-----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, DeCd+cJ52/PGbvKiIlNSmJnP7y6NiBotkNfJLtJSkbP/Ho2fsq6tvlvaWRRIwN/q zh/KJ+axJuKx872wCnajew== 0000789943-97-000013.txt : 19970814 0000789943-97-000013.hdr.sgml : 19970814 ACCESSION NUMBER: 0000789943-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09187 FILM NUMBER: 97658763 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04117 FILM NUMBER: 97658764 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Registrant; State of Incorporation; IRS Employer File Number Address; and Telephone Number Identification No. 1-9187 IES INDUSTRIES INC. (an Iowa Corporation) 42-1271452 IES Tower, Cedar Rapids, Iowa 52401 319-398-4411 0-4117-1 IES UTILITIES INC. (an Iowa Corporation) 42-0331370 IES Tower, Cedar Rapids, Iowa 52401 319-398-4411 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the registrants' classes of common stock, as of July 31, 1997. IES Industries Inc. Common Stock, no par value - 30,439,245 shares IES Utilities Inc. Common Stock, $2.50 par value - 13,370,788 shares IES INDUSTRIES INC. AND IES UTILITIES INC. INDEX Page No. Part I. Financial Information. Item 1. Consolidated Financial Statements. IES Industries Inc.: Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 3 - 4 Consolidated Statements of Income - Three, Six and Twelve Months Ended June 30, 1997 and 1996 5 Consolidated Statements of Cash Flows - Three, Six and Twelve Months Ended June 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 - 14 IES Utilities Inc.: Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 15 - 16 Consolidated Statements of Income - Three, Six and Twelve Months Ended June 30, 1997 and 1996 17 Consolidated Statements of Cash Flows - Three, Six and Twelve Months Ended June 30, 1997 and 1996 18 Notes to Consolidated Financial Statements 19 Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Condition. 20 - 34 Part II. Other Information. 35 - 38 Signatures. 39 - 40 PART I - FINANCIAL INFORMATION ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS June 30, 1997 December 31, ASSETS (in thousands) (Unaudited) 1996 Property, plant and equipment: Utility - Plant in service - Electric $ 2,032,872 $ 2,007,839 Gas 178,588 175,472 Other 133,707 126,850 2,345,167 2,310,161 Less - Accumulated depreciation 1,085,579 1,030,390 1,259,588 1,279,771 Leased nuclear fuel, net of amortization 27,739 34,725 Construction work in progress 56,674 43,719 1,344,001 1,358,215 Other, net of accumulated depreciation and amortization of $79,151 and $70,031, respectively 244,386 223,805 1,588,387 1,582,020 Current assets: Cash and temporary cash investments 8,932 8,675 Accounts receivable - Customer, less allowance for doubtful accounts of $976 and $1,087, respectively 24,002 50,821 Other 8,175 12,040 Income tax refunds receivable 17,740 8,890 Production fuel, at average cost 13,679 13,323 Materials and supplies, at average cost 24,183 22,842 Adjustment clause balances 0 10,752 Regulatory assets 34,644 26,539 Prepayments and other 17,017 24,169 148,372 178,051 Investments: Nuclear decommissioning trust funds 69,490 59,325 Investment in foreign entities 46,498 44,946 Investment in McLeodUSA Inc. 28,960 29,200 Cash surrender value of life insurance policies 11,906 11,217 Other 6,217 4,903 163,071 149,591 Other assets: Regulatory assets 195,717 201,129 Deferred charges and other 14,609 14,771 210,326 215,900 $ 2,110,156 $ 2,125,562 IES INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) June 30, CAPITALIZATION AND LIABILITIES 1997 December 31, (in thousands, except share amounts) (Unaudited) 1996 Capitalization: Common stock - no par value - authorized 48,000,000 shares; outstanding 30,352,843 and 30,077,212 shares, respectively $ 415,603 $ 407,635 Retained earnings 208,119 219,246 Total common equity 623,722 626,881 Cumulative preferred stock of IES Utilities Inc. 18,320 18,320 Long-term debt (excluding current portion) 719,654 701,100 1,361,696 1,346,301 Current liabilities: Short-term borrowings 150,000 135,000 Capital lease obligations 13,923 15,125 Maturities and sinking funds 487 8,473 Accounts payable 58,188 99,861 Dividends payable 16,578 16,431 Accrued interest 8,605 8,985 Accrued taxes 45,903 43,926 Accumulated refueling outage provision 5,506 1,316 Adjustment clause balances 4,315 0 Environmental liabilities 5,661 5,679 Other 21,316 22,087 330,482 356,883 Long-term liabilities: Pension and other benefit obligations 48,067 39,643 Capital lease obligations 13,816 19,600 Environmental liabilities 47,850 47,502 Other 21,923 18,488 131,656 125,233 Deferred credits: Accumulated deferred income taxes 253,168 262,675 Accumulated deferred investment tax credits 33,154 34,470 286,322 297,145 Commitments and contingencies (Note 7) $ 2,110,156 $ 2,125,562 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three For the Six For the Twelve Months Ended Months Ended Months Ended June 30 June 30 June 30 1997 1996 1997 1996 1997 1996 (in thousands, except per share amounts) Operating revenues: Electric $ 137,691 $ 137,032 $ 274,977 $ 262,400 $ 586,850 $ 573,246 Gas 25,768 42,628 109,874 132,651 251,201 225,999 Other 31,674 30,988 67,969 58,793 134,831 109,773 195,133 210,648 452,820 453,844 972,882 909,018 Operating expenses: Fuel for production 26,532 22,728 56,413 43,021 97,972 99,530 Purchased power 15,050 22,000 33,723 36,469 85,603 69,899 Gas purchased for resale 15,843 31,814 80,341 99,250 198,442 168,610 Other operating expenses 53,357 52,283 106,320 104,808 216,265 212,231 Maintenance 13,481 15,087 27,049 25,920 50,130 48,525 Depreciation and amortization 28,582 27,225 57,321 54,608 110,106 102,104 Taxes other than income taxes 12,897 12,741 26,193 26,004 48,360 48,211 165,742 183,878 387,360 390,080 806,878 749,110 Operating income 29,391 26,770 65,460 63,764 166,004 159,908 Interest expense and other: Interest expense 15,592 12,934 30,439 25,839 59,421 51,518 Allowance for funds used during construction -372 -691 -767 -1,380 -1,489 -2,904 Preferred dividend requirements of IES Utilities Inc. 229 229 457 457 914 914 Miscellaneous, net 1,936 -696 1,693 -2,373 6,398 -5,016 17,385 11,776 31,822 22,543 65,244 44,512 Income before income taxes 12,006 14,994 33,638 41,221 100,760 115,396 Income taxes: Current 4,855 5,466 20,992 19,576 39,663 51,713 Deferred -541 2,133 -6,703 817 4,314 -732 Amortization of investment tax credits -658 -661 -1,316 -1,323 -2,639 -2,663 3,656 6,938 12,973 19,070 41,338 48,318 Net income $ 8,350 $ 8,056 $ 20,665 $ 22,151 $ 59,422 $ 67,078 Average number of common shares outstanding 30,324 29,801 30,256 29,723 30,128 29,560 Earnings per average common share $ 0.28 $ 0.27 $ 0.68 $ 0.75 $ 1.97 $ 2.27 Dividends declared per common share $ 0.525 $ 0.525 $ 1.05 $ 1.05 $ 2.10 $ 2.10 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three For the Six For the Twelve Months Ended Months Ended Months Ended June 30 June 30 June 30 1997 1996 1997 1996 1997 1996 (in thousands) Cash flows from operating activities: Net income $ 8,350 $ 8,056 $ 20,665 $ 22,151 $ 59,422 $ 67,078 Adjustments to reconcile net income to net cash flows from operating activities - Depreciation and amortization 28,582 27,225 57,321 54,608 110,106 102,104 Amortization of principal under capital lease obligations 3,740 4,626 7,109 9,250 14,351 19,096 Deferred taxes and investment tax credits -1,199 1,472 -8,019 -506 1,675 -3,395 Refueling outage provision 2,504 2,373 4,190 4,920 -7,104 10,374 Amortization of other assets 2,190 2,194 5,226 5,104 9,875 9,853 Other 774 285 3,053 1,390 2,616 1,223 Other changes in assets and liabilities - Accounts receivable 12,115 9,431 30,684 2,300 6,230 -19,078 Sale of utility accounts receivable 0 7,000 0 7,000 0 9,000 Production fuel, materials and supplies -1,977 -396 -1,060 484 -894 5,365 Accounts payable -3,967 -1,554 -39,210 -10,175 -8,039 8,523 Accrued taxes -34,008 -28,680 -6,873 -12,387 -12,451 -115 Provision for rate refunds 0 -229 0 -63 -43 -10,164 Adjustment clause balances 556 -3,726 15,067 -339 1,506 2,332 Gas in storage 2,748 1,501 8,821 9,245 -1,578 2,350 Other 3,536 3,888 5,464 4,662 12,598 2,020 Net cash flows from operating activities 23,944 33,466 102,438 97,644 188,270 206,566 Cash flows from financing activities: Dividends declared on common stock -15,934 -15,643 -31,792 -31,225 -63,306 -62,117 Proceeds from issuance of common stock 3,147 3,673 6,626 7,399 13,391 15,014 Purchase of treasury stock -83 -269 -83 -269 -83 -269 Net change in IES Diversified Inc. credit facility 13,077 11,965 18,772 10,970 55,662 75,415 Proceeds from issuance of other long-term debt 55,000 0 55,000 0 115,000 50,003 Reductions in other long-term debt -63,195 -217 -63,274 -296 -78,432 -50,440 Net change in short-term borrowings 24,000 33,000 15,000 24,000 25,000 38,000 Principal payments under capital lease obligations -3,369 -4,624 -5,665 -9,536 -15,237 -17,781 Other -61 -22 35 -91 -400 -1,669 Net cash flows from financing activities 12,582 27,863 -5,381 952 51,595 46,156 Cash flows from investing activities: Construction and acquisition expenditures - Utility -28,466 -34,000 -48,231 -57,333 -133,147 -125,292 Other -22,254 -18,456 -35,670 -33,815 -97,985 -106,879 Oil and gas properties held for resale 0 0 0 9,843 0 0 Deferred energy efficiency expenditures -3,516 -5,090 -7,530 -8,757 -15,630 -18,808 Nuclear decommissioning trust funds -1,502 -1,502 -3,004 -3,004 -6,008 -6,338 Proceeds from disposition of assets 1,215 652 1,782 1,856 8,221 10,034 Other 304 1,152 -4,147 192 -904 -318 Net cash flows from investing activities -54,219 -57,244 -96,800 -91,018 -245,453 -247,601 Net increase (decrease) in cash and temporary cash investments -17,693 4,085 257 7,578 -5,588 5,121 Cash and temporary cash investments at beginning of period 26,625 10,435 8,675 6,942 14,520 9,399 Cash and temporary cash investments at end of period $ 8,932 $ 14,520 $ 8,932 $ 14,520 $ 8,932 $ 14,520 Supplemental cash flow information: Cash paid during the period for - Interest $ 17,330 $ 12,992 $ 29,638 $ 23,535 $ 59,148 $ 49,440 Income taxes $ 29,873 $ 24,277 $ 29,197 $ 32,748 $ 51,330 $ 50,877 Noncash investing and financing activities - Capital lease obligations incurred $ 10 $ 10,243 $ 123 $ 12,846 $ 1,558 $ 13,106 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
