose of determining each Adjusted CD Rate or Eurodollar Rate, as applicable. If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.07(a), (b) or (c), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.07(b) or (c). (c) If fewer than two Reference Banks furnish timely information to the Agent for determining the Adjusted CD Rate for any Adjusted CD Rate Advances, or the Eurodollar Rate for any Eurodollar Rate Advances, due to the unavailability of funds to such Reference Banks in the relevant financial markets: (i) the Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Adjusted CD Rate Advances or Eurodollar Rate Advances, as the case may be; (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance); and (iii) the obligation of the Lenders to make, or to Convert A Advances into, Adjusted CD Rate Advances or Eurodollar Rate Advances, as the case may be, shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Agent shall forthwith so notify the Borrower and the Lenders, whereupon: (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance or, if requested by the Borrower in accordance with Section 2.10, an Adjusted CD Rate Advance; and (ii) the obligation of the Lenders to make, or to Convert A Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (e) If the Borrower shall fail to (i) select the duration of any Interest Period for any Adjusted CD Rate Advances or any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, (ii) provide a Notice of Conversion with respect to any Eurodollar Rate Advances or Adjusted CD Rate Advances on or prior to 12:00 noon (A) on the third Business Day prior to the last day of the Interest Period applicable thereto, in the case of a Conversion to or in respect of Eurodollar Rate Advances, or (B) on the second Business Day prior to the last day of the Interest Period applicable thereto, in the case of a Conversion to or in respect of Adjusted CD Rate Advances, or (iii) satisfy the applicable conditions precedent set forth in Section 3.02 with respect to the Conversion to or in respect of any Eurodollar Rate Advances or Adjusted CD Rate Advances, the Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances; provided, however, that if, in the case of any failure by the Borrower pursuant to clause (iii), above, the Majority Lenders do not notify the Borrower within 30 days after such Conversion into Base Rate Advances that they have agreed to waive, or have decided not to waive, the applicable conditions precedent set forth in Section 3.02 that the Borrower failed to satisfy, the Majority Lenders shall be deemed to have waived such conditions precedent solely with respect to the Advances so Converted, and the Borrower shall, at any time after such 30-day period, be permitted to Convert such Advances into Eurodollar Rate Advances or Adjusted CD Rate Advances; and provided further, however, that such deemed waiver shall be of no further force or effect if, at any time after such 30-day period, the Majority Lenders notify the Borrower that they no longer agree to waive such conditions precedent, in which case any such Advances so Converted into Eurodollar Rate Advances or Adjusted CD Rate Advances shall automatically Convert into Base Rate Advances on the last day of the then existing Interest Period therefor. (f) On the date on which the aggregate unpaid principal amount of A Advances comprising any A Borrowing shall be reduced, by payment or prepayment or otherwise, to less than the product of (i) $1,000,000 and (ii) the number of Lenders on such date, such A Advances shall, if they are Advances of a Type other than Base Rate Advances, automatically Convert into Base Rate Advances, and on and after such date the right of the Borrower to Convert such A Advances into Advances of a Type other than Base Rate Advances shall terminate; provided, however, that if and so long as each such A Advance shall be of the same Type and have the same Interest Period as A Advances comprising another A Borrowing or other A Borrowings, and the aggregate unpaid principal amount of all such A Advances shall equal or exceed the product of (i) $1,000,000 and (ii) the number of Lenders on such date, the Borrower shall have the right to continue all such A Advances as, or to Convert all such A Advances into, Advances of such Type having such Interest Period. SECTION 2.10. Voluntary Conversion of A Advances. Subject to the applicable conditions set forth in Section 3.02, the Borrower may on any Business Day, by delivering a notice of Conversion (a "Notice of Conversion") to the Agent not later than 12:00 noon (i) on the third Business Day prior to the date of the proposed Conversion, in the case of a Conversion to or in respect of Eurodollar Rate Advances, (ii) on the second Business Day prior to the date of the proposed Conversion, in the case of a Conversion to or in respect of Adjusted CD Rate Advances and (iii) on the date of the proposed Conversion, in the case of a Conversion to or in respect of Base Rate Advances, and subject to the provisions of Sections 2.09 and 2.13, Convert all A Advances of one Type comprising the same A Borrowing into Advances of another Type; provided, however, that, in the case of any Conversion of any Adjusted CD Rate Advances or Eurodollar Rate Advances into Advances of another Type on a day other than the last day of an Interest Period for such Adjusted CD Rate Advances or Eurodollar Rate Advances, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b). Each such Notice of Conversion shall be in substantially the form of Exhibit 2.10 and shall, within the restrictions specified above, specify (A) the date of such Conversion, (B) the A Advances to be Converted, (C) if such Conversion is into Adjusted CD Rate Advances or Eurodollar Rate Advances, the duration of the Interest Period for each such A Advance, and (D) the aggregate amount of A Advances proposed to be Converted. SECTION 2.11. Optional Prepayments of Advances. The Borrower may, upon at least three Business Day's notice to the Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Advances comprising part of the same Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that each partial prepayment shall be in an aggregate principal amount not less than $1,000,000 (or, if lower, the principal amount outstanding hereunder on the date of such prepayment) or an integral multiple of $1,000,000 in excess thereof. In the case of any such prepayment of an Adjusted CD Rate Advance, Eurodollar Rate Advance or a B Advance, the Borrower shall be obligated to reimburse the Lender(s) in respect thereof pursuant to Section 8.04(b). Except as provided in this Section 2.11, the Borrower shall have no right to prepay any principal amount of any Advances. SECTION 2.12. Mandatory Prepayments. (a) On the date of any termination or reduction of the Commitments pursuant to Section 2.05, the Borrower shall pay or prepay for the ratable accounts of the Lenders so much of the principal amount outstanding under this Agreement as shall be necessary in order that the principal amount outstanding (after giving effect to such prepayment) will not exceed the amount of Commitments following such termination or reduction, together with (A) accrued interest to the date of such prepayment on the principal amount repaid or prepaid and (B) in the case of prepayments of Eurodollar Rate Advances, Adjusted CD Rate Advances or B Advances, any amount payable to the Lenders pursuant to Section 8.04(b). (b) All prepayments required to be made pursuant to this Section 2.12 shall be applied by the Agent as follows: (i) first, to the prepayment of the A Advances (without reference to minimum dollar requirements), applied to outstanding Base Rate Advances up to the full amount thereof before they are applied to the ratable prepayment of Eurodollar Rate and Adjusted CD Rate Advances; and (ii) second, to the prepayment of the B Advances (without reference to minimum dollar requirements), applied ratably among all the Lenders holding B Advances. (c) In lieu of prepaying any Eurodollar Rate Advances, Adjusted CD Rate Advances or B Advances under any provision (other than Sections 2.14 and 6.01) of this Agreement, the Borrower may, upon notice to the Agent, deliver such funds to the Agent, to be held as additional cash collateral securing the obligations hereunder and under the Notes. The Agent shall deposit all amounts delivered to it in a non-interest-bearing special purpose cash collateral account, to be governed by a cash collateral agreement in form and substance satisfactory to the Borrower and the Agent, and shall apply all such amounts in such account against such Advances on the last day of the Interest Period therefor. The Agent shall promptly notify the Lenders of any election by the Borrower to deliver funds to the Agent under this subsection (c). SECTION 2.13. Increased Costs. (a) If, due to either (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, in the case of Adjusted CD Rate Advances, included in the definition of Adjusted CD Rate or, in the case of Eurodollar Rate Advances, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Adjusted CD Rate Advances or Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error, provided that the determination thereof shall have been made by such Lender in good faith. (b) If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type, then, upon demand by such Lender (with a copy of such demand to the Agent), the Borrower shall immediately pay to the Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's Commitment. A certificate as to such amounts submitted to the Borrower and the Agent by such Lender, describing in reasonable detail the manner in which such amounts have been calculated, shall be conclusive and binding for all purposes, absent manifest error, provided that the determination and allocation thereof shall have been made by such Lender in good faith. (c) Notwithstanding the provisions of subsections (a) or (b), above, to the contrary, no Lender shall be entitled to demand compensation or be compensated thereunder to the extent that such compensation relates to any period of time more than 60 days prior to the date upon which such Lender first notified the Borrower of the occurrence of the event entitling such Lender to such compensation (unless, and to the extent, that any such compensation so demanded shall relate to the retroactive application of any event so notified to the Borrower). SECTION 2.14. Illegality. Notwithstanding any other provision of this Agreement to the contrary, if any Lender (the "Affected Lender") shall notify the Agent and the Borrower that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for the Affected Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) all Eurodollar Rate Advances of the Affected Lender shall, on the fifth Business Day following such notice from the Affected Lender, automatically be Converted into a like number of Base Rate Advances, each in the amount of the corresponding Eurodollar Rate Advance of the Affected Lender being so Converted (each such Advance, as so Converted, being an "Affected Lender Advance"), and the obligation of the Affected Lender to make, maintain, or Convert A Advances into Eurodollar Rate Advances shall thereupon be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist, or the Affected Lender has been replaced pursuant to Section 8.07(g), and (ii) in the event that, on the last day of each of the then-current Interest Periods for each Eurodollar Rate Advance (each such Advance being an "Unaffected Lender Advance") of each of the other Lenders (each such Lender being an "Unaffected Lender"), the Agent shall have yet to notify the Borrower and the Lenders that the circumstances causing such suspension of the Affected Lender's obligations as aforesaid no longer exist, or the Affected Lender has not yet been replaced pursuant to Section 8.07(g), such Unaffected Lender Advance shall be Converted by the Borrower in accordance with Section 2.10 into an Advance of another Type (or, in the event that the Borrower shall fail to duly deliver a Notice of Conversion with respect thereto, into a Base Rate Advance), and the obligation of such Unaffected Lender to make, maintain, or Convert A Advances into Eurodollar Rate Advances shall be suspended until the Agent shall so notify the Borrower and the Lenders, or the Affected Lender shall be so replaced. For purposes of any prepayment under this Agreement, each Affected Lender Advance shall be deemed to continue to be part of the same Borrowing as the Unaffected Lender Advance to which it corresponded at the time of the Conversion of such Affected Lender Advance pursuant to clause (i), above. SECTION 2.15. Payments and Computations. (a)The Borrower shall make each payment hereunder and under the Notes not later than 1:00 p.m. on the day when due in Dollars to the Agent at its address referred to in Section 8.02 in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or fees ratably (other than amounts payable pursuant to Section 2.03, 2.08, 2.12(b)(iii), 2.16 or 8.04(b)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of a Lender Assignment and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Lender Assignment, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Lender Assignment shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. (c) All computations of interest based on the Alternate Base Rate and the Federal Funds Rate and of fees shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Adjusted CD Rate and the Eurodollar Rate shall be made by the Agent, and all computations of interest pursuant to Section 2.08 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or fees are payable. Each determination by the Agent (or, in the case of Section 2.08, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error, provided that such determination shall have been made by the Agent or such Lender, as the case may be, in good faith. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fees, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.16. Taxes. (a) Any and all payments by the Borrower hereunder and under the other Loan Documents shall be made, in accordance with Section 2.15, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its overall net income and franchise taxes imposed on it by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its overall net income and franchise taxes imposed on it by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"); provided, however, that, notwithstanding the foregoing, Taxes shall not include any taxes otherwise required to be deducted by the Borrower pursuant to this subsection (a) as a result of activities of any Lender or the Agent in the State of Iowa (other than as a result, or in respect, of this Agreement). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any other Loan Document to any Lender or the Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.16) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or under any other Loan Document or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). (c) The Borrower will indemnify each Lender and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.16) paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Agent (as the case may be) makes written demand therefor. Nothing herein shall preclude the right of the Borrower to contest any such Taxes or Other Taxes so paid, and the Lenders in question or the Agent (as the case may be) will, following notice from, and at the expense of, the Borrower, reasonably cooperate with the Borrower to preserve the Borrower's rights to contest such Taxes or Other Taxes. (d) Within 30 days after the date of any payment of Taxes, the Borrower will furnish to the Agent, at its address referred to in Section 8.02, the original or a certified copy of a receipt evidencing payment thereof. (e) Each Lender agrees that, on or prior to the date upon which it shall become a party hereto, and upon the reasonable request from time to time of the Borrower or the Agent, such Lender will deliver to the Borrower and the Agent either (i) a statement that it is organized under the laws of a jurisdiction within the United States or (ii) duly completed copies of such form or forms as may from time to time be prescribed by the United States Internal Revenue Service indicating that such Lender is entitled to receive payments without deduction or withholding of any United States federal income taxes, as permitted by the Internal Revenue Code of 1986, as amended from time to time. Each Lender that delivers to the Borrower and the Agent the form or forms referred to in the preceding sentence further undertakes to deliver to the Borrower and the Agent further copies of such form or forms, or successor applicable form or forms, as the case may be, as and when any previous form filed by it hereunder shall expire or shall become incomplete or inaccurate in any respect. Each Lender represents and warrants that each such form supplied by it to the Agent and the Borrower pursuant to this subsection (e), and not superseded by another form supplied by it, is or will be, as the case may be, complete and accurate. (f) Any Lender claiming any additional amounts payable pursuant to this Section 2.16 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. (g) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.16 shall survive the payment in full of principal and interest hereunder and under the Notes. SECTION 2.17. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the A Advances made by it (other than pursuant to Section 2.08, 2.16 or 8.04(b)) in excess of its ratable share of payments on account of the A Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery, together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.17 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.18. Extension of Termination Date. (a) At least 90 but not more than 120 days before each of November 20, 1998 and November 20, 1999, the Borrower may, by delivering a written request to the Agent (each such request being irrevocable), request that each Lender extend for one year the Termination Date with respect to such Lender's Commitment. The Agent shall, upon its receipt of such a request, promptly notify each Lender thereof, and request that each Lender promptly advise the Agent of its approval or rejection of such request. (b) Upon receipt of such notification from the Agent, each Lender may (but shall not be required to), in its sole and absolute discretion, agree to extend the Termination Date with respect to its Commitment for a period of one year, and shall (should it determine to do so), no later than 60 days following its receipt of such notification, notify the Agent of its approval concerning such request. If any Lender shall not so notify the Agent, such Lender shall be deemed not to have consented to such request. The Agent shall thereupon notify the Borrower as to the Lenders, if any, that have consented to such request. (c) If all of the Lenders agree to extend the Termination Date, the Commitments shall be extended for a period of one year, commencing on the then-scheduled Termination Date; provided, however, that the Commitments shall be so extended notwithstanding the existence of one or more Lenders (the "Nonextending Lenders") which have elected not to extend (or failed to notify the Agent of its consent to extend) their Commitment if (i) such Nonextending Lender(s) have been replaced in the full amount of its (or their) Commitment(s) pursuant to Section 8.07(g) and (ii) no Event of Default or Unmatured Default shall then have occurred and be continuing. If a Nonextending Lender is not so replaced pursuant to Section 8.07(g), the Commitments of all of the Lenders shall automatically terminate on the then-scheduled Termination Date. ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to Closing. The Commitments of the Lenders shall not become effective unless the following conditions precedent shall have been fulfilled on or prior to November 20, 1996 (or such later Business Day as the parties hereto may mutually agree): (a) The Agent shall have received the following, each dated the date of the Closing, in form and substance satisfactory to the Lenders and (except for the Notes) in sufficient copies for each Lender: (i) this Agreement, duly executed by the Borrower, each Bank and the Agent; (ii) the A Notes payable to the order of the Lenders, respectively, duly completed and executed by the Borrower; (iii) certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement, the Notes and the other Loan Documents to which it is, or is to be, a party, and of all documents evidencing other necessary corporate action with respect to this Agreement, the Notes and such Loan Documents; (iv) certified copies of the resolutions of the Board of Directors of the Parent approving the Support Agreement and the other Loan Documents to which it is, or is to be, a party, together with a certificate of the Secretary or an Assistant Secretary of the Parent certifying that the credit facility evidenced by this Agreement is the only credit facility of the Borrower having the benefit of a guaranty or other support arrangement from the Parent pursuant to such resolutions, and of all documents evidencing other necessary corporate action with respect to the Support Agreement and such Loan Documents; (v) a certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names, true signatures and incumbency of the officers of the Borrower authorized to sign this Agreement, the Notes and the other Loan Documents to which it is, or is to be, a party; (vi) a certificate of the Secretary or an Assistant Secretary of the Parent certifying the names, true signatures and incumbency of the officers of the Parent authorized to sign the Support Agreement and the other Loan Documents to which it is, or is to be, a party; (vii) copies of the Certificate of Incorporation (or comparable charter document) and by-laws of the Borrower, together with all amendments thereto, certified by the Secretary or an Assistant Secretary of the Borrower; (viii) copies of the Certificate of Incorporation (or comparable charter document) and by-laws of the Parent, together with all amendments thereto, certified by the Secretary or an Assistant Secretary of the Parent; (ix) certified copies of all Governmental Approvals, if any, required in connection with the execution, delivery and performance of this Agreement and the other Loan Documents; (x) certified copies of the financial statements referred to in Section 5(d) of the Support Agreement; (xi) the Support Agreement duly executed by the Parent and the Borrower, together with (A) a letter from the Parent to the Agent affirming that the Lenders are "Lenders" under the Support Agreement and (B) proper Financing Statements (Form UCC-1 or UCC-3) to be filed under the Uniform Commercial Code in all jurisdictions as may be necessary or, in the opinion of the Agent, desirable to perfect the security interests created by the Support Agreement; (xii) favorable opinions of: (A) Winthrop, Stimson, Putnam & Roberts, special New York counsel for the Borrower and the Parent, in substantially the form of Exhibit 3.01(a)(xii)-1 and as to such other matters as the Majority Lenders, through the Agent, may reasonably request; (B) Stephen W. Southwick, Counsel for the Borrower and Vice President, General Counsel & Secretary of the Parent, in substantially the form of Exhibit 3.01(a)(xii)- 2 and as to such other matters as the Majority Lenders, through the Agent, may reasonably request; (C) King & Spalding, special New York counsel to the Agent, in substantially the form of Exhibit 3.01(a)(xii)-3 and as to such other matters as the Majority Lenders, through the Agent, may reasonably request; and (xiii) such other approvals, opinions and documents as any Lender, through the Agent, may reasonably request. (b) The following statements shall be true and correct and the Agent shall have received a certificate of a duly authorized officer of the Borrower, dated the date of the Closing and in sufficient copies for each Lender, stating that: (i) the representations and warranties set forth in Section 4.01 of this Agreement are true and correct on and as of the date of the Closing as though made on and as of such date, and (ii) no event has occurred and is continuing that constitutes an Unmatured Default or an Event of Default. (c) The Agent shall have received a certificate (the statements in which shall be true) of a duly authorized officer of the Parent, dated the date of the Closing and in sufficient copies for each Lender, stating that the representations and warranties set forth in Section 5 of the Support Agreement are true and correct on and as of the date of the Closing as though made on and as of such date. (d) The Borrower shall have paid (i) all fees under or referenced in Section 2.04 hereof, to the extent then due and payable, and (ii) all costs and expenses of the Agent (including counsel fees and disbursements) incurred through (and for which statements have been provided prior to) the Closing. (e) Each New Lender and Increasing Lender shall, on the date of the Closing, have purchased by assignment from the Existing Banks that are parties hereto such portion of the A Advances owing to them as shall be designated by the Agent such that, after giving effect to all such purchases and assignments, the outstanding A Advances owing to each Lender shall equal such Lender's Percentage of the aggregate amount of A Advances owing to all Lenders. SECTION 3.02. Conditions Precedent to Each A Borrowing. The obligation of each Lender to make an A Advance on the occasion of each A Borrowing (including the initial A Borrowing) shall be subject to the conditions precedent that, on the date of such A Borrowing, (a) the following statements shall be true and correct (and each of the giving of the applicable Notice of A Borrowing and the acceptance by the Borrower of the proceeds therefrom shall constitute a representation and warranty by the Borrower that, on the date of such A Borrowing, such statements are true and correct): (i) the representations and warranties contained in Section 4.01 (excluding those contained in subsections (e), (f), (g), (h) and (j) thereof if such A Borrowing does not increase the aggregate outstanding principal amount of A Advances over the aggregate outstanding principal amount of all Advances immediately prior to making such A Borrowing) and in Section 5 of the Support Agreement are true and correct on and as of the date of such A Borrowing, before and after giving effect to the application of the proceeds therefrom, as though made on and as of such date; and (ii) no event has occurred and is continuing, or would result from such A Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or an Unmatured Default; and (b) the Agent shall have received such other approvals, opinions, or documents as the Agent, or the Majority Lenders through the Agent, may reasonably request, and such approvals, opinions, and documents shall be satisfactory in form and substance to the Agent. SECTION 3.03. Conditions Precedent to Each B Borrowing. The obligation of each Lender to make a B Advance on the occasion of a B Borrowing (including the initial B Borrowing) shall be subject to the conditions precedent that (a) the Agent shall have received the written confirmatory Notice of B Borrowing with respect thereto; (b) on or before the date of such B Borrowing, but prior to such B Borrowing, the Agent shall have received a B Note payable to the order of such Lender for each of the one or more B Advances to be made by such Lender as part of such B Borrowing, in a principal amount equal to the principal amount of the B Advance to be evidenced thereby and otherwise on such terms as were agreed to for such B Advance in accordance with Section 2.03; (c) on the date of such B Borrowing the following statements shall be true and correct (and each of the giving of the applicable Notice of B Borrowing and the acceptance by the Borrower of the proceeds therefrom shall constitute a representation and warranty by the Borrower that, on the date of such B Borrowing, such statements are true and correct): (i) the representations and warranties contained in Section 4.01 (excluding those contained in subsections (e), (f), (g), (h) and (j) thereof if such B Borrowing does not increase the aggregate amount of Advances over the aggregate amount of all Advances outstanding immediately prior to such B Borrowing) and in Section 5 of the Support Agreement are true and correct on and as of the date of such B Borrowing, before and after giving effect to such B Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (ii) no event has occurred and is continuing, or would result from such B Borrowing or from the application of the proceeds therefrom, which constitutes an Event of Default or an Unmatured Default; and (d) the Agent shall have received such other approvals, opinions, or documents as the Agent, or the Majority Lenders through the Agent, may reasonably request, and such approvals, opinions, and documents shall be satisfactory in form and substance to the Agent. SECTION 3.04. Reliance on Certificates. The Lenders and the Agent shall be entitled to rely conclusively upon the certificates delivered from time to time by officers of the Borrower and the Parent as to the names, incumbency, authority and signatures of the respective Persons named therein until such time as the Agent may receive a replacement certificate, in form acceptable to the Agent, from an officer of such Person identified to the Agent as having authority to deliver such certificate, setting forth the names and true signatures of the officers and other representatives of such Person thereafter authorized to act on behalf of such Person. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary (except where the failure to so qualify would not have a material adverse affect on the business, financial condition, operations, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole). (b) The execution, delivery and performance by the Borrower of this Agreement, the Notes and the other Loan Documents to which it is or will be a party are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene (i) the Borrower's charter or by-laws, (ii) law, or (iii) any legal or contractual restriction binding on or affecting the Borrower; and such execution, delivery and performance do not and will not result in or require the creation of any Lien (other than pursuant to the Loan Documents) upon or with respect to any of its properties. (c) No Governmental Approval is required in connection with the execution, delivery or performance of any Loan Document. (d) This Agreement is, and each other Loan Document to which the Borrower will be a party when executed and delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, subject to the qualifications, however, that the enforcement of the rights and remedies herein and therein is subject to bankruptcy and other similar laws of general application affecting rights and remedies of creditors and that the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceedings therefor may be brought. (e) Since December 31, 1995, there has been no material adverse change in the business, financial condition, operations, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole, or in the Borrower's ability to perform its obligations under this Agreement or any other Loan Document to which it is or will be a party. (f) The pro forma unaudited consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at December 31, 1995, and the related pro forma unaudited consolidated and consolidating statements of income of the Borrower and its Subsidiaries for the fiscal year then ended, and the unaudited consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as at September 30, 1996 and the related unaudited consolidated and consolidating statements of income for the nine-month period then ended, copies of each of which have been furnished to each Bank, fairly present (subject, in the case of such balance sheets and statements of income for the nine months ended September 30, 1996, to year-end adjustments) the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance, in all material respects, with generally accepted accounting principles consistently applied. (g) Except as disclosed in the Parent's Report on Form 10-K for the year ended December 31, 1995 and Report on Form 10-Q for the period ended September 30, 1996, there is no pending or threatened action or proceeding affecting the Borrower or any of its Subsidiaries or properties before any court, governmental agency or arbitrator, that might reasonably be expected to materially adversely affect (i) the business, financial condition, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole, or (ii) the ability of the Borrower to perform its obligations under this Agreement or any other Loan Document to which the Borrower or the Parent is or is to be a party; and since September 30, 1996 there have been no material adverse developments in any action or proceeding so disclosed. (h) No ERISA Event has occurred or is reasonably expected to occur with respect to any Plan of the Borrower or any of its ERISA Affiliates which would result in a material liability to the Borrower. Since the date of the most recent Schedule B (Actuarial Information) to the annual report of Plans maintained by the Borrower (Form 5500 Series), if any, there has been no material adverse change in the funding status of the Plans referred to therein and no "prohibited transaction" has occurred with respect thereto which is reasonably expected to result in a material liability to the Borrower. Neither the Borrower nor any of its ERISA Affiliates has incurred nor reasonably expects to incur any material withdrawal liability under ERISA to any Multiemployer Plan. (i) The Support Agreement is in full force and effect without having been amended, modified, waived or terminated in any manner, except in each case in accordance with the terms thereof. (j) The Borrower has filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, or, to the extent the Borrower is contesting in good faith an assertion of liability based on such returns, has provided adequate reserves for payment thereof in accordance with generally accepted accounting principles. (k) Following application of the proceeds of each Advance, not more than 25 percent of the value of the assets of the Borrower and its Subsidiaries on a consolidated basis will be margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System). (l) The Borrower is not an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. (m) As of the date hereof, the Borrower is not a "holding company" within the meaning of PUHCA. (n) From and after the date upon which, and at all times during which, any Subsidiary of the Borrower shall be a "public-utility company" within the meaning of PUHCA, the Borrower will be a "holding company" within the meaning of PUHCA, but the Borrower and its Subsidiaries will be exempt from the provisions of that Act, except Section 9(a)(2) thereof, by virtue of having filed with the Securities and Exchange Commission a Statement by Holding Company Claiming Exemption Under Rule U-2 from the Provisions of the Public Utility Holding Company Act of 1935 on Form U-3A-2. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any amount in respect of any Note shall remain unpaid or any Lender shall have any Commitment, the Borrower will, unless the Majority Lenders shall otherwise consent in writing: (a) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, all taxes, assessments and governmental charges, royalties or levies imposed upon it or upon its property except, in the case of taxes, to the extent the Borrower or such Subsidiary is contesting the same in good faith and by appropriate proceedings and has set aside adequate reserves for the payment thereof in accordance with generally accepted accounting principles. (b) Maintenance of Insurance. Maintain, or cause to be maintained, insurance covering the Borrower and each of its Subsidiaries and their respective properties in effect at all times in such amounts and covering such risks as is usually carried by companies of a similar size (based on the aggregate book value of the Parent's assets, as determined on a consolidated basis in accordance with generally accepted accounting principles consistently applied), engaged in similar businesses and owning similar properties in the same general geographical area in which the Borrower and each such Subsidiary operates, either with reputable insurance companies or, in whole or in part, by establishing reserves of one or more insurance funds, either alone or with other corporations or associations. (c) Preservation of Existence, Etc. Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its corporate existence, material rights (statutory and otherwise) and franchises; provided, however, that neither the Borrower nor any of its Subsidiaries shall be required to preserve and maintain any such right or franchise, and no such Subsidiary shall be required to preserve and maintain its corporate existence, unless the failure to do so would have a material adverse effect on the business, financial condition, operations, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole, or on the Borrower's ability to perform its obligations under this Agreement or any other Loan Document to which it is or will be a party. (d) Compliance with Laws, Etc. Comply, and cause each of its Subsidiaries to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, including without limitation any such laws, rules, regulations and orders relating to zoning, environmental protection, use and disposal of Hazardous Substances, land use, ERISA, construction and building restrictions, and employee safety and health matters relating to business operations, the non-compliance with which would have a material adverse effect on the business, financial condition, operations, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole, or on the Borrower's ability to perform its obligations under this Agreement or any other Loan Document to which it is or will be a party. (e) Inspection Rights. At any time and from time to time upon reasonable notice, permit or arrange for the Agent, the Lenders and their respective agents and representatives to examine and make copies of and abstracts from the records and books of account of, and the properties of, the Borrower and each of its Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and its Subsidiaries with the Borrower and its Subsidiaries and their respective officers, directors and accountants. (f) Keeping of Books. Keep, and cause its Subsidiaries to keep, proper records and books of account, in which full and correct entries shall be made of all financial transactions of the Borrower and its Subsidiaries and the assets and business of the Borrower and its Subsidiaries, in accordance with generally accepted accounting principles consistently applied. (g) Maintenance of Properties, Etc. Maintain, and cause each of its Subsidiaries to maintain, good and marketable title to, and preserve, maintain, develop, and operate in substantial conformity with all laws and material contractual obligations, all of its properties which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted, except where the failure to do so would not have a material adverse effect on the business, financial condition, operations, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole, or on the Borrower's ability to perform its obligations under this Agreement or any other Loan Document to which it is or will be a party. (h) Reporting Requirements. Furnish to each Lender: (i) as soon as possible and in any event within five Business Days after the occurrence of each Unmatured Default or Event of Default continuing on the date of such statement, a statement of a Senior Financial Officer setting forth details of such Unmatured Default or Event of Default and the action that the Borrower proposes to take with respect thereto; (ii) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such quarter and consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and duly certified (subject to year-end audit adjustments) by a Senior Financial Officer as having been prepared in accordance (in all material respects) with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5(d) of the Support Agreement, together with a certificate of said officer stating that no Unmatured Default or Event of Default has occurred and is continuing or, if an Unmatured Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrower proposes to take with respect thereto; (iii) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and consolidated statements of income, retained earnings and cash flows of the Borrower and its Subsidiaries for such fiscal year, in each case (x) accompanied by the audit report of Arthur Andersen & Co. or another nationally-recognized independent public accounting firm acceptable to the Majority Lenders if at any time during such fiscal year the Moody's Rating was Baa2 or lower or the S&P Rating was BBB or lower or (y) in reasonable detail and duly certified by a Senior Financial Officer as having been prepared in accordance (in all material respects) with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5(d) of the Support Agreement, together with a certificate of a Senior Financial Officer stating that no Unmatured Default or Event of Default has occurred and is continuing or, if an Unmatured Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action that the Borrower proposes to take with respect thereto; (iv) as soon as possible and in any event (A) within 30 days after any ERISA Event described in clause (i) of the definition of ERISA Event with respect to any Plan of the Borrower or any ERISA Affiliate of the Borrower has occurred and (B) within 10 days after any other ERISA Event with respect to any Plan of the Borrower or any ERISA Affiliate of the Borrower has occurred, a statement of a Senior Financial Officer describing such ERISA Event and the action, if any, which the Borrower or such ERISA Affiliate proposes to take with respect thereto; (v) promptly after