ML20141A823

1996 Annual Rept, for Ies Utilities

ML20141A823
Person / Time
Site:	Duane Arnold
Issue date:	12/31/1996
From:	Leslie Liu, Root L IES UTILITIES INC., (FORMERLY IOWA ELECTRIC LIGHT
To:
Shared Package
ML20141A830	List: ML20141A823 ML20141A867 ML20141A904 NG-97-0841, Forwards 1996 Annual Financial Repts for Ies Utilities,Inc, Corn Belt Power Corp & Central Iowa Power Cooperative
References
NUDOCS 9705150023
Download: ML20141A823 (58)

Text

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F i oooo I oI N I eh I I O h t o o

pH AMOUNTS N TFtOUSANDS (EXCEPT PER SHARE DATA) 1996 1995 ECREASE) ( REAS }

Operating revenues. $ 973,912 $851,010 $ 122,902 14 Operating income $ 164,30N $ 151,712 $ 12,596 8 Net income . $ 60,907 $ 64,176 $ (3,269) (5) liarnings per average common share . $ 2.04 $ 2.20 $ (0.16) (7)

Dividends declared per common share $ 2.10 $ 2.10 - -

Construction and acquisition expenditures. $ 238,378 $ 218,099 $ 20.279 9 Cash flows from operating activities . $ 183,359 $ 199,831 $ (16,472) (8)

Sales of electricity to customers ((XXfs kw hL 9,953,204 9,783,514 169,690 2 Utility gas sales ((NXTs dekatherms) 42,140 39,805 2,335 6 Number of common shareholders . 27.46N 29,731 (2,263) (8)

Number of full-time employees . 2,406 2.635 (229) (9)

(n till ums enf dollars) i I nt IIr os cf f I rs) I r ti e s c n a whl i  ! r L in 9

O I'uhn n A,m4ntur a l'nhn e N,m l'nlu, s.drs us He ut! hnremb re use l'n< r twr Ash tBet "r of Snwmt

• I4M numtwrx are pn, forma ligurn ofIowa %>uthern hu amill.'Imluurm inc.. u hu h merge,I un IVvl toform II:5 Iminstna inc .

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2 f /r car Shareholders: impned electric price freeze for the customer service and cost ieductions in' M IES Industries recorded a successful next three years (excluding price the years ahead.

year in txuh decisions and performance. changes due to gosernment-mandated For 1996,in addition to pursu- i On September 5,1996, IES programs or unforeseen dramatic ing the lofty goals in cost reduction and shareholders approved the merger with changes in operation), w hich we beliese service improvement, it was also neces-WPL lloidings, Inc. and Interstate will increase our competitive advantage sary to alkicate our time and energy in Power Co., a three-way consolidation at the marketplace. The operating preparing for the integrated operation aimed at creating the new Interstate income of Whiting Petroleum, our after the merger completion. The success Energy Corporation, a regional energy major non-utility subsidiary, more than story of 1996 is described in detail in the pmerhouse. This merger will give IES doubled from the previous year. The following pages of this report. We would shareholders a large stake in a much total shareholder return for the year of like to further highlight the following larger company with excellent manage- 1996 ranked IES Industries as third in exceptiond performers among a host ment strength and growth puential. our peer group of IM companies. of successes brought about by our dedi-Your wtc of approval for this merger, Since the Energy Policy Act cated and skilled employees.

rejecting the unsolicited merger proposal enacted by Congress in 1992, our core Our nuclear pmer station, from MidAmerican Energy Co., reaf- utility business has been undergoing Duane Arnold Energy Center (DAEC),

firmed our objective in achieving long- dramatic changes anticipating deregula- in 1996 achieved 493 days of continuous term prosperity and sustainable gain in tion and competition. As new laws and operation. The following refueling out-shareholder value. We anticipate the regulations mandate a competitive future age was only 36 days, the shortest down completion of our pending merger by we, together with our merger partners, time for refueling since the plant became the end of the third quarter of 1997. are working with legislators and regula- operational in 1974. The exceptional The 1996 net income was tors to ensure that we will have equal performance at the DAEC has placed the 561 million, or $2.04 per share. opportunities at the marketplace and plant among the best in the world.

Excluding merger expenses and the we will not be disadsantaged in future Our largest fowil gererating cost of defending against the hostile competition. We believe that a lesel station, Ottumwa Unit I, in 1996 takeover, the net income wou!d hase playing field must be created for all in again achieved the distinction of being teen $2.30 per share. the energy industry. ranked as one of the most efficient in Our fourth quarter earnings internally we have long ree- the country.

rose 29 percent from the same period in ognized the importance of low energy While we respond proactively 1995, reflecting a decrease in expenses cost and high scrsice reliability for our in the chanFi ng environment of the and an adjustment to annualize depreci- customers. Last year we stated that electric utility business, we continue to ation. For the > car, our core business customer satisfaction was a major focus remain focused on the growth opportu-unit, IES Utilities, was able to con.rol in our internal restructuring effort. The nities in the disersified area. Over the expenses and to continue our growth in process improsement program initiated past decade, IES has put together an sales. Furthermore, as part of our in 1994 and implemented in 1996 will impressive portfolio of disersified busi-merger filings, we have placed a self- result in signincant improsements in nesses, including energy, transportation

Y In Novernber 1996, the Board of Directors elected Larry D. Root President & Chief Operating Officer of IES Industries and IES Utilities. Mr. Root returns from ,

retiremeest to serve in this capacity. Lee Liu contin-ues to be Chairman & Chief Executive Officer.

and teleconununications interests. Our beyond our current geographie borders. * . ;

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insesunents in Whiting Petroleum and and hase a presence in the carefully- . .

liiS Tiansportation base tonsistently selected internanonal market. We behese

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. i produced poixi returns, and the insest- that our growth strategy will position us  ;

ment in telecommunications at to ac hiese ciceptional and sustainable .. .

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Mcl cod. Inc reali/cd a sigmhcant salue for our sharehoklers. i ,

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increase in salue m 199h We intend to We want to express our deep _ L build on our history of succeu m the appreciation to you, our shareholders. -

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dnenitied area. and we will contmue to foi )our support of the formation of seek additional prowth opportunities m Interstate l'nergy Corp We are pratihed ordei to enhance our shareholder salue. by your approsal of the merger. whith -

We base incicased our pres- we are confident will proside ence in the international unlity inarket- the best sustainable long-term return '

place in 1996 by entering into a joir.t '

for your imestment. i partnership with tlie Jiasing Ci:3 Power In addition we would hke to

\

h.

llureau in China The partnership's hrst exprew our grantude to our employces ,

pioject is the ownership and operat:on f or their extraordinary ellort to under-of a coal-hred electric copeneration take the challengmg task of merger Assistant Vice President. licid facihty which produces electnca) for the integration. procew improsement and Operations, and John li.1.bnpht, as city and pn>ccu steam for the industnal reliable da)-to-da) operation. I urther- Controller & Chief Accounung Ofhcer.

customers. The city of Jiasing is one of more, we owe special thanks to those These esperiented managers will also the tastest-prowing industrial areas of u ho worked tirelenly for un merger base semor management posinons China. We are enthused with this long- sole and the takeoser def ense. The with Interm linergy Corp. once the tenu strategic businen af '.nce.12 rom userflow of enthusiasm and support inerper is completed.

this first step, we huik toruard to explor- was greatly appreciated ing moie opportumtics in the Jiasing in closing. we note changes area. At the same time we will continue in our senior management team. James with our effort to seek out other inter- E lloff man has been appointed thecu-1.ec 1.iu national opimrtunnies elsew here. tne Vice President of Il.S Industnes, t 'luarman of the lhwd A Our sision f or the future is responsible for the company's daersi- pjg,.f f m ,,7n c gig 7, a merged company with espanded hed busmess actnities in addinon.

resources, increased opnons, and broader Thomas M. Walker joined our company b opportumnes m the I'mted States and as lhecuine Vice President A (

oserseas With a tareer customer base

' Chiet Iinancial Othcci New members l.arry D. Ihnet and strooper tmancial capabihty, ue will of our senior management tea'a also pn g ,y 3 be able to access the domesne m.uket include Dundeana K.1.anpei, as Cho / ();9 raime ma < i

t E O ot o O I oooo i

lES Utilities

,:.._ IES Utilities proiides electric, natural gas

' d " Fucus or the customer has become the and steam energy to customers in more theme for IES Utilities. The company's than 550 communities across lowa. employce-driven process improvement pro-The company serves approximately gram began generating results in 1996 in j- 336.000 electric customers and 176,000 enhancing customer service and strengthen-t natural gas customers in a growing towa ing the company's competitive cost position.

senice territory. The launch of the Customer Senice Guaran-tee program reinforced the company's commitment to meeting customer needs.

n IES Energy M Whiting Petroleum Corp. is a natural gas and IES Energy companies are positioned to take

.- .) M:h oil acquisition and development company advantage of the changing enerFy market-46 T 1

based in Denser. The company focuses on place. Whiting has had a multi-year commit.

., m ,

7 developing proven and pnslucing oil and gas ment to aggressise acquisition of preven and properties. Industrial Energy Applications,

(" L e

~g O{%j * %

4 inc. (IEA) offers commodities-based and producing oil and natural gas properties. IEA and Whiting are focused on meeting cus-u; 1 sy facihtics-based energy resources and services tumerichanging needs as deregulation con-Y .. W ,j for customers. IEA serves as the exclusive tinues in the oil and gas industry and begins W marketing agent for Whiting's oil and gas. to take hold in the electricity marketplace, g g IES Investments

, A :c IES Industries has other interests in opportu- IES Investments' most significant investment

c. '

'Mp nities outside the regulated sector including is its interest in McEcod, Inc. McLeod pn>-

s 4 y telecommunications, financial investments sides bundled telecommunications services

. g; i i

. ;.g' . ;. and community development projects in and is building the town fiber optic network e

• support of IES Industrici other operations.

in conjunction with the state. IES's Melmi bh,d l, M f. t@ hp investment provides not only a potennal sig-niticant return but an opportumty to explore

• h )

wM"y options to combine energy and telecommuni-cations services.

i I

l IES Transportation hk Nk j , '4 The cornerstone of IES Transportation is The Cedar Rapids and Iowa City Railway Through its transportation companies, IES is able to offer customers a package of options, i

QC Company (CRANDIC), a short-line railroad including rail, harge and truck transportation g~ M hy 7.

~ '

yt 1 mith approximately 55 miles of track. IEl and transfer. IES is working to leverage HarFe Senices, Inc. operates a barge and those services with its utihty and other

[di ,,

M%.; f, ' , gig j;/ transfer terminal on the Mississippi River. diversified businesses. The company is

( IES Transfer Services is a distribution center also pursuing opportunities to market its 1p g#p with warehouse and transfer capabilities in Cedar Rapids.

transportation expertise to new customers.

1 IES International

y

.j%*y) y//h IES created its IES International subsidiary IES International seeks to leverage t

. .-; < 'jg in 1996 to manage its growing international its experience and expertise in energy 3

{

fn

'. M insestments in energy-related opportunities. production and delivery in overseas loca-

>,(f. '  % Q7%

. The subsidiary seeks to generate returns tions. The company is pursuing opportumtics 1,9 'yQ in growing and developing international primarily where it has existmg husiness and f THk y marketplaces To date, the company has customer contacts. By partnering with local l

' 'di t X V; investments in New Zealand and China. companies, IES International is successfully

{

b#'[ ( managinF it$ risk while navigaung hical business and regulatory processes.

_ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ _ . ~ . _ . . . _ _ _ _ _ _ . _ _ _ _ _ _ _ _

k e

5 M

as inaust,iec c<onomic desciopmeni .. Enscomm ellorts omtmue to increase energy sales .

Sen ac Area ~

1.letinc sales solumes to mdustnal customers mercased 4 I perterit mer the wl- ~

umes of IW5, the sesenth (onsecutne year -

, 7 that indusinal sales base grow n II.SN new electric mcentne pricmp program ,

V shoulJ lurther loster grow th m towa ,.

t he compans adJed innie than 4, WO .

custtliners nl IWh. ,

'Ihe two l131.ncrg) OmipalHes .ife ideall) g Ngates in w hich positioned to sene the western. tentral and .: il s i nergy southeast lineled Ntates. I rom its Cedar does business Rapids base and regional unices in Ni !.oon. ,

Atlanta,1)cmer and Phoenn, ll.A conimues to mme closer to its customers ll.N l.ncig) wmpames do busmess m 27 states  % .

~

I ollow mg its inihal Publh Otlermp in June 4 l cod iclesom IWh bis 1 cod ihqilired a telemarLeting firm nmnhanon wn he- [, ' '

and a regmnal telephone threctory pubhsher, ..

Ebe.d w w, both based m Cedar Rapah At the same Ei dme 1 J time NLLeod h.n outhned an aggressn e .

y, pfow th strateg) to lake lis hundled business and residential local phone sen h c mio g i2 slalCs in the (ofning )caIs

+

M llic ll.\ } rafnptirlJthin colnpanies af e M ('l< \Niil('~s

"~

stralegically located to sene custorners and .

hnes oiter inter -

grow mg markets CR ANDIC ollen cus- '. I connecnons to ,,

-ycg 'um"r %I+ cst torneis access to maior rail centen through ,

' " I ' c "I""

it,s attiliation with Ones incluJmg the low a

. , .s q ) w w.

j ..

Interstaic Railroad and liurhngton Northern .

Santa I e RadroaJ l1.1 liarge Senices a positioned to sene the grow mg mdustnal

' \~ f* _

Lase along the Mnsivsippi Rner. ****

M ll.\ Interildfloli.nl itKines on the P.hitic Nim ' ' ' ' g ll $ jmcIn.tnonal and Central and Nouth Amenca. uhere encry) napannviunh

.V' needs ugmticantl) outpate cunent supph. ';.~ ihe haung Ca3 The company N partnersinp in Jiaung n an entry mio one of the lastest grow mg and Chre

-(

,-[

l'ou er liure.ut haung. Muna most he n ih indtntriah/ed areas of Chma S

'Ihe company N New /caland msestment benefits f rom the pinah/ anon of thai . . ,

nanonNt lectue thstnbution setem I

QO O O t 4O O O O A Q O W O t O e

3 During 1996, these were frequently-asked questions wi'1 he able to realize susings and synergies as soon as M

IES receised from shareholders: possible after the merger is approved.

Why is it necessary for IES Industeies to merge with What will happen to my share value and disidend as WPI. Iloidings, Inc. and Interstate Power Co.?

a result of the mesger?

Our industry is undergoing fundamental transition from Based on the amended merger agreement, each share of a regulated marketplace to a more competitive environ-IES common stock will be converted into 1.14 shares of ment that will allow customers greater thoice in selecting Interstate Energy common stock. Based on the closing their energy suppliers. We beliese companies that will price of WPLII common stock on December 31,1996, succeed in the competitive marketplace will be those that each share of IES common stock is valued at $32.06 per have sufficie il resources to offer a variety of products share, llased on WPLII's current div.idend rate, it is antic-and senices and to expand beyond existing geographic

)

ipated that IES shareholders will receive an initial cash borders, both nationally and internationally. IES will be dividend of at least $2.28 for each share of IES common better positioned for the future as part of a more power-stock they ow n at the time of the merger, ful, regional company than as a stand-alone utility.

l When will the merger he completed?

past two years?

The merger is subject to the approval of several federal There were extraordinary factors that affected our net agencies, including the Federal Energy Regulatory income during that time. For example, our 1996 net incorne Commission, as well as regulatory authorities in four of $2.(M per share reflected a charge of 26 cents per share states. We have made progress in the approval procem for the costs of preparing for the company's pending Minnesota's Public Utility Commission conditionally three-way merger and expenses incurred as a result of the approved the merger in January 1997 and the FERC unsolicited merger proposal by MidAmerican Energy Co.

has set u timetable for acting on the merger. Gisen that in 1995, net income of $2.20 per share reflected a 33-cents-timetable, we anticipate completing the merFer by the per-share reduction caused by the Iowa Utilities floard's end of the third quarter of 1997. A number of integration order reducmg retail electric prices by $14.4 million.

teams from the merger partners base begun uork so we

u 4: What is IES's strategy for growth? Ilow well is IFS positiom d to compete in a deregulated 7

utility marketplace?

= ,

IES is taking steps to expand both its core utility business and its diversified businesses. At IES Utilities, we are For the past three years, IES has made significant changes continuing our long-standing commitment to economic ia its etility operations as part of a process improvement deselopment and competitive pricing, to generate sales initiative to improve its cost structure, efficiency, relia-volume growth beyond the industry average. On the bility and customer service. Such improvements will disersified side, we are leveraging our years of successful enable IES Utilities to be a stronger player in the com-experience in enerFy and transportation into new realms, petitive marketplace.

including international partnerships. fly building on our

• cxpertise and relationships, both nationally and interna- What is IES doing to make its customer sersice stand tionally, our goal is to derive a substantial portion of our out from that of possible competitors?

future income from our diversified businesses.

We have desoted a significant amount of time and effort to dramatically change how we provide service to cus-What are we doing to minimlie our risk in tomers. We are investing in training so that our employ-inte mational operations?

ces are expertly skilled and prepared to meet the diverse We are focusing our efforts on developing international needs of our customers. We initiated a Customer Senice markets where there are needs for the services of compa- Guarantee program, which prosides senice guarantees nies hke IES. We also are focused on opportunities where in those areas that are most important to customers. We we can offer services in w hich we hase expertise, includ- anticipate this program will grow in the years ahead. The ing developing energy production and delivery infrastrue- account management program is an example of how we

, ture. Lly forming kical partnerships, we can reduce capital are dedicating resources to ensure that we know our cus-commitments,. spread our risk and benefit from our tomers and their businesses The chnges that ue made partners' knowledge of kical customs and regulatory this year in our interruptible electric pricing program, in processes. We are also investigating opportunities to follow direct response to customers' requests, is another demon- ' '

our existing domestic customers into new markets, meeting stration of our focus on customer needs.

their eneryy needs as they expand into new locations.

Ooe C3 o e O o e

, he strategic merger of IES Industries, Wii??p?yq?""y:

g e WPL lloidings, Inc. and laterstate by

~,4';p

..p.jh. ,' i < /

. .. & a.

~ ~ b 5.p. - 4

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., (3 ;.

4N

7 Power Company was approsed by g .;a ,;y i%

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w m-i 4 'e,< 31-',

4

• 4'gm,J, L yn . DV shareholders of all three companies A 0 . ]j4i .

on Sept. 5,1996. Interstate Energy b ,

h "'

Corporation (IEC), with over $2 billion M in sales and $44 bilhon in assets, will q)  ;

'~

be among the top 40 electne utility I:

'unes=

companies in the United States. More ~"

4 importantly, the merger will allow IES 1

].

b. '

Q;y 775 f to achiese an overridmg objectise -to 'g >

q.,. .W; y ,y py be part of a stronger and more power- r+ - '

ful company than we could ever be hications, with the utility operations More than 1,000 shareholders standmg alone. The merger also will remaining decentralized so that IEC attended the IES Industries ennual result in a stronger complement of can remain close to its customers. The meeting on September 5. rottowing disersified businesses. We believe these business units and their hications are presentations by merger partner assets will be the engine for signincant as follows: representatives, including future grow th.

• Energy delisery and the non-regulated Each of our merger part- businew units both will be headquar-whelmingly voted to create ners brings distinct strenphs uhich, tered in Cedar Rapids. Iowa.

Interstate Energy Corp., a regional .

w ben combined, pise the merged

• Administration business unit will be energy company.

company a portfolio of(ompetencies headquartered in Dubuque. Iowa. ,

and resources that will differentiate

• Power generation will be headquartered '-

E ..

~

us f rom our competitors. in Madison Wis., as will the parent ~~ mo#

[

The merget planning process holdmg company. -

. //-

xy:

,' ~'

is already well along, with des clopment I)urmg the year, we also g .

i

of the IEC operating structure. IEC will named the top cuvutises for the utili- '

.. . s.

hase four major busmess units in three ties and the four future liiC busmess ,u_.__m_._,._ _

5 uEits. They are as follows: tise Vice President & Chief Financial ,

• Eliot G. Protsch will serve as President Officer of IES.

?,

of IES Utilities, as well t E:.ecutive As announced at the time of N4 N Vice President of the energy delivery the merger, Lee Liu, Chairman of the business unit. lie is currently Senior floard & Chief Executive Officer of hf .