This document contains the Quarterly Reports on Form 10-Q for the quarter ended June 30, 1997 for each of IES Industries Inc. and IES Utilities Inc. Information contained herein relating to an individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, IES Utilities Inc. makes no representation as to information relating to IES Industries Inc. or to any other companies affiliated with IES Industries Inc. IES Industries Inc. and its consolidated subsidiaries may collectively be referred to as "the Company". From time to time, the Company may make forward-looking statements within the meaning of the federal securities laws that involve judgments, assumptions and other uncertainties beyond the control of the Company. These forward-looking statements may include, among others, statements concerning revenue and cost trends, cost recovery, cost reduction strategies and anticipated outcomes, pricing strategies, changes in the utility industry, planned capital expenditures, financing needs and availability, statements of the Company's expectations, beliefs, future plans and strategies, anticipated events or trends and similar comments concerning matters that are not historical facts. Investors and other users of the forward-looking statements are cautioned that such statements are not a guarantee of future performance of the Company and that such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Some, but not all, of the risks and uncertainties include weather effects on sales and revenues, competitive factors, general economic conditions in the Company's service territory, federal and state regulatory or government actions, the operating of a nuclear facility and changes in the rate of inflation. IES INDUSTRIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 1997 (1) GENERAL: The interim Consolidated Financial Statements have been prepared by IES Industries Inc. (Industries) and its consolidated subsidiaries, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Industries' wholly- owned subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc. (Diversified). Industries is an investor-owned holding company whose primary operating company, Utilities, is engaged principally in the generation, transmission, distribution and sale of electric energy and the purchase, distribution, transportation and sale of natural gas. The Company's principal markets are located in the State of Iowa. The Company also has various non-utility subsidiaries which are primarily engaged in the energy-related, transportation and real estate development businesses. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company, the Consolidated Financial Statements include all adjustments, which are normal and recurring in nature, necessary for the fair presentation of the results of operations and financial position. Certain prior period amounts have been reclassified on a basis consistent with the 1997 presentation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect: 1) the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and 2) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. It is suggested that these Consolidated Financial Statements be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company's Form 10-K for the year ended December 31, 1996. The accounting and financial policies relative to the following items have been described in those notes and have been omitted herein because they have not changed materially through the date of this report: Summary of significant accounting policies Leases Utility accounts receivable (other than discussed in Note 4) Income taxes Benefit plans Common, preferred and preference stock Debt (other than discussed in Note 6) Estimated fair value of financial instruments (other than discussed in Note 5) Derivative financial instruments Commitments and contingencies (other than discussed in Note 7) Jointly-owned electric utility plant Segments of business (2) PROPOSED MERGER OF THE COMPANY: On November 10, 1995, Industries, WPL Holdings, Inc. (WPLH) and Interstate Power Company (IPC) entered into an Agreement and Plan of Merger, as amended (Merger Agreement). At the 1996 annual meetings, the shareowners of all three companies approved the Merger Agreement. The merger is still subject to approval by several federal and state regulatory agencies. See Management's Discussion and Analysis of Financial Condition and Results of Operations for a further discussion. (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 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. Utilities, Wisconsin Power and Light Company (WP&L) and IPC also proposed to freeze their wholesale electric prices for four years from the effective date of the merger as part of their merger filing with the Federal Energy Regulatory Commission (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 - Under provisions of the IUB rules, Utilities is currently recovering the costs incurred through 1993 for its energy efficiency programs, including its direct expenditures, carrying costs, a return on its expenditures and a reward. These costs are being recovered over a four-year period and the recovery began on June 1, 1995. In December 1996, under provisions of the IUB rules, the Company filed for recovery of the costs relating to its 1994 and 1995 programs. The Company received the IUB's final order in the proceeding in May 1997 which allowed for recovery of approximately $45 million ($35 million electric and $10 million gas) and was composed of direct expenditures and carrying costs as well as a return on the expenditures over the recovery period. The costs will be recovered over a four-year period and such recovery commenced on August 1, 1997. Iowa statutory changes enacted in 1996 have eliminated: 1) specific electric and gas percentage spending requirements in favor of IUB-determined energy savings targets, 2) the delay in recovery of energy efficiency costs by allowing recovery which is concurrent with spending and 3) the recovery of a sharing reward. The IUB commenced a rulemaking in January 1997 to implement the statutory changes and a final order in this proceeding was issued in April 1997. The new rules provide that the Company recover its 1996 expenditures, and the 1997 expenditures incurred prior to August 1, 1997, over a four-year recovery period which began on August 1, 1997. The Company also began concurrent recovery of its prospective expenditures on August 1, 1997. The implementation of these changes will gradually eliminate the regulatory asset which 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 (in thousands): June 30, December 31, 1997 1996 Costs incurred through 1993 $ 9,890 $ 12,834 Costs incurred in 1994-1995 34,328 33,161 Costs incurred from 1/1/96 - 6/30/97 21,451 15,087 $ 65,669 $ 61,082 The above amounts include the direct expenditures and carrying costs incurred by the Company but do not include any amounts for a return on its expenditures over the recovery period. (4) UTILITY ACCOUNTS RECEIVABLE: Utilities has entered into an agreement, which expires in 1999, with a financial institution to sell, with limited recourse, an undivided fractional interest of up to $65 million in its pool of utility accounts receivable. At June 30, 1997, $65 million was sold under the agreement. SFAS 125, issued by the FASB in 1996 and effective for 1997, provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. The accounting for Utilities' sale of accounts receivable agreement is impacted by this standard. As a result, the agreement was modified in the first quarter of 1997 to comply with the SFAS 125 requirements and thus the accounting and reporting for the sale of Utilities' receivables remains unchanged. (5) INVESTMENTS: (a) Foreign Entities - At June 30, 1997, the Company had $46.5 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 June 30, 1997, included investments of approximately $32.1 million in New Zealand, $13.9 million in China and $0.5 million in other countries. (b) McLeodUSA Inc. (McLeod) - At June 30, 1997, the Company had a $29.0 million investment in Class A common stock of McLeod and vested options that, if exercised, would represent an additional investment of approximately $2.3 million (1.3 million shares). During the second quarter of 1997, the Company converted its $9.2 million investment in Class B Common Stock into shares of Class A Common Stock. 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 June 30, 1997, the Company was the beneficial owner of approximately 10.3 million total shares on a fully diluted basis. (The Company contributed 300,000 of its McLeod Class A shares to the IES Industries Charitable Foundation in the second quarter of 1997.) The Company currently accounts for this investment under the cost method. The Company has entered into an agreement with McLeod which restricts the sale or disposal of its shares without the consent of the McLeod Board of Directors. The agreement was modified in the second quarter of 1997 to extend the restriction until the earlier of March 1999 or twelve months following the completion of a recently announced merger between McLeod and Consolidated Communications Inc. (CCI). This merger is expected to be completed in the second half of 1997. (In the event the merger is not consummated, the restriction will be eliminated in June 1998.) 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 June 30, 1997, on the Nasdaq National Market, was $33.75 per share. The current market value of the shares the Company beneficially owns (approximately 10.3 million shares) is impacted by, among other things, the fact that the shares cannot be sold for a period of time. 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. The estimated fair value of the McLeod investment at June 30, 1997, based upon the closing price on June 30 of $33.75, was $347 million. 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 the earlier of the close of the McLeod/CCI merger or March 1998 (assuming the McLeod/CCI merger consummates), 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 the Company). (6) DEBT: (a) Long-Term Debt - In August 1997, Utilities issued $135 million of 6-5/8% Senior Debentures, due 2009. The proceeds from these debentures were used to reduce Utilities' short-term borrowings. Utilities repaid at maturity $8 million of 6-1/8% First Mortgage Bonds during the second quarter of 1997. Also in the second quarter of 1997, Utilities issued $55 million of Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to have their Collateral Trust Bonds redeemed, in whole but not in part, on May 1, 2002, at 100% of the principal amount thereof, plus accrued interest. The proceeds from the Collateral Trust Bonds were used to refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30 million of Series M, 7.625% First Mortgage Bonds and $10 million of 7.375% First Mortgage Bonds. 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 June 30, 1997, there were no borrowings outstanding under this facility. Diversified had $190.9 million of commercial paper outstanding at June 30, 1997, with interest rates ranging from 5.78% to 6.65% and maturity dates in the third quarter of 1997. Diversified intends to continue borrowing under the renewal options of the facility and no conditions exist at June 30, 1997, that would prevent such borrowings. Accordingly, this debt is classified as long-term in the Consolidated Balance Sheets. (b) Short-Term Debt - At June 30, 1997, the Company had bank lines of credit aggregating $160.1 million. Utilities was using $145 million to support commercial paper (weighted average interest rate of 6.13%) 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 June 30, 1997, there was $5 million outstanding under this facility (weighted average interest rate of 5.98%). (7) CONTINGENCIES: (a) Environmental Liabilities - The Company has recorded environmental liabilities of approximately $54 million in its Consolidated Balance Sheets at June 30, 1997. The Company's significant environmental liabilities are discussed below. Former Manufactured Gas Plant (FMGP) Sites Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 FMGP sites, but believes it is not responsible for two of these sites based on extensive reviews of the ownership records and historical information available for the two sites. Utilities has notified the appropriate regulatory agency that it believes it does not have any responsibility as relates to these two sites, but no response has been received from the agency on this issue. Utilities is also aware of six other sites that it may have owned or operated in the past and for which, as a result, it may be designated as a PRP in the future in the event that environmental concerns arise at these sites. Utilities is working pursuant to the requirements of the various agencies to investigate, mitigate, prevent and remediate, where necessary, damage to property, including damage to natural resources, at and around the sites in order to protect public health and the environment. Utilities believes it has completed the remediation of twelve sites although it is in the process of obtaining final approval from the applicable environmental agencies on this issue for each