receipt thereof by the Borrower or any of its ERISA Affiliates from the PBGC copies of each notice received by the Borrower or such ERISA Affiliate of the PBGC's intention to terminate any Plan of the Borrower or such ERISA Affiliate or to have a trustee appointed to administer any such Plan; (vi) promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Plan (if any) to which the Borrower or any ERISA Affiliate of the Borrower is a contributing employer; (vii) promptly after receipt thereof by the Borrower or any ERISA Affiliate of the Borrower from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or such ERISA Affiliate concerning the imposition or amount of withdrawal liability in an aggregate principal amount of at least $250,000 pursuant to Section 4202 of ERISA in respect of which the Borrower or such ERISA Affiliate is reasonably expected to be liable; (viii) promptly after the Borrower becomes aware of the occurrence thereof, notice of all actions, suits, proceedings or other events of (A) of the type described in Section 4.01(g) or (B) for which the Agent, the Lenders will be entitled to indemnity under Section 8.04(c); (ix) promptly after the sending or filing thereof, copies of all such proxy statements, financial statements, and reports which the Borrower sends to its public security holders (if any), and copies of all regular, periodic and special reports, and all registration statements and periodic or special reports, if any, which the Borrower or the Parent files with the Securities and Exchange Commission or any governmental authority which may be substituted therefor, or with any national securities exchange; and (x) promptly after requested, such other information respecting the business, properties, results of operations, prospects, revenues, condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as the Agent or any Lender through the Agent may from time to time reasonably request. (i) Further Assurances. At the expense of the Borrower, promptly execute and deliver, or cause to be promptly executed and delivered, all further instruments and documents, and take and cause to be taken all further actions, that may be necessary or that the Majority Lenders through the Agent may reasonably request to enable the Lenders and the Agent to enforce the terms and provisions of this Agreement and to exercise their rights and remedies hereunder or under any other Loan Document. In addition, the Borrower will use all reasonable efforts to duly obtain Governmental Approvals required in connection with the Loan Documents from time to time on or prior to such date as the same may become legally required, and thereafter to maintain all such Governmental Approvals in full force and effect. SECTION 5.02. Negative Covenants. So long as any amount in respect of any Note shall remain unpaid or any Lender shall have any Commitment, the Borrower will not, without the written consent of the Majority Lenders: (a) Liens, Etc. Create, incur, assume, or suffer to exist, or permit any of its Subsidiaries to create, incur, assume, or suffer to exist, any lien, security interest, or other charge or encumbrance (including the lien or retained security title of a conditional vendor) of any kind, or any other type of arrangement intended or having the effect of conferring upon a creditor a preferential interest upon or with respect to any of its properties of any character (including, without limitation, accounts) (any of the foregoing being referred to herein as a "Lien"), excluding, however, from the operation of the foregoing restrictions the Liens created under the Loan Documents and the following: (i) Liens for taxes, assessments or governmental charges or levies to the extent not past due; (ii) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's liens and other similar Liens arising in the ordinary course of business securing obligations which are not overdue or which are being contested in good faith, provided that any such contested Lien securing an amount claimed in excess of $1,000,000 shall be fully bonded within 90 days after the imposition of such Lien; (iii) pledges or deposits to secure obligations under workmen's compensation laws or similar legislation, to secure public or statutory obligations of the Borrower or such Subsidiary, or to secure the utility obligations of any such Subsidiary incurred in the ordinary course of business; (iv) (A) purchase money Liens upon or in property now owned or hereafter acquired by the Borrower or any of its Subsidiaries in the ordinary course of business (consistent with present practices) to secure (1) the purchase price of such property or (2) Debt incurred solely for the purpose of financing the acquisition, construction or improvement of any such property to be subject to such Liens, or (B) Liens existing on any such property at the time of acquisition, or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided that no such Lien shall extend to or cover any property other than the property being acquired, constructed or improved and replacements, modifications and proceeds of such property, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced; (v) Liens on the capital stock of any of the Borrower's single-purpose Subsidiaries or any such Subsidiary's assets to secure the repayment of project financing for such Subsidiary; (vi) attachment, judgment or other similar Liens arising in connection with court proceedings, provided that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith by appropriate proceedings or the payment of which is covered in full (subject to customary deductible amounts) by insurance maintained with responsible insurance companies and the applicable insurance company has acknowledged its liability therefor in writing; (vii) Liens securing obligations under agreements entered into pursuant to the Iowa Industrial New Jobs Training Act or any similar or successor legislation, provided that such obligations do not exceed $1,000,000 in the aggregate at any one time outstanding; and (viii) other Liens set forth in Schedule II hereto, and any extensions or renewals of any such Liens upon or in the same property theretofore subject thereto. (b) Debt. Create, incur, assume, or suffer to exist any Debt other than: (A) Debt hereunder and under the other Loan Documents; and (B) other Debt of the Borrower; provided, however, that both immediately before and after the incurrence of any such other Debt, the Parent shall be in compliance with the covenant set forth in Section 2(a) of the Support Agreement. (ii) Permit any of its Subsidiaries to create, incur, assume, or suffer to exist any Debt other than: (A) Debt of any Person acquired by the Borrower or any such Subsidiary (whether by merger, stock or asset purchase, or otherwise) that was in effect and outstanding at the time of acquisition; (B) Debt owing by any such Subsidiary to the Borrower or to any other such Subsidiary; (C) Debt of such Subsidiaries under working capital lines and with respect to Capitalized Lease Obligations not to exceed $5,000,000 in the aggregate at any one time outstanding (such dollar limitation to apply to the Debt of any Persons acquired by and merged into any such Subsidiary to the extent of any surviving working capital lines and Capitalized Lease Obligations of any such Person which shall survive such acquisition and merger); (D) Debt secured by Liens permitted by Section 5.02(a)(iv) and (v); (E) Debt under agreements entered into pursuant to the Iowa Industrial New Jobs Training Act or any similar or successor legislation, provided that such Debt does not exceed $1,000,000 in the aggregate at any one time outstanding; and (F) existing Debt set forth in Schedule III hereto; provided, however, that both immediately before and after the incurrence of any Debt described in clauses (A), (B), (C), (D) and (E), above, the Parent shall be in compliance with the covenant set forth in Section 2(a) of the Support Agreement. (c) Compliance with ERISA. (i) Permit to exist any "accumulated funding deficiency" (as defined in Section 412(a) of the Internal Revenue Code of 1986, as amended from time to time) (unless such deficiency exists with respect to a Multiple Employer Plan or Multiemployer Plan and the Borrower has no control over the reduction or elimination of such deficiency), (ii) terminate, or permit any ERISA Affiliate of the Borrower to terminate, any Plan of the Borrower or such ERISA Affiliate so as to result in any material (in the opinion of the Majority Lenders) liability of the Borrower to the PBGC, or (iii) permit to exist any occurrence of any Reportable Event (as defined in Title IV of ERISA), or any other event or condition, which presents a material (in the opinion of the Majority Lenders) risk of such a termination by the PBGC of any Plan of the Borrower or such ERISA Affiliate and such a material liability to the Borrower. (d) Transactions with Affiliates. Enter into, or permit any of its Subsidiaries to enter into, any transaction with an Affiliate of the Borrower, unless such transaction is on terms no less favorable to the Borrower or such Subsidiary, as the case may be, than if the transaction had been negotiated in good faith on an arm's length basis with a Person which was not an Affiliate of the Borrower. (e) Mergers, Etc. (i) Merge with or into or consolidate with or into any other Person, except that the Borrower may merge with or into or consolidate with or into any of the Parent's Subsidiaries or the Parent, provided that immediately after giving effect thereto, (A) no event shall occur and be continuing which constitutes an Unmatured Default or an Event of Default, (B) the Borrower is the surviving corporation or, with respect to any merger or consolidation of the Borrower with or into the Parent, the surviving (if not the Borrower) or resulting corporation shall have expressly assumed the obligations of the Borrower under this Agreement, the Notes and the other Loan Documents to which the Borrower is a party, (C) the Parent (unless it shall be the surviving corporation) shall reaffirm its obligations to the surviving or resulting corporation under the Support Agreement and (D) the Borrower shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement or any other Loan Document on the date of such transaction, and (ii) permit any of its Subsidiaries to merge with or into or consolidate with or into any other Person, except that any such Subsidiary may merge with or into any other Person, provided that immediately after giving effect thereto, (x) the surviving corporation is a Subsidiary of the Borrower, (y) no event shall occur and be continuing which constitutes an Unmatured Default or an Event of Default and (z) the Borrower or any of its Subsidiaries shall not be liable with respect to any Debt or allow its property to be subject to any Lien which it could not become liable with respect to or allow its property to become subject to under this Agreement or any other Loan Document on the date of such transaction. (f) Sales, Etc., of Assets. Sell, lease, transfer, assign or otherwise dispose of all or any substantial part of its assets, or permit any of its Subsidiaries to sell, lease, transfer, assign or otherwise dispose of all or any substantial part of its assets, except (i) sales, leases, transfers and assignments from one Subsidiary of the Borrower to another such Subsidiary, (ii) in any transaction in which the proceeds from such sale, lease, transfer, assignment or disposition are solely in Cash and Cash Equivalents and such proceeds are (A) reinvested, or held for no more than 180 days in Cash and Cash Equivalents pending reinvestment, in lines of business (other than real estate) in which the Borrower or any of its Subsidiaries is engaged in at the time of the Closing, (B) applied as a reduction of the Commitments and an optional prepayment pursuant to Sections 2.05 and 2.11, respectively, or (C) applied to pay or prepay Debt incurred by the Borrower or any such Subsidiary in connection with the project comprising such assets, or (iii) in connection with a sale and leaseback transaction entered into by any Subsidiary of the Borrower, provided in each case that no Unmatured Default or Event of Default shall have occurred and be continuing after giving effect thereto, and provided, further, that, notwithstanding the foregoing, so long as no Unmatured Default or Event of Default shall have occurred and be continuing, the Borrower and its Subsidiaries may sell, lease, transfer, assign or otherwise dispose of up to $20,000,000 (in book value) in the aggregate of their collective assets during any 12-calendar- month period in any single or series of transactions, whether or not related. (g) Modification of Support Agreement. Agree to amend, modify, terminate, or waive any provision of the Support Agreement. (h) Letter of Credit Obligations. Incur, or permit any of its Subsidiaries to incur, any indebtedness, liabilities or obligations (whether contingent or otherwise) in excess of $1,000,000 in the aggregate at any one time outstanding under reimbursement or similar agreements with respect to letters of credit issued to support obligations that do not constitute Debt. (i) Maintenance of Ownership of Significant Subsidiaries. Sell, assign, transfer, pledge or otherwise dispose of any shares of capital stock of any of its Significant Subsidiaries or any warrants, rights or options to acquire such capital stock, or permit any of its Significant Subsidiaries to issue, sell or otherwise dispose of any shares of its capital stock or the capital stock of any other of its Subsidiaries or any warrants, rights or options to acquire such capital stock, except (and only to the extent) as may be necessary to give effect to a transaction permitted by subsection (e), above. ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events (each an "Event of Default") shall occur and be continuing after the applicable grace period and notice requirement (if any): (a) The Borrower shall fail to pay any principal of any Note when the same becomes due and payable; or (b) The Borrower shall fail to pay any interest on any Note or any other amount due under this Agreement for two days after the same becomes due; or (c) Any representation or warranty made by or on behalf of the Borrower in any Loan Document or in any certificate or other writing delivered pursuant thereto shall prove to have been incorrect in any material respect when made or deemed made; or (d) Any representation or warranty made by or on behalf of the Parent in the Support Agreement or in any certificate or other writing delivered pursuant thereto shall prove to have been incorrect in any material respect when made or deemed made; or (e) The Borrower shall fail to perform or observe any term or covenant on its part to be performed or observed contained in Section 5.02 (other than subsections (c), (d), (g), (i) or (j) thereof), or the Parent shall fail to perform or observe any term or covenant on its part to be performed or observed contained in Section 1, 2 or 4 of the Support Agreement; or (f) The Borrower shall fail to perform or observe any other term or covenant on its part to be performed or observed contained in Section 5.01, Section 5.02 or in any other Loan Document, or the Parent shall fail to perform or observe any other term or covenant on its part to be performed or observed contained in the Support Agreement, and any such failure shall remain unremedied, after written notice thereof shall have been given to the Borrower by the Agent, for a period of 30 days; or (g) The Parent or any of its Subsidiaries (including the Borrower but excluding IES Utilities) shall fail to pay any of its Debt (including any interest or premium thereon but excluding Debt evidenced by the Notes) aggregating $5,000,000 or more when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in any agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof as a result of a default or other similar adverse event; or (h) IES Utilities shall fail to pay any of its Debt (including any interest or premium thereon) aggregating $5,000,000 or more when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in any agreement or instrument relating to such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment) prior to the stated maturity thereof as a result of a default or other similar adverse event; or (i) The Borrower, the Parent or IES Utilities shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make an assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower, the Parent or IES Utilities seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of its debts under any law relating to bankruptcy, insolvency, or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of a proceeding instituted against the Borrower, the Parent or IES Utilities, either such proceeding shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceeding (including without limitation the entry of an order for relief against the Borrower, the Parent or IES Utilities or the appointment of a receiver, trustee, custodian or other similar official for the Borrower, the Parent or IES Utilities or any of its property) shall occur; or the Borrower, the Parent or IES Utilities shall take any corporate or other action to authorize any of the actions set forth above in this subsection (i); or (j) Any judgment or order for the payment of money equal to or in excess of $5,000,000 shall be rendered against the Parent or any of its Direct Subsidiaries (including, without limitation, the Borrower and IES Utilities) or their respective properties and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (k) The Support Agreement, after delivery thereof under Article III, shall for any reason, except to the extent permitted by the terms thereof, cease to be valid and binding on the Parent or the Borrower; or (l) Any Governmental Approval required in connection with the execution, delivery and performance of the Loan Documents shall be rescinded, revoked, otherwise terminated, or amended or modified in any manner which is materially adverse to the interests of the Lenders and the Agent; or (m) Any ERISA Event shall have occurred with respect to a Plan which could reasonably be expected to result in a material liability to the Borrower, and, 30 days after notice thereof shall have been given to the Borrower by the Agent or any Lender, such ERISA Event shall still exist; then, and in any such event, the Agent (i) shall at the request, or may with the consent, of the holders of at least 66-2/3% in principal amount of the A Advances then outstanding or, if no A Advances are then outstanding, Banks having at least 66-2/3% of the Commitments (without giving effect to any B Reduction), by notice to the Borrower, declare the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the holders of at least 66-2/3% in principal amount of the Advances then outstanding or, if no Advances are then outstanding, Lenders having at least 66-2/3% of the Commitments, by notice to the Borrower, declare the Notes (if any), all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (A) the Commitments and the obligation of each Lender to make Advances shall automatically be terminated and (B) the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII THE AGENT SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Agent by the terms hereof, together with such powers as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement or any other Loan Document (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. The Agent shall be deemed to have exercised reasonable care in the administration and enforcement of this Agreement and the other Loan Documents if it undertakes such administration and enforcement in a manner substantially equal to that which Citibank, N.A. accords credit facilities similar to the credit facility hereunder for which it is the sole lender. SECTION 7.02. Agent's Reliance, Etc. Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or any other Loan Document, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (i) may treat the payee of any Note as the holder thereof until the Agent receives and accepts a Lender Assignment entered into by the Lender which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement or any other Loan Document; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement or any other Loan Document on the part of the Borrower or the Parent or to inspect the property (including the books and records) of the Borrower or the Parent; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto or thereto; and (vi) shall incur no liability under or in respect of this Agreement or any other Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Citibank, N.A. and Affiliates. With respect to its Commitment, the Advances made by it and the Notes issued to it, Citibank, N.A. shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent; and the term "Bank" or "Banks" and "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Citibank, N.A. in its individual capacity. Citibank, N.A. and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, the Parent any of its Subsidiaries and any Person who may do business with or own securities of the Borrower, the Parent or any such Subsidiary, all as if Citibank, N.A. were not the Agent and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 5(d) of the Support Agreement and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower), ratably according to (a) on or before the Termination Date, the respective principal amounts of the A Notes then held by each of them (or if no A Notes are at the time outstanding or if any A Notes are held by Persons which are not Lenders, ratably according to the respective Percentages of the Lenders), or (b) after the Termination Date, the respective principal amounts of the Notes then held by each of them (or if no Notes are at the time outstanding or if any Notes are held by Persons which are not Lenders, ratably according to the respective unpaid principal amounts of the Advances made by each Lender), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower. SECTION 7.