/,

Vice President at Wisconsm Power IES, w ill become Chairman of IEC. ' '

and Light Co. Wayne Stoppelmoor, Chairman of '- .

• Michael R. Chase will be President interstate Power, wil'l serve as Vice .

A of Interstate Power Co. and Executive Chairman, and Erroll 11. Davis Jr.,

4 Vice President of the administration Chairman of the lloard, President and ,,,,,, ,,,,,,,,g,,, ,g ,,,w ,,,,

business unir. lie is curn'ntly Presi. Chief Executive Oflicer of WPL stoppelmoor of interstate power dent and Chief Executive Officer of lioldings, will be President and Chief Co., Erroll R. Davis Jr. of WPL Interstate Power. Executise Officer of IEC. Holdings, Inc. and Lee Liu of IES Industries Inc.) have been signifi.

• William D. liarsey will serse as Pres.i- As our merger planning pro-dent of Wisconsin Power and Light Co. gresses, we have established seseral business expansion activilles. In and Executive Vice President of Gener- integration teams, composed of employ-November, the three company ation. lie is presently Senior Vice Presi. ecs u ho are seeking information and Chairmen traveled to Jimming, <

dent, Wisconsin Power and L.ight. ideas throughout the three companies.

China, to launch IES International's

• James E. Iloffman will be President Through their efforts, we will be able newest venture.

of the aon-regulated company and also to realize savings and synergies once

^

Executive Vice President of the busi- the merger is approved. Regulatory pess deselopment unit, combining the approvals are also proceeding. The diversified activities of IES and WPL Federal Energy Regulatory Commission, lloidmps. ile is currently Executive in applying its new merger policies to Vice President of IES, its review of the IEC merger, has estab-

• Thomas M. Walker will be Executive lished a timetable that should permit the Vice President & Chief Financial merger to be completed by the end of Ofheer of II.C. lie is currently Execu- the third quarter of 1997.

l w __ . _ - _ _

1 E S U t i t i t i o a .-

- ~ '

)

.. /

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G-

,o l ,f uring 1996. we began implementing today, eser) employee is focusing on We also aw continued energy M our employec-drisen prosess improse- prosiding senice and salue in eser)- sales grow th in 1996. Results insluded.

ment initialise at II.S l tihties Inc. to thing we do.

• A 3.5 percent weather-normali/cd ensure our competitise edge oser the in 1996, we maintained increase in kilowatt-hour sales solumes, long term. As ue contmue implemen- our competitise energy prices. IliS ewluding of f-s) stem sales. tThe growth tation in 1997, IES l tilities, ib cus- l'tihties' as erage electrie industrial was 1.7 percent on an actual basis.)

tomers and IES shareholders uill begin price at 3.82 cents per kilowatt-hour,

• A 4.1 percent increase in electnc sales to reah/e benetits f rom the redesign of is among the low est in the nation and solumes to our industrial cu stomers.

tar below the national aserage of

• An increase of 5.9 percent in natural

, 4.92 cents, according to hpures reported pas sales and transportation solumes.

J'

At %* g by the Edison Electric Institute in (The increase was 1.9 percent on a MM

,,, O f' '

~

/ July 1996. weather-normalized basis )

.ifs .

7 4 IE5 Utliities' new Red Cedar Cogeneration Station in Cedar Rapids is a 23 W ,

.gg Q-- megawatt electric production facility that also supplies process steam to I. i t- ' 1 Penford Products Co. y Training at the OAEC simulator is one factor that l 4

, influenced the nuclear plant's licensed reactor operator 100 percent pass

,#s@7 .

rate in 1996 and the plant's overall outstanding performance.

Ib A 'E A our business pnicesses throughout e .*

This improsenient ellort has Mg ,

transformed how ll.S l'tihties operates _ ,

e-j and lesponds to 001 cilstoiners, l$ntplo)- - ....,,,

g e

(~

(.

~

ces are lirme the sision of our com- . ,.

4, -

pan) "to be the st ppher of choice for -  %.

its pnniuch anc en ices through out. - =

1 g . .

stanthog perform.mse and responuble

^

G cairpiir.ite citi/enship." At lhh l'Illttles '* O

~ '

E Creation of business units for processes including how we deliver energy lji" - -

.. . ,.4 and generate eiectricity was a first step in defining IES Utitities' new busi- ..

ness structure for the coming competitive environment. Liite the other units, . ..

eut energy delivery group has revamped its work processes, including dedi. .

cating crews to the maintenance anal reliability of our energy services.

A Through its Vision impact pilot, tt g

.. 4 IES Utilities is testing a compre. .

g .

, . . hensive software and technology program to enhance the company's y- x n d, responsiveness and customer

.'#. r

.L. , satisfaction. Mobile terminals connect employees with dispatch.

I -

era and customers in savoral test communities. The company will C4 ' " . p;

' .J '

launch Vision Impact systemwide 12 sag

i. C In the next year.

,p; -

[* .

y

• A signihcant increase in steam sales. A pilot program is currently underw a) 4e primarily due to the addition of a new in sescral communitiet industrial customer. To enhance the com- . .

()ur planiling for the f uture pany's delisery of criergy and includes espanded linestment in teth- customer sen ice, it.S l'tihties fiolog) to sen e custoiners' fleeds ll.S is conuihdating IX operating 1:lihties is deseloping a leadmg. edge tacihties and mstituimg an indnidual.

s)stCin IntCflatlllp outayC InililapCinCnt. i/Cd " rapid IespilndCr ss stell) bir y oik managennnt, senice calls and a tiuicker senice. The company also geographic information system The estabhshed new customer payinent '

use et mobile data teimmals will allow locations with detheated customer ser-customer senice calls to he routed sice phone hnes to replace eight tom-directly to an employ ee's customer ser- mercial oflice locations . .

s ne schule or esen to the home of an 11.5 l'nhiics lully recognizes employee w ho ines neaf the customer that custm ers tislay put the lughest ,

y Customer catisfaction is the ultimate test. In 1996,92 percent of customers surveyed expressed satisfaction with IES Utilities' .

24-hour customer service centers.

MU p r* w re w y p y m ywro m m y r#M respecting customers' property and senes as a single point for coordmating "W ' '

f, jy repairmy security lighting on cus- the resources of IES l'tilities, tailoring tomers' schedulet solutions to specihc needs and ensuring i i or our industrial customers, that energy solutions are prosided j i

IES Utilities inaugurated an account quickly, etticiently and most economi- l management approach, auigning a cally Our goal is not just to respond

dedicated account manager to each of to customers' needs, but to know their

[ our top 1,(XW) customers. I'he manager businesses so well that we anticipate

..i y Manufacturing and technology customers like Norand Company have unique needs in their energy services. IES Utilities' 20 account managers like Jan priority on reliable senice and salue- Otto provit:e single points of contact for coordinating the company's resources The way to retain customers in a com. to meet the needs of these customers. This customer. focused approach Is petitise ensironment is to offer superior vital for success in a competitive environment, senice and reli.ibihty at esceptional .

I salue. ihe changes we are making to  : ~~~. m i .

I >-

achiese those goals reflect our commit-

~

'=

ment to our custoniers, communities - '" "% . ,

- 4 g lk e and shareholders. .

y c. .

[' . e ,.

e, In Nosember, we launched

~

' ~ i IES tiilitiev Customer Senice e

" 5 s Guarantee program. another tangible .

I - 7 demonstration that we are not just talk-  ; 'gg ' . -

I Y .

ing about customer senice, but hsing /

p w it. Tlie pitigrain pian ides tiiiancial .

guarantees l'll the af eas that are W(ht

- ): . i .' i-6 Important to cusioniers-keeping senice appointments as scheduled. notifying '

them of pl. nned senice mterruptions, . . . . . . . ..

l

y IES Utilities' new electric Incentive pricing program is an extension of thJ company's long standing commitment to lowa's economic growth.

The program of incentive prices for customers who significantly increase electric load encouraged Dexter Company's $6 million expansion of its Fairfised foundry.

. . y Breaking the monopoly mindset, 13

, ' " )'

( - i . .

J q , ,

IES Utilities inaugurated a program

.- % g'7 r

..} .

~[ .

,'3

,y g

to provide financial guarantees to o;n customers c>n four of the services A  ; .

.. that they said matter most to them. .

The company's commitment to coew 0

- * . k necting service when a customer g

^ '

requests it - or making it right with r4 -

a customer -Is one of the ways IES

.- Utilities is focusing on the customer.

their needs. I arly reaction trorn cus- outage was completed in just 36 days. -

tomers has been positise. the shortest in the plant's 226 ear his- '

5!.

e -

As part of its econonne desel- tory. Prior to the outage, the plant oper- ,

opment comnutment. IF.S Utihines initi- ated continuously for a record 493 days. .

ated an electrie incentise pncing program plating it fourth in the world for reactors '

, /

z; foi customers u ho add new or increnicu- of its 1)pe I.inployees also worked tal dectne loads exceeding 100 kilow arts. safel), surpassing more than 4 5 milhon Another econonne deselopnient initiatise ernployee-hours worked without a lost- $D ..

is an enhanced markeimg support lot our time accident.

sers ice commur itie. to help them attract hgy - .

e . w a

~

f new busmesses We alu launched an .

,j jnnosatne short-term loan program for k^ -

l cornmumtles to encourage new buildmg '"

,' , .I

.g; .. . _

construction to. attract industrict - -

4 Busy customers demand innovative Another IliS l'lilities suctew '

utility service. Through an automated story was the lhiane Arnold I nerg) .- ., -

payment terminal pilot program, cus. .

Center. Ihe nuclear power plant haJ an - p -

tomers can transact business with

g. ,. .

ousunamp iv% ne piancs refuehng @!L\ o -

+-

IES aMhW convesnce.

1

4 E S E n e r 0 y , rocusin, on p,..en and producing oil and natural gas properties, Whit.

Ing Petroleum Corp. has increassed w its daily oil production by nearly ,

I-p 350 percent in the past three years.

14 liS beheses that prusidmg energy prod- At the same time. Whiting

. ucts and senices in a competitise mar- continued its strategy of asquiring and Leiplace is one of the corporation's deselopmp relatisely small domestic prcatest opportunities for rapid grow th. lields that hase oil and natural pas I

l' n a strategy that we hate actisely resenes. The business strategy is based ,

pursued through two related and comple- on buying prosen properties and then ..,

mentary businesses. Whiting Petroleum aggregating them to add salue through Corp. and Industrial 1:ncrp) Apphea- management and operational expertne.

~

tiorn. In;. IlliA) fly acquiring produrmit properties, . _ . . . _ _ . . . . . _ . _ _ . . . m_

1996 was simply an excep- Whiting amids the risk and long-term to customers at contracted prices. The tional ) ear for Whiling Petroleum. Ihe uptront costs of exploring tindesel- Company is taking steps to nutipale the company 's earnings esceeded our oped regions. In the past three years. ef fect of the wlatihty in the pas market espectations for the year and were the  % hitmpN earnings base piown by in the future.

highest smcc liiS acquired Whiting an annuali/ed rate of approsimately lliA aho made a signincant Petroleum in 1992. Ihpher 35 percent. The company also has insestmert in its natural gas supply oil and natural pas prices increased its oil and pas tesenes by sources by purchasing a gavgathering and increased pas sales con- nearly 250 percent in the past three and transportation sy stem in eastern tribu.ied to the higher profits for years. The company's od and pas Tesat The pipchne consists of 66 miles the company. resenes totaled 27 nullion barrels of of transnussion. pathermg and feeder oil equisalent at the end of 19% knes connected to IX5 wells in the While high oil and pas prices sy stem. Smce taking user operation benefited W hiting Petroleum, they of the pipeline in Nosember liiA is .

)

created a challenging year for Ilia. tocusmp on increasing resenues by e'

1)espite De lel (Inp as the cultnise cosinectirig new and existing wells to y.

l Ar 4

marketing agent for oil and natural pas the system

_.(  %@pi 3..

l g -

produced by Whitmg. liiA felt the Ilia also prosides inJustrial nun

. . impact ol hipIl pas PflCes in 1996 and conuneicial etistoiness w ith priki-8.g - @ '

and its comnutments to supply gas ucts and senices both "up to" and

. . _ ._ b

-4 in 1996, BEA completed the purchase of a natural gas gathering and transportation sys-tem in eastern Texas. The 66 miles of transmission, gathering and feeder lines connect the 185 wells on the system to transportation pipelines. In 1997, the system is expected to carry throughput of between 70 million and 100 million dekatherms of natural gas per

, 4 day. The two largest shippers on the system recently signed 10-year contracts. y m%ie**1 "insule" the plant. Those sersices cogei:eration plants.

m ,

j y q

,5 include stantib) and peaking The IES Energ) companies <w 1 Q 1 ,3 f..

,V.. -' }il peneration, cogeneration. ptopane or are working to position themsches $n J i ' (j.

W i O +  %

systerns and/or steani ptoduc tion for the f uture as the energ) industry V

f' ;d A

d We beliese there are particular esperiences lurther competithe f '[-

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1 I ", .pf opportunities in plusiding standby changes. Il S I nerg) is pursuing 0;

, . ..j

.s 04 generation to current and plospectne alban < with partners in order to .)

N manulacturing customers u hose strengthen our position in the energ) i operations require contmual and marketplace. We beliese these will _ , .. ,

uninterrupted power supplies. The continue to be numerous opportuni.

As part of its portfolio of services, compan) also is continuing to lies in this sector of the energ) BEA provides standby electric aggrewhel) pursue such "inside-the- industry. and we are conunitted to generation equipment, operations lence" lacihl)-based opportunities as being a player. and maintenance services to 20 customers at 26 sites in four l

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-- < J states. AEGON USA, Inc. relles on

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T , , , : f IEA for back up generation service

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g. . - r g, at its corporate data center in

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,l? hlI ith capabilities in short-line rail, barge

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=w 16 7 centers. CRANDic has deseloped alhances

. . ~ w, fr rN. , q#ffW transportation and transfer and ancillary .Y with railroads such as the lowa Interstate sersices, the three companies of IES Railroad and the Burlington Northem 1ransportation provide integrated solu- .

Santa Fe Railroad. CRANDIC's perfor-tions for industnal customers in the mance in the coming year also should region. IES Transportation clearly - '

benefit from new customer alhances. The W ' l demonstrates our strategy of disersify- i D - :: ' .

location of Cedar Riser Paper Co. on the

<A w y w

ing into businesses that build on s ;';;y p# . CRANDIC line, for example, demonstrates 9

existing customer relationships while ,

our success in offering integrated eco-1 prosioing opportunity tor greater returns  :.-  ; nomie deselopment packages to current than m the tradnional utility business. 1 [. _ _ ..IT. .' and potential customers.

A Although market f actors For more than 90 years, CRANDIC has been a vital transportation link for reduced earnings at The Cedar Rapids eastern Iowa companies. CRANDIC's reliable service has helped to draw and lowa City Railway Company manufacturing facilities like Cedar River Paper Co. to the area and to the IES tCRANDK') from their record 1995 lev _ utilities service territory. In 1996, CRANDIC moved its shop and repair facili-els, the short-line railroad nesertheless II88 I8 8 R8W I C8tl n i 8310W It I mak8 railcar F8 Pairs more efficiently.

Y led IES Transportation's pre-tas 19 per- -

.f.

During the year, CRANDIC

. . ~

j cent return on imestment in 1996. As .# also contiliued its insestment in

'm corn poces reached an all-time high, .

equipment to meet customeri needs.

E . ,

some of CRANblC's large prain pro- .

The company added four rebuilt loro-cessing customers reduced their corn -

motises that will allow it to handle purchases and shipments. An aggressise

~

• heasier loads of coal and grain for ,,

~

cost-control program at CRANDIC, and # '

customers in addition CH ANDIC mp . -

more stabih/ed corn prices late in 1996, ^2 leased additional boxear capacity to b.~.&.

benetiied IES Transportation's resultv ,

help serse customers.

CR ANDic contmues to prosper in addition to rail hauhng, because it cost-effectisely of fers indus- , -

IES Transportation has deseloped tw o trial customers access to mapr llS. rad _ . . .

... .. . .~ facihties that otter prmluct loading /

New buildings at its Mississippi > ' IE$ Transfer Services espanded River harbor and enhanced rela. Its service offerings in 1996 to i 2.< i tionships with its key customers ps; . ; .

Include bulk material transloading, Joelped position IEt Barge Services new trucidng services and railcar for the future. Y pro trip inspections.

~

v controlled storage facihty, which h p equipped with userhead cranes capable I M of litiing up to 45 tons, liiS Transfer  !

1 i

also offers trusking senices, railcar  ;

inspections and rail-tmtruck transfer for l l h

+

customers who lack threct rail access.

l

!!!S Transportation is continu-

[ ally lookmg for opportumties that will allow us to further deselop our tranu

portation business. As the large railroads

. . merge to fonn more national operations unIoading, transfer and storage senices. based on high solume and high4 peed ,

t lH llarge Senices located on a prhate transportation,it h likely they will want Mississippi Rner harbor in 1:ast to dnest some of their branch hnes. , .. .. , .

Dubuque, Ill, has found a niche sen ing CRANIHC. with 90 years of esperience customen who transport sush dnerse in running a short-hne r;ntroad. h in a

~

bulk produch as coal, hshmeal, salt and premier position to acqmre such branch # ..

cottonseed. Rner, truck and rail trans- hnes and operate them to proside cuv T g

portation access pnes the company a tomers with a higher lesel ut senice foundation for growth. Iwo new butid- and sathfaction.

~ .

h 9

ings bmh on the harbor thh scar already II;S Transportation a also kI

.are fully utihred thanks to long term a critical hnk in liiS's econonne dael-customer agreements. opment efforh. With ih saned transport IES Transfer Senices h the capabihties liiS Transportation can newest II.S Transportation wmpany, but pros tde customen with integrated n

it lollows that saine senlie pluh1Noph) business solutioth with the t'ase al The company prosides trandoadmg and one-stop shopping.

short-term warchousmp in ih chmate x x -.

t E S t a y o o t m o a t a 4 a

/  ;

d

[ y uring the past decade. IliS has insested it to proside additional soice and data will be an insaluable asset as li!S con-is [

.f in its future, not only in its core utility conununications sersices. The company tinually seeks to enhance its ability to business but by insestmg in companies also recently espanded into wirelew communicate and market its senices with significant growth potential. In teleconununications. In a recent Federal in a deregulated marketplace.

particular. we hase sought opportunities Communications Commission auction, ,

that complement fliS's growth strategies. Nkl. cod successfully acquired 26 U.S. . 'i '.

. - *; .d One of our most esciting endeasors Personal Conimunications Senices  ?-

recently has been the imestment in heenses in 24 Nhdwest markets, sening Nkl. cod. Inc.. a Cedar Rapidebased a potential population of approximately company that prosides h> cal and long 6.5 million people. The company also distance telecommunications senices. publishes and distributes nearly eight N1cl. cod is currently building a state- million telephone directories in 15 states s. . . . . .. . . . .

A wiJe hber optie network in conjunction and maintains a telemarketing senice McLeod has aggressively wilh the state of Iowa that v '.I enable in Cedar Rapids- expanded its tiber optic network, The Niel.e(s! strategy for building more than 2,130 miles of f grow th is excellent in its ow n right. But lines in Iowa in 1996. Through a more importantly, the N1cl. cod imest. Partnership agreement, IES ment could lit nicely uith our core ""

businew. We beliese the comergence the utility service area.

of the telecommunications and utilities Y

mdustries already has begun and we  :

.s 4 .

_-.__-i.,-m.. could emision teaming with NLt. cod

)4 A

McLeod, Inc. brcke ground in 1996 on a new technology campus in a multiplicity of new products and ser. C"l.

s Cedar Rapids. The now campus sices to current and potential customers.

headquarters will allow McLeod N1ct. cod also has honed its marketing to consoHdate most of its growing skills and esperthe in a highly-com. y ll .

business operations in one location. .