site. Utilities is in various stages of the investigation and/or remediation processes for the remaining fourteen sites and estimates the range of additional costs to be incurred for investigation, remediation and monitoring of the sites to be approximately $24 million to $55 million. Utilities has recorded environmental liabilities related to the FMGP sites of approximately $35 million (including $4.7 million as current liabilities) at June 30, 1997. These amounts are based upon Utilities' best current estimate of the amount to be incurred for investigation, remediation and monitoring costs for those sites where the investigation process has been or is substantially completed, and the minimum of the estimated cost range for those sites where the investigation is in its earlier stages. It is possible that future cost estimates will be greater than the current estimates as the investigation process proceeds and as additional facts become known. Regulatory assets of approximately $35 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 five carriers and an agreement in principle has been reached with three other carriers thus far. Amounts received from insurance carriers are being deferred pending a determination of the regulatory treatment of such recoveries. National Energy Policy Act of 1992 The National Energy Policy Act of 1992 requires owners of nuclear power plants to pay a special assessment into a "Uranium Enrichment Decontamination and Decommissioning Fund." The assessment is based upon prior nuclear fuel purchases and, for the Duane Arnold Energy Center (DAEC), averages $1.4 million annually through 2007, of which Utilities' 70% share is $1.0 million. Utilities is recovering the costs associated with this assessment through its electric fuel adjustment clauses over the period the costs are assessed. Utilities' 70% share of the future assessment, $9.9 million payable through 2007, has been recorded as a liability in the Consolidated Balance Sheets, including $0.9 million included in "Current liabilities - Environmental liabilities," with a related regulatory asset for the unrecovered amount. Oil and Gas Properties Dismantlement and Abandonment Costs Whiting Petroleum Corporation (Whiting), a wholly-owned subsidiary under Diversified, is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties, the most significant of which is located off the coast of California. The Company estimates the total costs for these properties to be approximately $16 million and the expenditures are not expected to be incurred for approximately four years. Whiting accrues these costs as reserves are extracted and such costs are included in "Depreciation and amortization" in the Consolidated Statements of Income, resulting in a liability of $8.6 million at June 30, 1997, in the Consolidated Balance Sheets. (b) Air Quality Issues - The Clean Air Act Amendments of 1990 (Act) requires emission reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve reductions of atmospheric chemicals believed to cause acid rain. The provisions of the Act are being implemented in two phases; the Phase I requirements have been met and the Phase II requirements affect eleven other fossil units beginning in the year 2000. Utilities expects to meet the requirements of Phase II by switching to lower sulfur fuels, capital expenditures primarily related to fuel burning equipment and boiler modifications, 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. In June 1997, President Clinton gave his support for lowering the NAAQS for ozone and particulate matter. In July 1997, the EPA issued the final rules on these emissions issues. The impacts of these regulations are too speculative to quantify at this point in time. Also in the fourth quarter of 1996, the EPA announced that it would issue a notice requiring the 37 states in the Ozone Transport Assessment Group (OTAG), which includes Iowa, to implement further controls on NOx. In June 1997, OTAG made their final recommendations to the EPA. These recommendations exclude Iowa from the OTAG process with the understanding that Iowa will work with Wisconsin in the development of the SE Wisconsin attainment State Implementation Plan (SIP). Utilities believes that the potential cost of this effort will not have a material adverse effect on its financial position or results of operations. In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the NAAQS established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences and recommended that additional monitors be located near Utilities' sources to assess actual ambient air quality. As a result of exceedences at a relocated monitor, the EPA issued a letter in March 1997 to the Iowa Governor's Office directing the state to develop a plan of action within 120 days. The Governor of Iowa then issued a letter to the EPA stating that a plan of action would be in place with local industry to avoid the area being declared nonattainment. In this regard, Utilities has entered into a Consent Order with the Iowa Department of Natural Resources (IDNR). The objective of this order is to establish the necessary commitments which will maintain the area in attainment for SO2. Two primary commitments are being made by Utilities in this consent order: 1) Utilities will limit SO2 emissions from the two noted generating facilities located in Cedar Rapids, and 2) Utilities will install a new stack at one of the facilities at a potential aggregate capital cost of up to $4.5 million over the next two years. It is anticipated that this consent order will receive EPA approval in the third quarter of 1997. Pursuant to a routine internal review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Utilities initiated discussions with its regulators on the matter, resulting in the submittal of a PSD permit application in February 1997. Utilities expects to receive the PSD permit by the fourth quarter of 1997. Utilities may be required to accept operational limits or to install additional controls and may be subject to a penalty for not having obtained the permit previously; however, Utilities believes that any likely actions resulting from this matter will not have a material adverse effect on its financial position or results of operations. IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS June 30, 1997 December 31, ASSETS (in thousands) (Unaudited) 1996 Property, plant and equipment: Utility - Plant in service - Electric $ 2,032,872 $ 2,007,839 Gas 178,588 175,472 Other 133,707 126,850 2,345,167 2,310,161 Less - Accumulated depreciation 1,085,579 1,030,390 1,259,588 1,279,771 Leased nuclear fuel, net of amortization 27,739 34,725 Construction work in progress 56,674 43,719 1,344,001 1,358,215 Other, net of accumulated depreciation and amortization of $1,560 and $1,438, respectively 5,750 5,872 1,349,751 1,364,087 Current assets: Cash and temporary cash investments 3,381 11,608 Accounts receivable - Customer, less allowance for doubtful accounts of $491 and $546, respectively 13,691 22,461 Other 7,797 11,270 Income tax refunds receivable 10,815 2,664 Production fuel, at average cost 13,679 13,323 Materials and supplies, at average cost 22,666 21,716 Adjustment clause balances 0 10,752 Regulatory assets 34,644 26,539 Prepayments and other 11,147 18,705 117,820 139,038 Investments: Nuclear decommissioning trust funds 69,490 59,325 Cash surrender value of life insurance policies 4,635 4,281 Other 79 313 74,204 63,919 Other assets: Regulatory assets 195,717 201,129 Deferred charges and other 10,273 10,437 205,990 211,566 $ 1,747,765 $ 1,778,610 IES UTILITIES INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) June 30, CAPITALIZATION AND LIABILITIES 1997 December 31, (in thousands, except share amounts) (Unaudited) 1996 Capitalization: Common stock - par value $2.50 per share - authorized 24,000,000 shares; 13,370,788 shares outstanding $ 33,427 $ 33,427 Paid-in surplus 279,042 279,042 Retained earnings 221,622 231,337 Total common equity 534,091 543,806 Cumulative preferred stock - par value $50 per share - authorized 466,406 shares; 366,406 shares outstanding 18,320 18,320 Long-term debt (excluding current portion) 517,265 517,334 1,069,676 1,079,460 Current liabilities: Short-term borrowings 150,000 135,000 Capital lease obligations 13,923 15,125 Maturities and sinking funds 140 8,140 Accounts payable 46,932 76,287 Accrued interest 8,591 8,839 Accrued taxes 43,262 40,953 Accumulated refueling outage provision 5,506 1,316 Adjustment clause balances 4,315 0 Environmental liabilities 5,517 5,517 Other 18,172 17,114 296,358 308,291 Long-term liabilities: Pension and other benefit obligations 32,992 25,826 Capital lease obligations 13,816 19,600 Environmental liabilities 39,070 40,299 Other 17,299 14,030 103,177 99,755 Deferred credits: Accumulated deferred income taxes 245,400 256,634 Accumulated deferred investment tax credits 33,154 34,470 278,554 291,104 Commitments and contingencies (Note 7) $ 1,747,765 $ 1,778,610 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. IES UTILITIES INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the Three For the Six For the Twelve Months Ended Months Ended Months Ended June 30 June 30 June 30 1997 1996 1997 1996 1997 1996 (in thousands) Operating revenues: Electric $ 137,691 $ 137,032 $ 274,977 $ 262,400 $ 586,850 $ 573,246 Gas 25,776 22,445 107,203 91,686 176,382 153,951 Other 6,156 4,763 13,841 8,922 24,761 15,126 169,623 164,240 396,021 363,008 787,993 742,323 Operating expenses: Fuel for production 26,532 22,728 56,413 43,021 97,972 99,530 Purchased power 15,050 22,000 33,723 36,469 85,603 69,899 Gas purchased for resale 15,788 12,042 76,579 59,411 121,044 99,021 Other operating expenses 38,163 36,555 74,459 74,912 149,548 153,106 Maintenance 12,644 14,333 25,450 24,325 46,995 45,621 Depreciation and amortization 23,294 22,024 46,764 44,049 87,691 82,116 Taxes other than income taxes 11,715 11,549 23,607 23,609 43,601 43,892 143,186 141,231 336,995 305,796 632,454 593,185 Operating income 26,437 23,009 59,026 57,212 155,539 149,138 Interest expense and other: Interest expense 12,768 10,988 25,075 21,880 46,908 44,151 Allowance for funds used during construction -372 -691 -767 -1,380 -1,489 -2,904 Miscellaneous, net 1,746 -176 1,327 -1,139 7,759 -880 14,142 10,121 25,635 19,361 53,178 40,367 Income before income taxes 12,295 12,888 33,391 37,851 102,361 108,771 Federal and state income taxes: Current 7,313 4,994 24,395 18,355 41,370 48,847 Deferred -1,251 1,325 -8,430 -538 2,516 -821 Amortization of investment tax credits -658 -661 -1,316 -1,323 -2,638 -2,663 5,404 5,658 14,649 16,494 41,248 45,363 Net income 6,891 7,230 18,742 21,357 61,113 63,408 Preferred dividend requirements 229 229 457 457 914 914 Net income available for common stock $ 6,662 $ 7,001 $ 18,285 $ 20,900 $ 60,199 $ 62,494 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES UTILITIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Three For the Six For the Twelve Months Ended Months Ended Months Ended June 30 June 30 June 30 1997 1996 1997 1996 1997 1996 (in thousands) Cash flows from operating activities: Net income $ 6,891 $ 7,230 $ 18,742 $ 21,357 $ 61,113 $ 63,408 Adjustments to reconcile net income to net cash flows from operating activities - Depreciation and amortization 23,294 22,024 46,764 44,049 87,691 82,116 Amortization of principal under capital lease obligations 3,740 4,626 7,109 9,250 14,351 19,096 Deferred taxes and investment tax credits -1,909 664 -9,746 -1,861 -122 -3,484 Refueling outage provision 2,504 2,373 4,190 4,920 -7,104 10,374 Amortization of other assets 2,166 2,194 5,181 5,104 9,802 9,853 Other 12 65 228 61 544 586 Other changes in assets and liabilities - Accounts receivable 11,551 