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders, with any such resignation or removal to become effective only upon the appointment of a successor Agent pursuant to this Section 7.06. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Agent, which shall be a Lender or shall be another commercial bank or trust company reasonably acceptable to the Borrower organized under the laws of the United States or of any State thereof. If no successor Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a Lender or shall be another commercial bank or trust company organized under the laws of the United States of any State thereof reasonably acceptable to the Borrower. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of any Loan Document, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders and, in the case of any amendment, the Borrower, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (a) waive, modify or eliminate any of the conditions specified in Article III, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the A Notes, any Applicable Margin or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the A Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the A Notes, or the number of Lenders, which shall be required for the Lenders or any of them to take any action hereunder or (f) amend this Section 8.01; and provided, further, that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any Note. SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder and under the other Loan Documents shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 200 First Street, Cedar Rapids, Iowa 52401, Attention: Treasurer; if to the Parent, at its address at 200 First Street, Cedar Rapids, Iowa 52401, Attention: Treasurer; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Lender Assignment pursuant to which it became a Lender; and if to the Agent, at its address at One Court Square, 7th Floor, Zone 2, Long Island City, New York 11120, Attention: Bank Loan Syndications; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective five days after being deposited in the mails, or when delivered to the telegraph company, telecopied, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Agent pursuant to Article II or VII shall not be effective until received by the Agent. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs, Expenses, Taxes and Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses of the Agent in connection with the preparation (including, without limitation, printing costs), negotiation, execution, delivery, modification and amendment of this Agreement and the other Loan Documents, and the other documents and instruments to be delivered hereunder and thereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto and with respect to the administration of, and advising the Agent as to its rights and responsibilities under, this Agreement and the other Loan Documents. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement and the other Loan Documents and the other documents and instruments to be delivered hereunder and thereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a). In addition, the Borrower shall pay any and all stamp and other taxes payable or determined to be payable in connection with the execution and delivery of this Agreement and the other Loan Documents, and the other documents and instruments to be delivered hereunder and thereunder, and agrees to save the Agent and each Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes. (b) If any payment of principal of, or Conversion of, any Adjusted CD Rate Advance, Eurodollar Rate Advance or B Advance is made other than on the last day of the Interest Period for such A Advance or other than on the maturity date of such B Advance, as a result of a payment or Conversion pursuant to Section 2.09(f), 2.10, 2.11, 2.12 or 2.14 or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (c) The Borrower hereby agrees to indemnify and hold each Lender, the Agent and their respective officers, directors, employees, professional advisors and affiliates (each, an "Indemnified Person") harmless from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding) which any of them may incur or which may be claimed against any of them by any Person (except for such claims, damages, losses, liabilities, costs and expenses resulting from such Indemnified Person's gross negligence or willful misconduct): (i) by reason of or in connection with the execution, delivery or performance of any of the Loan Documents or any transaction contemplated thereby, or the use by the Borrower of the proceeds of any Extension of Credit; (ii) in connection with any documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of any of the Loan Documents; or (iii) in connection with or resulting from the utilization, storage, disposal, treatment, generation, transportation, release or ownership of any Hazardous Substance (i) at, upon, or under any property of the Borrower or any of its Affiliates or (ii) by or on behalf of the Borrower or any of its Affiliates at any time and in any place. (d) The Borrower's obligations under this Section 8.04 shall survive the repayment of all amounts owing to the Lenders under the Notes and the termination of the Commitments. If and to the extent that the obligations of the Borrower under this Section 8.04 are unenforceable for any reason, the Borrower agrees to make the maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 8.05. Right of Set-off. (a) Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent by the Majority Lenders specified by Section 6.01 to authorize the Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under any Loan Document and any Note held by such Lender, irrespective of whether or not such Lender shall have made any demand under such Loan Document or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which such Lender may have. (b) The Borrower agrees that it shall have no right of set-off, deduction or counterclaim in respect of its obligations hereunder, and that the obligations of the Lenders hereunder are several and not joint. Nothing contained herein shall constitute a relinquishment or waiver of the Borrower's rights to any independent claim that the Borrower may have against the Agent or any Lender for the Agent's or such Lender's, as the case may be, gross negligence or wilful misconduct, but no Lender shall be liable for the conduct of the Agent or any other Lender, and the Agent shall not be liable for the conduct of any Lender. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified in writing by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 8.07. Assignments and Participations. (a) Each Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement, (ii) the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Lender Assignment with respect to such assignment) shall in no event be less than the lesser of the amount of such Lender's then remaining Commitment and $5,000,000 (except in the case of assignments between Lenders at the time already parties hereto), and (iii) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, a Lender Assignment, together with any Note or Notes subject to such assignment and a processing and recordation fee of $2,500. Promptly following its receipt of such Lender Assignment, Note or Notes and fee, the Agent shall accept and record such Lender Assignment in the Register. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Lender Assignment, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Lender Assignment, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Lender Assignment, relinquish its rights and be released from its obligations under this Agreement (and, in the case of a Lender Assignment covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). Notwithstanding anything to the contrary contained in this Agreement, any Lender may at any time assign all or any portion of the Advances owing to it to any Affiliate of such Lender. No such assignment, other than to an Eligible Assignee, shall release the assigning Lender from its obligations hereunder. (b) By executing and delivering a Lender Assignment, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Lender Assignment, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with any Loan Document or the execution, legality, validity, enforceability, genuineness, sufficiency or value of any Loan Document or any other instrument or document furnished pursuant thereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the Parent or the performance or observance by the Borrower or the Parent of any of its obligations under any Loan Document or any other instrument or document furnished pursuant thereto; (iii) such assignee confirms that it has received a copy of each Loan Document, together with copies of the financial statements referred to in Section 5(d) of the Support Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Lender Assignment; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender. Anything in this Section 8.07 to the contrary notwithstanding, this Section 8.07 shall not apply to any of the assignments contemplated by Section 3.01(e). (c) The Agent shall maintain at its address referred to in Section 8.02 a copy of each Lender Assignment delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Parent, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a Lender Assignment executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Note or Notes subject to such assignment, the Agent shall, if such Lender Assignment has been completed and is in substantially the form of Exhibit 8.07 hereto, (i) accept such Lender Assignment, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within 10 Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Agent in exchange for the surrendered Note or Notes a new Note to the order of such Eligible Assignee in an amount equal to the Commitment assumed by it pursuant to such Lender Assignment and, if the assigning Lender has retained a Commitment hereunder, a new Note to the order of the assigning Lender in an amount equal to the Commitment retained by it hereunder. Such new Note or Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note or Notes, shall be dated the effective date of such Lender Assignment and shall otherwise be in substantially the form of Exhibit 1.01A-1 hereto. (e) Each Lender may sell participations to one or more banks, financial institutions or other entities in all or a portion of its rights and obligations under the Loan Documents (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, and (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower or the Parent furnished to such Lender by or on behalf of the Borrower or the Parent; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree, in accordance with the terms of Section 8.08, to preserve the confidentiality of any Confidential Information relating to the Borrower or the Parent received by it from such Lender. (g) If any Lender (or any bank, financial institution, or other entity to which such Lender has sold a participation) shall (i) make any demand for payment under Section 2.08 or 2.13, (ii) give notice to the Agent pursuant to Section 2.14 or (iii) determine not to extend the Termination Date in response to any request by the Borrower pursuant to Section 2.18, then (A) in the case of any demand made under clause (i), above, or the occurrence of the event described in clause (ii), above, within 30 days after any such demand or occurrence (if, but only if, in the case of any demanded payment described in clause (i), such demanded payment has been made by the Borrower), and (B) in the case of the occurrence of the event described in clause (iii), above, at any time prior to the then-scheduled Termination Date, the Borrower may, with the approval of the Agent (which approval shall not be unreasonably withheld), and provided that no Event of Default or Unmatured Default shall then have occurred and be continuing, demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower all (but not less than all) of such Lender's Commitment and the Advances owing to it within the period ending on the latest to occur of (x) the last day in the period described in clause (A) or (B), above, as applicable, (y) the last day of the longest of the then current Interest Periods for such Advances, and (z) the latest maturity date of any B Advances owing to such Lender. If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignees for all or part of such Lender's Commitment or Advances, then such demand by the Borrower shall become ineffective; it being understood for purposes of this subsection (g) that such assignment shall be conclusively deemed to be on terms acceptable to such Lender, and such Lender shall be compelled to consummate such assignment to an Eligible Assignee designated by the Borrower, if such Eligible Assignee (1) shall agree to such assignment by entering into a Lender Assignment with such Lender and (2) shall offer compensation to such Lender in an amount equal to all amounts then owing by the Borrower to such Lender hereunder and under the Note made by the Borrower to such Lender, whether for principal, interest, fees, costs or expenses (other than the demanded payment referred to above and payable by the Borrower as a condition to the Borrower's right to demand such assignment), or otherwise. (h) Anything in this Section 8.07 to the contrary notwithstanding, any Lender may assign and pledge all or any portion of its Commitment and the Advances owing to it to any Federal Reserve Bank (and its transferees) as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Lender from its obligations hereunder. SECTION 8.08. Confidentiality. In connection with the negotiation and administration of this Agreement and the other Loan Documents, the Borrower and the Parent have furnished and will from time to time furnish to the Agent and the Lenders (each, a "Recipient") written information which is identified to the Recipient in writing when delivered as confidential (such information, other than any such information which (i) as publicly available, or otherwise known to the Recipient, at the time of disclosure, (ii) subsequently becomes publicly available other than through any act or omission by the Recipient or (iii) otherwise subsequently becomes known to the Recipient other than through a Person whom the Recipient knows to be acting in violation of his or its obligations to the Borrower or the Parent, being hereinafter referred to as "Confidential Information"). The Recipient will maintain the confidentiality of any Confidential Information in accordance with such procedures as the Recipient applies generally to information of that nature. It is understood, however, that the foregoing will not restrict the Recipient's ability to freely exchange such Confidential Information with current or prospective participants in or assignees of the Recipient's position herein, but the Recipient's ability to so exchange Confidential Information shall be conditioned upon any such prospective participant's or assignee's entering into an understanding as to confidentiality similar to this provision. It is further understood that the foregoing will not prohibit the disclosure of any or all Confidential Information if and to the extent that such disclosure may be required (i) by a regulatory agency or otherwise in connection with an examination of the Recipient's records by appropriate authorities, (ii) pursuant to court order, subpoena or other legal process or in connection with any pending or threatened litigation, (iii) otherwise as required by law, or (iv) in order to protect its interests or its rights or remedies hereunder or under the other Loan Documents; in the event of any required disclosure under clause (ii) or (iii), above, the Recipient agrees to use reasonable efforts to inform the Borrower and the Parent as promptly as practicable. SECTION 8.09. WAIVER OF JURY TRIAL. THE AGENT, THE LENDERS, THE BORROWER AND THE PARENT HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN), OR ACTIONS OF THE AGENT, SUCH LENDERS, THE BORROWER OR THE PARENT. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT. SECTION 8.10. Consent. Unless otherwise specified as being within the sole discretion of the Agent, the Lenders the Majority Lenders or the Borrower, whenever the consent or approval of the Agent, the Lenders, the Majority Lenders or the Borrower, respectively, is required herein, such consent or approval shall not be unreasonably withheld or delayed. SECTION 8.11. Governing Law. This Agreement and the other Loan Documents shall be governed by, and construed in accordance with, the laws of the State of New York. The Borrower, the Parent, each Lender, and the Agent (i) irrevocably submits to the non-exclusive jurisdiction of any New York State court or Federal court sitting in New York City in any action arising out of any Loan Document, (ii) agrees that all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. SECTION 8.12. Relation of the Parties; No Beneficiary. No term, provision or requirement, whether express or implied, of any Loan Document, or actions taken or to be taken by any party thereunder, shall be construed to create a partnership, association, or joint venture between such parties or any of them. No term or provision of the Loan Documents shall be construed to confer a benefit upon, or grant a right or privilege to, any Person other than the parties thereto. SECTION 8.13. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. IES DIVERSIFIED INC. By Title: CITIBANK, N.A., as Agent By Vice President Bank CITIBANK, N.A. By Title: Bank CIBC INC. By Title: Bank MELLON BANK, N.A. By Title: Bank THE CHASE MANHATTAN BANK By Title: Bank BARCLAYS BANK PLC By Title: Bank THE FIRST NATIONAL BANK OF CHICAGO By Title: Bank THE FUJI BANK, LIMITED By Title: Bank THE SANWA BANK, LIMITED, CHICAGO BRANCH By Title: Bank UNION BANK OF CALIFORNIA, N.A. By Title: Bank NORWEST BANK IOWA, NATIONAL ASSOCIATION By Title: Bank ABN AMRO N.V. by ABN AMRO NORTH AMERICA, INC. By Title: EXHIBIT 1.01A-1 FORM OF A NOTE U.S.$__________ Dated:__________, 19__ FOR VALUE RECEIVED, the undersigned, IES DIVERSIFIED INC., an Iowa corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of ___________________________ (the "Lender") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below) the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the A Advances (as defined below) made by the Lender to the Borrower pursuant to the Credit Agreement outstanding on the Termination Date (as defined in the Credit Agreement). The Borrower promises to pay interest on the unpaid principal amount of each A Advance from the date of such A Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to Citibank, N.A., as Agent, at 399 Park Avenue, New York, New York 10043, Attention: Utilities Department, in same day funds. Each A Advance made by the Lender to the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note, provided that the failure to so record any A Advance or any payment thereof shall not affect the payment obligations of the Borrower hereunder or under the Credit Agreement. This Promissory Note is one of the A Notes referred to in, and is entitled to the benefits of, the Third Amended and Restated Credit Agreement, dated as of November 20, 1996 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Lender and certain other lenders parties thereto, and Citibank, N.A., as Agent for the Lender and such other lenders. The Credit Agreement, among other things, (i) provides for the making of advances (the "A Advances") by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such A Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of New York. The Borrower (i) irrevocably submits to the non-exclusive jurisdiction of any New York State Court or Federal court sitting in New York City in any action arising out of this Promissory Note, (ii) agrees that all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. IES DIVERSIFIED INC. By Title: ADVANCES, MATURITIES, AND PAYMENTS OF PRINCIPAL Amount of Maturity Principal Unpaid Amount of of Paid or Principal Notation Date Advance Advance Prepaid Balance Made By _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ _____________________________________________________________________________ EXHIBIT 1.01A-2 FORM OF B NOTE U.S.