4 L E S t a t o e a o t i o a o t 1

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{ .- }!- e- increasincl> s iew' the international -

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j arena as a prmie opportunity to create shareholder salue. With prisatizations #

.ei, I r

I thioughout the Pacihe Rim and energy

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, demand exceeding supply in many I

i i parts of South America and Western 12.urope, international markets of fer i

prow th and higher returns on imest-j ments with a manageable lesel of A

risk. To encourage success, one of our in Jiaxit g, China. This $13 million IES International leverages

, strategies has been to form partnerships insestment leserages our operationa! Its utility experience to gener.

l with other cornpanies, to allow us to expertise in a rapidly-deseloping area ate returns with international 1

spread risk, reduce capital commit- that offers double-digit annual growth Partners. The company's invest-

"'*"'I"'** "*" ***'*"#**""

nients and beneht from local partners' prospects. We siew this as the first step l

i panies was followed this year i understanding of. businew tustoms in a grow mg presence in C. h.ina.

with forrnation of JIES Heat and

, and regulatory approsal procedures IliS has a strong hase of Power partnership in China, in other countries. customers with significant global y In 1995. we entered the presence and expertise, and a network New Zealand energy market through a of businew relationships and world-525 nulhon imestment in two distribu- wide contacts ll.S l'tihties has long tion companies, Powerco 1.td. and been successf ul in attracting global

. Central Power 1.td We made an addi- companies such as Cargill. Ajinomoto tional $6 nullion imestment in the and PN1N Industries to its lowa sersice .

.?h companies in 1996. territory. We intend to build on these Also in 19%.11.5 Interna- relationships. One of our strategies #"

tional extended its international presence is to follow our customers, extendmg 4 thntugh a $0-percetit joint senture existing ielatioriships to new geo-wIth the Jiaxitig ('ity Power llureati graphic hicationt

Poe t o e an oooo no IES Utilities Whiting Oil and IEA Capacity at Year-End IES Transportation l're-tax s ns Ii s f I ll rs I< r e >I <isulent in nrillioru) {in onegawatts) (> r iJ w

tu a h m' =

e a e m a m e g

E Gas Resenes n e a e E thi Rncrres a e e a m a a e w a m a w 1996 IES Utilities 1996 IES Utilities 1996 IES Utilities 1996 IES Utilities Electric Revenue Mix Electric Sales Mix Energy Source l'.lectric acity Mix (pen eau) (pcn eniI (perccruI (pen ent)

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l C o o o g o sm o o t ' o 0800000400 000 Aootyoto of t it o Doculta of Operattene and Finamelat Canditlen

'The Con.wlidated Financial Statements include the accounts with anofIES interest or stake in the issues. In January 1996, the IUU cre- y Industries Inc. (Industries) and its conwlidated subsidiaries (collec- uted its own timeline for evaluating industry restructuring in Iowa. g rively the Company). Industries' wholly-owned subsidiaries are IES included in the IUB's pmcess was the creation of a 22-member Utilities Inc. (Utilities) and IE:S Diversified inc. (Diversified). advisory panel, of which Utilities is a member. The IUB conducted public information meetings around the state of Iowa. A draft report Competition was created by the IUB staff and is expected to be finalized in the Utilities and its predominant business, electric energy generation, first quarter of 1997. The draft repost indicated that the IUB is of transmission and distribution, are in a period of fundamental change the opinion that there is no compelling reason to move quickly into in the manner in w hich customers obtain, and energy suppliers pro- restructuring the electric utility industry in lowa. However, they vide, energy services. As legislatise, regulatory, economic and tech- will continue the analysis and debate on restructuring and retail nological chaages occur, electric utilities are faced with increasing competition in Iowa.

pressure to become more competitise. Such competitise pressures As part of Utilities' strategy for the emerging and competitive could result in loss of customers and an incurrence of stranded costs power markets, Utilities, Interstate Power Company (IPC) and (i.e., the cost of assets rendered unrecoverable as the result of com. Wisconsin Power and Light Company (the utility subsidiary of WPL petitive pricing). To the extent stranded costs cannot be recovered floidings, Inc. (WPLill), and a number of other utilities have pro-from customers, they would be borne by security holders. posed the creation of an independent system operator (ISO) for The National Energy Policy Act of 1992 addresses several mat- the companies' power transmission grid. (The Company, WPLil and ters designed to promote competition in the electric wholesale power IPC have entered into a merger agreement, as discussed later.) The generation market, in April 1996, the Federal Energy Regulatory companies would retain ownership and control of the facilities, but Commission (FERC) issued final rules (FERC Orders 888 and 889), the ISO would set rates for access and assure fair treatment for largely confirming earlier proposals, requiring electric utilities to all companies seeking access. The proposal requires approsal from open their transmission lines to other wholesale buyers and sellers state regulators and the FERC. Various other proposals for ISO's of electricity. The tules became effective on July 9,1996. Utilities have

• een made by other companies and Utilities is ' monitoring filed conforming pro forma open access transmission taritTs with all such proposals. Membership in an ISO could become a condi-the FERC w hich became effective October 1,1995. In response tion of merger approval by the various regulatory bodies.

to FERC Order 88d, Utilities Gled its final pro-forma tariffs uith Utilities is subject to the provisions of Statement of Financial FERC on July 9,1996. The non-rate provisions of the tariffs were Accounting Standards No. 71," Accounting for the Effects of Certain approved on November 13,1996. I ERC has not yet ruled on the Types of Regulation"(SFAS 71). If a portion of Utilities

• operations rate provisions of the tariffs. The geographic position of Utilities' become no longer subject to the provisions of SFAS 71, as a result transmission system could proside revenue opportunities in the of competitive restructurings or otherwise, a write-down of related open access environment. Industrial Energy Applicat;ons, Inc. (IEA), regulatory assets would be required, unless some form of transition a wholly-owned subsidiary under Diversificd, received approval in cost recovery is established by the appropriate regulatory body. In the 1995 FERC proceeding to market electric power at market based addition, the Company would be required to determine any impair-

. rates. he Company cannot predict the long-term consequences of ment to other awets and write-down such assets to their fair value.

these rules on its results of operations or Gnancial condition. Utilities belieses that it still meets the requirements of SFAS 71.

FERC does not have jurisdiction over the retailjurisdiction, The Company cannot predict the long-term consequences of

'and thus the final FERC rules do not provide for the recovery of these competitive issues on its results of operations or Gnancial stranded costs resulting from retail competition. Tne various states condition, ne Company's strategy for dealing with these emerging retain jurisdiction over the question of w hether to permit retail issues includes seeking growth opportunities, continuing to offer competition, the terms of such retail competition and the recovery quality customer service, ongoing cost reductions and productivity of any portion of stranded costs that are ultimately determined by enhancements, the major objective of which is to allow Utilities to FERC and the states to have resulted from retail competition. better prepare for a competitive, deregulated electric utility industry.

The Iowa Utilities Board (IUll) initiated a Notice of Inquiry in this connection, Utilities is in the Gnal stages of a signincant (Docket No. NOI-95-1) in early 1995 on the subject of " Emerging process improvement program to improve its service levels, reduce Competition in the Elecuic Utility Industry" to address all forms of its cost structure and become more market-focused and customer competition in the electrie utility industry and to gather information oriented. (The Company's continuous improvement etTorts, in gen-and perspectives on electric competition fmm all persons or entities cral, will be an ongoing effort, howeser).

9

,, Examples of the process improvement changes being imple- wholesale price freezes to be implemented in certainjurisdictions.

3 mented are, but are not limited to: managing the business in business Refer to Notes 2 and 3 of the Notes to Consolidated Financial unit form, rather than functionally; formation of alliances with vendors Statements for additiotial information regarding the proposed of certain types of. material and/or services rather than opening most merger and the proposed price freezes.

purchases to a bidding process; changing standards and constmetion practices in transmission and distribution areas; changing certain Heaults of 0perations work practices in power plants; making investments in information The following discussion analyzes significant changes in the com-technology upgrades; and improving the method by which service ponents of net income and financial condition from the prior periods is delivered to customers in all customer classes. The specific for the Company.

changes range from simple improvements in current operations to The Company's net income decreased ($3.3) million and ($2.6) radical changes in the way work is performed and service is deliv- million during 1996 and 1995, respectively. Earnings per average cred. Some of the changes are currently in the pilot stage thus the common share declined to $2.04 in 1996 from $2.20 in 1995.

results from this evaluation period or the potential effects of the The 1996 decrease in earnings was primarily due to costs incurred pending merger could prove that some of the changes are not effi- relating to the successful defense of the hostile takeover attempt cient or effective and must be revised or eliminated. Subject to mounted by MidAmerican Energy Company (M AEC) and preparing delays causc3 by implementing any such revisions, implementation for the Company's pending three-way merger. The Company esti-of the changes began in 1996 and will continue into 1997; however, mates that the hostile takeover defense and merger costs reduced certain results will not be realized until 1997. In addition, the Com- 1996 earnings by $0.15 per share and $0.11 per share, respectively.

pany must give consideration to the potential effects of the pending The 1996 earnings benefved from increased ciectric, gas and steam merger a.; part of the implementation process so that duplication of sales at Utilities, the impact of a natural gas pricing increase imple-efforts are avoided. mented in the fourth qua-ter of 1995 and increased earnings at the Company's oil and gas subsidiary, Whiting Petroleum Corporation Propoaed Merg=r of the Company (Whiting). Increased operating expenses, higher interest expense The Company, WPLil and IPC have entered into an Agreement and and a higher etTective income tax rate also contnbuted to the decrease Plan of MerFer, as amended (Mecer Agreement), dated November in earnings in 1996. The 1995 results reflect the impact of the IUB 10,1995. As a result of the transactions contemplated by the Merger pri;c reduction order in Utilities' latest electric rate case. The effect Agreement, the combined company, Interstate Energy Corporation . of the lower electric prices, including the required refund, reduced (Interuate Energy), anticipates cost savings of approximately $749 the 1995 net income by approximately $9.7 million ($0.33 per million over a ten-year period, net of transaction costs and costs to share). Warmer than normal weather conditions during the summer achieve the savings of appmximately $14 million and $64 million, months, which LJded 50.18 to earnings, and en aggressive cost con.

respectively. The estimate of potential cost savings constitutes a tainment program partialJy offset the negative effects of the IUB forward-k oking statement and actual results may differ materially order. The 1994 results were affected by milder than normal from this estimate. The estimate is necessarily based upcm various weather, particularly during the summer months awumptions that involve judgments with respect to, among other The Company's operating income increased $12.6 million ,

things, future natitmal and regional economic and competitive and $3.8 million during 1996 and 1995, respectively, The contrast.

conditions, technological developments, inflation rates, regulatory ing relationship between the change in operating income and net treatments, weather conditions, financial market conditions, future income for 1996 was due to the hostile takeover defense costs of business decisions and other uncertainties. No assurance can be $7.8 million, w hich are included in "Mheellaneous, net" in the given that the estimated cost savings will actually be realized. Consolidated Statements of Income, higher interest expense end The merger, which is conditioned uptm, among other things, a higher effective income tax rate. The 1995 difference was also receipt of certain regulatory and governmental approvals, is due to increased interest expense and a higher effective income expected to close by the end of the third quarter of 1997. As part tax rate. Reasons for the changes in the results of operations are of the approval process, management has proposed retail and explained in the following discussion.

1 .

i Electric Operations Electric margins and Kwh sales for Utilities were as follows: y REVENUES AND COSTS 3

KWHS SOLD ON THOUSANDS) (IN THOUSANDS) 1996 1995 1994 1996 1995 1994 Residential and rural. , $ 212,799 $ 216,270 $ 199,587 2,633,704 2,680,340 2,484,089 -

General service. , 98,196 97,496 97,454 1,231,115 1,242,373 1,170,923 large general service . 213,223 199,840 191,601 5,500,606 5,283,694 4,990,890 Sales for resale and other , 30.565 29,063 30.608 587,779 577,107 645,673 Total, excluding off-system sales 554,783 542,669 519,250 9,953,204 9,783,514 9,291,575 Off-system sales . 19,490 17,802 18,077 1.231,298 1.086,121 1,137.219 Total , 574,273 560,471 537.327 11,184,502 10,869,635 10,428,794 Fuel for production (excluding steam), 74,608 90,558 81,567 Purchased power. 88,350 66,874 68,794 Margin , , ,

, $403,039 $386,966

$_411.315 Electric margins increased $8,3 million and $16.1 million lion as a result of the IUB price reduction order, of which approxi.

during 1996 and 1995, respectively. The increase during 1996 was mately $3.5 million related to revenues collected in the fourth quarter primarily due to higher sales relating to continuing sales growth in of 1994. Refer to Notes 3(a) and 3(b) of the Notes to Consolidated Utilities' service territory, lower purchased power capacity costs Financial Statements for a discussion of merger-related retail and and increased revenues due to the recovery of previously deferred wholesale electric price proposals that Utilities has announced and energy efHeiency expenditures. These increases were partially off- the energy efGciency cost recoveries, respectively, set by a true-up adjustment to Utilities' unhilled sales recorded in Under historically normal weather conditions, total sales 1995 and lower sales to residential and rural customers during 1996, (excluding off-system sales) during 1996 and 1995 would have primarily due to cooler weather conditions during the summer of increased 3.5% and 3.6%, as compared to actual increases of 1996 as compared to the summer of 1995. The 1995 electne margin 1,7% and 5.3%, respectively.

increase was primarily due to higher sales due to a significantly Utilities' electric tariffs include energy adjustment clauses (EAC) warmer summer in 1995 as compared to 1994, sales growth, the that are designed to currently recover the costs of fuel and the energy unbilled sales adjustment, lower pure! ased power capacity costs portion of purchased power billings to customen. See Note 1(k) of the and Se recovery of energy efficiency costs. These increases were Notes to Consolidated Financial Statements for discussion of the EAC, partially offset by a reduction in revenues of approximately $17 mil-Gas Operations

, Gas margins and dekatherm sales for Utilities and IEA were as follows:

REVENUES AND COSTS DTHS SOLD CN THOUSANDS)

CN THOUSANDS)

. 1996 1995 j994 1996 1995 1994 Utilities-Residential , $ 97,708 $ 84,562

$ 82,79.' 17,680 16,302 15,766 Commercial . 46,966 40,390 40,912 10,323 9,534 9,298 Industrial , 12,256 8,790 12.515 3,796 3.098 4,010 Transportation and other , 3,934 3.550 2.811 10.341 10.871 8,901 Total Utilities , 160,864 137,292 139,033 42,140 39,805 37,975 IEA 113,115 53,047 26,536 43,055 31,916 14,443 Total . , , 273,979 190,339 165,569 85,195 71,721 52,418 Gas purchased for resale, 217,351 141,716 120,795 Margin . , , , $ 56,628 5 48,623 $ 44,774

{

\

Total gas margins increased $8.0 million and $3.8 million Center (DAEC), Utilities' nuclear generating facihty. The 1995 3

g during 1996 and 1995, respectively. The 1996 increase was primar- increase was also due to costs relating to the Company's pmcess ily due to an annual increase of $6.3 million in Utilities' gas rates improvement program, partially offset by lower nuclear operating that was implemented in the fourth quarter of 1995, recovery of and insurance costs at Utilities, decreased costs resulting from the Utilities' previously deferred energy efliciency expenditures and the sale of the Diversified subsidiaries and a cost-cutting effort imple-increased sales, largely the result of more favorable weather condi- mented after the receipt of the IUB electric price reduction order tions in 1996. While IEA's gas sales were up significantly in 1996, earlier in 1995.

their margins actually decreased due to iluctuations in gas prices Maintenance expenses increased or (decreased) $2.9 million and and the competitiveness of the gas marketing business.Therefore, ($6.7) million during 19% and 1995, respectively. The 1996 increase this decrease partially offset the increase in Utilities' margin. The was due to increased maintenance activities at Utilities' fossil-fueled 1995 margin increase was primarily due to the price increase at generating stations, partially offset by lower maintenance expenses Utilities mentioned above, recovery of Utili:ies' previously deferred at the DAEC.The 1995 decrease was due to lower maintenance energy efficiency espenditures and higher IEA gas margins resulting expenses at the DAEC and at Utilities' fossil fueled generating from increased volumes sold due to heightened marketing efforts stations as well as the cost containment actions discussed above.

as well as expanding into additional regional markets. Depreciation and amortization increased $9.4 million and Under historically normal weather conditions. Utilities' gas $11.6 million in 1996 and 1995, respectively, because of increases sales and transported volumes would have increased 1.9% and 3.5% in utility plant in service, the acquisition of oil and gas operating in 1996 aral 1995, as compared to actual increases of 5.9% and properties and amortization costs relating to the future dismantle-4.8%, respectively. ment and abandonment of Whiting's offshore oil and gas properties.

Utilities' gas tariffs include purchased gas adjustment clauses (See Note 13(f) of the Notes to Consolidated Financial Statements (PGA) that are designed to currently recover the cost of gas sold, for a further discussion of the dismantlement and abandonment costs)

See Note 1(k) of the Notes to Consolidated Financial Statements for The 1995 increase was partially offset by lower depreciation rates discussion of the PGA. implemented at Utilities as a result of the IUB electric price reduction order. Depreciation and amortization expenses for all periods include Other Revenues a provision for decommissioning the DAEC, which is collected Other revenues m.ereased $25.5 million and $17.2 million during through rates. The current annual recovery level is $6.0 million.

1996 and 1995, respectively, primarily because of m.ereased rev.

. . . During the first quarter of 1996, the Financial Accounting ennes at Whiting due to increases m od and gas prices and m.ereased

. . Standards Board (FASB) issued an Exposure Draft on Accounting gas volumes sold during 1996, and .mereases m od and gas volumes for Liabilities Related to Closure and Removal of Long-Lived Assets sold in 1995. An increase in Utilities' steam revenues also contributed which deals with, among other issues, the accounting for decommis-to the increase in both years. The steam volumes sold m.ereased s.ig-sioning costs. If current electric utility industry accounting practices nificantly during 1996 and 1995 primarily due to the addition of a for such decomrnissioning are changed: (1) annual provisions for new industrial customer. The 1995 merease was partially offset as decommissioning could increase relative to 1996 and, (2) the esti-a result of the sale of several of Diversified's subsidiaries during mated cost for decommissioning could be recorded as a liability. .

1995 and 1994. The operations of the subsidiaries that were sold rather than as accumulated depreciation, with recognition of an were not significant to the results of operations or financial position increase in the recorded amount of the related DAEC plant. If such of the Company.

• changes are required, Utilities believes that there would not be an Operating Expenses adverse effect on its financial position or results of operations based Other operating expenses increased $13.4 million and $24.5 million on current rate making practices. See Note 1(g) of the Notes to in 1996 and 1995, respectively. Contributing to the increase in both Consolidated Financial Statements for a discussion of the recovery periods were increased operating activities at Whiting and IEA. of decommissioning costs allowed in Utilities' most recent rate case.

iacreased labor and benefits costs at Utilities, increases in the amor- Taxes other than income taxes increased or (decreased) ($0.8) tization of previously deferred energy efficiency expenditures at million and $2.7 million during 1996 and 1995, respectively, largely Utilities (which are currently being recoscred through rates) and due to changes in property taxes at Utilities caused by fluctuations costs relating to the pending merger. The 1996 increase was partially in assessed property salues. The 1996 decrease was partially offset offset by decreased operating expenses at the Duane Arnold Energy by an increase in pmduction taxes at Whiting.