8,434 12,243 975 -1,932 -13,287 Sale of utility accounts receivable 0 7,000 0 7,000 0 9,000 Production fuel, materials and supplies -1,564 26 -669 928 -946 5,517 Accounts payable -1,679 -3,068 -26,892 -13,365 -580 1,200 Accrued taxes -34,056 -30,028 -5,842 -12,958 -4,118 -1,153 Provision for rate refunds 0 -229 0 -63 -43 -10,164 Adjustment clause balances 556 -3,726 15,067 -339 1,506 2,332 Gas in storage 2,748 1,501 8,218 9,245 -1,578 2,350 Other 2,561 2,865 7,865 4,372 10,621 -1,703 Net cash flows from operating activities 16,815 21,951 82,458 78,675 169,205 176,041 Cash flows from financing activities: Dividends declared on common stock -14,000 -12,000 -28,000 -22,000 -50,000 -42,000 Dividends declared on preferred stock -229 -229 -457 -457 -914 -914 Proceeds from issuance of long-term debt 55,000 0 55,000 0 115,000 50,000 Reductions in long-term debt -63,140 -140 -63,140 -140 -78,140 -50,140 Net change in short-term borrowings 24,000 34,334 15,000 19,687 20,425 36,794 Principal payments under capital lease obligations -3,369 -4,624 -5,665 -9,536 -15,237 -17,781 Other -112 -86 -112 -172 -360 -1,936 Net cash flows from financing activities -1,850 17,255 -27,374 -12,618 -9,226 -25,977 Cash flows from investing activities: Construction and acquisition expenditures - Utility -28,486 -34,009 -48,251 -57,383 -133,249 -125,492 Other -2 -146 -7 -342 -932 -1,705 Deferred energy efficiency expenditures -3,516 -5,090 -7,530 -8,757 -15,630 -18,808 Nuclear decommissioning trust funds -1,502 -1,502 -3,004 -3,004 -6,008 -6,338 Other 89 1,225 -4,519 813 -897 916 Net cash flows from investing activities -33,417 -39,522 -63,311 -68,673 -156,716 -151,427 Net increase (decrease) in cash and temporary cash investments -18,452 -316 -8,227 -2,616 3,263 -1,363 Cash and temporary cash investments at beginning of period 21,833 434 11,608 2,734 118 1,481 Cash and temporary cash investments at end of period $ 3,381 $ 118 $ 3,381 $ 118 $ 3,381 $ 118 Supplemental cash flow information: Cash paid during the period for - Interest $ 14,365 $ 11,046 $ 24,142 $ 19,576 $ 46,638 $ 42,072 Income taxes $ 32,422 $ 24,430 $ 31,876 $ 31,568 $ 45,691 $ 49,268 Noncash investing and financing activities - Capital lease obligations incurred $ 10 $ 10,243 $ 123 $ 12,846 $ 1,558 $ 13,106 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
IES UTILITIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Except as modified below, the IES Industries Inc. (Industries) Notes to Consolidated Financial Statements are incorporated by reference insofar as they relate to IES Utilities Inc. (Utilities). Industries' Note 5 does not relate to Utilities and, therefore, is not incorporated by reference. (1) GENERAL: The interim Consolidated Financial Statements have been prepared by IES Utilities Inc. (Utilities) and its consolidated subsidiaries, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Utilities' only wholly- owned subsidiary is IES Ventures Inc. (Ventures), which is a holding company for unregulated investments. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION IES Industries Inc.'s Consolidated Financial Statements include the accounts of IES Industries Inc. (Industries) and its consolidated subsidiaries (collectively the Company). Industries' wholly-owned subsidiaries are IES Utilities Inc. (Utilities) and IES Diversified Inc. (Diversified). The information presented in this management's discussion and analysis addresses the financial statements of Industries and Utilities as presented in this joint filing. Information related to Utilities also relates to Industries' Consolidated Financial Statements. Information related to Diversified does not pertain to the discussion of the financial condition and results of operations of Utilities. The references to various Notes to Consolidated Financial Statements are all to Industries' Notes to Consolidated Financial Statements. COMPETITION Electric energy generation, transmission, and distribution, are in a period of fundamental change in the manner in which customers obtain, and energy suppliers provide, energy services. As legislative, regulatory, economic and technological changes occur, electric utilities are faced with increasing pressure to become more competitive. Such competitive pressures could result in loss of customers and an incurrence of stranded costs (i.e., the cost of assets rendered unrecoverable as the result of competitive pricing). To the extent stranded costs cannot be recovered from customers, they would be borne by security holders. The National Energy Policy Act of 1992 addresses several matters designed to promote competition in the electric wholesale power generation market. In 1996, the Federal Energy Regulatory Commission (FERC) issued final rules (FERC Orders 888 and 889) requiring electric utilities to open their transmission lines to other wholesale buyers and sellers of electricity. The rules became effective in July 1996. Utilities filed conforming pro-forma open access transmission tariffs with the FERC which became effective in October 1995. In response to FERC Order 888, Utilities filed its final pro-forma tariffs with FERC in July 1996. The non-rate provisions of the tariffs were approved in November 1996. FERC has not yet ruled on the rate provisions of the tariffs. The geographic position of Utilities' transmission system could provide revenue opportunities in the open access environment. 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 retail distribution, and thus the final FERC rules do not provide for the recovery of stranded costs resulting from retail competition. The various states retain jurisdiction over the question of whether to permit retail competition, the terms of such retail competition, and the recovery of any portion of stranded costs that are ultimately determined by FERC and the states to have resulted from retail competition. The Iowa Utilities Board (IUB) initiated a Notice of Inquiry (Docket No. NOI-95-1) in early 1995 on the subject of "Emerging Competition in the Electric Utility Industry" to address all forms of competition in the electric utility industry and to gather information and perspectives on electric competition from all persons or entities with an interest or stake in the issues. 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. The Staff's report in this docket was accepted by the IUB, finding, in part, that there is no compelling reason to move quickly into restructuring the electric utility industry in Iowa, based upon the current level of relative prices. However, they 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 (WP&L) (the utility subsidiary of WPL Holdings, Inc. (WPLH)), and a number of other utilities have proposed the creation of an independent system operator (ISO) for the companies' power transmission grid. The companies would retain ownership and control of the facilities, but the ISO would set rates for access and assure fair treatment for all companies seeking access. The proposal requires approval from state regulators and the FERC. Various other proposals for ISO's have been made by other companies, and Utilities is monitoring all such proposals. 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 which would meet the requirements under generally accepted accounting principles for continued accounting as regulatory assets during such recovery period. 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 these 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). PROPOSED MERGER OF THE COMPANY Industries, WPLH and IPC have entered into an Agreement and Plan of Merger, as amended, dated November 10, 1995, which provides for the combination of all three companies. The new company will be named Interstate Energy Corporation (IEC). WPLH is a holding company headquartered in Madison, Wisconsin, and is the parent company of WP&L and Heartland Development Corporation (HDC). WP&L supplies electric and gas service to approximately 385,000 and 150,000 customers, respectively, in south and central Wisconsin. HDC and its principal subsidiaries are engaged in businesses in three major areas: environmental engineering and consulting, affordable housing and energy services. IPC, an operating public utility headquartered in Dubuque, Iowa, supplies electric and gas service to approximately 165,000 and 49,000 customers, respectively, in northeast Iowa, northwest Illinois and southern Minnesota. The proposed merger, which will be accounted for as a pooling of interests, was approved by the respective shareowners on September 5, 1996. The merger is conditioned on the receipt of approvals of several federal and state regulatory agencies. Updates to the status of these approvals are as follows (for additional information regarding the merger please refer to the Company's 1996 Annual Report on Form 10-K): The FERC issued an order on January 15, 1997, finding no substantial market-power concerns with the merger. Some limited issues were set for hearings which began on April 23, 1997 and ended on May 2, 1997. On July 3, 1997, an administrative law judge issued a non-binding recommendation that FERC approve the merger subject to the terms of a stipulation agreement on competition issues entered into between the companies and FERC trial staff. A final decision is expected in the third or fourth quarter of 1997. On May 7, 1997, the Illinois Commerce Commission (ICC) issued an order approving the proposed merger. On March 24, 1997, the Minnesota Public Utilities Commission (MPUC) issued an order approving the merger without hearings, subject to a number of technical conditions which the parties are willing to meet. Included is a 4-year rate freeze for IPC's Minnesota customers. Hearings regarding the merger were completed in July 1997 before the IUB. On May 7, 1997, WP&L filed testimony with the Public Service Commission of Wisconsin (PSCW) proposing a retail electric, gas and water rate freeze from the date of the merger approval through calendar year 2000. Hearings regarding the merger were completed in June 1997 before the PSCW. Given that the merger was not consummated before July 7, 1997, the merger partners are required to submit new information to the U.S. Department of Justice (DOJ) pursuant to the Hart-Scott-Rodino Antitrust Improvements Act. The DOJ completed its impact review of the merger on market power earlier and all requirements of such review were satisfied. The merger partners do not believe that the resubmission will cause any material delays in finalizing the merger. The companies expect to receive all necessary regulatory approvals relating to the merger by the end of 1997. Refer to Note 3(a) of the Notes to Consolidated Financial Statements for a discussion of merger- related retail and wholesale price proposals that Utilities has announced. RESULTS OF OPERATIONS OF THE COMPANY The following discussion analyzes significant changes in the components of net income and financial condition from the prior periods for the Company. Summary The Company's net income increased or (decreased) $0.3 million, ($1.5) million and ($7.7) million during the three, six and twelve month periods, respectively. Earnings per average common share increased or (decreased) $0.01, ($0.07) and ($0.30) for the respective periods. Utilities' net income available for common stock decreased ($0.3) million, ($2.6) million and ($2.3) million during the three, six and twelve month periods, respectively. Increased electric sales resulting from continuing growth in Utilities' service territory and a lower effective tax rate contributed to the three month increase and partially offset the six and twelve month decreases. Partially offsetting the three month increase and contributing to the six