$__________ Dated:__________, 19__ FOR VALUE RECEIVED, the undersigned, IES DIVERSIFIED INC., an Iowa corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _______________________________ (the "Lender") for the account of its Applicable Lending Office (as defined in the Credit Agreement referred to below), on __________,19__, the principal amount of __________ Dollars ($________). The Borrower promises to pay interest on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the interest rate and payable on the interest payment date or dates provided below: Interest Rate: ____% per annum (calculated on the basis of a year of ______ days for the actual number of days elapsed). Interest Payment Date or Dates:__________ Both principal and interest are payable in lawful money of the United States of America to Citibank, N.A., as Agent, at 399 Park Avenue, New York, New York 10043, Attention: Utilities Department, in same day funds. This Promissory Note is one of the B Notes referred to in, and is entitled to the benefits of, the Third Amended and Restated Credit Agreement, dated as of November 20, 1996 (as amended, modified or supplemented from time to time, the "Credit Agreement"), among the Borrower, the Lender and certain other lenders parties thereto, and Citibank, N.A., as Agent for the Lender and such other lenders. The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of New York. The Borrower (i) irrevocably submits to the non-exclusive jurisdiction of any New York State Court or Federal court sitting in New York City in any action arising out of this Promissory Note, (ii) agrees that all claims in such action may be decided in such court, (iii) waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum and (iv) consents to the service of process by mail. A final judgment in any such action shall be conclusive and may be enforced in other jurisdictions. Nothing herein shall affect the right of any party to serve legal process in any manner permitted by law or affect its right to bring any action in any other court. IES DIVERSIFIED INC. By Title: SUPPORT AGREEMENT THIS THIRD AMENDED AND RESTATED SUPPORT AGREEMENT, made the 20th day of November, 1996, by and between IES INDUSTRIES INC., an Iowa corporation (together with any successor thereto in accordance with Section 2(e) hereof, the "Parent"), and IES DIVERSIFIED INC., an Iowa corporation (the "Borrower"). W I T N E S S E T H: WHEREAS, the Parent is the owner of 100% of the outstanding common stock of the Borrower; WHEREAS, the Borrower, certain banks (the "Existing Banks") and Citibank, N.A., as agent for the Existing Banks, are parties to that certain Second Amended and Restated Credit Agreement, dated as of November 9, 1994 (the "Existing Facility"). The Borrower has requested that the Existing Facility be amended and restated so as to (i) increase the Commitments (as defined therein) to $300,000,000 and (ii) effect certain other amendments and modifications as set forth in the Third Amended Credit Agreement (as defined below). WHEREAS, the Borrower intends to make borrowings from, and issue promissory notes to, certain lenders pursuant to that certain Third Amended and Restated Credit Agreement, dated as of November 20, 1996 (said Agreement, as it may hereafter be amended or otherwise modified from time to time, being the "Third Amended Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), among the Borrower, said lenders (the "Lenders") and Citibank, N.A., as Agent, so that the Borrower will be in a position to provide financing for itself and for some or all of its (and, in turn, the Parent's) Subsidiaries (other than IES Utilities); WHEREAS, the Parent and the Borrower are parties to that certain Second Amended and Restated Support Agreement, dated as of November 9, 1994 (the "Existing Support Agreement"). In connection with the amendment and restatement of the Existing Facility, the Parent and the Borrower desire to amend and restate the Existing Support Agreement to enhance and maintain the financial condition of the Borrower as hereinafter set forth in order to enable the Borrower to incur Debt under the Third Amended Credit Agreement on more advantageous and reasonable terms; and WHEREAS, the Parent has entered into an Agreement and Plan of Merger, dated as of November 10, 1995, as amended, with WPL Holdings, Inc., a Wisconsin Corporation ("WPL"), and Interstate Power Company, a Delaware corporation ("IPC"), pursuant to which, if the merger contemplated thereby (the "Proposed Merger") is consummated, the Parent will merge with and into WPL and IPC will become a subsidiary of such merged entity; WHEREAS, the Parent and the Borrower understand and agree that the Agent and the Lenders have relied upon this Agreement in entering into the Third Amended Credit Agreement and will rely hereon in making Advances to the Borrower; NOW, THEREFORE, in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Existing Support Agreement is hereby amended and restated in its entirety to read as follows: SECTION 1. Affirmative Covenants of the Parent. So long as any amount in respect of any Note shall remain unpaid or any Lender shall have any Commitment, the Parent will, unless the Majority Lenders shall otherwise consent in writing: (a) Stock Ownership. At all times maintain direct ownership of 100% of the shares of capital stock (or comparable interests) of the Borrower and IES Utilities now or hereafter issued and outstanding, other than the preferred and preference stock of IES Utilities. (b) Net Worth. Cause the Borrower to have at all times a positive net worth (net assets less intangible assets, if any), as determined in accordance with generally accepted accounting principles. SECTION 2. Negative Covenants of the Parent. So long as any amount in respect of any Note shall remain unpaid or any Lender shall have any Commitment, the Parent will not, without the written consent of the Majority Lenders: (a) Consolidated Leverage Ratio. Allow the ratio of (i) Consolidated Debt of the Parent to (ii) Consolidated Capital of the Parent to exceed 0.65 to 1.00 at any time. (b) Debt. Create, incur, assume, or suffer to exist any Debt other than: (i) Debt under (A) existing guaranties of the mortgage obligations of certain officers of the Parent and (B) an existing line of credit provided to the Parent by Firstar Bank which supports the Parent's obligations under such guaranties, provided that such Debt shall not exceed $1,500,000 in the aggregate at any one time outstanding; (ii) Debt under guaranties and other types of support agreements in respect of Debt of the Borrower; provided that if the terms of any such guaranty or support agreement are more favorable to the beneficiary thereof than are the terms of this Agreement to the Agent and the Lenders, this Agreement shall, coincident with the delivery of such guaranty or support agreement, be replaced with an agreement containing such more favorable terms (or amended to contain such more favorable terms); and provided, further, that both immediately before and after the execution and delivery of such guaranty or support agreement, the Parent shall be in compliance with the covenant set forth in subsection (a), above; (iii) unsecured Debt owing to the Borrower; (iv) existing Debt set forth in Schedule 2 hereto; and (v) from and after the consummation of the Proposed Merger and the satisfaction of the conditions set forth in Section 2(e) hereof, other Debt in the aggregate not to exceed $50,000,000. (c) Prohibited Transactions. Enter into any transaction, or permit the Borrower to enter into any transaction, which will result in an Event of Default. (d) Negative Pledge. Create or suffer to exist any Lien upon or with respect to any capital stock of the Borrower from time to time owned by the Parent or any capital stock of IES Utilities from time to time owned by the Parent. (e) Merger. Merge with or into or consolidate with or into any other entity, unless, as a condition to such merger or consolidation, the surviving corporation (if not the Parent) (i) expressly assumes in a writing delivered to the Agent (with sufficient copies for each Lender) the due and punctual performance and observance of all of the obligations in the Support Agreement to be performed or observed by the Parent and (ii) delivers to the Agent (with sufficient copies for each Lender) an opinion of counsel, in form and substance satisfactory to the Agent, as to the enforceability of the obligations set forth in such writing and the obtaining of all Governmental Approvals necessary for the performance of such obligations by such surviving corporation and such other matters as the Agent may reasonably request. SECTION 3. Delivery of Financial Statements. So long as any amount in respect of any Note shall remain unpaid or any Lender shall have any Commitment, the Parent will, unless the Majority Lenders shall otherwise consent in writing, furnish to each Lender: (a) Quarterly Financial Statements. As soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Parent, (i) a consolidated and consolidating balance sheet of the Parent and its Subsidiaries as at the end of such quarter and (ii) consolidated and consolidating statements of income and retained earnings, and a consolidated statement of cash flows, of the Parent and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, all in reasonable detail and duly certified (subject to year-end audit adjustments) by the chief financial officer of the Parent as having been prepared in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5(d) hereof, together with a schedule in form satisfactory to the Majority Lenders of the computations used by the Parent in determining compliance with the covenant contained in Section 2(a) hereof. (b) Annual Consolidated Financial Statements. As soon as available and in any event within 120 days after the end of each fiscal year of the Parent, a copy of the consolidated balance sheet of the Parent and its Subsidiaries as at the end of such fiscal year and consolidated statements of income, retained earnings and cash flows of the Parent and its Subsidiaries for such fiscal year, in each case accompanied by the audit report of Arthur Andersen & Co. or another nationally-recognized independent public accounting firm acceptable to the Majority Lenders, together with a schedule in form satisfactory to the Majority Lenders of the computations used by such accounting firm in determining, as of the end such fiscal year, compliance with the covenant contained in Section 2(a) hereof. (c) Annual Consolidating Financial Statements. As soon as available and in any event within 120 days after the end of each fiscal year of the Parent, a copy of the consolidating balance sheet of the Parent and its Subsidiaries as at the end of such fiscal year and consolidating statements of income and retained earnings of the Parent and its Subsidiaries for such fiscal year, all in reasonable detail and duly certified by the chief financial officer of the Parent as having been prepared in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 5(d) hereof. (d) Other Information. Promptly after requested, such other information respecting the business, properties, results of operations, prospects, revenues, condition or operations, financial or otherwise, of the Parent or any of its Subsidiaries as the Agent or any Lender through the Agent may from time to time reasonably request. SECTION 4. Liquidity Undertaking. If, during the term of this Agreement, the Borrower is unable to make timely payment of any of its obligations now or hereafter existing under the Third Amended Credit Agreement and the Notes, whether for principal, interest, fees, expenses or otherwise (such obligations being the "Obligations"), the Parent agrees that it shall promptly provide to the Borrower, at its request or at the request of the Agent or any Lender, such amount of funds (in the form of cash or liquid assets, and as equity or, subject to Section 5.02(b) of the Third Amended Credit Agreement, as a loan) as shall be necessary to enable the Borrower to make payment of such Obligations. If such funds are advanced to the Borrower as a loan, such loan shall be on such terms and conditions, including maturity and rate of interest, as the Parent and the Borrower shall agree. Notwithstanding the foregoing, any such loan shall be subordinated in all respects to any and all Obligations upon the terms set forth in Schedule 1 hereto, whether or not any Obligations are outstanding at the time of such loan. SECTION 5. Representations and Warranties of the Parent. The Parent represents and warrants to the Borrower, the Agent and the Lenders as follows: (a) The Parent and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary (except where the failure to so qualify would not have a material adverse affect on the business, financial condition, operations, results of operations or prospects of the Parent and its Subsidiaries, taken as a whole). (b) The execution, delivery and performance by the Parent of this Agreement are within the Parent's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene (i) the Parent's charter or by-laws, (ii) law, or (iii) any legal or contractual restriction binding on or affecting the Parent; and such execution, delivery and performance do not or will not result in or require the creation of any Lien upon or with respect to any of its properties. (c) This Agreement is the legal, valid and binding obligation of the Parent enforceable against the Parent in accordance with its terms, subject to the qualifications, however, that the enforcement of the rights and remedies herein is subject to bankruptcy and other similar laws of general application affecting rights and remedies of creditors and that the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceedings therefor may be brought. (d) The consolidated balance sheet of the Parent and its Subsidiaries as at December 31, 1995, and the related consolidated statements of income, retained earnings and cash flows of the Parent and its Subsidiaries for the fiscal year then ended, and accompanied by a report thereon of Arthur Andersen & Co., and the consolidated unaudited balance sheet of the Parent and its Subsidiaries as at September 30, 1996, and the related consolidated unaudited statements of income, retained earnings and cash flows of the Parent and its Subsidiaries for the nine-month period then ended, copies of each of which have been furnished to each Lender, fairly present (subject, in the case of such balance sheets and statements of income, retained earnings and cash flows for the nine months ended September 30, 1996, to year-end adjustments) the consolidated financial condition of the Parent and its Subsidiaries as at such dates and the consolidated results of operations of the Parent and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied, and since September 30, 1996, there has been no material adverse change in the business, financial condition, operations, results of operations or prospects of the Parent and its Subsidiaries, taken as a whole, or in the Parent's ability to perform its obligations under this Agreement or any other Loan Document to which it is or will be a party. (e) Except as disclosed in the Parent's Report on Form 10-K for the year ended December 31, 1995 and Report on Form 10-Q for the period ended September 30, 1996, there is no pending or threatened action or proceeding affecting the Parent or any of its Subsidiaries or properties before any court, governmental agency or arbitrator, that might reasonably be expected to materially adversely affect (i) the business, financial condition, operations, results of operations or prospects of the Parent and its Subsidiaries, taken as a whole, or (ii) the ability of the Parent to perform its obligations under this Agreement or under any other Loan Document to which it is or is to be a party; and since September 30, 1996 there have been no material adverse developments in any action or proceeding so disclosed. (f) The Parent has filed all tax returns (Federal, state and local) required to be filed and paid all taxes shown thereon to be due, including interest and penalties, or, to the extent the Parent is contesting in good faith an assertion of liability based on such returns, has provided adequate reserves for payment thereof in accordance with generally accepted accounting principles. (g) (i) Until such time as the Proposed Merger is consummated, the Parent is and will continue to be a "holding company" within the meaning of the PUHCA, but the Parent and its Subsidiaries are and will be exempt from the provisions of that Act, except Section 9(a)(2) thereof, by virtue of having filed with the Securities and Exchange Commission a Statement by Holding Company Claiming Exemption Under Rule U-2 from the Provisions of the Public Utility Holding Company Act of 1935 on Form U-3A-2. Until such time, such exemption is and will be in full force and effect and the Parent is not aware of any existing or proposed proceedings contemplating the revocation or modification of such exemption. (ii) From and after the consummation of the Proposed Merger, the Parent is and will continue to be a "holding company" within the meaning of he PUHCA. (h) No Governmental Approval which has not been obtained is required in connection with the execution, delivery and performance by the Parent of this Agreement. (i) The consolidated and consolidating financial statements of the Parent and its Subsidiaries contained in the Information Memorandum fairly present the financial condition of the Parent and its Subsidiaries as at the dates specified therein and the results of operations of the Parent and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. SECTION 6. Waivers. (a) The Parent hereby waives any failure or delay on the part of the Borrower in asserting or enforcing any of its rights or in making any claims or demands hereunder. The Borrower, the Agent or any Lender may at any time, without the Parent's consent, without notice to the Parent and without affecting or impairing the Borrower's, the Agent's or such Lender's rights or the Parent's obligations hereunder, do any of the following with respect to the Third Amended Credit Agreement and the Notes: (i) make changes, modifications, amendments or alterations thereto, by operation of law or otherwise, including, without limitation, any increase in the Commitments or the rate of interest payable with respect to Advances or any change in the method of calculating the rate of interest payable with respect thereto, (ii) grant renewals and extensions of time, for payment or otherwise, (iii) accept new or additional documents, instruments or agreements relating to or in substitution thereof, or (iv) otherwise handle the enforcement of their respective rights and remedies in accordance with their business judgment. (b) If the Parent shall at any time or from time to time fail to perform or comply with any of its obligations contained herein and if for any reason the Agent or any Lender shall have failed to receive when due and payable (whether at stated maturity, by acceleration, or otherwise) the payment of all or any part of principal of, or interest on, or any other amount payable by the Borrower in respect of any Obligations owing to the Agent or such Lender, then in each case, to the fullest extent permitted by law, (i) it shall be assumed conclusively without necessity of proof that such failure by the Parent was the sole and direct cause of the Agent's or such Lender's (as the case may be) failure to receive such payment when due irrespective of any other contributing or intervening cause whatsoever, and (ii) the Parent further irrevocably waives any right or defense that the Parent may have to cause the Agent or any Lender to prove the cause or amount of any damages or to mitigate the same. (c) The Parent irrevocably waives, to the fullest extent permitted by law and for the benefit of, and as a separate undertaking with, the Agent and each Lender, any defense to the performance of this Agreement that may be available to the Parent as a consequence of this Agreement's being rejected or otherwise not assumed by the Borrower or any trustee or similar official for the Borrower or for any substantial part of the property of the Borrower, or as a consequence of this Agreement's being otherwise terminated or modified, in any bankruptcy or insolvency proceeding, whether such rejection, non-assumption, termination or modification shall have been by reason of this Agreement's being held to be an executory contract or by reason of any other circumstance. If, notwithstanding the foregoing, this Agreement shall be rejected or otherwise not assumed, or terminated or modified, the Parent agrees, to the fullest extent permitted by law, for the benefit of, and as a separate undertaking with, the Agent and each Lender, that the Parent will be unconditionally liable to pay to the Agent and each Lender an amount equal to each payment that would otherwise be payable by the Parent under or in connection with this Agreement if this Agreement were not so rejected or otherwise not assumed or terminated or modified. SECTION 7. Amendments, Etc. No amendment or waiver of any provision of this Agreement, nor consent to any departure therefrom, shall in any event be effective unless the same shall be in writing and signed by both parties and consented to by the Majority Lenders. SECTION 8. Rights of the Lenders. The Borrower hereby assigns and pledges to the Agent for the ratable benefit of each Lender, the Borrower's rights under Sections 1, 2 and 4 of this Agreement, and, if the Borrower fails or refuses to take timely action to enforce its rights under Section 1, 2 or 4 of this Agreement or if the Borrower defaults in the timely payment of any Obligations owed to the Agent or any Lender when due, the Agent may proceed directly against the Parent to enforce the Borrower's rights under Sections 1, 2 and 4 of this Agreement or to obtain payment of such defaulted Obligations owed to the Agent or such Lender. SECTION 9. Notices. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 200 First Street, Cedar Rapids, Iowa 52401, Attention: Treasurer; if to the Parent, at its address at 200 First Street, Cedar Rapids, Iowa 52401, Attention: Treasurer; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I to the Third Amended Credit Agreement; if to any other Lender, at its Domestic Lending Office specified in the Lender Assignment pursuant to which it became a Lender; and if to the Agent, at its address at One Court Plaza, 7th Floor, Zone 2, Long Island City, New York 11120, Attention: Bank Loan Syndication; or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective five days after being deposited in the mails, or when delivered to the telegraph company, telecopied, confirmed by telex answerback or delivered to the cable company, respectively. SECTION 10. Successors. Subject to Section 2(e), this Agreement shall be binding upon the parties hereto and their respective successors and assigns and is also intended for the benefit of the Agent and the Lenders and, notwithstanding that the Agent and the Lenders are not parties hereto, the Agent and each Lender shall be entitled to the full benefits of this Agreement and to enforce the covenants and agreements contained herein. This Agreement is not intended for the benefit of any Person other than the Agent and the Lenders, and shall not confer or be deemed to confer upon any other such Person any benefits, rights or remedies hereunder. SECTION 11. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 12. Remedies. The parties to this Agreement acknowledge and agree that breach of any of the covenants of the Parent set forth herein may not be compensable by payment of money damages and, therefore, that the covenants of the Parent set forth herein may be enforced in equity by a decree requiring specific performance. Such remedies shall be cumulative and non-exclusive and shall be in addition to any other rights and remedies the Borrower may have under this Agreement. IN WITNESS WHEREOF, the parties hereto have set their hands and affixed their corporate seals as of the day and year above written. IES INDUSTRIES INC. By_________________________________ Title: IES DIVERSIFIED INC. By_________________________________ Title: Schedule 1 TERMS OF SUBORDINATION [The following provisions are to be included in each instrument or document evidencing loans from the Parent to the Borrower pursuant to Section 4 of the Support Agreement] 1. Reference is made to the Third Amended and Restated Credit Agreement, dated as of November 20, 1996 (such agreement, as it may hereafter be amended, modified or supplemented from time to time, being the "Credit Agreement"; the terms defined therein and not otherwise defined herein being used herein as therein defined), among IES Diversified Inc., the Lenders named therein and Citibank, N.A., as Agent for the Lenders. The Parent hereby agrees for the benefit of the Agent and the Lenders that all obligations of the Borrower to the Parent hereunder (the "Subordinated Debt") are and shall be subordinate, to the extent and in the manner set forth hereinafter, in right of payment to the prior payment in full of all obligations of the Borrower under the Credit Agreement and the other Loan Documents, whether for principal, interest (including interest, as provided in the Loan Documents, after the filing of a petition initiating any proceeding referred to in paragraph 3, below), fees, expenses or otherwise (all such obligations being the "Senior Debt"). 2. Upon the occurrence and during the continuance of an Event of Default or an Unmatured Default, the Parent shall not ask, demand, sue for, take or receive from the Borrower, directly or indirectly, in cash or other property or by set-off or in any other manner (including, without limitation, from or by way of collateral), payment of all or any of the Subordinated Debt. 3. Upon any distribution of all or any of the assets of the Borrower to creditors of the Borrower upon the dissolution, winding up, liquidation, arrangement, reorganization or composition of the Borrower, whether in any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings or upon an assignment for the benefit of creditors or any other marshaling of the assets and liabilities of the Borrower or otherwise, any payment or distribution of any kind (whether in cash, property or securities) which otherwise would be payable or deliverable upon or with respect to the Subordinated Debt shall be paid or delivered directly to the Agent for the benefit of the Agent and the Lenders for application (in the case of cash) to or as collateral (in the case of non-cash property or securities) for the payment or prepayment of the Senior Debt until the Senior Debt shall have been paid in full. For the purposes of these provisions, the Senior Debt shall not be deemed to have been paid in full until the Agent and the Lenders shall have indefeasibly received payment in full of the Senior Debt in cash. 4. Until such time as the Senior Debt shall have been paid in full, if any proceeding referred to in paragraph 3, above, is commenced by or against the Borrower, the Agent is hereby irrevocably authorized and empowered (in its own name, on behalf of the Lenders, in the name of the Parent, or otherwise), but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in paragraph 3, above, and give acquittance therefor and to file claims and proofs of claim and take such other action (including, without limitation, voting the Subordinated Debt or enforcing any Lien securing payment of the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of the Lenders hereunder. 5. All payments or distributions upon or with respect to the Subordinated Debt which are received by the Parent contrary to the provisions hereof shall be received in trust for the benefit of the Agent and the Lenders, shall be segregated from other funds and property held by the Parent and shall be forthwith paid over to the Agent for the benefit of the Agent and the Lenders in the same form as so received (with any necessary endorsement) to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities) for the payment or prepayment of the Senior Debt in accordance with the terms of the Loan Documents. 6. The Agent is hereby authorized to demand specific performance of these terms of subordination, whether or not the Borrower shall have complied with any of the provisions hereof applicable to it, at any time when the Parent shall have failed to comply with any of such provisions applicable to it. The Parent hereby irrevocably waives any defense based on the adequacy of a remedy at law which might be asserted as a bar to such remedy of specific performance. 7. So long as any of the Senior Debt shall remain unpaid, the Parent shall not (i) commence, or join with any creditor other than the Agent and the Lenders in commencing, any involuntary proceeding referred to in paragraph 3, above, or (ii) declare any default in payment due hereunder or sue for breach of the terms hereof, if and so long as payment hereunder would not be permissible pursuant to paragraph 2 above. 8. No payment or distribution to the Agent and the Lenders pursuant to the above provisions shall entitle the Parent to exercise any rights of subrogation in respect thereof until the Senior Debt shall have been paid in full. 9. The holders of the Senior Debt may, at any time and from time to time, without any consent of or notice to the Parent or any other holder of the Subordinated Debt and without impairing or releasing the obligations of the Parent under these terms of subordination: (i) change the manner, place or terms of payment or change or extend the time of payment of, or renew or alter, the Senior Debt (including any change in the interest rate under which any of the Senior Debt is outstanding); (ii) sell, exchange, release, not perfect and otherwise deal with any property at any time pledged, assigned or mortgaged to secure the Senior Debt; (iii) release anyone liable in any manner under or in respect of the Senior Debt; (iv) exercise or refrain from exercising any rights against the Borrower and others; and (v) apply any sums from time to time received to the Senior Debt. 10. The foregoing provisions regarding subordination are for the benefit of the holders of the Senior Debt and shall be enforceable by them directly against the holders of any Subordinated Debt, and no holder of the Senior Debt shall be prejudiced in its right to enforce subordination of any of the Subordinated Debt by any act or failure to act by the Borrower or anyone in custody of its assets or property. No such provisions may be amended or modified without the prior written consent of the Agent. SCHEDULE 2 Principal Borrower Amount Lender Type 1. Iowa Northern Railway Co. 220,649.00 Iowa Railway IES Guarantee of Financing unsecured loan Authority to Iowa Northern Railway EXHIBIT 2.02(a) FORM OF NOTICE OF A BORROWING Citibank, N.A., as Agent for the Lenders parties to the Credit Agreement referred to below Attention: __________ [Date] Gentlemen: The undersigned, IES Diversified Inc., refers to the Third Amended and Restated Credit Agreement, dated as of November 20, 1996 (as amended, modified or supplemented from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, the Lenders named therein and the Agent, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests an A Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such A Borrowing (the "Proposed A Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed A Borrowing is __________, 19__. (ii) The Type of A Advances comprising the Proposed A Borrowing is [Adjusted CD Rate Advances] [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed A Borrowing is $__________. 1] [(iv) The Interest Period for each A Advance made as part of the Proposed A Borrowing is [_____days] [_____month[s]].] _______________ 1 To be included for a Proposed A Borrowing comprised of Adjusted CD Rate Advances or Eurodollar Rate Advances. The undersigned hereby acknowledges that the delivery of this Notice of A Borrowing shall constitute a representation and warranty by the Borrower that, on the date of the Proposed A Borrowing, the statements contained in Section 3.02 of the Credit Agreement are true. Very truly yours, IES DIVERSIFIED INC. By Title: EXHIBIT 2.03(a)(i) FORM OF NOTICE OF B BORROWING Citibank, N.A., as Agent for the Lenders parties to the Credit Agreement referred to below Attention: ___________ [Date] Gentlemen: The undersigned, IES Diversified Inc., refers to the Third Amended and Restated Credit Agreement, dated as of November 20, 1996 (as amended, modified or supplemented from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, the Lenders named therein and the Agent, and hereby gives you notice pursuant to Section 2.03 of the Credit Agreement that the undersigned hereby requests a B Borrowing under the Credit Agreement, and in that connection sets forth the terms on which such B Borrowing (the "Proposed B Borrowing") is requested to be made: (A) Date of B Borrowing __________ (B) Amount of B Borrowing __________ (C) Maturity Date __________ (D) Interest Payment Date(s) __________ (E) __________ __________ (F) __________ __________ (G) __________ __________ The undersigned hereby acknowledges that the delivery of this Notice of B Borrowing shall constitute a representation and warranty by the Borrower that, on the date of the Proposed B Borrowing, the statements contained in Section 3.03 of the Credit Agreement are true. The undersigned hereby confirms that the Proposed B Borrowing is to be made available to it in accordance with Section 2.03 of the Credit Agreement. Very truly yours, IES DIVERSIFIED INC. By Title: EXHIBIT 2.10 FORM OF NOTICE OF CONVERSION Citibank, N.A., as Agent for the Lenders parties to the Credit Agreement referred to below Attention: _____________________ [Date] Gentlemen: The undersigned, IES Diversified Inc., refers to the Third Amended and Restated Credit Agreement, dated as of November 20, 1996 (as amended, modified or supplemented from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, the Lenders named therein and the Agent, and hereby gives you notice, irrevocably, pursuant to Section 2.10 of the Credit Agreement that the undersigned hereby requests a Conversion under the Credit Agreement, and in that connection sets forth below the information relating to such Conversion (the "Proposed Conversion") as required by Section 2.10 of the Credit Agreement: (i) The Business Day of the Proposed Conversion is __________, ____. (ii) The Type of Advances comprising the Proposed Conversion is [Adjusted CD Rate Advances] [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Conversion is $__________. (iv) The Type of Advances to which such Advances are proposed to be Converted is [CD Rate Advances] [Base Rate Advances] [Eurodollar Rate Advances]. (v) The Interest Period for each Advance made as part of the Proposed Conversion is [_____days] [_____ month(s)]. 2 _______________ 2 Delete for Base Rate Advances The undersigned hereby represents and warrants that the following statements are true on the date hereof, and will be true on the date of the Proposed Conversion: (A) The Borrower's request for the Proposed Conversion is made in compliance with Section 2.10 of the Credit Agreement; and (B) The statements contained in Section 3.02 of the Credit Agreement are true. Very truly yours, IES DIVERSIFIED INC. By Title: EXHIBIT 3.01(a)(xii)-1 FORM OF OPINION OF WINTHROP, STIMSON, PUTNAM & ROBERTS [Date of Closing] To each of the Lenders parties to the Credit Agreement referred to below, and to Citibank, N.A., as Agent Re: IES Diversified Inc. Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(a)(xii)(A) of the Third Amended and Restated Credit Agreement, dated as of November ___, 1996 (the "Credit Agreement"), among IES Diversified Inc. (the "Borrower"), the Banks parties thereto and the other Lenders from time to time parties thereto, and Citibank, N.A., as Agent. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as therein defined. We have acted as counsel for the Borrower and the parent in connection with the preparation, execution and delivery of, and the Closing on this date under, the Credit Agreement and the other Loan Documents. In that capacity we have examined: (a) The Credit Agreement; (b) The A Notes; (c) The Support Agreement; (d) The Articles of Incorporation of the Borrower and all amendments thereto (the "Borrower Charter"); (e) The by-laws of the Borrower and all amendments thereto (the "Borrower By-laws"); (f) The Articles of Incorporation of the Parent and all amendments thereto (the "Parent Charter"); and (g) The by-laws of the Parent and all amendments thereto (the "Parent By-laws"). In addition, we have examined the originals, or copies certified to our satisfaction, of such other corporate records of the Borrower and of the Parent, certificates of public officials and of officers of the Borrower and of the Parent, and agreements, instruments and other documents, as we have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, we have, when relevant facts were not independently established by us, relied upon certificates of the Borrower and of the Parent or their respective officers or of public officials. We have assumed (i) the due execution and delivery, pursuant to due authorization, of the Credit Agreement by all parties to the Credit Agreement and the Existing Facility (other than the Borrower), (ii) the authenticity of all such documents submitted to us as originals, (iii) the genuineness of all signatures (other than those of the Borrower and of the Parent) and (iv) the conformity to the originals of all such documents submitted to us as copies. Our opinions expressed herein are limited to the laws of the State of New York and the Federal laws of the United States of America. To the extent that any of the opinions expressed below involve conclusions as to matters governed by the laws of the State of Iowa, we have relied on the opinion of _______________, General Counsel and Secretary of the Borrower and Vice President, General Counsel and Secretary of the Parent, delivered to you pursuant to Section 3.01(a)(xii)(B) of the Credit Agreement. We believe that you and we are justified in relying on such opinion for such purposes. Based upon to the foregoing and upon such investigation as we have deemed necessary, we are of the following opinion: 1. Each of the Borrower and the Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Iowa. 2. The execution, delivery and performance by the Borrower of the Credit Agreement, the Notes, the Support Agreement and the Fee Letter are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (a) the Borrower Charter or the Borrower By-laws, (b) any law, rule, regulation or, to our knowledge, any order or judgment, applicable to the Borrower, (c) any contractual restriction arising under any agreement or instrument evidencing indebtedness described in Schedule III of the Credit Agreement, or (d) to our knowledge, any other legal or contractual restriction binding on or affecting the Borrower or its properties; and such execution, delivery and performance do not result in or require the creation or imposition of any Lien (other than the Lien of the Agent for the benefit of the Lenders upon the rights of the Borrower under the Support Agreement) upon or with respect to any of its properties under any agreement or instrument evidencing indebtedness described in Schedule III of the Credit Agreement or, to our knowledge, under any other agreement or instrument. The Credit Agreement, the A Notes, the Support Agreement and the Fee Letter have been duly executed and delivered on behalf of the Borrower. When completed in the form thereof attached as Exhibit 1.01A-2 to the Credit Agreement, and executed by a Senior Financial Officer and delivered on behalf of the Borrower, each B Note will have been duly executed and delivered on behalf of the Borrower. 3. The execution, delivery and performance by the Parent of the Support Agreement are within the Parent's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (a) the Parent Charter or the Parent By-laws, (b) any law, rule, regulation or, to our knowledge, any order or judgment, applicable to the Parent, (c) any contractual restriction arising under (i) the $1,500,000 line of credit provided to the Parent by Firstar Bank or (ii) any agreement or instrument evidencing indebtedness described in Schedule 2 of the Support Agreement, or (d) to our knowledge, any other legal or contractual restriction binding on or affecting the Parent or its properties; and such execution, delivery and performance do not result in or require the creation or imposition of any Lien upon or with respect to any of its properties under the $1,500,000 line of credit provided to the Parent by Firstar Bank or under any agreement or instrument evidencing indebtedness described in Schedule 2 of the Support Agreement, or, to our knowledge, under any other agreement or instrument. The Support Agreement has been duly executed and delivered on behalf of the Parent. 4. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Credit Agreement and the other Loan Documents to which it is, or is to be, a party. 5. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Parent of the Support Agreement. 6. The Credit Agreement, the A Notes, the Support Agreement and the Fee Letter are legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms; and when completed in the form thereof attached as Exhibit 1.01A-2 to the Credit Agreement, and executed by a Senior Financial Officer and delivered on behalf of the Borrower pursuant to corporate authorization existing and as in effect on the date hereof, each B Note will be a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. 7. The Support Agreement is the legal, valid and binding obligation of the Parent, enforceable against the Parent in accordance with its terms. 