I l

Interest Expense and Other The 1996 decrease was pnmarily due to the timing of income tax 3 Interest expense increased $41 rc,on and $4.7 million in 1996 payments and other changes in working capital. The 1995 decrease 3 and 1995, respectively, p%dy wme of increases in the average was primarily due to expenditures related to the 1995 DAEC refuel-amount of short-term ca a.:,w:..ma at Utilities and the average ing outage and other changes in working capital.

amount of borrowi.ngs under Diversitied's credit facility. Lower The Company anticipates that future capital requirements will average interest rates, partially attributable to refinani mg-term be met by cash generated from operations and external financing.

debt at lower rates and the mix of long-term and I debt. The level of cash generated from operations is partially dependent partially offset the increases for both periods. The iweas in inter- upon economie conditions, legislative activities, environmental mat-est expense during 1996 was also due to a higS artmni of long- ters and timely regulatory recosery of Utilities' costs. See Notes 3

. term debt outstanding at Utilities, partially ofi.et by : a r: fund and 13 of the Notes to Consolidated Financial Statements.

interest recordad in 1995 at Utilities and the eft .c interest Access to the forg-term and short tenn capital and credit mar-rate swap agreement discussed in Note 12(a) of tc t Con- Lets, and costs of external financing, are dependent on the Company's solidated Financial Statements. creditworthiness. The Company's debt ratings are as follows:

Misettlaneous, net reflects comparative decreases in income of uooDv S STANDARD

($5.5) million and (50.3) million during i N6 and 1995, respectively. &PM S The 1996 decrease was primarily due to approximately $7,8 mil- Utilities -long-term debt A2 A lion in costs incurred relating to the successful defense of the hostile -Commercial paper Pl Al takeover attempt mounted by MAEC and certain property write. Diversified -Commercial paper P2 A2 downs at Diversified. Tir deccease was partially offset by dividends received from the two New Zealand entities in which the company Utilities' credit ratings are under review for potential upgrade related to the pending merger.

has equity investmers and various gains realized on the disposition The Company's liquidity and capital resources will be affected of assets. The 1995 decrease was primarily because of higher fees by environmental, regulatory and competitive issues, including the associated with an increase in the average amount of utility accounts ultimate disposition of remediation issues scrrounding the Com-receivable sold. partially offset by various gains re dized on the sale of seseralin estments by Diversified. panfs envimnmentalliabilities and the Clean Air Act as amended, as discussed in Note 13 of the Notes to Consolidated Financial Fed:r ..I and State income Taxes Statements, and emerging competition in the electric utility industry Federal and state income taxes increased $4.9 million and $0.9 mil- as discussed in the Competition section. Consistent with rate making l

lion in 1996 and 1995, respectively. The increase for both periods principles of the IUB, management believes that the costs incurred was due to a higher effective tax rate resulting from: 1) the effect for the above matters will not have a material adverse effect on the of property related temporary differences for which deferred taxes Gnancial position or results of operations of the Company, had not previously been provided in rates, pursuant to rate making At December 31,1996, Utilities had approximately $61 million principles, that are now becoming payable and are being recovered of energy efficiency program costs recorded as regulatory assets.

from rate payers and 2) adjustments to tax reserves. The 1996 See Note 3(b) of the Notes to C(msolidated Financial Statements for increase in effective tax rate was also due to recording the impacts a discussion of the timing of the filings for the recovery of these of a tentatise internal Revenue Service audit settlement for tax costs under IUU rules and Iowa statutory changes recently enacted

. years 1991-1993 as well as the incurrence of certain merger-related relatmg to these programs.

expenses, which are not tax deductible. At December 31,1996, the Company had a $20.0 million investment in Class A common stock of McLeod, Inc.(McLeod),

! L1euidity and CapItaI Resourcea a $9.2 million investment in Class 13 common stock and vested The Company's capital requirements are primarily attnbutable options that, if exercised, would represent an additional investment to Utilities' construction programs, its debt maturities and the lesel of approximately $2.3 million. McLeal provides kical,long-distance of Dnersified's business opportunities. The Company's pretas ratio and other telecommunications services. See Notes 6(b) and 11 of of times interest earned was 2.99,3.12 and 3 38 in 1996-1994. .e Notes to Consolidated Financial Statements for further informa-respectisely. Cash flows from operating activities were $183 mil- tion on the Company's imestment in McLeod.

lion, $200 million and $217 milhon in 1996 199-8, respectively.

l

3 The Company has financial guarantees amounting to $22.9 mil- information t-chnology expenditures and 5% represents gas expen-g lion outstanding at December 31,1996, which are not renected in ditures. The remaining 14% represents miscellaneous electric, steam the consolidated financial statements. Such guarantees are generally and general expenditures. Diversi0ed's anticipated expenditures issued to support third-party borrowing arrangements and similar include approsmately $75 million for domestic and international j transactions. The Company belieses that the likelihood of material energy-related construction and acquisition expenditures.

cash payments by the Company under these agreements is remote. The Company's levels of construction and acquisition expen.

The Company increased its investments in foreign entities by ditures are projected to be 5208 million in 1998, $212 million in approximately $20 million in 1996 (see Note 6(a) of the Notes to 1999, $182 million in 2000 and 5198 million in 2001. It is esti-Consolidated Financial Statements for a further discussion). The mated that virtually all of Utilities

• construction and acquisition Company also continues to explore other international investment expenditures will be provided by cash from operating activities (after opportuniues. Such investments carry a higher level of risk than the payment of dividends) for the five-year period 1997-2001. Financing Corr.pany's traditional utility imestments or Diversified's domestic plans for Diversined's construction and acquisition program will investments. Such risks could include foreign government actiom, vary, depending primarily on the level of energy-related amuisitions.

foreign economic and currency risks and others. The Company may Capital expenditure and investment and financing plans are also incur business development expenses for potential projects pur. subject to continual review and change. The capital expenditure sued by the Company that may never materialize. The Company and investment programs may be revised signincantly ss a result is striving to select international investments where these risks are of many considerations including changes in economic conditions, both understood and minimited. variations in actual sales and load growth compared to forecasts, The Resale Power Group of Iowa (RPGI), consisting of virtu- requirements of environmental, nuclear and other regulatory authori, ally all of Utilities

• w holesale customers, has notified Utilities that it ties, acquisition and business combination opportunities, the avail-will not purchase its power supply from Utdities after December 31, ability of alternate energy and purchased power sources, the ability 1998. It is possible that certain RPGl customers will drop out of to obtain adequate and timely rate relief, escalations in construction RPGI in order to remain as Utilities' customers. RPGl will continue costs and conservation and energy efficiency programs.

to purchase transmission services from Utilities after December 31, Under provisions of the Merger Agreement, there are restric-1998. While the Company cannot determine the outcome of this tions on the amount of construction and acquisition expenditures issue at this time, the result will not have a rnaterial adverse effect the Company can make pending the merger. The Company does on its financial position or results of operations given 1) Utilities' not expect the restrictions to have a material effect on its ability wholesale sa' .s only accounted for approximately 5% of Utilities

• to implement its anticipated construction and acquisition program, total 1996 electric sales, excluding off-system sales; 2) Utilities cur-rently has to supplement its generating capability with purchased L o n g.Te r m Flnancing power to meet its sales load; and 3) Utilities' annual electric sales Other than Utilities' periodic sinking fund requirements, which growth rate continues to be strong. Utilities intends to meet by pledging additional property, the follow-Under provisions of the Merger Agreement, there are restrictions ing long-term debt will mature prior to December 31,2001:

on the amount of common stock and long-term debt the Company ON uwoNsi

• can issue pending the merger. The Company does not expect the Ut I ties. $ 207.2 restrictions to hase a material effect on its ability to meet its future Diversified's credit facihty 172.1 capital requirements. .

Other subsidiaries' debt. I 1.2

$390.5 Construction and Acquisition Program The Company's construction and acquisition program anticipates The Company intends to refinance the majority of the debt expanditures of approximately 5225 million for 1997, of w hich maturities with long-term securities.

approxmtely 5147 million represents expenditures at Utihties and In September 1996, Utilities repaid at maturity $15 million of approximatch 578 inillion represents expenditures at Diversified-Series J,6.25% First Mortgage Bonds and, in a separate transaction, Of the 5147 million of Utdities' expenditures,39% represents issued $60 million of Collateral Trust fionds,7.25%, due 20(.6.

expenditures for electric transmission and distribution facilities.

21% represents electric generation expenditures,21% represents

l l

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l .

Utilities has entered into an Indenture of Mongage and Deed 5.000,000 shares of Cumulative Preferred Stock, no par value, y l of Trust dated September 1,1993 (New Mortgage). The New authorized for issuance, none of which were outstanding at g l Mortgage provides for, among other things, the issuance of Collateral December 31,1996.

Trust Bonds upon the basis of First Mo tgage Bonds being issued he Company's capitalization ratios at year nd were as follows:

by Utilities.The lien of the New Mortgage is subordinate to the lien 1996 1995 of Utilities' first mongages until such time as all bonds issued under long-term debt. . 52 % 49 %

the first mortgages have been retired and such mortgages satisfied.

Preferred stock . , , 1 2 Accordingly, to the extent that Utilities issues Collateral Trust Common equity . . 47 49 Bonds on the basis of First Mortgage Bonds, it must comply with 100 % 100 %

the requirements for the issuance of First Mortgage Bonds under Utilities' first inortgages. Under the terms of the New Mortgage, Under provisions of the Merger Agreement, there are restrictions Utilities has covenanted not to issue any additional First Mortgage on the amount of common stock and long-term debt the Company.

Bonds under its first mortgages except to provide the basis for can issue pending the merger. He Company does not expect the issuance of Collateral Trust Bonds. restrictions to have a material effect on its ability to meet its future The indentures pursuant to which Utilities issues First Mortgage capital requirements.

Bonds constitute direct first mortgage liens upon substantially all tangible public utility property and contain covenants which restrict Short Term F3nancing the amount of additional bonds which may be issued. At December For interim financing, Utilities is authorized by the FERC to issue,

! 31,1996, such restrictions would have allowed Utilities to issue at through 1998, up to $200 million of short-term notes. In addition least $241 million of additional First Mortgage Bonds. to providing for ongoing working capital needs, this availability in order to provide an instrument for the issuance of unsecured of short-term financing provides Utilities flexibility in the issuance subordinated debt securities, Utilities entered into an Indenture dated oflong-term securities. At December 31,1996, Utilities had out-December 1,1995 (Subordinated Indenture). The Subordinated standing short-term borrowings of $135 million.

Indenture pmvides for, among other things, the issuance of unsecured Utilities has an agreement, which expires in 1999, with a i

subordinated debt secunties. Any debt securities issued under the financial institution to sell, with limited recourse, an undivided frac-Subordinated Indenture are subordinate to all senior indebtedness of tional interest of up to $65 million in its pool of utility accounts Utiitties, including First Mortgage Bonds and Cellateral Trust Bonds. receivable. At December 31,1996, Utilities had sold $65 million l

Utilities has received authority from the FERC and the SEC to under the agreement. Refer to Note 5 of the Notes to Consolidated issue up to $250 million of long-term debt, and has $190 million of Financial Statements for a further discussion of this agreement, remaining authority under the current FERC docket through April including the issuance of a new accounting standard which impacts

1998, and $140 million of remaining authority under the current the accounting for the sales.

! SEC shelf registration. At December 31,1996, the Comoany had bank lines of credit Diversified has a variable rate credit facility that extends aggregating $136.1 million. Utilities was using $110 million to sup-through November 20,1999, with two one-year extensions poten- port commercial paper (weighted ave, age interest rate of 5.70%)

tially available to Diversified. Refer to Note 10(a) of the Notes to and $11.1 million to suppori certain pollution control obligations.

l Consolidated Financial Statements for a further discussion of this Commitment fees are paid to maintain these lines and there are no

' ' credit facility. conditions which restrict the unused lines of credit in addition to The Articles of Incorporation of Utilities authorize and limit the above, Utilities has an uncommitted credit facility with a finan-the aFgregate amount of additional shares of Cumulative Preference cial institution whereby it can boww up to $40 million. Rates are Stesk and Cumulative Preferred Stock that may be issued. At Dec- set at the time of borrowing and no fees are paid to maintain this ember 31,1996, Utilities could have issued an additional 700.000 fac lity. At December 31,1996, there was $25 million outstanding shares of Cumulative Preference Stock and 100,000 additional under this facility (weighted average interest rate of 6.28%).

shares of Cumulative Preferred Stock. In addition. Industries had i 1 I l

1 e

3 Environmentai Matters The Nuclear Waste Policy Act of 1982 assigned responsibility g Utihties has been named as a Potentially Responsible Party (PRP) to the U.S. Department of Energy (DOE) to establish a facility for by various federal and state environmental agencies for 28 Former the ultimate disposition of high level waste and spent nuclear fuel Manufactured Gas Plant (FMGPJ sites. Utilities has recorded envi- and authorized the DOE to enter into contracts with parties for the ronmental liabilities related to the FMGP sites of approximately disposal of such material beginning in January 1998. Utilities

$36 million (including $4.7 million as current liabilities) at Dec- entered into such a contract and has made the agreed payments to ember 31.1996. Regulatory assets of approximately $36 million, the Nuclear Waste Fund (NWF) held by the U.S. Treasury. The which reflect the future recovery that is being provided through DOE, however, has experienced significant delays in its efforts and Utilities

• rates, have been recorded in the Consolidated Halance material acceptance is now expected to occur no earlier than 2010 Sheets. Considering the current rate treatment allowed by the IUB, with the possibility of further delay being likely. Utilities has been management believes that the clean-up costs incurred by Utilities storing spent nuclear fuel on-site since plant operations began in for these FMGP sites will not have a material adverse effect on its 1974 and has current on-site capability to store spent fuel until 2001.

linancial position or results of operations. Refer to Note 13(f) of the Utilities is aggressively reviewing optiens for expanding on-site Notes to Consolidated Financial Statements for a further discussion, storage. Utilities has been formally notilled by the DOE that they includmg a discussion of a lawsuit filed by Utilities seeking recovery anticipate being unable to begin acceptance of spent nuclear fuel by of FMGP-related costs from its insurance carriers. January 31,1998. Utilities is evaluating courses of action to protect The Clean Air Act Amendments of 1990 (Act) requires emis- the interests of its customers and its rights under the DOE contract.

sion reductions of sulfur dioxide (502) and nitrogen oxides (NOx) Utihties is also evaluating legislation proposed to the Congress to achiese reductions of atmospheric chemicals believed to cause addressing this issue. In July 1996, the IUB initiated a Notice of acid rain. The acid rain program under the Act also governs SO2 Inquiry (NOI) on spert nuclear fuel. One purpose of the NOl was allowances. The Act and other federal laws also require the United to evaluate whether the current collection of money from Utilities' States Environmental Protection Agency (EPA) to study and regu- customers for payment to the NWF should be placed in an escrow late, if necessary, additional issues that potentially affect the electric account in lieu of being paid to the NWF. Utilities believes that the utility industry, including emissions relating to NOx, ozone trans- issue of using an escrow account should be decided at the federal port, mercury and particulate control; toxic release inventories and level rather than the state level. Utilities cr.nnot predict the outcome modifications to the PCB rules. of this NOI.

In 1995, the EPA published the Sulfur Dioxide Network The 1.ow-1.evel Radioactive Wr ste Policy Amendments Act of Design Review for Cedar Rapids, lowa, which, based on the EPA's 1985 mandated that each state mus take responsibility for the stor-assumptions and worst-case modeling method suggests that the age of low-level radioactise waste produced within its borders. The Cedar Rapids area could be classified as "nonattainment" for the State of Iowa has joined the Midwest interstate low-Lesel Radio-National Ambient Air Quality Standards established for SO2. The active Waste Compact Commission (Compact), w hich is planning worst-case modeling study suggested that two of Utilities' generat- a storage facility to be kicated in Ohio to store waste generated by ing facilities contribute to the nuleled exceedences, the Compact's six member states. At December 31,1996, Utilities Pursuant to a routine review of operations Utilities determined has prepaid costs of approximately $1.1 million to the Compact for -

that certain changes undertaken during the previous three years at the building of such a facdity. A Compact disposal facility is antici-one of its power plants may hasc required a federal Prevention of pated to be in operation in approximately ten years after approval of Significant Deterioration (PSD) p?rmit. Refer to Note 13(F) of the new enabling legislation by the member states. Such legislation was Notes to Consolidated Financial Statements for a further discussion approved in 1996 by all six states that are members of the Compact.

of the above mentioned air quahty issues. Final approval by the U,S. Congress is now required. On-site storage The National Energy Policy Act of 1992 requires owners of capability currently exists for low-level radioactive waste expected nuclear power plants to pay a special assessment into a " Uranium to be Fenerated until the Compact facility is able to accept waste Enrichment Decontamination and Decommissioning Fund." Refer materials. In addition, the Barnwell, South Carolina disposal facility to Note 13(f) of the Notes to Consolidated Financial Statements has reopened for an indefinite time period and Utilities is in the for a further discussion.

l

I i

e process of shipping to Barnwell the majority of the low-level radio-Financial Derivathes ,

active waste it has accumulated on site, and currently intends to The Company has a policy that financial derivatives are to be used . g l l . ship the waste it produces in the future as long as the Barnwell site only to mitigate business risks and not for speculative purposes 1

j. remains open, thereby minimizing the amount of low-level waste Derivatives have been used by the Company on a very limited basis.

stored on-site. Ilowever, management of the Barnwell site has mod- At December 31.1996, the only material financial derivatives out- )

ined its fee schedule to emphasize total radioactivity content and standing for the Company were the interest rate swap agreement (

weight. instead of the histori'c al volume related fees. Utilities is and gas futures contracts described in Note 12 of the Notes to -I evaluating the outcome of these changes on its potential future dis- Consolidated Financial Statements.

posal costs at the Barnwell site; such changes could result in a revi- l h

sion to Utilities' future disposal plans.

Utilities does not expect the effects of inflation at current les els -

. The possibiSty that exposure to electric and magnetic fields . .

to have a s.ignificant etfeet on its financial position or results of (EMF) emanating from power lines, household appliances and other .

operations.

electric sources may result in adverse heahh effects has been the subject of increased public, governmental, industry and media atten-Selected Consolidated Quarterly tion. A recent study completed by the National Research Council concluded that the current body of evidence does not support the Financial Data (unaudited) .

The following unaudited consolidated quarterly data, m the opinion notion that exposure to these fields may result in adverse health of the Company, m.cludes adj.ustments, which are normal and recur-effects. Utilities will continue to monitor the events in this area, . . .

. . . nng in nature, necessary for the fair presentation of the results of mcluding future scientific research. .

operations and financial position. Utilities' results of operations are a Whiting is responsible for certain dismantlement and abandon- . .

sigmficant portion of the consolidated results.The quarterly amounts ment costs related to various off-shore oil and gas properties. Refer .

were affected by, among other i.tems, Utilities' rate activities, seasonal to Note 13(f) of the Notes to Consolidated Financial Statements for .

weather conditions, changes in sales and operating expenses and i a further discussion. .

i costs incurred relating to the successful defense of the hostile take-

! over attempt mounted by MidAmerican Energy Company. Refer to Other Matters Management's Discussion and Analysis of the Results of Operations labor Issues and Financial Condition for a discussion of these items. The fourth Utilities has six collective bargaining agreements, covering approxi-quarter of 1996 net income benefited from lower than anticipated mately 54% of its workforce. None of the agreements expire in 1997.

costs for a refueling outage at Utih. . ties' nuclear power plant.

OUARTER ENDED ON T>OUSANDS. EXCEPT PER SHARE AMOUNTS) MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 l 1996

( Operating revenues. . . . .. .. ... .. . $ 243,197 $210,648 $ 233,907 $ 286,160 l > Operating income. . ... .. .. . . 36,995 26,770 55,701 44,842 Net income. . . . . . . .. . .. . . 14,095 8,056 20,889 17,867 Earnings per average common share. .. .. . . 0.48 0.27 0.70 0.59 1995

, Operating revenues. . ... . . .. . $206,392 $189.447 $238,467 $216.704 I Operating income. . . . . . . .. .. . .. ... 22,115 33.456 63.710 32,431 l Net income. . . . . .. .. . .. ... ... . . . . 6,740 12,508 31,120 13.808 Earnings per average common share. . . .. .. . . .. . .. 0.23 0.43 1.06 0.48

(

, . . . . . . , _ _ , _ .. _ . . _ . . _ _ 4

0000t4 Of 1000D00000t Qoport of 000000mo04 Pubtle Aeeaustante 3 To the Board of Directors of IES Industries Inc.: The Company's management has prepared and is responsible for the 3 We have audited the accompanying consolidated balance sheets and presentation, integrity and objectivity of the consolidated financial statements of capitalization of IES Industries Inc. (an Iowa corpora- statements and related information included in this report. The con-tion) and subsidiary companies as of December 31,1996 and 1995, solidated financial statements have been prepared in conformity and the related consolidated statements of income, retained earnings with generally accepted accounting principles applied on a consis-and cash flows for each of the three years in the period ended tent basis and,in some cases, include estimates that are based upon December 31,1996. These financial statements are the responsibil- management's judgment and the best available 'information, giving ity of the Company's management. Our responsibility is to express due consideration to materiality. Financial information contained an opinion on these financial statements based on our audits. clsewhere in this report is consistent with that in the consolidated We conducted our audits in accordance with generally accepted financial statements.

auditing standards. Those standards require that we plan and per. The Company maintains a system of internal accounting con-form the audit to obtain reasonable assurance about whether the trols which it believes is adequate to provide reasonable assurance financial statements are free of material misstatement. An audit that assets are safeguarded, transactions are executed in accordance includes examining, on a test basis, evidence supporting the with management authorization and the financial records are reliable amounts and disclosures in the financial statements. An audit also for preparing the consolidated financial statements. The system of includes assessing the accounting principles med end significant internal accounting controls is supported by written policies and estimates made by management, as well as evaluating the oserall procedures, by a stafT of internal auditors and by the selection and f'mancial statement presentation. We believe that our audits provide training of qualified personnel. The internal audit staff conducts a reasonable basis for our opinion. ca  ; ensive audits of the Company's system of internal account-In our opinion, the financial statements referred to above pre- in3 cv . mis. Management strives to maintain an adequate system sent fairly, in all material respects, the financial position of IES of internal controls, recognizing that the cost of such a system should Industries Inc. and subsidiary companies as of December 31,1996 not exceed the benefits derived. In accordance with generally and 1995, and the results of their operations and their cash flows for accepted auditing standards, the independent public accountants each of the three years in the period ended December 31,1996, in (Arthur Anderse I LP) obtained a sufficient understanding of the conformity with generally accepted accounting principles. Company's internal contruis to plan their audit and determine the nature, timing and extent of other tests to be performed. Manage-ment is not aware of any material intemal control weaknesses, fevIM The Board of Directors, through its Audit Committee com-prised entirely of outside directors, meets periodically with manage-ARTilUR ANDERSEN LLP ment, the internal auditor and Arthur Andersen LLP to discuss financial reporting matters, internal control and auditing. To ensure Chicago, Illinois their independence, both the internal auditor and Arthur Andersen January 31,1997 LLP have full and free access to the Audit Committee.