and twelve month decreases were increased interest and depreciation expense and the recording of a $2.5 million reserve for non-utility investments at Utilities. The impact of weather, primarily the significant positive impact the weather had on the prior period results, on Utilities' electric and gas sales also contributed to the decrease in earnings for the twelve month period. Accordingly, in comparing the twelve month periods, the Company estimates that weather impacted earnings by approximately ($0.26) per share. The earnings for the twelve month period were also impacted by costs incurred relating to the successful defense of the hostile takeover attempt mounted by MidAmerican Energy Company (MAEC) in the third quarter of 1996. The Company estimates that the cost of the hostile takeover defense reduced earnings for the twelve month period by ($0.15) per share. The Company's operating income increased $2.6 million, $1.7 million and $6.1 million during the three, six and twelve month periods, respectively, while Utilities' operating income increased $3.4 million, $1.8 million and $6.4 million during the same periods. The contrasting relationship between the change in operating income and net income was primarily due to higher interest expense and comparative decreases in income included in "Miscellaneous, net" in the Consolidated Statements of Income. Miscellaneous, net includes the recording of the reserve for non-utility investments at Utilities for all three periods and hostile takeover defense costs of $7.8 million for the twelve month period. Electric Operations Electric margins and Kwh sales for Utilities for the three months ended June 30 were as follows: Revenues and Costs Kwhs Sold (In thousands) (In thousands) 1997 1996 1997 1996 Residential and rural $ 50,177 $ 49,219 600,758 591,896 General service 23,197 22,261 290,815 276,484 Large general service 55,609 52,934 1,444,842 1,364,453 Sales for resale and other 7,408 7,052 129,744 136,992 Total, excluding off- system sales 136,391 131,466 2,466,159 2,369,825 Off-system sales 1,300 5,566 73,097 384,666 Total 137,691 137,032 2,539,256 2,754,491 Fuel for production (excluding steam) 23,156 20,464 Purchased power 15,050 22,000 Margin $ 99,485 $ 94,568 Electric margins and Kwh sales for Utilities for the six months ended June 30 were as follows: Revenues and Costs Kwhs Sold (In thousands) (In thousands) 1997 1996 1997 1996 Residential and rural $ 102,993 $ 99,071 1,291,768 1,301,307 General service 47,017 44,537 601,403 590,975 Large general service 106,709 94,532 2,855,938 2,640,417 Sales for resale and other 15,085 14,013 272,887 286,972 Total, excluding off- system sales 271,804 252,153 5,021,996 4,819,671 Off-system sales 3,173 10,247 119,992 641,223 Total 274,977 262,400 5,141,988 5,460,894 Fuel for production (excluding steam) 48,049 38,627 Purchased power 33,723 36,469 Margin $ 193,205 $ 187,304 Electric margins and Kwh sales for Utilities for the twelve months ended June 30 were as follows: Revenues and Costs Kwhs Sold (In thousands) (In thousands) 1997 1996 1997 1996 Residential and rural $ 216,721 $ 220,262 2,624,164 2,728,534 General service 100,677 99,668 1,241,543 1,241,351 Large general service 225,399 204,189 5,716,127 5,348,739 Sales for resale and other 31,637 27,202 573,695 585,216 Total, excluding off- system sales 574,434 551,321 10,155,529 9,903,840 Off-system sales 12,416 21,925 710,067 1,341,191 Total 586,850 573,246 10,865,596 11,245,031 Fuel for production (excluding steam) 84,029 92,283 Purchased power 85,603 69,899 Margin $ 417,218 $ 411,064 The electric margin increased $4.9 million, $5.9 million and $6.2 million during the three, six and twelve month periods, respectively, primarily due to higher Kwh sales (excluding off-system sales). Large general service Kwh sales increased during all periods due to continuing industrial growth in Utilities' service territory. Weather was the primary reason for the changes in residential and rural Kwh sales during each period. Lower purchased power capacity costs also contributed to the increase in margin for all periods. Under historically normal weather conditions, total Kwh sales (excluding off-system sales) for the three, six and twelve month periods would have increased 3.1%, 4.4% and 4.9%, respectively, as compared to actual increases of 4.1%, 4.2% and 2.5%. 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. Utilities' electric tariffs include energy adjustment clauses (EAC) that are designed to currently recover the costs of fuel and the energy portion of purchased power billings. Gas Operations Gas margins and dekatherm (Dth) sales for Utilities and IEA for the three months ended June 30 were as follows: Revenues and Costs Dths Sold (In thousands) (In thousands) 1997 1996 1997 1996 Utilities - Residential $ 15,649 $ 13,358 2,478 2,370 Commercial 7,244 6,106 1,429 1,365 Industrial 2,030 1,856 599 573 Transportation and other 853 1,125 2,455 2,478 Total Utilities 25,776 22,445 6,961 6,786 IEA (8) 20,183 3 8,651 Total 25,768 42,628 6,964 15,437 Gas purchased for resale 15,843 31,814 Margin $ 9,925 $ 10,814 Gas margins and Dth sales for Utilities and IEA for the six months ended June 30 were as follows: Revenues and Costs Dths Sold (In thousands) (In thousands) 1997 1996 1997 1996 Utilities - Residential $ 66,235 $ 57,786 10,115 10,881 Commercial 32,819 27,291 5,762 6,127 Industrial 6,270 4,664 1,434 1,414 Transportation and other 1,879 1,945 5,220 5,304 Total Utilities 107,203 91,686 22,531 23,726 IEA 2,671 40,965 978 17,137 Total 109,874 132,651 23,509 40,863 Gas purchased for resale 80,341 99,250 Margin $ 29,533 $ 33,401 Gas margins and Dth sales for Utilities and IEA for the twelve months ended June 30 were as follows: Revenues and Costs Dths Sold (In thousands) (In thousands) 1997 1996 1997 1996 Utilities - Residential $ 106,157 $ 95,529 16,915 17,637 Commercial 52,494 44,992 9,958 10,164 Industrial 13,862 9,629 3,816 3,165 Transportation and other 3,869 3,801 10,256 10,772 Total Utilities 176,382 153,951 40,945 41,738 IEA 74,819 72,048 26,895 35,932 Total 251,201 225,999 67,840 77,670 Gas purchased for resale 198,442 168,610 Margin $ 52,759 $ 57,389 Total gas margin decreased ($0.9) million, ($3.9) million and ($4.6) million during the three, six and twelve month periods, respectively, primarily due to lower gas margins at IEA. IEA's reported Dth gas sales were significantly lower during each period as a result of IEA contributing substantially all of its gas marketing business to a joint venture, effective January 1, 1997, in exchange for a partial interest in the joint venture. The investment in the joint venture is accounted for under the equity accounting method and IEA's allocated portion of gas revenues and gas expenses resulting from the joint venture are recorded in "Miscellaneous, net" on Industries' Consolidated Statements of Income. Utilities' gas margin increased or (decreased) ($0.4) million, ($1.7) million and $0.4 million during the three, six and twelve month periods, respectively. The decrease in Utilities' margin during the six month period was primarily due to lower Dth sales, resulting from the milder weather conditions in the first quarter of 1997. Under historically normal weather conditions, Utilities' gas sales and transported volumes would have increased or (decreased) 1.1%, (1.7%) and (0.7%) during the three, six and twelve month periods, respectively, as compared to actual increases or (decreases) of 2.6%, (5.0%) and (1.9%). The contrasting relationship between the change in Utilities' gas revenues and Dths sold during the six and twelve month periods was primarily due to higher per unit gas costs during the 1997 periods. Utilities' gas tariffs include purchased gas adjustment clauses (PGA) that are designed to currently recover the cost of gas sold. Other Revenues The Company's other revenues increased $0.7 million, $9.2 million and $25.1 million during the three, six and twelve month periods, respectively ($1.4 million, $4.9 million and $9.6 million at Utilities). Steam revenues at Utilities increased during all periods due to an increase in volumes sold resulting from the addition of a new industrial customer and increased demand from existing customers. Increased operating activities at IEA also contributed to the increase each period. The three and six month increases were partially offset by decreased oil and gas revenues at Whiting resulting primarily from a decrease in oil volumes sold. Whiting's oil and gas revenues increased during the twelve month period primarily due to increases in oil and gas prices. Operating Expenses The Company's other operating expenses increased or (decreased) $1.1 million, $1.5 million and $4.0 million during the three, six and twelve month periods, respectively ($1.6 million, ($0.5) and ($3.6) million at Utilities). The three month increase was primarily due to increases in labor and benefits costs and former manufactured gas plant (FMGP) clean-up costs, partially offset by lower operating costs at Whiting. The six and twelve month increases were primarily due to the increased operating activities at IEA, increased international business development activities and higher information technology and FMGP clean-up costs at Utilities. The six and twelve month increases were partially offset by decreases in costs relating to the Company's process improvement programs, decreased operating expenses at the Duane Arnold Energy Center (DAEC), Utilities' nuclear generating facility, and lower operating costs at Whiting. Costs incurred relating to the Company's merger also contributed to the twelve month increase. The Company's maintenance expenses increased or (decreased) ($1.6) million, $1.1 million and $1.6 million during the three, six and twelve month periods, respectively (($1.7) million, $1.1 million and $1.4 million at Utilities), primarily due to fluctuations in maintenance activities at Utilities' fossil-fueled generating stations. The twelve month increase was partially offset by lower maintenance expenses at the DAEC. The Company's depreciation and amortization expense increased $1.4 million, $2.7 million and $8.0 million during the three, six and twelve month periods, respectively ($1.3 million, $2.7 million and $5.6 million at Utilities), primarily because of increases in utility plant in service. The twelve month increase was also due to increases in amortization costs of Whiting's oil and gas properties. Depreciation and amortization expenses for both periods include a provision for decommissioning the DAEC, which is collected through rates. The current annual recovery level is $6.0 million. During the first quarter of 1996, the Financial Accounting Standards Board (FASB) issued an Exposure Draft on Accounting for Liabilities Related to Closure and Removal of Long-Lived Assets which deals with, among other issues, the accounting for decommissioning costs. If current electric utility industry accounting practices for such decommissioning are changed: (1) annual provisions for decommissioning could increase and (2) the estimated cost for decommissioning could be recorded as a liability, rather than as accumulated depreciation, with recognition of an increase in the recorded amount of the related DAEC plant. If such changes are required, Utilities believes that there would not be an adverse effect on its financial position or results of operations based on current rate making practices. Interest Expense and Other The Company's interest expense increased $2.7 million, $4.6 million and $7.9 million during the three, six and twelve month periods, respectively ($1.8 million, $3.2 million and $2.8 million at Utilities), primarily because of increases in the average amount of short-term debt outstanding at Utilities, the average amount of borrowings under Diversified's credit facility and a higher amount of long-term debt outstanding at Utilities. The twelve month increase was partially offset by lower average interest rates, rate refund interest recorded in 1995 at Utilities and the effects of an interest rate swap agreement at Diversified. Miscellaneous, net for the Company reflects comparative decreases in income of ($2.6) million, ($4.1) million and ($11.4) million during the three, six and twelve month periods, respectively (($1.9) million, ($2.5) million and ($8.6) million at Utilities). The recording of a $2.5 million reserve for non-utility investments at Utilities contributed to the decrease for all three periods. The twelve month decrease was also 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. Dividends received from the two New Zealand entities in which the company has investments partially offset these items during the twelve month period. Income Taxes The Company's income tax expense decreased ($3.3) million, ($6.1) million and ($7.0) million during the three, six and twelve month periods, respectively (($0.3) million, ($1.8) million) and ($4.1) million at Utilities). The decreases were primarily due to 1) lower pretax income, 2) the impact of a tax deduction ($1.4 million) resulting from the contribution of 300,000 shares of the Company's investment in McLeodUSA Inc. (McLeod) to the IES Charitable Foundation and 3) reserves recorded during the first and second quarters of 1996 related to an Internal Revenue Service (IRS) audit for tax years 1991- 1993. 