8. Neither the Borrower nor the Parent is an "investment company" as defined in the Investment Company Act of 1940, as amended. The Borrower is not a "holding company" as that term is defined in, and is not otherwise subject to regulation under, the Public Utility Holding Company Act of 1935, as amended. The Parent is a "holding company" as that term is defined in the Public Utility Holding Company Act of 1935, as amended, but is exempt from said Act except with respect to the acquisition of securities in other public utility companies and other public utility holding companies. The opinions set forth in paragraphs 6 and 7, above, are subject to the following qualifications: (a) The enforceability of the Borrower's obligations under the Credit Agreement and the other Loan Documents to which it is, or is to be, a party, and the enforceability of the Parent's obligations under the Support Agreement, are subject to the effect of any applicable bankruptcy, insolvency, reorganization, moratorium or similar law affecting creditors' rights generally. (b) The enforceability of the Borrower's obligations under the Credit Agreement and the other Loan Documents to which it is, or is to be, a party, and the enforceability of the Parent's obligations under the Support Agreement, are subject to general principals of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). Such principles of equity are of general application and, in applying such principles, a court, among other things, might not allow a contracting party to exercise remedies in respect of a default deemed immaterial, or might decline to order an obligor to perform covenants. Such principles would include an expectation that parties act with reasonableness and in good faith, and might be applied, for example, to provisions which purport to grant a party with the authority to exercise sole discretion or make conclusive determinations. (c) We note further that, in addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification. Very truly yours, EXHIBIT 3.01(a)(xii)-2 FORM OF OPINION OF GENERAL COUNSEL OF THE BORROWER AND THE PARENT [Date of Closing] To each of the Lenders parties to the Credit Agreement referred to below, and to Citibank, N.A., as Agent IES Diversified Inc. Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(a)(xii)(B) of the Third Amended and Restated Credit Agreement, dated as of November ___, 1996 (the "Credit Agreement"), among IES Diversified Inc. (the "Borrower"), the Banks parties thereto and the other Lenders from time to time parties thereto, and Citibank, N.A., as Agent. Terms defined in the Credit Agreement and not otherwise defined herein are used herein as therein defined. I am Secretary of the Borrower and act as its counsel and Vice President, General Counsel & Secretary of the Parent and have acted as such in connection with the preparation, execution and delivery of, and the Closing on this date under, the Credit Agreement and the other Loan Documents. In that capacity I have examined, or have arranged for the examination by an attorney or attorneys under my general supervision of: (d) The Credit Agreement; (e) The A Notes; (f) The Support Agreement; (g) The Articles of Incorporation of the Borrower and all amendments thereto (the "Borrower Charter"); (h) The by-laws of the Borrower and all amendments thereto (the "Borrower By-laws"); (i) The Articles of Incorporation of the Parent and all amendments thereto (the "Parent Charter"); and (j) The by-laws of the Parent and all amendments thereto (the "Parent By-laws"). In addition, I, or an attorney or attorneys under my general supervision, have examined the originals, or copies certified to my or their satisfaction, of such other corporate records of the Borrower and of the Parent, certificates of public officials and of officers of the Borrower and of the Parent, and agreements, instruments and other documents, as I or such attorneys have deemed necessary as a basis for the opinions expressed below. As to questions of fact material to such opinions, I or such attorneys have, when relevant facts were not independently established by me or by them, relied upon certificates of the Borrower and of the Parent or their respective officers or of public officials. I have assumed (i) the due execution and delivery, pursuant to due authorization, of the Credit Agreement by all parties to such document (other than the Borrower), (ii) the authenticity of all such documents submitted to me as originals, (iii) the genuineness of all signatures (other than those of the Borrower and of the Parent) and (iv) the conformity to the originals of all such documents submitted to me as copies. I, or an attorney or attorneys under my general supervision, have made such examination of law as in my or their judgment is necessary or appropriate for purposes of this opinion. I and such attorneys do not, however, purport to be qualified to pass upon, and express no opinion as to, the laws of any jurisdiction other than the laws of the State of Iowa. Based upon and subject to the foregoing, I am of the opinion that: 1. Each of the Borrower and the Parent is a corporation duly organized, validly existing and in good standing under the laws of the State of Iowa and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of the property owned or leased by it makes such qualification necessary, except where the failure to so qualify would not have a material adverse affect on the business, financial condition, results of operations or prospects of the Borrower and its Subsidiaries, taken as a whole, or of the Parent and its Subsidiaries, taken as a whole. 2. The execution, delivery and performance by the Borrower of the Credit Agreement, the Notes, the Support Agreement and the Fee Letter are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (a) the Borrower Charter or the Borrower By-laws, (b) any law, rule, regulation, order or judgment applicable to the Borrower, (c) any contractual restriction arising under any agreement or instrument evidencing indebtedness described in Schedule III of the Credit Agreement, or (d) to my knowledge, any other legal or contractual restriction binding on or affecting the Borrower or its properties; and such execution, delivery and performance do not result in or require the creation or imposition of any Lien (other than the Lien of the Agent for the benefit of the Lenders upon the rights of the Borrower under the Support Agreement) upon or with respect to any of its properties under any agreement or instrument evidencing indebtedness described in Schedule III of the Credit Agreement or, to my knowledge, under any other agreement or instrument. The Credit Agreement, the A Notes, the Support Agreement and the Fee Letter have been duly executed and delivered on behalf of the Borrower. When completed in the form thereof attached as Exhibit 1.01A-2 to the Credit Agreement, and executed by a Senior Financial Officer and delivered on behalf of the Borrower, each B Note will have been duly executed and delivered on behalf of the Borrower. 3. The execution, delivery and performance by the Parent of the Support Agreement are within the Parent's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (a) the Parent Charter or the Parent By-laws, (b) any law, rule, regulation, order or judgment applicable to the Parent, (c) any contractual restriction arising under (i) the $1,500,000 line of credit provided to the Parent by Firstar Bank or (ii) any agreement or instrument evidencing indebtedness described in Schedule 2 of the Support Agreement, or (d) to my knowledge, any other legal or contractual restriction binding on or affecting the Parent or its properties; and such execution, delivery and performance do not result in or require the creation or imposition of any Lien upon or with respect to any of its properties under the $1,500,000 line of credit provided to the Parent by Firstar Bank or under any agreement or instrument evidencing indebtedness described in Schedule 2 of the Support Agreement, or, to my knowledge, under any other agreement or instrument. The Support Agreement has been duly executed and delivered on behalf of the Parent. 4. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of the Credit Agreement and the other Loan Documents to which it is, or is to be, a party. 5. No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Parent of the Support Agreement. 6. There is no pending or, to my knowledge, threatened action or proceeding affecting the Borrower or its properties before any court, governmental agency or arbitrator, that could reasonably be expected, if adversely determined, to materially and adversely affect the business, financial condition, operations, results of operations or prospects of the Borrower, or affect the legality, validity or enforceability of the Credit Agreement or any other Loan Document to which the Borrower is, or is to be, a party. 7. There is no pending or, to my knowledge, threatened action or proceeding affecting the Parent or its properties before any court, governmental agency or arbitrator, that could reasonably be expected, if adversely determined, to materially and adversely affect the business, financial condition, operations, results of operations or prospects of the Parent, or affect the legality, validity or enforceability of the Support Agreement. I authorize Winthrop, Stimson, Putnam & Roberts, special New York counsel to the Borrower and the Parent, to rely on this opinion respecting matters covered by or relating to the laws of the State of Iowa. Very truly yours, EXHIBIT 3.01(a)(xii)-3 FORM OF KING & SPALDING OPINION [Date of Closing] To each of the Lenders parties to the Credit Agreement referred to below and to Citibank, as Agent IES Diversified, Inc. Ladies and Gentlemen: We have acted as special New York counsel to Citibank, N.A., individually and as Agent, in connection with the preparation, execution and delivery of the Third Amended and Restated Credit Agreement, dated as of November __, 1996 (the "Credit Agreement"), among IES Diversified, Inc., the Banks party thereto and Citibank, N.A., as Agent for the Banks. Unless otherwise indicated, terms defined in the Credit Agreement are used herein as therein defined. In that connection, we have examined the following documents: (1) counterparts of the Credit Agreement, executed by the Borrower, the Agent and the Banks; and (2) a counterpart of the Support Agreement, executed by the Parent; and (3) the other documents furnished by the Borrower pursuant to Section 3.01 of the Credit Agreement, including the opinion of Winthrop, Stimson, Putnam & Roberts, special New York counsel for the Borrower and Stephen W. Southwick, Counsel for the Borrower and Vice President, General Counsel and Secretary of the Parent (collectively, the "Opinions"). In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that each of the Banks and the Agent has duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Credit Agreement. To the extent that our opinions expressed below involve conclusions as to matters governed by law other than the law of the State of New York, we have relied upon the Opinions and have assumed without independent investigation the correctness of the matters set forth therein, our opinions expressed below being subject to the assumptions, qualifications and limitations set forth in the Opinions. As to matters of fact, we have relied solely upon the documents we have examined. Based upon the foregoing, and subject to the qualifications set forth below, we are of the opinion that: (i) The Credit Agreement and the A Notes are, and the B Notes will be, when executed and delivered by the Borrower for value, the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. (ii) The Support Agreement is the legal, valid and binding obligation of the Parent enforceable against the Parent in accordance with its terms. (iii) While we have not independently considered the matters covered by the Opinions to the extent necessary to enable us to express the conclusions stated therein, the Opinions and the other documents referred to in item (3) above are substantially responsive to the corresponding requirements set forth in Section 3.01 of the Credit Agreement pursuant to which the same have been delivered. Our opinions are subject to the following qualifications: (a) Our opinions in paragraphs (i) and (ii) above are subject to the effect of any applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or similar law affecting creditors' rights generally. (b) Our opinions in paragraphs (i) and (ii) above are subject to the effect of general principles of equity, including (without limitation) concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether considered in a proceeding in equity or at law). (c) We note further that, in addition to the application of equitable principles described above, courts have imposed an obligation on contracting parties to act reasonably and in good faith in the exercise of their contractual rights and remedies, and may also apply public policy considerations in limiting the right of parties seeking to obtain indemnification under circumstances where the conduct of such parties in the circumstances in question is determined to have constituted negligence. (d) We express no opinion herein as to (i) Section 8.05 of the Credit Agreement or Section 14 of the Support Agreement, (ii) the enforceability of provisions purporting to grant to a party conclusive rights of determination, (iii) the availability of specific performance or other equitable remedies, (iv) the enforceability of rights to indemnity under Federal or state securities laws and (v) the enforceability of waivers by parties of their respective rights and remedies under law. (e) Our opinions expressed above are limited to the law of the State of New York and the Federal law of the United States, and we do not express any opinion herein concerning any other law. Without limiting the generality of the foregoing, we express no opinion as to the effect of the law of any jurisdiction other than the State of New York wherein any Bank may be located or wherein enforcement of the Credit Agreement, any Note or the Support Agreement may be sought that limits the rates of interest legally chargeable or collectible. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any Person that may become a Bank under the Credit Agreement after the date hereof. Very truly yours, MEO:IS:pc EXHIBIT 8.07 FORM OF LENDER ASSIGNMENT Dated__________, 19__ Reference is made to the Third Amended and Restated Credit Agreement, dated as of November _, 1996 (said Agreement, as it may hereafter be amended or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), among IES Diversified Inc., an Iowa corporation (the "Borrower"), the Lenders named therein and the Agent. Pursuant to the Credit Agreement, _________________ (the "Assignor") has committed to make advances ("Advances") to the Borrower, which Advances are evidenced by a promissory note (the "Note") issued by the Borrower to the Assignor. The Assignor and _______________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Credit Agreement as of the Effective Date (as defined below) which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Credit Agreement (the "Assigned Interest"), including, without limitation, such interest in the Assignor's Commitment, the Advances owing to the Assignor, and the Note[s] held by the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. The effective date of this sale and assignment shall be the date specified on Schedule 1 hereto (the "Effective Date"). 2. On the Effective Date, the Assignee will pay to the Assignor, in same day funds, at such address and account as the Assignor shall advise the Assignee, $___________, and the sale and assignment contemplated hereby shall thereupon become effective. From and after the Effective Date, the Assignor agrees that the Assignee shall be entitled to all rights, powers and privileges of the Assignor under the Credit Agreement and the Note[s] to the extent of the Assigned Interest, including without limitation (1) the right to receive all payments in respect of the Assigned Interest for the period from and after the Effective Date, whether on account of principal, interest, fees, indemnities in respect of claims arising after the Effective Date, increased costs, additional amounts or otherwise, (2) the right to vote and to instruct the Agent under the Credit Agreement according to its Percentage based on the Assigned Interest, (3) the right to set-off and to appropriate and apply deposits of the Borrower as set forth in the Credit Agreement and (4) the right to receive notices, requests, demands and other communications. The Assignor agrees that it will promptly remit to the Assignee any amount received by it in respect of the Assigned Interest (whether from the Borrower, the Agent or otherwise) in the same funds in which such amount is received by the Assignor. 3. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; (iv) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Parent or the performance or observance by the Parent of any of its obligations under the Support Agreement or any other instrument or document furnished pursuant thereto; and (v) attaches the Note[s] referred to in paragraph 1 above and requests that the Agent exchange such Note[s] for a new Note payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto or new Notes payable to the order of the Assignee in an amount equal to the Commitment assumed by the Assignee pursuant hereto and the Assignor in an amount equal to the Commitment retained by the Assignor under the Credit Agreement, respectively, as specified on Schedule 1 hereto. Except as specified in this Section 3, the assignment of the Assigned Interest shall be without recourse to the Assignor. 4. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 5(d) of the Support Agreement and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Lender Assignment; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; [and] (vi) specifies as its CD Lending Office, Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (vii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement and the Notes or such other documents as are necessary to indicate that all such payments are subject to such rates at a rate reduced by an applicable tax treaty]. 1 5. Following the execution of this Lender Assignment by the Assignor and the Assignee, it will be delivered to the Agent for acceptance and recording by the Agent. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Lender Assignment, have the rights and obligations of a Lender thereunder and under the other Loan Documents and (ii) the Assignor shall, to the extent provided in this Lender Assignment, relinquish its rights and be released from its obligations under the Credit Agreement and the other Loan Documents. 6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and commitment fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. This Lender Assignment may be executed in any number of counterparts and by different parties in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. 8. This Lender Assignment shall be governed by, and construed in accordance with, the laws of the State of New York. IN WITNESS WHEREOF, the parties hereto have caused this Lender Assignment to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. _______________ 1 If the Assignee is organized under the laws of a jurisdiction outside the United States. SCHEDULE 1 to LENDER ASSIGNMENT Dated__________, 19__ Section 1. Percentage Interest: _____% Section 2. Assignee's Commitment: $ _____ Aggregate Outstanding Principal Amount of A Advances owing to the Assignee: $ _____ An A Note payable to the order of the Assignee Dated:__________, 19__ Principal amount: _____ An A Note payable to the order of the Assignor Dated:__________, 19__ Principal amount: _____ Aggregate Outstanding Principal Amount of B Advances owing to the Assignee: $ _____ A B Note payable to the order of the Assignee Dated:__________, 19__ Principal amount: _____ A B Note payable to the order of the Assignor Dated:__________, 19__ Principal amount: _____ Section 3. Effective Date: __________, 19 [NAME OF ASSIGNOR] By _______________ Title: [NAME OF ASSIGNEE] By _______________ Title: CD Lending Office: [Address] Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Accepted this _____ day of __________, 19__ CITIBANK, N.A., as Agent By __________ Title: SCHEDULE I IES DIVERSIFIED INC. Third Amended and Restated Credit Agreement, dated as of November 20, 1996, among IES Diversified Inc., the Banks named therein and Citibank, N.A., as Agent