Lee Liu Chairman of the Board & Chief Executive Oficer '

U Du Thomas SL Walker Etecutive Vice President & Chief Financial Officer l

' John E. Ebright Controller & ChiefAccounting 0.gicer l

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L 000008 8 00t00 Ot otosmoot o of t o o o sm o l

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i l Year Ended December 31 1996 1995 1994 l . UN THOUSANDS. EXCEPT PER SHARE AMOUNTS)

Oper: ting revenues: "

l Electric . . . . . . . .. .. . $574,273 $560,471 $537,327 M

Gas . . , , . 171.979 .190,339 165,569 Other , . . , . .... . 125,67* 100,200 82,968 973,912' ~ 851,010 785,864 Oper: ting expenses:

Fuel for prWuction . . ... . . 84,579 96,256 85,952 Purchased power . . . 88,350 66,874 68,794 Gas purchased for resale . 217,351 141,716 120,795 Other operating expenses . 214,759 201,390 176,863 Maintenance . . . . 49,001 46,093 52,841 Depreciation and amortization . 107,393 97,958 86,378 Taxes other than income taxes 48,171 49,011 46,308 809,604 699,298 637,931 Oper: ting income , , 164,308 151,712 147,933 Intirest expense and other:

Interest expense . 54,822 50,727 46,010 Allowance for funds used during construction .. (2,103) (3,424) (3,910)

Preferred dividend requirements of IES Utilities Inc. 914 914 914 Miscellaneous, net . . 2,333 (3,170) (3,472) 55,966 45,047 39,542 Income before income taxes . 108,342 106,665 108,391 Feder:I and state income taxes . 47,435 42,489 41,573 Net income . . , $ 60,907 $ 64,176 $ 66,818 1

Averrge number of common shares outstanding . . . . . 29,861 29.202 28,560 Ecrnings per aserage common share $ 2.04 $ 2.20 $ 2.34 l

l The acwmpanying Notes to Conwhdated Funancoal Statements are an integralpart of these statements. l

-Ooo s elid a t e d statements et Retained seemines lear Ended December 31 UN THOUSANDS) 1996 1995 1994 II:lince at beginnir.g of year . $ 221,077 $218.293 $211,750 l

l Net income . . . . 60,907 64,176 66.818

! Cas:t dividends declared on common stock, at a per share rate of $2.10 for all years . (62,738) (61,392) (60,065)

Other . .

(210)

Bdance at end of year . .

$ 219,246 $221,077 $ 218.293

=.

The accompun_ving Notes to Conwhdated Fmancial Statements are an insegralpart of these statements.

0000011d 04 00 Dolocco Ohoot o '

- I Awets December 31 CN THOUSANDS) 1996 1995. l 32 Property, plant and equipment:

M Utih.ty- I Plant in service-Electric , . ., , . . . ... $ 2,007,839 $ 1,900,157 Gas . . . .. 175,472 165,825 Other . . . . . . 126,850 '106.396 1 2,310,161 '2.172.378 Less- Accumulated depreciation . . . . . 1,030,390 950,324 1,279,771 1,222,054 .

Leased nuclear fuel, net of amortization . . . .. 34,725 16,935 i Construction work in progress . .. . .. . . 43,719 52,772 1,358,215- 1.311,761 Other, net of accumulated depreciation and amortization of $70,03 i and $53,026, respectively . , . . . 223,805 193,215 1,582,020 1,504,976 .

Current assets:

Cash and temporary cash investments. . .... . . 8,675 6,942 Accounts receivable-Customer, less allowance for doubtful accounts of

$1,087 and $1,145, respectively . . 50,821 37,214' Other . . . 12,040 10,493 Income tax refunds receivable. . . , . . 8,890 982 Praluction fuel, at average cost . . . . . . , 13,323 12,155 Materials and r,upplies, at average cost .. . . . . . 22,842 28,354 Adjustment clause balances . .. . . 10,752 -

Regulatory assets . ..... ... 26,539 22,791 Oil and gas properties held for resale . , , . . . .

- 9,843 Prepayments and other . . 24,169 23,099 178,051 151,873 Investments:

I Nuclear decommissioning trust funds . . . . 59,325 47,028 -

l Investment in foreign entities . . . . .., , 44,946 24,770

! Investment in McLeod, Inc. . . . . 29,200 9,200 l

l Cash surrender value of life insurance policies . . I1,217 9,838 i Other .. . . ,. . . . 4,903 3,897-i 149,591 94,733

, Other assets:

Regulatory assets . . , , 201,129 207,202

~ Deferred charges and other , , .. .. . . 14,771 26,807 l 215,900 234,009 i $ 2,125,562 $1,985,591 l

1he ne cumywnvmg Noors ur Conwiulased Tomsm tal Statemenn are un integrulpart of these statements.

t

t Capitalization and I.iabilities lucember 31

, ON THOUSANO8) 1996 1995 Cepiitlization (See Consolidated Statements of Capitalization): 88' g'

Common stock .. . . . . . . $ 407,635 $ 391,269 Retained earnings ... . . . . . 219,246 221,077 Total common equity . . . . . . . . . . . . 626,881 612,346 r

' Cumulative preferred stock of IES Utilities Inc. , , . . . . . 18,320 18,320 Long-term debt (excluding current portion) . . . . . . 701,100 601,708 1.346,30I 1.232,374 Current liabilities:

- Short-tenn borrowings . . . . 135,000 101,000 Capital lease obligations. . . . . 15,125 15,717 Maturities and sinking funds . . . . . . 8,473 15,447 Accounts payable . . . . . . . 99,861 80,089 Disidends payable . . . . . 16,J31 16,244 Accrued interest . .. , , . . . . . 8,985 8,051 Accrued taxes . . . . . . 43,926 53,983 Accumulated refueling outage provision . . . 1,316 7,690 '

Adjustment clause balances . -

3.148 Er<ronmental liabilities . . 5,679 5,634' Other . . . . . . 22,087 21,800 356hn3 328.803 1.ong term liabilities:

Pension and other ber.cfit obligations. . . . . . . . . 3v,643 - 52,677 Capital lease cbligations . . . . . . . . 19,600 21,218 Ensironments.1 liabilities . . . . 47,502 43,087 Other . . . . . . . , 18,488 13.039 125,233 130,021 Deferred credits:

Accumulated deferred income taxes . . 262,67.4 257,278 Accumulated deferred investment tax credits. . . . 34,470 37,115 297,145 294,393 Commitments and contingencies (Note 13)

$ 2,125,562 $ 1.985,591

i I

~

I C

.Ooooottdotod Ototomooto of 0 o 0 4 t 014 0 0 t 8 0 0 l

~

i 'l j

l l

December 31 l (oottAnS IN THOUSANDS) 1996 199$ ,

i M ' Common equity:

O Common stock-no par value-authorized 48,000,000 shares; outstanding 30,077,212 and 29,508,415 shares, respectively. . . . .. . $ 407,635 $ 391,269 ,

Retained earnings . . ..r . . . .. 219.246 221,077 626,881 612,346 Cumulative preferred stock of IES Utilities Inc. . . . . .. . 18J20 18.320 Long-term debt: ,

IES Utilities Inc.-

Collateral Trust Bonds-7.65% series, due 2000 . . . . , , , .. . 50,000 50,000 7.25% series, due 2006 . . 60,000 -

6% series, due 2008 . . . . . ., , 50,000 50,000 7% series, due 2023 . . . . . . . . . . 50,000 50,000 5.5% series, due 2023. , . , . . . 19,400 19,400 229,400 169,400 First Mortgage Bonds-Series 1,6 W%, retired in 1996 . . . . . .

- 15,000 Series L,7 %%, due 2000 . . . 15,000 15,000 Series M,7%%, due 2002 . . . .. 30,000 30,000 Series Y,8 %%, due 2001 . . ... . 60,000 60,000 Series Z,7.60%, due 1999 . . . . 50,000 50,000 6 W% series, due 1997 . . . . . . 8,000 8,000 9 W% series, due 2001 . . . . 21,000 21,000 7%% series, due 2003 . . . . . 10,000 10,000 7 W% series, due 2007 . . . . . . . . . 30,000 30,000 224,000 239,000.

Pollution control obligations-5.75%, due serially 1997 to 2003 . . . . . . . . 3,416 3,556 5.95%, due serially 2000 to 2007, secured by First Mortgage Bonds . 10,000 10,000 s Variable rate (4.25%-4.35% at December 31,1996), due 2000 to 2010 . .. . 11,100 11,100 24,516 24.656 Subordinated Deferrable Interest Debemures,7%%, due 2025. . . . 50,000 50,000 Total IES Utilities Inc. . . . . . . . . . . 527,916 483,056 IES Diversified Inc.-

Credit facility . . . . . 172,105 124,245 Other subsidiaries' debt maturing through 2013 . . . . 11,994 12.307 712,015 619,608 Unamortized debt premium and (discount), net . . . (2,442) (2,453) 709,573 617.155 Less- Amount due within one year . . . . . . 8,473 15,447 701,100 601,708

$ 1,346,301 $1,232.374 rhe accwnpunying Notes to Cwuotidated Iinancud Statements a>w an integralpart <>f thru statements.

000 0o 6 4 00 t o 0 O t o t o um oo t o o f Oo o h Flowo l

l Year Ended December 31

, ON THOUSANDS) 1996 1995 1994 Cash flows from operating activities:

as Net income . $ 60,907 Adju;tments to reconcile net income to net cash flows

. . . $ 64,176 $ 66.818 M from operating activities-

, Depreciation and amortization . . . . . 107,393 97,958 86,378 l Amortization of principal under capital lease obligations . 16.491 15,714 16.246 l Deferred taxes and investment tax credits . . .. 9,189 7,757 ' 4,050 l Refueling outage provision . . .. . .. . (6,374) (7,506) 12,536 Amortii.ation of other assets I l . . . . 9,828 7,391 2,228 l Other . . . 856 712 3

387 '

l Other changes in assets and liabilities-Accounts receivable . . . (22,154) (15,221) 6,777 Sale of utility accounts receivable . . 7,000 4,000 800 l Production fuel, materials and supplies . . . 650 4,050 (1,184) l Accounts payable . . . . 20,934 2,902 21,871 i

Accrued taxes . . . (17,965) 9,434 4,575 i Provision for rate refunds .. . . . . (106) 106 (8.670)

I Adjustment clause balances . . . (13,900) 4,581 (6,582) i Gas in storage . . . . (1,154) 3,245 1,135

,l l Other . 11,764 532 9.340 Net cash flows from operating activities . . 183,359 199,831 216,705 (ksh flows from financing activities:

Dividends declared on common stock . . . (62,738) (61,392) (60,065) j Proceeds from issuance of common stock . . . , 14,164 15,616 16,426 Purchase of treasury stock . . . . .

(269) -

(6,233)

Net change in IES Diversified Inc. credit facility . . . , 47,860 43,745 48,500 Proceeds from issuance of other long-term debt . . 60,000 100,007 11,640

Reductions in other long-term debt . . . (15,454) (100,424) (9,790)

Net change in short term borrowings . 34,000 64,000 13,000 l .

Principal payments under capital lease obligations . . (19,108) (14,463) (16,304)

Other . . . . . . . . (458) (1.438) (46) l Net cash flows from financing activities. . 57,997 45.651 (2.872)

Cash flows from investing activities:

l Construction and acquisition expenditures-

! Utility . . . . . . (142,259)- (125,558) (138,829)

Other . . . (96,119) (92,541) (67,719)

! Oil and gas properties held for resale . . 9,843 (9,843) -

Deferred energy efficiency expenditures . (16,857) (18,029) (16,157)

, Nuclear decommissioning trust funds . . .. . . (6,008) (6,100) (5,532)

Proceeds from disposition of assets . . . 8,295 14,271 8,803 I

Other . ,. . .

3,482 (5.733) 3,129

. Net cash flows from investing activities . . . (239,623) (243.533) (216.305)

Net incmase idecrease)in cash and temporary cash investments 1,733 1,949 (2,472)

Cash end temporary cash investments at beginning of year . . .

6,942 4,993 7,465 Cash end temporary cash investments at end of year $ 8,675 $ 6,942 $ 4,993 l . .

Supplemental cash flow information:

, Cash paid during the year for-4 Interest . . .

$ 53,046 $ 50,877 $ 44,421 Income taxes . . . . . . . .. $ 54,881 $ 26,478 $ 36,097

, Noncash investing and flnancing activities-Capitallease obligations incurred . . . . . $ 14.281 $ 2.918 $ 14.297 The amnpanying Notes so Conwlidas*d hnancial 5 asensen:s are w, tniegrut part of these xnst

0o400 to 0o00o44004o0 Plocootot Ototosnooto ,

=

, g Summary of SIenIfIcant Accounting making process. At December 31, regulatory assets as reflected in the #

g PoiIcIes Consolidated Balance Sheets were comprised of the fo! lowing items:

(a) Hasis of Consolidation-The Consolidated Financial Statements (iN uwoNs) .1996 1995 include the accounts of IES Industries Inc. (Industries) and its con-solidated subsidiaries Pollectively the Company). Industries is an  ?

Energy efhciency prografn costs (Note 3(b)) . 61.1 49.7 investor-owned holding company w hose primary operating company, Environmental liabilities (Note 13(f)) . . 46.3 46.9-IES Utilities Inc. (Utilities). is engaged principally in the generation, Employee pension and benefit costs (Note 8). 22.9 ' 27.5. <

transmission, distribution and sale of electric energy and the purchase.

" ' * * ** ** I~

distribution, transportation and sale of natural gas. %e Company's principal markets are located in the state of Iowa. The Company also - *

.. Classified as

• Current assets-

, , has various non-utility subsidianes which are primarily engaged in the regulatory assets" . . . . . , 26.6 22.8

. energy-related transportation and real estate development businesses

• Classified as "Other assets- [

All subsidiaries for which Ir.dustries owns directly or indirectly regulatory assets" . ... . ,, . $201.1 $207.2 more than 50% of the voting stock are included as consolidated sub-  !

sidiaries. Industries' wholly-owned subsidiaries are Utilities and IES Refer to the individual notes referenced above for a further dis-Diversified Inc. (Diversifiedh All significant intercompany balances cussion of certain items reflected in regulatory assets.' i and transactions, other than energy-related transactions affecting If a portion of Utilities' operations become no longer subject [

Utilities, have been eliminated from the Consolidated Financial State- to the provisions of SFAS 71, a write-off of related regulatory assets  ;

ments. Such energy-related transactions are made at prices that uould be required, unless some form of transition cost recovery is i approximate market value and the associated costs are recoverable established by the appropriate regulatory body. In addition, the Com- ,

from Utilities' customers through the rate making process. pany would be required to determine any impairment to other assets l Investments for w hich the Company has at least a 20% voting and write-dow n such assets to their fair value. EffectWe January 1, interest are generally accounted for under the equity method of 1996, the Company adopted SFAS 121 which established accounting accounting. These imestments are stated at acquisition cost, increased standardA for the impairment of long-lived assets. This standard also or decreased for the Company's equity in undistributed net income requires that regulatory assets that are no longer probable of recov- ,

or loss, which is included in " Miscellaneous, net" in the Consolidated cry through futtee revenues be charFed to earnings. There was no Statements ofIncome. Investments that do not meet the criteria for impact on Ae Company's financial position or results of operations the consolidating or equity metnods of accounting are accounted for upon adoptim. J SFAS 121, >

under the cost method.

. . (d) Incor.se h+ -The Company follows the liability method of [

The preparation of financial statements m conform.ity with gen- '

9ecounting for deferred income taxes, which requires the establish-erally accepted accounting principles requires management to make med of deGrred tax liabilities and assets, as appropriate, for all tem-  !

estimates and assumptions that affect: 1) the reported amou.its I

. assets and liabilities and the disclosure of contingentdifferences porary assets between ond h(a- the tax basis of assets and liabilities and the amounts reported in the financial statements. Deferred taxes are a

bilities at the date of the financial statements, and 2) the repoved f recorded using currently enacted tax' rates, amounts of revenues and expenses during the reporting period. Actual Except a; noted below, income tax expense includes provisions results could ditTer from those estimates.

7 7 gg Certam prior period amounts have been reclassified on a basi' '

• i- between the time when certain costs are recorded in the accounts and consistent with the 1996 presentation.  ;

(b) Regulation- Because of its ownership of Utilities, Industries is ences reverse, the related asumulated deferred income taxes are  !

a holding company under the Public Utility llolding Company Act reversed to income. Investment tax credits for Utilities have been of 1935, but claims an exemption from all provisions thereof except deferred and are subsequently credited to income over the average Section 9(a)(2). which applies to the purchase of stock of other utility lives of the related property. >

l companies. Utilities is subject to regulation by the Iowa Utilities Consistent with rate making practices for Utilities, deferred tax Board (IUB) and the Federal Energy Regulatory Commise iIT.RC). expense is not recorded for certain temporary differences (primarily .

Refer to Note 2 for a discussion of the proposed merger of related to utility property, plant and equipment). As the deferred taxes the Company. become payable, over periods exceeding 30 years for some generat-

.. . ing plant differences, they are recovered through rates. Accordingly, i l (c) Regulatory Assets-Utilities is subj.ect to the provisions of State- .

. Utilit es has recorded deferred tax liabilities and regulatory assets, as ment of F.mancial Accounting Standards No. 71," Accounting for the l identifiedin Note f(c)'

Effects of Certain Types of Regulation" (SFAS 71). The regulatory i assets represent probable future revenue to Utilities associated with . (e) Temporary Cash Investments-Temporary cash investments are l certain incurred costs as these costs are recovered through the rate stated at cost, w hich upproximates market value, and are considered

l cash equivalents for the Consolidated Statements of Cash Flows. (h) Pmperty, Plant and Equipment-Utility plant (ather than acqui- y These investments consist of short-term liquid investments that have sition adjustments of $29.4 million. net of accumulated amortization, miiturities of less than 90 days Imm the date of acquisition.-

g recorded at cost) is recorded at original cost, which includes overhead and adirmistrative costs and an allowance for funds used during con-(f) Depreclation of Utility Property, Plant and Equipment-Utihues uses the remaining life method of depreciation for its nuclear struction (AFC). The AFC w hich represents the cost during the con.

struction period of funds used for construction purposes,is capitalized generating facility, the Duane Amold E,nergy Center (DAEC), and the

- by Utihties as a component of the cost of utility plant. The amount of straight Im.e nwthod for all other utility property. The remaining life f - he DAEC is based on the Nuclear Regulatory Comnussion (NRC) '. .

g g '

stem, as computed m.accordance with the prescribed ERC formula.