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 2.71 and 3.26 for the twelve months ended June 30, 1997 and June 30, 1996, respectively. Cash flows from operating activities for the twelve months ended June 30, 1997 and June 30, 1996 were $188 million and $207 million, respectively. The Company anticipates that future capital requirements will be met by cash generated from operations and external financing. The level of cash generated from operations is partially dependent upon economic conditions, legislative activities, environmental matters and timely regulatory recovery of Utilities' costs. See Notes 3 and 7 of the Notes to Consolidated Financial Statements as well as the Company's 1996 Annual Report on Form 10-K. Access to the long-term and short-term capital and credit markets, and costs of external financing, are dependent on the Company's creditworthiness. The Company's debt ratings are as follows: Moody's Standard & Poor's Utilities - Long-term debt A2 A - Commercial paper P1 A1 Diversified - Commercial paper P2 A2 The Company's liquidity and capital resources will be affected by environmental, regulatory and competitive issues, including the ultimate disposition of remediation issues surrounding the Company's environmental liabilities and the Clean Air Act as amended, as discussed in Note 7 of the Notes to Consolidated Financial Statements and the Company's 1996 Annual Report on Form 10-K, and emerging competition in the electric utility industry as discussed in the Competition section. Consistent with rate making principles of the IUB, management believes that the costs incurred for the above matters will not have a material adverse effect on the financial position or results of operations of the Company. At June 30, 1997, Utilities had approximately $66 million of energy efficiency program costs recorded as regulatory assets. See Note 3(b) of the Notes to Consolidated Financial Statements for a discussion of the recovery of these costs. At June 30, 1997, the Company had a $29.0 million investment in Class A common stock of McLeod and vested options that, if exercised, would represent an additional investment of approximately $2.3 million (1.3 million shares). McLeod provides local, long-distance and other telecommunications services. See Note 5(b) of the Notes to Consolidated Financial Statements for further information on the Company's investment in McLeod. The Company has financial guarantees amounting to $22.2 million outstanding at June 30, 1997, which are not reflected in the consolidated financial statements. Such guarantees are generally issued to support third-party borrowing arrangements and similar transactions. The Company believes that any possible cash payments associated with these agreements will not have a material adverse effect on the financial position or results of operations of the Company. The Company continues to explore domestic investment opportunities, including investments in the domestic utility business. Such investments could be significant. At June 30, 1997, the Company had approximately $46.5 million of investments in foreign entities (see Note 5(a) of the Notes to Consolidated Financial Statements for a further discussion). In addition, the Company also continues to explore other international investment opportunities. Such investments may carry a higher level of risk than the Company's traditional 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 manageable. The Resale Power Group of Iowa (RPGI), consisting of virtually all of Utilities' wholesale customers, has notified Utilities that it will not purchase its power supply from Utilities after December 31, 1998. It is possible that certain RPGI customers will drop out of RPGI in order to remain as Utilities' customers; to-date, three customers have signed contracts to remain with Utilities. All RPGI customers will continue to purchase transmission services from Utilities after December 31, 1998. While the Company cannot determine the outcome of this issue at this time, the result will not have a material adverse effect on its financial position or results of operations given 1) Utilities' wholesale sales only account for approximately 5% of Utilities' total electric sales, excluding off-system sales; 2) Utilities currently has to supplement its generating capability with purchased power to meet its sales load; 3) Utilities' annual electric sales growth rate continues to be strong; and 4) Utilities will continue to realize transmission revenues from such customers. Under provisions of the Merger Agreement, there are restrictions on the amount of common stock and long-term debt the Company can issue pending the merger. The Company does not expect the restrictions to have a material effect on its ability to meet its future capital requirements. CONSTRUCTION AND ACQUISITION PROGRAM The Company's construction and acquisition program anticipates expenditures of approximately $225 million for 1997, of which approximately $147 million represents expenditures at Utilities and approximately $78 million represents expenditures at Diversified. Of the $147 million of Utilities' expenditures, 39% represents expenditures for electric transmission and distribution facilities, 21% represents electric generation expenditures, 21% represents information technology expenditures and 5% represents gas expenditures. The remaining 14% represents miscellaneous electric, steam and general expenditures. Diversified's anticipated expenditures include approximately $75 million for domestic and international energy-related construction and acquisition expenditures. The Company had construction and acquisition expenditures of approximately $84 million for the six months ended June 30, 1997, including approximately $48 million of utility expenditures and $36 million of non-utility expenditures. The Company's levels of construction and acquisition expenditures are projected to be $208 million in 1998, $212 million in 1999, $182 million in 2000 and $198 million in 2001. It is estimated that virtually all of Utilities' construction and acquisition expenditures will be provided by cash from operating activities (after payment of dividends) for the five-year period 1997-2001. Financing plans for Diversified's construction and acquisition program will vary, depending primarily on the level of energy-related acquisitions. Capital expenditure and investment and financing plans are subject to continual review and change. The capital expenditure and investment programs may be revised significantly as a result of many considerations including changes in economic conditions, variations in actual sales and load growth compared to forecasts, requirements of environmental, nuclear and other regulatory authorities, acquisition and business combination opportunities, the availability of alternate energy and purchased power sources, the ability to obtain adequate and timely rate relief, escalations in construction costs and conservation and energy efficiency programs. Under provisions of the Merger Agreement, there are restrictions on the amount of construction and acquisition expenditures the Company can make pending the merger. The Company does not expect the restrictions to have a material effect on its ability to implement its anticipated construction and acquisition program. LONG-TERM FINANCING Other than Utilities' periodic sinking fund requirements, which Utilities intends to meet by pledging additional property, the following long-term debt will mature prior to December 31, 2001: (in millions) Utilities $ 184.0 Diversified's credit facility 190.9 Other subsidiaries' debt 11.0 $ 385.9 The Company intends to refinance the majority of the debt maturities with long-term securities. In August 1997, Utilities issued $135 million of 6-5/8% Senior Debentures, due 2009. The proceeds from these debentures were used to reduce Utilities' short-term borrowings. Utilities repaid at maturity $8 million of 6-1/8% First Mortgage Bonds during the second quarter of 1997. Also in the second quarter of 1997, Utilities issued $55 million of Collateral Trust Bonds, 6.875%, due 2007. Holders thereof may elect to have their Collateral Trust Bonds redeemed, in whole but not in part, on May 1, 2002, at 100% of the principal amount thereof, plus accrued interest. The proceeds from the Collateral Trust Bonds were used to refinance $15 million of Series L, 7.875% First Mortgage Bonds, $30 million of Series M, 7.625% First Mortgage Bonds and $10 million of 7.375% First Mortgage Bonds. In 1993, Utilities entered into an Indenture of Mortgage and Deed of Trust dated as of September 1, 1993 (New Mortgage). The New Mortgage provides for, among other things, the issuance of Collateral Trust Bonds upon the basis of First Mortgage Bonds being issued by Utilities. The lien of the New Mortgage is subordinate to the lien of Utilities' first mortgages until such time as all bonds issued under the first mortgages have been retired and such mortgages satisfied. Accordingly, to the extent that Utilities issues Collateral Trust Bonds on the basis of First Mortgage Bonds, it must comply with the requirements for the issuance of First Mortgage Bonds under Utilities' first mortgages. Under the terms of the New Mortgage, Utilities has covenanted not to issue any additional First Mortgage Bonds under its first mortgages except to provide the basis for issuance of Collateral Trust Bonds. The indentures pursuant to which Utilities issues First Mortgage Bonds constitute direct first mortgage liens upon substantially all tangible public utility property and contain covenants which restrict the amount of additional bonds which may be issued. At June 30, 1997, such restrictions would have allowed Utilities to issue at least $233 million of additional First Mortgage Bonds. In order to provide an instrument for the issuance of unsecured subordinated debt securities, Utilities entered into an Indenture dated December 1, 1995 (Subordinated Indenture). The Subordinated Indenture provides for, among other things, the issuance of unsecured subordinated debt securities. Any debt securities issued under the Subordinated Indenture are subordinate to all senior indebtedness of Utilities, including First Mortgage Bonds, Collateral Trust Bonds and Senior Debentures. In order to provide an instrument for the issuance of senior unsecured debt securities, Utilities entered into an Indenture dated as of August 1, 1997 (Senior Unsecured Indenture). The Senior Unsecured Indenture provides for, among other things, the issuance of senior unsecured debt securities. Any debt securities issued under the Senior Unsecured Indenture will rank on parity with other unsecured unsubordinated debt of the Company. Subsequent to the issuance of $135 million of Senior Debentures in August 1997, Utilities does not have any remaining authority to issue additional long-term debt under either the current FERC docket or the current Securities and Exchange Commission shelf registrations. Utilities plans to evaluate future needs for authority to issue additional long-term debt. 