Name of Bank Commitment Domestic Lending Office CD Lending Office Eurodollar Lending Office ABN AMRO N.V. $28,000,000 ABN AMRO Bank Same as Domestic Same as Domestic N.V. Chicago Branch Lending Office Lending Office 135 South LaSalle Street, Suite 625 Chicago, IL 60603 Telephonr: 312.904.2007 Telecopy: 312.606.8425 Attention: Barbara Popp Barclays $20,000,000 222 Broadway Same as Domestic Same as Domestic Bank PLC New York, New York 10038 Lending Office Lending Office Telephone: 212.412.3571 Telecopy: 212.412.5002 Attention: Stephanie Gledhill The Chase $28,000,000 One Chase Plaza, 8th Floor Same as Domestic Same as Domestic Manhattan New York, NY 10081 Lending Office Lending Office Bank Telephone: 212.552.7692 Telecopy: 212.552.5777 Attention: Lynett Lang CIBC Inc. $40,000,000 Two Paces West Same as Domestic Same as Domestic 2727 Paces Ferry Road, Lending Office Lending Office Suite 1200 Atlanta, Georgia Telephone: 404.319.4836 Telecopy: 404.319.4950 Attention: Clare Coyne Citibank, $40,000,000 One Court Square, 7th Floor Same as Domestic Same as Domestic N.A. Zone 2 Lending Office Lending Office Long Island City, NY 11120 Telecopy: 718.248.4490 Attention: Bank Loan Syndications The First $28,000,000 One First National Plaza, Same as Domestic Same as Domestic National Suite 0363 Lending Office Lending Office Bank of Chicago, Illinois 60670-0363 Chicago Telephone: 312.732.9780 Telecopy: 312.732.3055 / 312.732.6485 Attention: Robert G. Bussa The Fuji $28,000,000 U.S. Corporate Banking Same as Domestic Same as Domestic Bank, 225 West Wacker Drive, Lending Office Lending Office Limited, Suite 2000 Chicago Chicago, Illinois 60606 Branch Telephone: 312.621.0526 Telecopy: 312.621.0539 Attention: James Bell Mellon $40,000,000 One Mellon Bank Center-151-4425 Same as Domestic Same as Domestic Bank Pittsburgh, Pennsylvania Lending Office Lending Office 15258-0001 Telephone: 412.236.2988 Telecopy: 412.234.6375 Attention: Jacquelyn S. Peters Norwest $ 8,000,000 101 Third Avenue S.W. Same as Domestic Same as Domestic Bank Iowa, Cedar Rapids, Iowa 52404 Lending Office Lending Office N.A. Telephone: 319.368.1143 Telecopy: 319.368.1299 Attention: R. Troy Hansen The Sanwa $28,000,000 10 South Wacker Drive, Same as Domestic Same as Domestic Bank, Ltd. 31st Floor Lending Office Lending Office Chicago Chicago, Illinois 60606 Branch Telephone: 312.368.3016 Telecopy: 312.346.6677 Telex: 3735188 Attention: Beverly Wyckoff Union Bank $12,000,000 445 South Figueroa Street Same as Domestic Same as Domestic Los Angeles, California 90071 Lending Office Lending Office Telephone: 213.236.5809 Telecopier: 213.236.4096 Attention: John M. Edmonston
SCHEDULE II LIENS Subsidiary Amount Holder Property 1. Centerplace Limited $1,029,724.00 Norwest Bank River Place Apartments Cedar Rapids, Iowa 2. 2060 Partnership $9,485,088.00 Firstar Bank 201/221 Town Center Building Cedar Rapids, Iowa 3. 2002 Partnership $1,553,811.00 Brenton Bank Iowa Building Cedar Rapids, Iowa SCHEDULE III DEBT Subsidiary Amount Holder Property 1. Centerplace Limited $1,029,724.00 Norwest Bank Mortgage 2. 2060 Partnership $9,485,088.00 Firstar Bank Mortgage 3. 2002 Partnership $1,553,811.00 Brenton Bank Mortgage EX-10 5 Exhibit 10(s) DIRECTOR RETIREMENT PLAN This Retirement Plan for the benefit of the Directors of IES INDUSTRIES, INC. is adopted this 1st day of February, 1994 and revised effective November 6, 1996, by IES INDUSTRIES INC. (hereafter the "Company"). WITNESSETH: WHEREAS, the Company wishes to provide a non-qualified retirement benefit for its Directors, subject to a Director satisfying certain conditions and periods of service as a Director with the Company as set forth herein. NOW, THEREFORE, the Company hereby adopts the following non- qualified Retirement Plan (the "Plan"): ARTICLE I 1.1 Right to Participate Under This Plan and Loss of Such Right. The only individuals eligible to participate under this Plan shall be those Directors of the Company who are serving on the date of the adoption of this Plan or who subsequently serve on the Board of Directors of the Company, and who complete the required years of service with the Company as a Director and who satisfy the other terms and conditions of this Plan. ARTICLE II 2.1 Director. "Director" shall mean an individual elected by the shareholders of the Company to serve as a member of the Board of Directors of the Company. 2.2 Qualified Director. "Qualified Director" shall mean a Director who has served at least forty-eight (48) months (service before the adoption of this Plan shall be taken into account for this purpose) as a Director of the Company, as a Director of IOWA SOUTHERN INC. or IE INDUSTRIES INC. and who has not acted in a manner detrimental to the best interests of the Company as determined by the Board of Directors. The service requirement may be satisfied by continuous or non-continuous service as a Director. 2.3 Qualified Inside Director. "Qualified Inside Director" shall mean any Qualified Director who has served as a Director while in regular employee status with the Company, IES UTILITIES INC. or any affiliated companies. 2.4 Annual Directors Fee. "Annual Directors Fee" shall mean the annual outside Directors Fee in effect at the time of a Qualified Director's termination of his or her position as a Director with the Company. For those Directors who are Directors as of November 6, 1996, and who will not be a Director as a result of the Merger among WPL Holdings, Inc. and Interstate Power Company, the "Annual Directors Fee" shall mean the annual cash fee and the value of the common stock award in effect at the time of that Director's termination as a Director. 2.5 Surviving Spouse. "Surviving Spouse" shall mean the individual, if any, married to a Qualified Director at the time of his or her death. 2.6 Retirement Benefit. "Retirement Benefit," shall mean an amount equal to eighty percent (80%) of the Annual Directors Fee. Such benefit shall be paid on the date the Company pays Annual Directors Fee. 2.7 Death Benefit. "Death Benefit" shall mean an amount equal to eighty percent (80%) of the Annual Directors Fee. Such benefit shall be paid on the date the Company pays Annual Directors Fee. 2.8 Board of Directors. "Board of Directors" shall mean the Board of Directors of the Company. 2.9 Benefit Period. "Benefit Period" shall mean a period of four (4) years plus one (1) additional year for each additional twelve (12) months of service as a Director after forty-eight (48) months of service, subject to the limitation that in no event shall the Benefit Period be more than eight (8) years. ARTICLE III 3.1 Receipt of Retirement Benefit upon Director's Retirement from the Company. Subject to Paragraph 3.2 of this Article and the provisions of Article V, a Qualified Director shall receive an amount equal to the Retirement Benefit, as established in Paragraph 2.6 of Article II of this Plan, for the Benefit Period, as established under Paragraph 2.9 of Article II. The Retirement Benefit shall be paid to the Qualified Director or his or her Surviving Spouse. Payment of the Retirement Benefit shall commence to a Qualified Director, other than a Qualified Inside Director, on the next date, following the Qualified Director's termination as a Director, that the Company pays the Annual Directors Fee to its Board of Directors. Payment of the Retirement Benefit shall be made to a Qualified Inside Director on the next date one (1) year following the later of the Qualified Inside Director's termination as a Director or termination of employment with the Company or any affiliate that the Company pays the Annual Directors Fee to its Board of Directors. 3.2 Benefit Payable to Surviving Spouse Prior to Receipt by Director of Benefits for the Benefit Period. Subject to the provisions of Article V, in the event of the death of the Qualified Director after termination as a Director, but prior to the Qualified Director receiving the Retirement Benefit payments for the Benefit Period that he or she is entitled to receive from the Company under this Plan, the Surviving Spouse of the Qualified Director shall be entitled to receive the Retirement Benefit payments under this Plan until the earlier of (a) the receipt by the Qualified Director and his or her Surviving Spouse of Retirement Benefit payments under this Plan for the Benefit Period that the Director was entitled to receive; or (b) the Surviving Spouse's death. ARTICLE IV 4.1 Death Benefit Payable Prior to Termination as a Director. Subject to the provisions of Article V, if a Director dies while serving as a Director with the Company and at the time of death was a Qualified Director, the Company shall pay to the Surviving Spouse of the Qualified Director a Death Benefit as defined in Paragraph 2.7. The Death Benefit, if any, payable under this Article is to be made in yearly payments (on the date that Company pays the Annual Directors Fee) for a period equal to the Benefit Period for which the Director was entitled to receive benefit payments at the time of his or her death. The first payment to be made under this Article shall be on the next date that the Company pays its Annual Directors Fee following the death of the Director. If the Qualified Director leaves no Surviving Spouse or the Surviving Spouse dies prior to the receipt of the yearly Death Benefit payments that he or she is entitled to receive, the Death Benefit shall terminate and the Company shall have no further obligation under this Plan. ARTICLE V 5.1 Retirement Benefit or Death Benefit Payable if No Surviving Spouse. In the event a Qualified Director dies leaving no Surviving Spouse or, if at any time during the Benefit Period or during the period for payment of the Death Benefit under Article IV the Qualified Director's Surviving Spouse dies, the payments to the Surviving Spouse shall terminate and the Company shall have no further obligation under Articles III or IV. 5.2 No Payment to the Qualified Director's or Surviving Spouse's Estate. In no event shall any payment under this Plan be payable to the estate of any Qualified Director, the estate of any Qualified Director's Surviving Spouse or to any heir of either of the above. 5.3 No Payment Beyond Benefit Period. In no event shall the Director or his or her Surviving Spouse be entitled to receive a Retirement Benefit or a Death Benefit for more than the Benefit Period. ARTICLE VI 6.1 Unsecured Obligation. The Company's obligation under this Plan to the Qualified Director or his or her Surviving Spouse is solely an unsecured promise of the Company and nothing herein shall be construed to give the Qualified Director or his or her Surviving Spouse any right, title, interest or claim in or to any specific asset, fund, reserve, account or property of any kind whatsoever owned by the Company or in which it may have any right, title, or interest now or in the future. The Qualified Director or his or her Surviving Spouse shall have only the right to enforce a claim against the Company in the same manner as any unsecured creditor. ARTICLE VII 7.1 Modifications. At any time this Plan may be terminated or amended by action of the Board of Directors in its sole and absolute discretion without notice, consent or approval of any Director. The right of the Board of Directors to amend or terminate this Plan at any time shall include the absolute discretion to make any amendments prospective or retroactive in application, except that no such amendment or termination shall terminate or reduce any benefit to a Qualified Director or his or her Surviving Spouse after that Qualified Director or his or her Surviving Spouse has received one (1) annual benefit payment under this Plan. 7.2 Administration and Interpretation of this Plan. Interpretation by the Board of Directors shall be final and binding upon a Director. The Board of Directors in its sole and absolute discretion shall have the right to determine whether a Director has acted in a manner detrimental to the best interests of the Company. The Board of Directors may adopt rules and regulations relating to this Plan as it may deem necessary or advisable for the administration of this Plan, including designating a committee to act on behalf of the full Board of Directors. 7.3 Claims Procedure. If a Qualified Director or the Qualified Director's Surviving Spouse (hereinafter referred to as a "Claimant") is denied the Retirement Benefit or the Death Benefit under this Plan for any reason including a determination that the Director has acted in a manner detrimental to the best interests of the Company, he or she may file a claim with the Board of Directors. The Board of Directors shall notify the Claimant within sixty (60) days of allowance or denial of the claim, unless the Claimant receives written notice from the Board of Directors prior to the end of the sixty (60) day period stating that special circumstances require an extension of the time for decision. Notice of the Board of Directors' decision shall be in writing sent by mail to Claimant's last known address, and, if a denial of the claim, must contain the following information: a. specific reasons for the denial; b. specific reference to pertinent provisions of this Plan on which the denial is based; and c. if applicable, a description of any additional information or material necessary to perfect the claim, an explanation of why such information or material is necessary and an explanation of the claims review procedure. 7.4 Review Procedure. a. A Claimant is entitled to request a review of any denial of his or her claim for the Retirement Benefit or Death Benefit by the Board of Directors. The request for review must be submitted in writing within sixty (60) days of mailing of the notice of the denial. Absent a request for review within the sixty (60) day period, the claim will be deemed to be conclusively denied. The Claimant or his or her representative shall be entitled to review all pertinent documents, and to submit issues and comments orally and in writing. b. The review shall be conducted by the Board of Directors, which shall afford the Claimant a hearing and the opportunity to review all pertinent documents and submit issues and comments orally and in writing. The Board of Directors shall render a decision within ninety (90) days after receipt of a request for a review, provided that, in special circumstances (such as the necessity of holding a hearing) the Board of Directors may extend the time for decision by not more than sixty (60) days upon written notice to the Claimant. The Claimant shall receive written notice of the Board of Directors' review decision, together with specific reasons for the decision and references to the pertinent provisions of this Plan. ARTICLE VIII 8.1 Assignability of Benefits. Neither a Qualified Director, nor his or her Surviving Spouse, shall have the power to transfer, assign, anticipate, mortgage or otherwise encumber any right to receive Retirement Benefits or Death Benefits in advance of such payment and any attempted transfer, assignment, anticipation, mortgage or encumbrance shall be void. No payment shall be subject to seizure for payment of public or private debts, judgments, alimony or separate maintenance, or be transferred by operation of law in the event of bankruptcy, insolvency or otherwise. ARTICLE IX 9.1 Covenant Not to Compete. Payments pursuant to this Plan also serve as consideration for the following covenant not to compete. Notwithstanding anything in this Plan to the contrary, it is expressly agreed that the Retirement Benefit or the Death Benefit payment under this Plan shall terminate as to the Qualified Director and his or her Surviving Spouse and the Company shall have no further obligation under this Plan upon the violation of the provisions of Paragraph 9.2 by the Qualified Director. 9.2 If the Qualified Director, during the period set forth herein and within the service area in which the Company or any affiliated companies provide utility services or, in the case of any non- utility business, within the geographic area served by such business, accepts employment or engages in any business as an employee, officer, consultant, director or becomes a partner or shareholder (except that the Qualified Director and his or her Surviving Spouse may hold up to a five percent (5%) interest in any company that is traded on the New York Stock Exchange, American Stock Exchange or other national over-the- counter exchange) in any company that is in competition with the business of the Company or any of its affiliated companies, and the Qualified Director fails to terminate such position within thirty (30) days after notice from the Board of Directors to the Qualified Director of the violation of this covenant not to compete, the Qualified Director and the Qualified Director's Surviving Spouse shall forfeit all rights to future payments under this Plan, and the Company shall have no further obligation under this Plan. Any violation of the provisions set forth above during the period the Qualified Director is receiving any payments under this Plan beginning with the date of the receipt of the first payment under this Plan shall constitute a violation of this Article and result in the termination of all future payments under this Plan. The determination of the Board of Directors as to whether a business is in competition with the Company and whether the Competition is occurring in the geographic area designated above shall be controlling for purposes of this Plan. ARTICLE X 10.1 Applicable Law. This Plan shall be governed by and construed in accordance with the laws of the State of Iowa and venue for any action brought under this Agreement shall be in Linn County, Iowa. 10.2 Tax Withholding. The Company shall withhold all applicable taxes required on all payments under this Plan. ARTICLE XI 11.1 Headings. The headings in this Plan are for convenience only and shall not be used to interpret or construe its provisions. EX-12 6 EXHIBIT 12 IES UTILITIES INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, 1992 1993 1994 1995 1996 (in thousands, except ratio of earnings to fixed charges) Net income $ 45,291 $ 67,970 $ 61,210 $ 59,278 $ 63,729 Federal and state income taxes 20,723 37,963 37,966 41,095 43,092 Net income before income taxes 66,014 105,933 99,176 100,373 106,821 Interest on long-term debt 35,689 34,926 37,942 36,375 37,048 Other interest 3,939 5,243 3,630 8,085 6,666 Estimated interest component of rents 4,567 3,729 3,970 4,637 4,091 Fixed charges as defined 44,195 43,898 45,542 49,097 47,805 Earnings as defined $ 110,209 $ 149,831 $ 144,718 $ 149,470 $ 154,626 Ratio of earnings to fixed charges (unaudited) 2.49 3.41 3.18 3.04 3.23 For the purposes of computation of these ratios (a) earnings have been calculated by adding fixed charges and federal and state income taxes to net income; (b) fixed charges consist of interest (including amortization of debt expense, premium and discount) on long-term and other debt and the estimated interest component of rents.
EX-21 7 EXHIBIT 21 IES INDUSTRIES INC. SUBSIDIARIES OF THE REGISTRANT The following are deemed to be significant subsidiaries of Industries -- Name of Subsidiary State of Incorporation IES Utilities Inc. Iowa IES Diversified Inc. Iowa EX-23 8 Exhibit 23(a) ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into IES Industries Inc.'s (the "Company") previously filed Form S-8 Registration Statement (File No. 33-57088) for the Company's Employee Stock Purchase Plan, Form S-8 Registration Statement (File No. 33-32468) for the Company's Employee Savings Plan and Form S-3 Registration Statement (File No. 33-56981) for the Company's Dividend Reinvestment and Stock Purchase Plan. ARTHUR ANDERSEN LLP Chicago, Illinois March 14, 1997 EX-23 9 Exhibit 23(b) ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into IES Utilities Inc.'s previously filed Form S-3 Registration Statement (File No. 33- 62259). ARTHUR ANDERSEN LLP Chicago, Illinois March 14, 1997 EX-27 10
UT Exhibit 27(a) The schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement of Income and the Consolidated Statement of Cash Flows for the twelve months ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 0000789943 IES INDUSTRIES INC. 1,000 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 1,358,215 373,396 178,051 14,771 201,129 2,125,562 407,635 0 219,246 626,881 0 18,320 701,100 25,000 0 110,000 8,473 0 19,600 15,125 601,063 2,125,562 973,912 47,435 809,604 809,604 164,308 (230) 164,078 54,822 60,907 914 60,907 62,738 38,709 183,359 2.04 0 Income tax expense is not included in Operating Expense in the Consolidated Statements of Income for IES Industries Inc. (Industries). Since the preferred dividends are for a subsidiary of Industries, they are considered a fixed charge on Industries' Consolidated Statement of Income.
EX-27 11
UT Exhibit 27(b) The schedule contains summary financial information extracted from the Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement of Income and the Consolidated Statement of Cash Flows for the twelve months ended December 31, 1996 and is qualified in its entirety by reference to such financial statements. 0000052485 IES UTILITIES INC. 1,000 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 1,358,215 69,791 139,038 10,437 201,129 1,778,610 33,427 279,042 231,337 543,806 0 18,320 517,334 25,000 0 110,000 8,140 0 19,600 15,125 521,285 1,778,610 754,979 43,092 601,254 601,254 153,725 (3,190) 150,535 43,714 63,729 914 62,815 44,000 38,709 165,506 0 0 Income tax expense is not included in Operating Expense in the Consolidated Statements of Income for IES Utilities Inc.
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