- hcense life of 2014. He average rates of depreciation for electric and The aggregate gross rates used by Utilities for 1996-19M were 5.5%,

Fas propert es of Utihties, consistent with current rate making prac-taces, were as follows: 6.5% and 9.3%, respectively. These capitalized costs are recovered by Utilities in rates as the cost of the utility plar t is depreciated.

Ifr96 1995 1994 Other property, plant and equipment is recorded at cost. Upon Electric . . . . . . , ,- 3.5 % 3.4% 3.6% retirement or sale of other property and equipment, the cost and Gas . . . . . . , ,. 3.5 % 3.5% 3.8% related accumulated depreciation are removed from the accounts iand any gain or loss is included in " Miscellaneous, net" in the Con-

. The electric and gas depreciation rates declined in 1995 from solidated Statements of Income,

~ 1994 because of revised depreciation rates approved in rate proceed' Nornul repairs, maintenance and minor items of utility plant ingsof Utilities. ~

and other property, plant and equipment are expensed. Ordinary (g) Deconunissioning of the DAEC-Pursuant to the most recent retirements of utility plant, including removal costs less salvage .

electric rate case order, the IUB allows Utilities to recover $6.0 million value,' are charged to accumulated depreciation upon removal from annually for the cost to decommission the DAEC. Decommissioning utility plant accounts, and no gain or loss is recognized.

expense is included in " Depreciation -and amortization" in the Consoli-(1) Oil and Gas Properties-Whiting; Petroleum Corporation dated Statements of Income and the cumulative amount is included in (Whiting), a w holly-owned subsidiary under Diversified, uses the full

" Accumulated depreciation"in the Consolidated Balance Sheets to cost method of accounting for its oil and gas properties. Accordingly, the extent recovered thmugh rates. The current recovery figures are all costs of acquisition, exploration and development of properties are based on the following assumptions: 1) cost to decommission the

. capitalized. Amortization of proved oil and gas pmperties is calculated DAEC of $252.8 million, which is Utilities 70% portion in 1993 dol-using the units of production method. At December 31,1996, capital-lars, based on the NRC minimum formula (which exceeds the amount ized costs less related accumulated amortization did not exceed the sum in the current site 4pecific study completed in 1994); 2) inflation of of I) the present value of future net revenue from estimated production 4.91% annually through 1997; 3) the prompt dismantling knd removal of proved oil and gas reserves (calculated using current prices); plus 2) method of decommissioning, w hich is assumed to begin in the year the cost of pmperties not being amonized, if any; plus 3) the lower of 2014; 4) monthly funding of all future collections into external trust cost or estimated fair value of unproved propenies included in the costs funds and funded on a tax-qualified basis to the estent possible; and being amortized, if any; less 4) income tax efTects related to ditTerences

- 5)an average after-tax return of 6.82% for all extemalinvestments. All in the book and tax basis of oil and gas properties. The Company had

. of these assumptions are subject to change in future regulatory pm-

$9.8 million on its Consolidated Balance Sheet at December ? 1,1995, i ceedings. At December 31,1996, Utihties had $59.3 million inve.sted in relating to specific oil and gas properties purchased by Whiting in the s external decommissioning trust funds as mdicated in the Consolidated fourth quarter of 1995 that it intended to sell during 1996. De Com-

Balance Sheets, and also had an intemal decommissioning reserve of pany subsequently decided not to sell these properties and, accordingly,

$21.7 million recorded as accumulaed depreciation. Earnings on the

' the balance at December 31,1996 is included in "Other property, plant external trust funds, which were 52.2 million in 1996, are recorded as and equipmect" on the Consolidated Balance Sheet.

. interest income and a corresponding interest expense payable to the funds is recorded. De carnings accumulate in the external tmst fund 0) Operating Resenues-The Company accrues revenues for ser-balances and in accumulated depreciation on utility plana. vices rendered but unbilled at month-end in order to more properly See " Management's Discussion and Analysis of the Results of match revenues with expenses.

Operations and Fmancial Condition" for a discussion of the Exposure (k) Adjustment Clauses-Utilities' tariffs provide for subsequent

. Draft on Accounting for Liabilities Related to Closure and Removal adjustments to its electric and natural gas rates for changes in the oflong Lived Assets, issued by the Fmancial Accounting Standards cost of fuel and purchased energy and in the cost of natural gas pur-Board (FASB) in the first quarter of 1996, w hich deals with, among chased for resale. Changes in the under/over cellection of these costs 1

other issues, the accounting for decommissioning costs, are reflected in " Fuel for production" and " Gas purchased for resale" in the Consolidated Statements ofincome. The cumulative effects

-_ m__ _ _ mm - ~_ -___-_ ._._ __ .. . . _ _ .

m are reflected in the Consolidated llalance Sheets as a current asset Under the terms of the Merger Agreement, the outstanding shares g or current liability, pending automatic reflection in future billings of WPLil's common stock will remain unchanged and outstanding as to customers. - shares of Interstate Energy, Each outstanding share of the Company's

1. "*""" #"" # # " "# "#'E *

(1) Accumulated Hefueling Outage Prmision-The IUB allows common stock. Each share of IPC's common stock will be converted to Utilities to collect, as part of its base revenues, funds to offset other , g ,

operating and maintenance expenditures incurred during refueling g g, outages at the DAEC. As these revenues are collected, an equivalent b f k effective time of the merger. On January 22,1997, the -

amount is charged to other operating and maintenance expenses with Ikwd of Directors of WPLil declared a quarterly dividend of $0.50 a correspmding credit to a reserve. During a refueling outage, the g

reserve is reversed to offset the refueling outage expenditures.- g  ;

"'" E" " " " "

$ Proposed Merger of the Company "" "#" "" # *# '" "

On November l0,1995, Industries, WPL iloldings,Inc. (WPLilj and "T*"I '

WP&L supplies electric and gas service to approximately 385,000 Interstate Power Company (IPC) entered into an Agreement and Plan and 150,000 customers, respectively, .m south and central Wisconsin.

of Merger, as amended (Merger Agreement), providing for: a) IPC . .

IIDC and its prmespal subsidiaries are engaged in businesses in three becoming a w holly-owned subsidiary of WPLil, and b) the me'rger .

of Industries with and into WPLil, w hich merger will result in the "".'"'#""#" " " "*"#'*"E "##"""E "" #"" "8' " #

combination ofIndustries and WPLl! as a single holding company "E "" "##EI '# E" "E (collectively, the Proposed Merger). De new holding company will

• " "#' " ' " #* #

• E"' "# ""'

approximately 165,000 and 49,000 customers, respectively, m north-be named Interstate Energy Corporation (Interstate Energy) and msiM Mm Mhm l Industries will cease to exist. He Proposed Merger, which will be

. Interstate E.nergy will be the parent company of Utilities, WP&L accounted for as a pooling of interests and is. .mtended to be tax-f.ree and IPC and will be registered under the Public Utihty llolding Com-

• for federal income tax purposes, has been approved by the respective pany Act of 1935, as amended (1935 Act). De Merger Agreement

, Hoards of Directors and shareholders. It is still subject to approval i provides that these operating t.tility companies uill continue to oper- J by several federal and state regulatory agencies.The companies ate as separate entities for a minimum of three years beyond the I expect to receive such regulatory approvals by the end of the third  ;

the Company and WPLil will be combined shortly after the effective De summary below contains selected unaudited pro forma

" *#'E# " " "# # I " **"#8 # "E"'"~

financial data for the year ended December 31,1996. The financial l

, . . Lions of Interstate Energy. The corporate headquarters of Interstate 1 9

data should be read m.conjunctmn with the historical consolidated 1 Energy will be m . Madison.  !

financial statements and related notes of the Company, WPLil, and The SEC historically has interpreted the 1935 Act to preclude I IPC and m conjuncuon with the unaudited pro forma combmed . I registered holding companies, with limited exceptions, l' rom owning financial statements and related notes of Interstate Energy included l both electnc and gas utility systems. Although the SEC has recom-m the Form 10-K Annual Report of the Company. The pro forma mended that registered holding companies be allowed to hold both  ;

comb,med earnings per share reflect the issuance of shares associated . 1

. gas and electric utility operations if the affected states agree, it remains 1 with the exchange ratios discussed bek)w.

possible that the SEC may require as a condition to its approval of the - j

. 'E)CE R '. lES COMBN

• SHARE AMOUNTS) INDUETRIES WPt.H IPC (UNAUDrTED) utility properties, and possibly Certain non-utility Ventures of the Operating Company and WPLil, within a reasonable time after the effective revenues .,,. $ 973,912 $ 932,844 $326,084 $2,232,840 date of the Proposed Merger.

Net income from continuing operations ,, , 60,907 73.205 25,860 159,972 $ Rate Mattera (a) Electric Price Announcements-Utilities and its towa-based 8P proposed merger partner, IPC, announced in 1996 their intentions to re f r continuing hold retail electric prices to their current levels until at least January 1.

operations , , 2.04 2.38 2.69 2.12 2000. The companies made the proposal as part of their testimony in A s at Dec.11, the merger related application filed with the IUlh the application 5M L900 3 WM WM93 . was later withdrawn and w as resubmitted in January 1997 and the long-term obligations at c mpanies included the same proposal in the resubmittal of the filing.

~ Dec. 31,1996. . 744,298 , 430,190. 188,731 1,363,219 ne propmal excludes price changes due to government-mandated

programs, such as energy efficienev cou recovery, or unforeseen The above amounts include the direct expenditures and carrying 3

dramatic changes in operations. costs incurred by the Company but do not include any amounts for a g Utilities WP&L and IPC also pn? posed to freeze.their wholesale return on its expenditures over the recovery period or for a reward.

electric prices for four years from the effective date of the merger as part of their merger filing with the FERC. The Company does not Q Leaseo expect the rnerger related electric price proposals to have a material Utilities has a capital lease covering its 70% undivided interest in adverse effect on its financial position or results of operations. nuclear fuel purchased for the DAEC. Future purchases of fuel may (b) Energy Erliciency Cost Recmery-L,urrent IUB rules m~.ndate also be added to the fuel lease. This lease provides for annual one-Utilities to spend 2% of electne and 1.5% of gas grms retailiperat- year extensions and Utilities intends to continue exercising such extensions, interest costs under the lease are based on commerciai ing revenues for energy efficiency programs. Under provisions of . .

the IUB rules, Utih. . '. ties is currently recovering the energy efficiencypaper costs incurred by the lessor. Utih. .ues is responsible for the pay-costs incurred through 1993 for such programs, including its direct

• " " " * * * ' * " #"*"' ' E##" "E #" ' " ' " " "'"

ance relating to the leased fuel.

expenditures, carrying costs, a return on its expenditures and a reward.

These costs are being recovered over a four-year period and the recov- .The lessor has a $45 million credit agreement with a bank sup-ery bzgan on June 1,1995. portmg the nuclear fuel lease. The agreement continues on a year.

to-year bas.is, unless e.it her party provides at least a three-year notice in December 1996, under provisions of the IUB rules, the Com- .

of termmation; no such notice of termination has been provided by pany filed for recovery of the costs relating to its 1994 and 1995 pro- .

either party.

grarns. Utilities

• proposed recovery was for approximately $53 million g.

($42 million electrie and $1I million gas) and was composed of $34 .

based on the quantity of heat produced for the generation of electne million for direct expenditures and carrying costs, $10 million for a energy, plus the lessor's interest costs related to fuel in the reactor and return on the expenditures over the recovery period and $9 million administrative expenses. These expenses (included in " Fuel for pro-for a revard based on a sharing of the benetits of such programs. ,,

g The Compar. cxpects to receive the final order in the proceeding in June 1997 with recosery of the allowed costs to commente in the

. were $18.2 million, $18.0 million and $17.8 milh.on, respecuvely.

The Company's operating lease rental expenses for 1996-1994 third quarter of 1997.

Iowa statutory changes enacted in 1996, and annlicable to future were $8.3 million, $10.4 million and $11.1 milh.on, respectively.

. . .. . The Company's future minimum lease payments by year are programs once the legislatmn is implemented by the IUB, have eh.mi-nated: 1) the 2% and 1.54 spending requirements described above in -

favor of IUB-determined energy savings targets,2) the delay in recov-CAPrr L ERADNG ery of energy efficiency costs by allowing recovery which is concur- YEAR LEASE LEASES rent with spending and 3) the recovery of a sharing reward. The IUB 1997, $ 16,808 $ 6,891 commenced a rulemaking in January 1997 to implement the statutory 1998. 9,889 6.565 change and a final order in this proceeding is expected in the second 1999. 6,969 4,741 quarter of 1997. The proposed rules prmide that the Company would 2000. 3,004 2,510 begin to recover its 1996 expenditures, and the 1997 expenditures 2001. 861 1,370 incurred at such time, during the summer of 1997 over a likely four- Thereafter. 307 197

! year recovery period. The Company would also begin concurrent 37,838 $22.274 i

recovery of its prospective expenditures at such time. The implemen-Less: Amount representing interest. 3.113

. tation of these changes will gradually climinate the regulatory asset Present value of net minimum which exists under the current rate making mechanism as these costs capital lease payments . $34.725 are recovered.

The Company has the following amounts of energy efficiency costs included in regulatory assets on its Consolidated Balance O u iiiir a=caoai= a eai =bia Customer accounts receivable, including unbilled revenues, arise pri-Sheets at December 31:

marily from the sale of electricity and natural gas. At December 31, ON THoUSANOS) 1996 1995 1996, Utilities w as serving a diversified base of residential, commer-Costs incurred through 1993. $ 12.834 $ 18,287 cial and industrial customers consisting of approximately 336,000 Costs ir: curred in 1994-1995 . 33,161 31,393 electric and 176,000 gas customers and did not have any significant

! Costs incurred in 1996 . 15,087 - concentrations of credit risk.

$ 61,082 $49.680 Utilities has entered into an agreement, w hich expires in 1999, l

l with a financial institution to sell, with limited recourse, an undi-l I

g vided fractional interest of up to $65 million in its pool of utility No. I15), Accounting for Certain investments in Debt and Equity g accounts receivable. Expenses related to the sale of receivables are Securities, until such time as the restrictions lapse and such shares paid to the financial organization under this contract and approxi- became qualified for sale within a one year period. As a result, the mated a 5.86% annual rate during 1996. During 1996 and 1995, the Company currently carries this investment at cost.

monthly proeceds from the sale of accounts receivable aseraged The closing price of the McLeod Class A common stock on

$62.9 million and $61.9 million, respectisely. At December 31, December 31,1996, on the Nasday National Market, was $25.50 1996,$65 mill.on was sold under the agreement. per share. The current market value of the shares the Company SFAS 125, issued by the FASil in 19% and effective for 1997, beneficially owns (approximately 10.6 million shares)is currently provides accounting and reporting stand.uds for transfets and servic- impacted by, among other things, the fact that the shares cannot be ing of financial assets and extinguishment of liabilities. The account. sold for a period of time and it is not possible to estimate w hat the ing for Utihties' sale of accounts receivable agreement is impacted by market value of the shares will be at the point in time such sale this standard. As a result, the agreement is being modified to comply restrictions are lifted. In adthtion, any gain upon an eventual sale with the SFAS 125 requirements and thus the accounting and report- of this imestment would likely be subject to a tax.

ing for the sa!e of Utihtics' receivables uill remain unchanged. Under the provisions of SFAS No. I 15. the carrying value of the McLeod investment w ill be adjusted to estimated fair value at the Q Inveatmenta time such shares become quablied for sale within a one year period; (a) Foreign Entities- At December 31,1996, the Company had this will occur on June 10,1997, w hich is one > car before the con-

$44.9 million of investments in foreign entities on its Consolidated tractual restrictions on sale are lifted. At that time, the adjustment to 11alance Sheet that included l } investments in two New 7xaland elec- reflect the estimated fair value of this investment will be reflected as tric distribution entities,2) a loan to a New Zealand company,3) an an increase in the it. vestment carrying value with the unrealized gain imestment in a cogeneration facility in China, and 4) an imestment reported as a net of tax amount in other common shareholders equity in an international venture capital fund. The Company accounts for until realized (i.e., sold by the Company).

the China imestment under the equity method and the other invest-ments under the cort method. The geographic concentration of the $ 1ncome Taxes Company's investments in foreign entities at December 31,1996 The components of federal and state income taxes for the years inchided investments of approximately $30.9 million in New Zealand, ended December 31, were as follows:

$13.6 in China and $0.4 million in other countries. (IN uit. Lions, 1996 1995 1994 (b) McLeod, Inc. (McLeod)- At December 31,1996, the C,m- Current tax expense . $ 3N.2 $34.7 $37.5 pany had a $20.0 million investment in Class A common stock of Deferred tax expense . I 1.8 10.5 6.7 McLeal, a $9.2 million investment in Class Il common stock and Amortization and adjustment sested options that, if exercised, would represent an additional of investment tax credits. (2.6) (2.7) (2.6)

I imestment of approximately $2.3 million. McLeod provides kical, $ 47.4 $ 42.5 $ 41.6 long-distance and other telecommumcations seruces.

McLeod completed an Initial Public Of"ering (IPO) of its Class The overall effectise income tax rates show n below for the A comnon stock in June 19% and a secondary offering in November years ended December 31, were computed by disiding total income 19%. As of December 31,1996, the Company is the benencial ow ner tax expense by income before income taxes.

of approximately 10.6 million total shares on a fully dduted basis. 1996 1995 1994 l Class Il shares are comertible at the option of the Company into Class Statutory federal A shares at any time on a one-for-one basis. The rights of Metrod income tax rate . 35.0% 35.0 % 35.0L Class A common stock and Class Il common stock are substantially State income taxes, net of identical except that Class A common stock has 1 vote per share and federal benefits . 6.6 5.5 5.9 l Class 11 comnnn stock has 0.40 vote per share. The Company currently Effect of rate making on property related differences 2.H 2.6 1.6 accounts for this imestment under the cost method.

n of investment The Company has entered into an agreement with McLeod An[ ,

u hich prosides that for two years commencing on June 10,1996. the Adjustment of prior Company cannot sell or otherwise dispose of any ofits securities of period taxes. 1.4 (0.4) (l.6)

McLeod without the consent of the McLeod floard of Directors.This Other items, net. 0,4 (0.4) -

contractual sale restriction results in restricted stock under the prosi- Oserall effectis e income sions of Statement of Financial Accounting Standards No. I15 tSFAS tax rate. 43.8% 39.8 % 38 4 %

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The accumulated deferred income taxes as set forth below in $0.2 million was charged to expense and the remaining amount y the Consolidated Balance Sheets at December 31, arise from the was deferred for future recovery through the regulatory process, l

following temporary differences:

g!

A reconciliation of the funded status of the plans to the amounts UN W.UONS) 1996 1995 Tecognized in the Consolidated Balance Sheets at December 31, is Property related . " #

. ., ... . . . . $293 $296 investment tan redit related , , . . .... (24) (26) ON THOUSANDSl 1996 ~ 1995 Decommissioning related. . .. '(15) (14) . Fa;r market value of plans' assets .

- $ 212.394 $195.329 l . Other. . . ....., , . . - .. . , 9 1 Actuarial present value of benefits U63 $257 rendered to date:

== Accumula:cd benefits based on i

, compensation to date, including i DenefIt P1ans vested benetit', of $130,334 I @(a) Pension Plans-The Company has two and non-contributary M p . m pec h e b . pension H2 m m.m ~  ;

I " "

i plans that, collectively, cover substantially all ofits employees. Plan e; a tu a I vels . 42.940 ' 41,581 I l- benefits are generally based on years of service and compensation '

Projected benefit obligation . . . . 185,455 172.855 -

' during the employees' latter years of employment. Payments made Plans' assets in excess of projected from the pension funds to retired employees and beneficiaries during benefit obligation . . . . , , 26,939 22,474

l. 1996 totaled $10.7 million. - Remaining unrecognized net asset

! The Company's policy is to fund the pension cost at an amount existing at January 1,1987, that is at least equal to the minimum funding requirements mandated ng amortued over 20 years . . . (3,179) - (3,511) i by the Employee Retirement Income Security Act (ERISA) and that Unree gmzed prior service cost. . . . . 15,523 16,905 Unrecogmzed net gain . . . . . t34,442) -(41,795) does not exceed the maximum tax deductible amount for the year. i

.The Company has an in estment policy governing asset allocation Accrued pension cost recognized .m j the Consolidated Balance Sheets . $ (15,159) $ (5.927) i i

. guidelines for its pension plans. The target ranges are as follows: 1) 37%-43% in large and mid-sized dotnestic company equity securi- Assumed rate of return, all plans . . 9.00 % 8.00 %

ties,2) 74-13% in foreign equity securities,3) 7413% in small

' Weighted average discount rate of domestic company equity securities. 4) 0-5% in real estate, and 5) projected benefit obligation,  !