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 6(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 June 30, 1997, 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 June 30, 1997. The Company's capitalization ratios at June 30, 1997 were as follows: Long-term debt 53% Preferred stock 1 Common equity 46 100% 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 June 30, 1997, Utilities had outstanding short-term borrowings of $150 million. In August 1997, Utilities issued $135 million of Senior Debentures and used the proceeds to reduce Utilities' short-term borrowings. Utilities has an agreement, which expires in 1999, with a financial institution to sell, with limited recourse, an undivided fractional interest of up to $65 million in its pool of utility accounts receivable. At June 30, 1997, Utilities had sold $65 million under the agreement. At June 30, 1997, the Company had bank lines of credit aggregating $160.1 million. Utilities was using $145 million to support commercial paper (weighted average interest rate of 6.13%) 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 June 30, 1997, there was $5 million outstanding under this facility (weighted average interest rate of 5.98%). ENVIRONMENTAL MATTERS Utilities has been named as a Potentially Responsible Party (PRP) by various federal and state environmental agencies for 28 FMGP sites. Utilities has recorded environmental liabilities related to the FMGP sites of approximately $35 million (including $4.7 million as current liabilities) at June 30, 1997. Regulatory assets of approximately $35 million, which reflect the future recovery that is being provided through Utilities' rates, have been recorded in the Consolidated Balance Sheets. Considering the current rate treatment allowed by the IUB, management believes that the clean-up costs incurred by Utilities for these FMGP sites will not have a material adverse effect on its financial position or results of operations. Refer to Note 7(a) of the Notes to Consolidated Financial Statements for a further discussion, including a discussion of a lawsuit filed by Utilities seeking recovery of FMGP-related costs from its insurance carriers. The Clean Air Act Amendments of 1990 (Act) requires emission reductions of sulfur dioxide (SO2) and nitrogen oxides (NOx) to achieve reductions of atmospheric chemicals believed to cause acid rain. The acid rain program under the Act also governs SO2 allowances. The Act and other federal laws also require the United States Environmental Protection Agency (EPA) to study and regulate, if necessary, additional issues that potentially affect the electric utility industry, including emissions relating to NOx and mercury, toxic release inventories and modifications to the PCB rules. In July 1997, the EPA issued new rules pertaining to ozone and particulate matter emissions. In 1995, the EPA published the Sulfur Dioxide Network Design Review for Cedar Rapids, Iowa, which, based on the EPA's assumptions and worst- case modeling method suggests that the Cedar Rapids area could be classified as "nonattainment" for the National Ambient Air Quality Standards established for SO2. The worst-case modeling study suggested that two of Utilities' generating facilities contribute to the modeled exceedences. Utilities entered into a Consent Order with the Iowa Department of Natural Resources in the third quarter of 1997 on this issue. Pursuant to a routine review of operations, Utilities determined that certain changes undertaken during the previous three years at one of its power plants may have required a federal Prevention of Significant Deterioration (PSD) permit. Refer to Note 7(b) of the Notes to Consolidated Financial Statements for a further discussion of the above mentioned air quality issues. The National Energy Policy Act of 1992 requires owners of nuclear power plants to pay a special assessment into a "Uranium Enrichment Decontamination and Decommissioning Fund." Refer to Note 7(a) of the Notes to Consolidated Financial Statements for a further discussion. The Nuclear Waste Policy Act of 1982 (NWPA) assigned responsibility to the U.S. Department of Energy (DOE) to establish a facility for the ultimate disposition of high level waste and spent nuclear fuel and authorized the DOE to enter into contracts with parties for the disposal of such material beginning in January 1998. Utilities entered into such a contract and has made the agreed payments to the Nuclear Waste Fund (NWF) held by the U.S. Treasury, however, Utilities has since been formally notified by the DOE that they anticipate being unable to begin acceptance of spent nuclear fuel by January 31, 1998. Furthermore, the DOE has experienced significant delays in its efforts and material acceptance is now expected to occur no earlier than 2010 with the possibility of further delay being likely. Utilities is evaluating and pursuing multiple options including litigation and legislation to protect its customers and its contractual and statutory rights that are diminished by delays in the DOE program. The NWPA assigns responsibility of interim storage of spent nuclear fuel to generators of such spent nuclear fuel, such as Utilities. In accordance with this responsibility, Utilities has been storing spent nuclear fuel on-site since plant operations began in 1974 and has current on-site capability to store spent fuel until 2001. Utilities is reviewing options for expanding on-site storage and according to their current analysis, construction of an on-site storage facility with dry cask modular capability is the most favorable option. Analysis and discussion of this and other options continues. The Low-Level Radioactive Waste Policy Amendments Act of 1985 mandated that each state must take responsibility for the storage of low- level radioactive waste produced within its borders. The State of Iowa is a member of the Midwest Interstate Low-Level Radioactive Waste Compact Commission (Compact), which is responsible for any development of new disposal capability within the member states of the Compact. In June 1997, the Compact commissioners voted to discontinue work on a proposed waste disposal facility in the State of Ohio because the expected cost of such a facility was comparably higher than other options currently available. At June 30, 1997, Utilities had prepaid costs of approximately $1.1 million to the Compact. The Compact is currently evaluating its plans for the future. Utilities continues to ship the waste it produces to a disposal facility located near Barnwell, South Carolina, thereby minimizing the amount of low-level waste stored on-site. Utilities has on-site storage capability that would be available in the event of disruptions of shipments to the Barnwell facility. Whiting is responsible for certain dismantlement and abandonment costs related to various off-shore oil and gas properties. Refer to Note 7(a) of the Notes to Consolidated Financial Statements for a further discussion. OTHER MATTERS 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 June 30, 1997, the only material financial derivatives outstanding for the Company were an interest rate swap agreement at Diversified and gas futures contracts at IEA. Accounting Pronouncements SFAS 128, Earnings Per Share, was issued by the FASB in the first quarter of 1997. SFAS 128 deals with, among other issues, the computation and disclosure of earnings per share amounts when a company has stock options, warrants and/or convertible securities outstanding. SFAS 128 is effective for periods ending after December 15, 1997, and is not expected to have a material impact upon adoption. SFAS 130, Reporting Comprehensive Income, was issued by the FASB in the second quarter of 1997. SFAS 130 establishes standards for reporting of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 will require the Company to report a total for comprehensive income which includes, among other items (a) unrealized holding gains / losses on securities classified as available-for-sale under SFAS 115, (b) foreign currency translation adjustments accounted for under SFAS 52, and (c) minimum pension liability adjustments made pursuant to SFAS 87. SFAS 130 is effective for periods beginning after December 15, 1997. SFAS 131, Disclosures About Segments of an Enterprise and Related Information, was issued by the FASB in the second quarter of 1997. SFAS 131 requires disclosures for each business segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. SFAS 131 is effective for periods beginning after December 15, 1997. Joint Venture On June 11, 1997, WPLH announced the formation of a joint venture with Cargill. The joint venture, to be named Cargill-IEC, will be an energy-commodity trading company that will offer a range of energy trading, marketing and risk management services to wholesale electric customers. Power trading will begin under the joint venture upon receipt of a FERC license which is anticipated during the third quarter of 1997. Interstate Energy Corporation will ultimately be the formal partner with Cargill in the new joint venture. Inflation The Company does not expect the effects of inflation at current levels to have a significant effect on its financial position or results of operations. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On April 30, 1996, Utilities filed suit, IES Utilities Inc. v. Home Ins. Co., et al., No. 4-96-CV-10343 (S.D. Iowa filed Apr. 30, 1996), against various insurers who had sold comprehensive general liability policies to Iowa Southern Utilities Company (ISU) and Iowa Electric Light and Power Company (IE) (Utilities was formed as the result of a merger of ISU and IE). The suit seeks judicial determination of the respective rights of the parties, a judgment that each defendant is obligated under its respective insurance policies to pay in full all sums that Utilities has become or may become obligated to pay in connection with its defense against allegations of liability for property damage at and around Former Manufactured Gas Plant (FMGP) sites, and indemnification for all sums that it has or may become obligated to pay for the investigation, mitigation, prevention, remediation and monitoring of damage to property, including damage to natural resources like groundwater, at and around the FMGP sites. Settlement discussions are proceeding between Utilities and its insurance carriers regarding the recovery of these FMGP-related costs. Settlement has been reached with five carriers and an agreement in principle has been reached with three other carriers thus far. Amounts received from insurance carriers are being deferred pending a determination of the regulatory treatment of such recoveries. Industries, Diversified, IES Energy Inc. (a wholly-owned subsidiary of Diversified), MicroFuel Corporation (the Corporation) now known as Ely, Inc. in which IES Energy has a 69.40% equity ownership, and other parties have been sued in Linn County District Court in Cedar Rapids, Iowa, by Allen C. Wiley. Mr. Wiley claims money damages on various tort and contract theories arising out of the 1992 sale of the assets of the Corporation, of which Mr. Wiley was a director and shareholder. All of the defendants in Mr. Wiley's suit answered the complaint and denied liability. Industries and Diversified were dismissed from the suit in a motion for summary judgment. In addition, a grant of summary judgment has reduced Mr. Wiley's claims against the remaining parties to breach of fiduciary duty. A separate motion for summary judgment, which was filed seeking dismissal of the remaining claims against the remaining parties, was overruled on September 20, 1996, and the trial has been set for May 1998. All of the defendants are vigorously contesting the claims. The Corporation commenced a separate suit to determine the fair value of Mr. Wiley's shares under Iowa Code section 490. A decision was issued on August 31, 1994, by the Linn County District Court ruling that the value of Mr. Wiley's shares was $377,600 based on a 40 cent per share valuation. The Corporation contended that the value of Mr. Wiley's shares was 2.5 cents per share. The Decision was appealed to the Iowa Supreme Court by the Corporation on a number of issues, including the Corporation's position that the trial court erred as a matter of law in discounting the testimony of the Corporation's expert witness. The Iowa Supreme Court assigned the case to the Iowa Court of Appeals. On February 2, 1996, the Iowa Court of Appeals reversed the District Court ruling after determining the District Court erred in discounting the expert testimony. The case was remanded back to the District Court for consideration of the expert testimony, but with no additional evidence taken. The District Court re-affirmed its original decision on August 28, 1996, and the Corporation has again appealed to the Iowa Supreme Court. On October 3, 1996, Lambda Energy Marketing Company, L. C. (Lambda) filed a request with the IUB that the IUB initiate formal complaint proceedings against Utilities. Lambda alleges that Utilities is discriminating against it by refusing to enter into contracts with it for remote displacement service and by favoring IEA, a subsidiary of the Company, in such matters. On October 17, 1996, Utilities filed a Response which denied the allegations, and alleged, inter alia, that Lambda is unlawfully attempting to provide retail electrical services in Utilities' exclusive service territory. The IUB hearings were held in March 1997. A decision is expected in the third 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 (three former employees of the Company and/or its subsidiaries), collectively the "Defendants", alleging, inter alia, violations of Iowa's trade secret act and interference with existing and prospective business advantage. On November 1, 1996, the Defendants filed their Answer and Counterclaims alleging, inter alia, violation of Iowa competition law, tortious interference and commercial disparagement. The Defendants therewith also filed a Third-Party Petition against Utilities, IEA and Lee Liu, Chairman of the Board & Chief Executive Officer of Industries and Utilities, alleging, inter alia, tortious interference and commercial disparagement. On April 9, 1997, Utilities amended its suit to include Central Iowa Power Cooperative alleging that it, too, inter alia had violated Iowa's trade secret act, and had tortiously interfered with existing and prospective business advantage. Reference is made to Notes 3 and 7 of Industries' Notes to Consolidated Financial Statements for a discussion of Utilities' rate proceedings and the Company's environmental matters, respectively, and Item 2. Management's Discussion and Analysis of the Results of Operations and Financial Condition - Environmental Matters. Item 2. Changes in the Rights of the Company's Security Holders. None. Item 3. Default Upon Senior Securities. None. Item 4. Results of Votes of Security Holders. (a) The Company held its Annual Meeting of Shareholders on May 22, 1997. (b) The following matter was voted upon at the Annual Meeting of Shareholders: The election of nominees for Directors who will serve a one-year term or until their respective successors shall be duly elected. The nominees were all elected. The number of votes for, against or withheld, and non-votes for each nominee were as follows: AGAINST / FOR WITHHELD NON-VOTES C.R.S. Anderson 25,048,497 440,103 4,726,840 J. Wayne Bevis 25,146,326 342,274 4,726,840 Lee Liu 25,131,871 356,729 4,726,840 Jack R. Newman 25,127,426 361,174 4,726,840 Robert D. Ray 25,106,928 381,672 4,726,840 David Q. Reed 25,137,718 350,882 4,726,840 Henry Royer 25,140,584 348,016 4,726,840 Robert W. Schlutz 25,166,322 322,278 4,726,840 Anthony R. Weiler 25,139,887 348,713 4,726,840 Item 5. Other Information. (a) IES Utilities Inc. has calculated their ratio of earnings to fixed charges pursuant to Item 503 of Regulation S-K of the Securities and Exchange Commission as follows: For the twelve months ended: June 30, 1997 3.00 December 31, 1996 3.23 December 31, 1995 3.04 December 31, 1994 3.18 December 31, 1993 3.41 December 31, 1992 2.49 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits - 4(a) Fifth Supplemental Indenture, dated as of April 1, 1997, supplementing Utilities' Indenture of Mortgage and Deed of Trust, dated September 1, 1993. (Filed as Exhibit 4(a) to Industries' Form 10-Q for the quarter ended March 31, 1997 (File No. 1-9187)). 4(b) Sixty-third Supplemental Indenture, dated as of April 1, 1997, supplementing Utilities' Indenture of Mortgage and Deed of Trust, dated August 1, 1940. (Filed as Exhibit 4(b) to Industries' Form 10-Q for the quarter ended March 31, 1997 (File No. 1-9187)). 4(c) Commercial Paper Dealer Agreement, dated as of November 9, 1994, between IES Diversified Inc. and Citicorp Securities, Inc. (Filed as Exhibit 4(c) to Industries' Form 10- Q for the quarter ended March 31, 1997 (File No. 1-9187)). 4(d) First Amendment, dated as of March 24, 1997, to the Commercial Paper Dealer Agreement, dated as of November 9, 1994, between IES Diversified Inc. and Citicorp Securities, Inc. (Filed as Exhibit 4(d) to Industries' Form 10-Q for the quarter ended March 31, 1997 (File No. 1-9187)). 4(e) Indenture (For Senior Unsecured Debt Securities), dated as of August 1, 1997, between Utilities and The First National Bank of Chicago, as Trustee. (Filed as Exhibit 4(j) to Utilities' Registration Statement, File No. 333-32097). 10(a) Receivables Purchase and Sale Agreement dated as of June 30, 1989, as Amended and Restated as of February 28, 1997, among IES Utilities Inc. (as Seller) and CIESCO L.P. (as the Investor) and Citicorp North America, Inc. (as Agent). (Filed as Exhibit 10(a) to Industries' Form 10-Q for the quarter ended March 31, 1997 (File No. 1-9187)). *10(b) Director Retirement Plan. *12 Ratio of Earnings to Fixed Charges (IES Utilities Inc.) *27(a) Financial Data Schedule (IES Industries Inc.) *27(b) Financial Data Schedule (IES Utilities Inc.) * Exhibits designated by an asterisk are filed herewith. (b) Reports on Form 8-K - IES Industries Inc. None. IES Utilities Inc. Items Reported Financial Statements Date of Report 5 None April 28,1997 5 None July 29, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IES INDUSTRIES INC. (Registrant) Date: August 13, 1997 By /s/ Thomas M. Walker (Signature) Thomas M. Walker Executive Vice President & Chief Financial Officer By /s/ John E. Ebright (Signature) John E. Ebright Controller & Chief Accounting Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IES UTILITIES INC. (Registrant) Date: August 13, 1997 By /s/ Thomas M. Walker (Signature) Thomas M. Walker Executive Vice President & Chief Financial Officer By /s/ John E. Ebright (Signature) John E. Ebright Controller & Chief Accounting Officer EX-10 2 EXHIBIT 10(b) DIRECTOR RETIREMENT PLAN This Retirement Plan for the benefit of the Directors of IES INDUSTRIES, INC. is adopted this 1st day of February, 1994, amended November 6, 1996, and revised effective May 22, 1997, 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 except that payment shall commence 30 days following the effective date of the Merger among the Company, WPL Holdings, Inc. and Interstate Power Company for those Qualified Directors who are Directors as of May 22, 1997 and who will not be a Director as a result of the above referenced Merger. 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. 3.3 Receipt of Retirement Benefit Upon Merger With WPL Holdings, Inc. and Interstate Power Company. Subject to Paragraph 3.2 of the Article and the provisions of Article V, Qualified Directors and Qualified Inside Directors, who become Directors of Interstate Energy Corporation upon the merger of the Company with WPL Holdings, Inc. and Interstate Power Company, 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 Qualified Inside Director or to his or her Surviving Spouse. Payment of the Retirement Benefit shall commence 30 days following the effective date of the Merger among the Company, WPL Holdings, Inc. and Interstate Power Company. 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 3 EXHIBIT 12 IES UTILITIES INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Twelve Months Year Ended December 31, Ended 1992 1993 1994 1995 1996 June 30, 1997 (in thousands, except ratio of earnings to fixed charges) Net income $ 45,291 $ 67,970 $ 61,210 $ 59,278 $ 63,729 $ 61,113 Federal and state income taxes 20,723 37,963 37,966 41,095 43,092 41,248 Net income before income taxes 66,014 105,933 99,176 100,373 106,821 102,361 Interest on long-term debt 35,689 34,926 37,942 36,375 37,048 38,694 Other interest 3,939 5,243 3,630 8,085 6,666 8,214 Estimated interest component of rents 4,567 3,729 3,970 4,637 4,091 4,228 Fixed charges as defined 44,195 43,898 45,542 49,097 47,805 51,136 Earnings as defined $ 110,209 $ 149,831 $ 144,718 $ 149,470 $ 154,626 $ 153,497 Ratio of earnings to fixed charges (unaudited) 2.49 3.41 3.18 3.04 3.23 3.00 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-27 4
UT EXHIBIT 27(a) The schedule contains summary financial information extracted from the Consolidated Balance Sheet at June 30, 1997 and the Consolidated Statement of Income and the Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 0000789943 IES INDUSTRIES INC. 1,000 6-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 1,344,001 407,457 148,372 14,609 195,717 2,110,156 415,603 0 208,119 623,722 0 18,320 719,654 5,000 0 145,000 487 0 13,816 13,923 570,234 2,110,156 452,820 12,973 387,360 387,360 65,460 (926) 64,534 30,439 20,665 457 20,665 31,792 37,780 102,438 0.68 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 5
UT EXHIBIT 27(b) The schedule contains summary financial information extracted from the Consolidated Balance Sheet at June 30, 1997 and the Consolidated Statement of Income and the Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and is qualified in its entirety by reference to such financial statements. 0000052485 IES UTILITIES INC. 1,000 6-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 1,344,001 79,954 117,820 10,273 195,717 1,747,765 33,427 279,042 221,622 534,091 0 18,320 517,265 5,000 0 145,000 140 0 13,816 13,923 500,210 1,747,765 396,021 14,649 336,995 336,995 59,026 (560) 58,466 25,075 18,742 457 18,285 28,000 37,780 82,458 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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