( thd remainder in fixed income securities. As of December 31,1996, all plans . . . . 7.50 % 7.50 % -i l - the plan's imestment mix was consistent with the policy guidelines. Assumed rate of increase in future Pursuant to the provisions of SFAS 71, certain adjustments to compensation levels for the plans . 4.75 % 4.75 % j Utilities' pension provision are necessary to reflect the accounting for pension costs allowed in its most recent rate cases. The assumed rate of return was increased to 9.00% in 1996 The components of the pension provision for the years ended based on actual historical performance of the previously stated December 31, were as follows: 4"******"'"I*'

The Company also sponsors defined contnbution pension plans

( ' hN THOUSANDS) 1996 1995 '1994 (401(k) plans) covering substantially all employees. The Company %

l . Service cost . . , . ..... ' $ 5,997 $ 5,215 $ 5,863 contributions to the plans, which are based on the participants' level F ' interest cost on projected of contribution and cannot exceed 2.8% of the panicipants' salaries 1 benetit obligation . .. 12,71I i1,811 11,431 or wages, were $1.7 million $1.5 million and $1.8 nullion in 1996,

' = Assumed return on -

. . plans' assets . ., .. . . (14,976) (12,567) (12,593) 1995 and 1994. respectively.

~ Early retirement benefits . ,, 4,713. - -

(b) Other Postemployment Benefit Plans-The Company provides Net amonization. . , , . 906 268 841 certain benefits to retirees (primarily health care benefits). The IUB

' Pension cost , , ,, 9,351 4,727 5.542 ad' opted rules stating that postretirement benefits other than pensions Adjustment to funding level. . . (9,351) (4.727) (5.431) will be included in Utilities' rates pursuant to the provisions of SFAS

{ Total pension costs paid to 106. The rules permit Utilities to amortize the transition obligation the Trustee . . . . . ... . . $ -$ - $ 1i1 as of January 1,1993, over 20 years and require that all amounts col-

$26,297 $36.614 $ lected are to be funded into an external trust to pay benefits as they Actual return on plans' assets. . (97) become due. The gas and electric portions of these costs are being During 1996, the Company incurred a one-time charge of recovered through rates beginning in 1993 and 1995, respectively.

$4.7 million related to an early retirement program. Of such costs, including amounts that were deferred by the Company, pursuant to IUB rules, between w hen SFAS 1% was adopted and when recovery l

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a through rates began. The amounts deferred are being amortized as he assumed rate of return was increased to 9.00% in 1996 based g they are collected through rates over a three-year period. Utilities' on actual historical performance of investments of a similar nature.

unamortized balance of these deferred costs was $1.5 million at he assumed medical trend rates are critical assumptions in deter-December 31,1996. mining the service and interest cost and accumulated postretirement Pursuant to the provisions of SFAS 71, certain adjustments to benetit obligation related to postretirement benefit costs. A 1% change Utilities

• other postretirement benefit provisions are necessary to in the medical trend rates, holding all other assumptions constant, reflect ihe accounting for other postretirement benefit costs allowed would have changed the 1996 service and interest cost by $1.2 mil-in its most recent rate cases. lion (21%) and the accumulated postretirement benefit obligation at The components of postretirement benefit costs for the years December 31,1996, by $8.5 million (17%).

ended December 31, were as follows:

ON rHOUSANOS) 1996 1995 1994 0 comman. Pref erred and

$ 1,888 Pref erence Stock Service cost. $ 1,387 $ 1.838 .

(a) Common Stock-The followmg table presents mformation Interest cost on accumulated post-retirement benefit obligation. 3,726 3,175 3,275 relating to the changes in common stock.

Assumed return on plans' assets. (388) (56) (60) COMMON STOCK Net amortization of transition NUMBER obligation and other . 1,970 1,813 2,037 OF SHARES AMOUNT oWSTANDNG ON THOWANDS)

Amortized /(deferred) post-retirement benefit costs. 1,863 2,220 (2,732) Balance December 31,1993. 28.304,188 $360,301 Regulatory recognition of Shares issued in connection incurred cost . 49 1,162 -

with acquisition of Net postretirement benefit costs . $ 9,108 $9,701 $4,358 oil and gas companies . 139,102 4,027 Purchases of treasury stock . (213,300) (6,233)

Actual return on plans' assets. $ 945 $ 273 $ 47 Stock plan issuances * . 547.056 15,395 Balance, December 31,1994. 28,777,046 373,490 A reconciliation of the funded status of the plans to the amounts Shares issued in connection recognized in the Consolidated Balance Sheets at December 31,is *ith acquisition of oil and gas companies . 75,638 1,925 E*#" # Stock plan issuances * . 655.731 15.854 ON THOUSANDS) 1996 1995 Balance, December 31,1995. 29,508.415 391.269 Fair market value of plans' assets. $ 12.312 5 6.515 Purchases of treasury stock . (9.448) (269)

Accumulated postretirement Stock plan issuances

• 578.245 16,635 benefit oblication: Balance, December 31,1996. . 30,077,212 $407,635 Active employees not yet eligible. 19,056 22,254 Shares reserved for issuance Actise employees eligible. 4,866 6.282 pursuant to the Company a stock Retirees . 25,992 22.575 plans at December 31,1996* 1,632,869 Total accumulated postretirement benetit obligation 49,914 51.111

• onuend armmiment and Sim k Pwhase Plan. Empimee Sta k Pun haw Plan.

Accumulated postretirement benetit E"P tme savmv Plan, long.rerm incenme Plan, its sona stock ownenssp obligation in excess of plans' assets . (37,602) (44,596) Plan and Wag Swk optm Plans Unrecognized transition obligation. 31,020 34,415 During 19% Industries reacquired 9,448 shares of its common Unrecogn.ized net (gain)/ loss (2,505) 349 stock on the open market, at an average price of $28.44 per share, Unrecogm.ied prior service cost . (427) 151 which were subsequently issued to various C,ompany Directors and Accrued postretirement benefit cost in the Consolidated Balance Sheets . $ (9,514) $ (9.681) employees. During 1994, Industries reacquired 213,300 shares of its common stock on the open market, at an average price of $29.22 Assumed rate of return . 9.00 % 8.00 % per share which were subsequently issued to the Dividend Reimest-Weighted average discount rate ent Plan and certain of its benefit plans. At December 31, 1996, of accumulated postretirement no shares remained held as treasury stock.

benefit obUgation 7.50 % 7.50 %

Medical trend on paid charges:

initial trend rate. 9.00 % 10.00 %

Ultimate trend rate . 6.50 % 6.50 %

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- (b) Preferred and Preference Stock-Utilities has 466,406 shares - (b) Short-Term Debt- At December 31,1996, the Company had , ,

of Cumulative Preferred Stock, $50 par value, authorized for issuance banilines of credit aggregating $136.1 million. Utilities was using 'g at December 31,1996, of which the 6.10%,4.80% and 4.30% Series $110 million to support commercial paper and $11.1 million to sup-  !

had 100.000,146,406 and 120,000 shares, respectively, outstanding port certain pollution control obligations. Commitment fees are paid at both December 31,1996 and 1995.These shares are redeemable . to maintain these lines and there are no conditions which restrict the at the option of Utilities upon 30 days notice at $51.00. $50.25 and unused lines of credit. In addition to the above, Utilities has an

. $51.00 per share, respectively, plus accrued dividends. ' uncommitted credit facility with a financialinstitution whereby it There are 5,000,000 shares of Industries Cumulative Preferred can borrow up to $40 million. Rates are set at the time of borrowing Stock (no par value) and 700,000 shares of Utilities Cumulative and no fees are paid to maintain this facility. Information regarding Preference Stock ($100 par value) authorized for issuance, of which short-term debt is as follows:

none were outstanding at December 31, 1996. 1996 1995 1994 (ooLLAns W rHOuSANOS)

As of end of year:

%, 0obt Commercial paper (s)long Term Debt-in September 1996, Utilities repaid at matu. outstanding. , . . . . $ 110,000 $101,000 $37,000 rity $15 million of Series L 6.25% First Afortgage Bonds and,in a Notes payable outstanding . 25,000 - -

separate transaction, issued $60 million of Collateral Trust Bonds, Weighted average interest l

7,25%, due 2006. rate on commercial paper. 5.70 % 5.81 % 6.13 %

Utilities' Indentures and Deeds of Trust securing its First hlort- Weighted average interest .

rate on notes payable . . 6.28 % - -

! gwge Bonds constitute direct first mortgage liens upon substantially For the year ended:

all tangibie public utility property. Utilities' Indenture and Deed of hlatimum month-end Trust securing its Collateral Trust Bonds constitutes a second lien on amount of short-term debt . $145,000 $ 132,000 $37,000 substantially all tangible public utility property while First hlortgage Average daily amount Bonds remain outstanding. outstanding . . 120,112 79,159 5.269 Diversified has a variable rate credit facility that extends through Weighted average interest rate, . . . 5.52 % 5.97 % 5.31 %

November 20,1999, with two one-year extensions potentially avail-able to Diversified. The unborrowed portion of the agreement is also j

used to support D.iversified's commercial paper program. A com- $ Estimated Fair Value of Financial g,  ;

bined maximum of $300 million of borrowings under the agreement The following methods and assumptions were used to estimate the i and commercial paper program may be outstanding at any one time.

Interest rates and maturities are set at the time of borrowing for direct l'

borrowings under the agreement and for issuances of commercial Current Assets and Current Liabilities-The carrying amount paper. The interest rate options are based upon quoted market rates approximates fair value because of the shoit maturity of such finan- l

' and the maturities are less than one year. At December 31,1996, cial instruments.

$23 million was borrowed under this facility, bearing an interest -

l . Nuclear Decommissioning Trust Funds-The carrying amount rep-rate of 5.75%. maturing in the first quarter of 1997. D.iversified had resents the fair value of these trust funds, as reported by the trustee.

$149.1 million of commercial paper outstanding at December 31, d

. The balance of the " Nuclear decommissioning trust funds" as shown 1996, with interest rates ranging from 5.50% to 7.10% and matunty in the Consolidated Balance Sheets included $9.4 million of unreal-s dates m the first quarter of 1997. Dnersified intends to continue bor-ized gains at December 31,1996, and $$.3 million of unrealized gains rowing under the renewal options of the facility and no conditions at December 31,1995, on the investments held in the trust funds.

' exist at December 31,1996, that would present such borrowings.

The accumulated reserve for decommissioning costs was adjusted Accordingly, this debt is classified as long-term m the Consolidated

"### 8 "* "

Balance Sheets. Refer to Note 12(a) for a discussion of an interest rate swap agreement Diversified entered into relating to this facility. Cumulative Preferred Stock of Utilities-Based upon the market

)

Total sinking fund requirements, w hich Utilities intends to meet yield of similar securitics and quoted market prices.

! by pledging additional property under the terms of its Indentures and . .

Deeds of Trust, and debt maturities for 1997-2001 are 59 million,

' $1 million, $61 million, $67 million and $255 million, respectively.

' The Company intends to refinance the majority of the debt maturi-ties with long-term securities.

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g Investments Carried at Cost-Fair value of the McLeod investment rates as well as the amount of time remaining in the agreement. The g is based on quoted market prices at December 31,1996 (including Company has no intention of terminating the agreement at this time.

an assumed exercise of the Company's options at the December 31,

. . (b) Gas Futures Contracts-Industrial Energy Applications,Inc.

1996 market price less the exercise pricer, the 1995 fair value is .

(IEA), a w holly-owned subsidiary under D.iversified, has entered based on the carrying value as there was no quoted market price .

. into natural gas contracts on 'the New York Mercantile Exchange prior to the 1996 IPO. f. . air value of the New Zealand investments is

~

- (NYMEX) in the notional amount of $6.4 million at December 31, based on quoted market prices; while the market is not of a breadth 1996. The on. .gmal contract terms range from one to seventeen

-- and scope comparable to a U.S. market as required for SFAS 115 .

. months. The contracts are miended to mitigate risk from fluctuations accounting purposes, the Company does beh. eve it produces a rea- , .

m the price of natural gas that will be required to satisfy sales commit-sonable representation of the fa.ir market value of the investment. .

ments for future deliveries to customers and for sales from storage.

F, air value of the other investmentsis. based on quoted market prices Ga.ms and losses on these he<Jging contracts are deferred and recog-i where available, and cost when not available as the Company beh. eves .

mzed in income when the transactions being hedged are finalized.

l the carrying value approximates fa.tr value for such investments.

The following table presents the carrying amount and estimated fa.ir value of certain f.manetal instruments as of December 31:

$ Commitments and Contingencies

! (al Construction Program -The Company's construction and N E acquisition program anticipates expenditures of approximately U" " U" " 8 nN MWONS) VAL E VALUE VALUF VAL UE '

and $78 million at Diversified. Substantial commitments have >

S k Ut it s $ 18 $ 12 $ 18 $ 11 been made in connection with these expenditures.

long-tenn debt, including th) Purchased Power, Coal and Natural Gas Contracts- Utilities current portion , 712 722 620 644 has entered into purchased power capacity and coal contracts and its investrents carried at cost:

minimum commitments are as follows (dollars and tons in thousands):

l Investment in McLeod, Inc, (Note 64 b)) .. ., 29 267 9 9 PURCHASED POWER COAL Investments in New Zealand NLLARS WS DOLLARS ENS (Note 6(o) . , , , 31 45 25 22 $ I1,175 69-144 1997. $68,323 4,472

.Other,, .. . 3 4 3 5 1998, ,, 3,415 9-109 17,250 886 1999, ,.. 3.283 1-101 17,509 874 Since Utilities is subject to regulation, any gains or losses 2000., 283 1 15,696 762 related to the difference between the carrying amount and the fa.ir 2001. , 283 1 15,913 751 value of its financial instruments may not be realized by the Company's shareholderL The Company has several purchased power contracts for the annual six-month summer season and thus the minimum and maxi-

$ DerIwatIwe F1nancIa11nstrumonis mum of the noted range represent the power purchased during the The Company has a policy that financial derivatives are to be used w inter and summer seasons, respectively. The Company expects to only to mitigate business risks and not for speculative purposes.

supplement its coal contracts with spot market purchases to fulfill Derivatises have been used by the Company on a very limited basis, " ;

its future fossil fuel needs. I

. (a) Interest Rate Suap Agreement-In February 1996, Diversitied Utilities also has various natural gas supply, transportation and entered into an interest rate swap agreement on a variable rate bor- storage contracts outstanding. The gas supply commitments are all rowing of $100 million comerting this debt into a fixed-rat.e borrow. index based and the minimum dekathemi commitments, in thousands, ing at a rate of 4.7 percent. The swap period is for two years with for 1997-2001 are 10,699,5,074,5,074,3,574 and 3,574, respec-an additional one-year option mailable to the counterparty and the tively. The minimum transportation and storage commitments for agreement includes quarterly settlement dates. Disersified realized 1997-2001, in thousands, are $32,080, $31,842, $29,220, $27,050 l~ approximately 50.7 million in interest expense savings in 1996 under and $24,008, respectively. The Company expects to supplement its the agreement. The fair value of this financial instrument is based natural gas supply with spot market purchases as needed,

[

on the amounts estimated to terminate or settle the agreement. At (c) Informatlun Technology Sersices-The Company entered into December 31,1996, the agreement,if settled on that date, would an agreement, expiring in 20N, with Electronic Data Systems i have required the counterparty to pay the Company appnnimately Corporation (EDS) for information technology services. The con-l $1.2 million. Such value is based on the difference in the interest l

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tract is subject to declining termination fees. The Company's antici- In the unlikely event of a catastrophic loss at DAEC, the amount g pated operating and capital expenditures under the agreement for of insurance available may not be adequate to cover property dam- g 1997 are estimated to total approximately $ 12.5 million. Future costs age, decontamination and premature decommissioning. Uninsured under the agreement are variable and are dependent upon the Com- losses, to the extent not recovered through rates, would be borne pany's level of usage of technological services from EDS. by Utilities and could have a material adverse effect on Utilities *

. financial position and results of operations.

(d) Financial Guarantas-The Company has financial guarantees amounting to $22.9 million outstanding at December 31,1996, w hich (f) Environmental Liabilities-The Company has recorded environ-are not reflected in the consolidated financial statements. Such guar- mental liabilities of approximately $53 million in its Consolidated antees are generally issued to support third-party borrowing arrange- Balance Sheets at December 31,1996. The Company's significant ments and similar transactions. The Company believes that the environmental liabilities are discussed below.

likelihood of material cash payments by the Company under these agreements is remote, Former Alanufactured Gas Plant WNIGP) Sites Utilities has been named as a Potentially Respons.ble i Party (PRP)

(e) Nucicar Insurance Programs-Public liability for nuclear acci- by various federal and state emironmental agencies for 28 FhlGP dents is gmerned by the Price Anderson Act of 1988 which sets a sites, but believes it is not responsible for two of these sites based on statutory limit of $8.9 billion for liability to the public for a single extensisc reviews of the ownership records and historical infonna-nuclear power plant incident and requires nuclear power plant opera- tion available for the two sites. Utilities has notified the appmpriate l tors to prmide financial protection for this amount. As required, regulatory agency that it believes it does not have any responsibility Utilities provides this financial protection for a nuclear incident at as relates to these two sites, but no response has been received from the DAEC through a combination of liability insurance ($200 mil- the agency on this issue. Utilities is also aware of six other sites that lion) and industry-wide retrospectise payment plans t $8.7 billion). it may have owned or operated in the past and for which, as a result, Under the industry-wide plan, each operating licensed nuclear reac- it may be designated as a PRP in the future in the event that environ-tor in the United States is subject to an assessment in the event of a mental concerns arise at these sites. Utilities is working pursuant to nuclear incident at any nuclear plant in the United States. Based on the requirements of the various agencies to investigate, mitigate, pre-its ownership of the DAEC, Utilities could be assessed a maximum vent and remediate, where necessary, damage to property, including of $79.3 million per nuclear incident, with a maximum of $10 mil- damage to natural resources, at and around i ' sites in order to pro-lion per incident per year (of which Utilities' 70% ownership portion tect public health and the environment. Utilities believes it has com-would be approximately $55 m a lion and $7 million, respectively)if pleted the remediation of ten sites although it is in tne process of losses relating to the incident exceeded $200 million. These limits obtaining final approval from the applicable emironmental agencies are subject to adjustments for changes in the number of participants on this issue for each site Utilities is in various stages of the imesti-and inflation in future years, gation and/or remediation processes for the remaining 16 sites and Utilities is a member of Nuclear Mutual Limited (NML) and estimates the range of additional costs to be incurred for imestigation, Nuclear Electric Insurance Limited (NEIL). These companies pro- remediation and monitoring of the sites to be approximately $24 mil-vide $1.9 billion of insurance coverage on certain property losses at lion to $54 million.

DAEC for property damage, decontamination and premature decom. Utilities has recorded em ironmental liabilities related to the missioning. The proceeds from such insurance, however, must first FMGP sites of approximately $36 million (including $4.7 million as be used for reactor stabilization and site decontamination before they current liabilities) at December 31,1996. These amounts are based can be used for plant repair and premature decommissioning. NEIL upcm Utilities' best current estimate of the amount to be incurred for also prmides separate coserage for the cost of replacement power imestigation, remediation and monitoring costs for those sites w here during certain outages. Owners of nucim generating stations insured the investigation process has been or is substantially completed, and through NML and NEll are subject to retroactise premium adjust- the minimum of the estimated cost range for those sites where the ments if losses exceed accumulated resene funds. NML and NEIL's investigation is in its earlier stages. It is possible that future cost esti-l accumulated reserve funds are currently sufficient to more than cover mates will be greater than the current estimates as the investigation its exposure in the event of a single incident under the primary and process proceeds and as additional facts become know n. Regulatory excess property damage or replacement power coverages. Iloweser, assets of approximately $36 million, which reflect the future reemery Utilities could be assessed annually a maximum of $3.0 million that is being prmided through Utilities' rates, have been recorded in under NML, $6.4 million for NEIL property and $0.7 million for the Consolidated flalance Sheets. Considering the current rate treat-NEIL replacement power if losses exceed the accumulated resene ment allowed by the IUB, management belieses that the clean-up costs l fundt Utilities is not aware of any losses that it believes are likely incurred by Utilities for these FMGP sites will not have a material to result in an assessment. adverse efTect on its financial position or results of operations.

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, In Aprii 1996 Utilities filed a lawsuit against certain ofits ning in the year 2000. Utilities expects to meet the requirements of .i g insurance carriers seeking reimbursement for imestigation, mitiga. Phase 11 by switching to lower sulfur fuels, capital expenditures pri- l tion, prevention, remediation and monitoring costs associated with marily related to fuel burning equipment and boiler modifications, '

the FMGP sites. Settlement discussions are proceeding between and the possible purchase of SO2 allowances. Utilities estimates Utilities and its insurance carriers regarding the recovery of these capital expenditures at approximately $12.9 million, including $0.6 FMGP-related costs. Settlement has been reached with two carriers million in 1997,in order to meet the acid rain requirements of the Act.

and an agreement in principle has been reached with three other The acid rain program under the Act also governs SO2

. carriers thus far. Any amounts received from insurance carriers will - allowances. An allowance is defined as an authorization for an '

be deferred pending a determination of the regulatory treatment of owner to emit one ton of SO2 into the atmosphere. Currently, such recoveries. Utilities receives a sufficient number of allowances annually to 4

offset its emissions of SO2 from its Phase I units. It is anticipated National Energy Policy Act of 1992 that in the year 2000, Utilities may have an m. sufficient number of The Nat.ional Energy Policy Act of 1992 requires owners of nuclear . .

allowances annually to offset its estimated emissions and may have power plants to pay a special assessment into a " Uranium Enn.c h-to purchase additional allowances, or make modifications to the ment Decontammation and Decommissiomng Fund. The assess- . . .

Pl ants or limit operations to reduce emissions. Utilit.ies is reviewmg ment is based upon prior nuclear fuel purchases and, for the DAEC, its pti ns to ensure that it will have sufficient allowances to offset averages $1.4 million annually through 2007, of which Utilities, its emissions in the future. Utilities believes that the potential cost 70% shareis. $1.0 million. Utilities is recovering the costs associated

. . . of ensuring suffic.ient allowances wd. l not have a material adverse with this assessment through its electric fuel adjustment clauses oser ,

the period the costs are assessed. Utilities' 70% share of the future The Act and other federal iaws also require the United States assessment, $9.9 million payable through 2007, has been recorded as .

a liability in the Consolidated Balance Sheets, including $0.9 million .

mcluded in " Current liabih. . ties- E.nvironmental l'iabilities," with a necessary, additional issues that potentially affect the electne utility m

. dustry, meluding emissions relating to NOx, ozone transport, mer-related regulatory asset for the unrecovered amount.

g ,

Oil and Gas Properties Dismantlement and Aband,onmer.t Costa tions to the PCB rules. In December 1996, the EPA issued proposed Whiting is responsible for certain dismantlement and abandonment rules that would tighten the National Ambient Air Quality Standards  ;

costs related to various off-shore oil and gas properties, the most (NAAQS) for ozone and particulate matter emissions. Also in the .

significant of w hich is located off the coast of California. The Com- '

fourth quarter of 1996, the EPA announced that it would issue a pany estimates the total costs for these properties to be appmximately notice in March 1997 requiring the 37 states in the Ozone Transport ,

$16 million and the expenditures are not expected to be incurred for Assessment Group (OTAG), which includes lowa, to implement approximately five years. Whiting accrues these costs as reserves are further controls on NOx. These proposals could result in the Com.

extracted and such costs are included in " Depreciation and amortiza- pany having to incur additional capital expenditures to further reduce tion" in the Consolidated Statements of Income, resulting in a liabil- its emissions of NOx, ozone and particulate matter. Currently, the ity of $7.0 million at December 31,1996,in the Consolidated impacts of these potential regulations are too speculative to quantify.

Balance Sheets. In 1995, the EPA published the Sulfur Dioxide Network Design

.. Review for Cedar Rapids. Iowa, w hich, based on the EPA's assump-The Company adopted the provisions of Statement of Position 96-1 (SOP 96-1), Environmental Remediation Liabilities, in 1996. tions and worst-case modeling method suggests that the Cedar Rapids - i Th.is statement provides authoritative guidance for recognition, mea- area could be classified as "nonattamment" for the NAAQS estab- l lished for SO2. The worst-case modeling study suggested that two surement and disclosure of environmental remediation liabilities in of Utilities' generating facilities contribute to the modeled excee-financial statements. Upon adoption of SOP-96-1, the Company's g

estimated liability mereased by approximately $2.2 milhon, pnmanly

..* **"#* "#""#""'" * " " " " ^** "

resulting from the recording of Utilities' anticipated FMGP post-

. these exceedences, Utilities is entering into a Consent Agreement remediation monitoring costs, and a related increase to regulatory g g  ; g ,

a< sets was also recorded. I agreement, as currently proposed, is to develop a three-year plan ,

(g) Air Quality issues-The Clean Air Act Amendments of 1990 for a process to explore and implement options to modify one of Utili-l' (Act) requires emission reductions of sulfur dioxide (SO2) and nitro- ties fossil generating facilities to reduce SO2 emissions. In addition, gen oxides (NOx) to achieve reductions of atmospheric chemicals Utilities is proposing to resolve the remainder of EPA's nonattainment betimd tv c.mse acid rain. The provisions of the Act am being concerns by either modifying the current stack or installing a new implemented in two phases; the Phase I requirements have been met stack at the other generating facility contributing to the modeled and the Phase 11 requirements affect eleven other fossil units begin-

. . . . _ _ _ _ _ _ .-_ _ _ m . . . . _ _ . - ___ _ .

t 4

i

. l l exceedences at a potential aggregate capital cost of up to $4.5 mil. its respective costs in its Statements of income. Information relative , ,

lion over the next two years. to Utilities

• ownership interest in these facilities at December 31, g-l Pursuant to a routine internal review of operations, Utilities 1996 is as follows:

determined that certain changes undertaken during the previous three . OTrUsWA NEAL

, years at one of its power plants may have required a federal Prevention DAEC UNIT 1 Unit 3

. ,. . (DOLLARS IN MILUONS) (NUCLEAR) (COAL) (COAL) of S.igmficant Deterioration (PSD) permit. Utih. .ues imtiated discus- i sions with its regulators on the matter and is preparing the PSD per- Utility plant in service . . . . . $501.0 $ 190.2 $ 60.7 j mit application for filing in the first quarter of 1997. Utilities may be Accumulated depreciation. , $217.2 $ 91.0 $ 28.8 required to accept operational limits or to install additional controls Construction work in progress. '$ 1.2 $ 0.1 $ 0.1 and may be subject to liability for not having obtained tne permit Plant capacity-Mw . . . 520 716 515-

. previously; however, Utilities believes that any 'ikely actions result-Percent ownership , , , 70 % 48 % 28 %

ing from this matter will not have a material adverse effect on its

'" *** - I financial position or results of operations.

l (h) Spent Nuclear Fuel-The Nuclear Waste Policy Act of 1982 h S

• 9 m e n't s o f B u s i n e s s assigned responsibility to the U.S. Department of Energy (DOE) to The principal lxtsiness segments of Industries are the generation, establish a facility for the ultimate disposition of high level waste and transmission, distribution and sale of electric energy by Utilities and spent nuclear fuel and authorized the DOE to enter into contracts the purchase, distribution, transportation and sale of natural gas by with parties for the disposal of such material beginning in January Utilities and IEA. Certain financial information relating to industries' l 1998, Utilities entered into such a contract and has made the agreed significant segments of business is presented below. j l paymems to the Nuclear Waste Fund (NWF) held by the U.S. Trea-YEAR ENDED DECEMBER 31 sury. The DOE, however, has experienced significant delays in its 1996 1994-l (IN THOUSANDS) 1995 efforts and material acceptance is now expected to occur no earlier Operating results:

! than 2010 with the possibility of further delay being likely. Utilities Revenues:

- has been sto-ing spent nuclear fuel on-site since plant operations Electric . . . , $ 574,273 $ 560,471 $ $37,327 i began in 1974 and has current on-site capability to store spent fuel

. Gas , , 273,979 190,339 165,569 until 2001. Utilities is aggressively reviewing options for expanding ,

Operating income. ,

l on-site storage. Utilities has been formally notified by the DOE that Electric , , 132,278 130,390 125,487 they anticipate being unable to begin acceptance of spent nuclear Gas . . .. . 14,978 11.056- 8,762 fuel by January 31,1998. Utilities is evaluating courses of action t OMfek i protect the interests of its customers and its rights under the DOE Depreciation and l contract. Utilities is also evaluating legislation proposed to the amortization:

Congress addressing this issue. Electric . 77,578 72,487 68,640 Gas 6,200 6,176 6,214 (i) Legil Proceedings-The Company is involved in other legal

( and administrative proceedings before various courts and agencies "'

uis ex nditures;*

p with respect to inatters ansing m the ordinary course of business.

Electric . I15,810 108,356 112,773 Although unable to predict the outcome of these matters, the Com-Gas .. , ,, 20,980 9,368 10,066 pany believes that appropriate liabilities have been established and final disposition of these actions will not have a material adverse

• Identifiable assets:

effe'et on its financial position or results of operations.

Electric , , 1,438,370 1,395,666 1,347,024 O saiativ o-aad si otrio utiiity ai at "' - """ " *"

I,667,150 1,594,716 1,539,421 l Underj. .omt ownersh.ip agreements with other Iown utilities, Utiliu.es

. .. Other corporate assets . 458,412 390.875 309,672 i has undivided ownersh. .ip mierests m jomtly-owned electric generat-

, . Total consolidated mg stations and related transmission facilities. Each of the respective assets , , , . $ 2,125,562 $ 1,985.591 $ 1,849.093 owners is responsible for the financing of its portion of the construe-tion costs. Kilowatt-hour generation and operating expenses are %cludes inumenvant acqubitie which are ,hmuwudhr cmonsuushwncial

d"""'"' P"'r="n divided on the same basis as ownership with each owner reflecting l

tolootod 0000088404od Floooolot 004o l

4e Income statement data (000's):

Operating revenues . . . $ 973,912 '$ 851,010 $ 785,864 $ 801,266 $ 678,296 $ 604,952 Operating income. . . 164,308 151,712 147,933 151,269 109,024 111,603 '

Net income , ... . . 60,907 64,176 66.818 67,938 48,711 44,255 Common stock data (per share except percentages): ,

Earnings . . $ 2.04 $ 2.20 $ 2.34 $ 2.45 $ 1.92 $ 1.96 Dividends declared . . 2.10 2,10 2.10 2.10 2.10 1.64 ,

Return on average common equity . , 9.9 % 10.7 % 11.5 % 12.4 % 10.3 % 12.4 % ,

Market price at year-end .. . $ 29.88 $ 26.50 $ 25.25 5 31.25 $ 29.50 $ 23.38 Book value at year-end . . . 20.84 20.75 20.56 20.21 18.89 16.04  ;

Ratio of market price to book value at year-end . 143 % 128 % 123 % 155 % 156 % 146 %

Capitalli.ation:

Common equity. . . 47 % 49 % 50 % 51 % 48 % 48%

Preferred and preference stock . .. I 2 2 2 2 5 Long-tenn debt . .. . 52 49 48 47 50 47 100 % 100 % 100 % 100 % 100 % 100 %

Other selected financial data: j Total assets (000's) . . . . $2,125,562 $1,985,591 $ 1,849,093 $ 1,699,819 $ 1,594,382 $1,172,224 Non-utility assets (000's) di , 352,824 282,433 206,411 153,853 153,491 48,779 Long-tenn obligations, net (000's) . 744,298 654,090 623,359 574,488 551,335 415,367 Construction and acquisition expenditures (000's) . .. 238,37d 218,099 206,548 169,017 192,520 ct 52,782 Times interest earned before income taxes . . 2.99 3.12 3.38 3.38 2.63 3.30 Selected financial data for .'i IFS Utilities Inc.:

Utility plant in service (000's) . . $ 2,310,161 $2,172.378 $2,042,179 $ 1,932,558 $ 1,852,733 $ 1,318,060 Accumulated depreciation of utility plant in service (000's) . . 1,030,390 9%,324 880.888 813,312 759,754 458,855 Construction and acquisition expenditures (00ffs)m . . . 143,648 129,444 148,103 113.212 171,013 0 > 50,200 ,

Times interest earned before income taxes . . .. . 3.44 3.26 3.39 3.64 2.67 3.39 Electric Kwh sales (excluding otT-systern)(000's) . 9,953,204 9,783,514 9,291,575 8,905,522 7,132,671 6,I $ 5,712 Gas Dth sales (including transported volumes)(000's) . . 42,140 39,805 37.975 39,006 37.035 38,285 tI) Includes nem utdits assets eiIES Vaderies Inc.

(?) includes $6I mahonfor tlw awquuitwn of the Iowa service temtaryfrum Unt<m Electric Com;xony.

(3)Im tudes orquisitiams fnun t@ilmted camapan es and Utdstus' non-utihty expendstures.

- 4 y

i Elootelo Oporotloo Oomportsoo l

l

.- \

i l., 1996 1995 1994 1993 1992 1986 Operating resenues (000's): 4e Residential and rural . ... _ $212,799 - $216,270 $199,587 $203,870. $176,811 $160,267 General service . , , . . . . , 98,196 97,496 97,454 99,221 87,202 75,649 Large general service . . . .. . 213,223 199,840 191,601 184,657 140,496 127,034 Street lighting , . .. .. . 8,778 8,810 8,521 8,404 7,241 7,194 Total from ultimate consumers . 532,996 522,416 497.163 496,152 411,750 370,144 l ' Sales for resale . . . 17,894 17,554 19,195 20,254 18,602 14,963 Off system . ., , 19,490 17,802 18,077 29,400 28,304 34,397 Other ,,. , . .. . 3,893 2,699 2,892 4,715 4,343 2,091 -1

$574,273 $560,471 $537,327 $550,521 $462.999 $421,595 1

Energy sales (000's Kwh):

Residential and rural .. .. 2,633,704 2,680,340 2,484,089 2,518,580 2,146,079 2,122,204  ;

i General service . , 1,231,115 1,242,373. 1,170,923 1,166,072 1,061,444. 914.665 . )

Large general service , 5,500,606 5,283,694 4,990,890 4,581,590 3,320,439 2,629,046 Street lighting . . 73,381 77,388 77,952 78,004 75,957 78,754 Total to ultimate consumers . . 9,43N,806 9,283,795 8,723,854 8,344,246 6,603,919 5,744,669 Sales for resale .. 514,398 499,719- 567,721 561,276 528,752 411,043 Sales of electricity to customers . 9,953,204 9,783,514 9,291,575 8,905,522 7,132,671' 6,155,712 Off-system ., , .. 1,231,298 1,086,121 1,137.219 2,068,015 2,275,616 2,349,985 q 11,184,502 10,869,635 10,428,794 10,973,537 9,408,287 8,505,697 I

)

l Sources of electric energy (000's Kwh):

Generation:

Fouil, primanly coal . . . . .. 4,972,736 5,775,002' 5,522,966 5,356,930 4,317,154 3,983,607 Nuclear m . . ,,.. .. , 2,753,542 2.610,979 2,875,867 2,264.507 2,402,501 2,095,334 j Hydro , .. ..,,.. . 7,081 7,690 8,205 7,201 7,579 5.595 L 7,733,359 8.393,671 8,407,038 7,628,638 6,727,234 6,084,536 Purchases . . . . . 4,176,700 3,012,034 2,646,673 3,949.296 3,322,182 2,930,845 11,910,059 11,406,605 11,053.711 11,577,934 10,049,416 9,015.381 i Net erpahility at time of peak load (Kw):

Generating capability . ,, ,, 1,864,390- 1,873.300 1,741,100 1,733,700 1,718,600 1,626,600 Purchase capability . . 232,000 207,100 280,000 248,000 207.000 100,000 2,096,390 2,080.400 2,021.100 1,981,700 1,925.600 1,726,600

[ Net peak load (Kw)ai , 1,833,203 1,824,100 1,779,627 1,716,380 1,425,441 1.380,391 Cooling degree days as percentage of normal 89 % 128 % 99 % 89 % 72 % 106 %

Number of customers at year-end , 336,048 333,489 330,405 327,265 325,172 299,506 f

' Revenue per Kwh (escluding off-9 stem)ln cents. . 5.57 5.55 5.59 5.85 6.09 6.29 tI) Reporsents IES Unbries* Ms omdwidedinseuret in the Duane Arnold Energy Center, s,hich is operated by IES l'tihries inc, Q) w minutes integrawd.

w a c- y- + w gi

000 Oporottos Oomporlooo 1996 1995 1994 1993 1992 1986 ,

80 Operating resenues (000's):

1ES Utilities Inc.:

Residential . . .. . $ 97,708 $ 84,562 $ 82,795 $ 90,462 $ 78,685 $ 79,176 Commercial. .. .. ... 46,966 40,390 40,912 45,528 '39,780 42',608, i

Industrial . . .. . ... 12,256 8,790 12,515 15,593 18,649 39,485 156,930 133,742 136,222 151,583 137,114 161,269 i Other. . . 3,934 3,550 2,811 2.735 2,341 881 Total revenues . , 160,864 137,292 139,033 154,318 139,455 162,150

)

Industrial Energy Applications, Inc. I13,115 53,047- 26,536 27,605 27,627 -

$ 273,979 $ 190,339 $ 165,569 $ 181,923 $ 167,082 $162,150 Energy sales (000's dekatherms):

IES Utilities Inc.:

Residential . ., , 17,680 16,302 15,766 16,971 15,098 1$,825 Commercial. ,. 10,323 9,534 9,298 10,133 8,479 9,707 Industrial . . ., ,. 3,796 3,098 4,010 4,618 6,175 11,722 31,799 28,934 29,074 31,722 .29,752 37,254 Industrial-transported volumes *. 10,341 10,871 8,901 7,284 7,283 1,031 Total solumes delivered . 42,140 39,805' 37,975 39,006 37,035 38,285 Industrial Energy Ad. :ations Inc.*. . 43,055 31,916 14,443 12,493 14.830 -

85,195 71,721 52,418 51,499 51,865 38,285

• LEA energy sales that at also included as transported volumes of IES Utilities Inc. . . 4,383 4,232 3,134 2,883 2,955' -

Operating statistics for IFS Utilities Inc.:

Cost per dekatherm of gas purchased for resale , . $ 3.29 $ 3.13 $ 3.31 $ 3.49 $ 3.36 $ 3.62 Peak daily sendout in dekatherms. . 290,987 269,545 288,352 268,419 254,989 282,956 -

flcating degree days as . ,

percentage of normal 109 % 101% 96 % 103 % 93 % 94 % i Number of eustomers at year-end . .. 176,238 174,470 172,829 170,719 167,813 164,670 Revenue per dekatherm sold for IES Utilities Inc.

(excluding transported volumes) . $ 4.94 $ 4.62 $ 4.69 $ 4.78 $ 4.61 5 4.33

. . - .= . - - . . -. -. - . - _ . - - - . - - -- . -

l O l c o c o r y -o s To e um o I l

l

> 1

• Allicncesi Kilowatt hour: ,,

Partnerships developed with customers, vendors and suppliers A unit of measurement equating 1,000 watts of electric energy sup- M through which both parties have incentives to have a successful - plied to or taken from an electric circuit continuously for one hour.

relationship.

Outaget Cucinteas units The period during which a generating unit, transmission line or The collective activities and infrastructure of a specific business 'other facility is out of service.  ;

precess.

Peaking generations

,CsganoratIon Electric power production during periods of maximum demand.

i ' he simultaneous production of electric energy and useful thermal (heat or steani) energy for industrial and commercial heating or cool. Process improvement efforts:

' ing purposes or manufecturing processes. A company initiatise designed to improve and streamline how the business operates, either as a single process or as an entire company.

Borsgulation:

The process of easing or removing regulatory controls and barriers Rapid Responders i, that affect how and where a company can do business. Utility customer response personnel equipped with technology to enable real-time responses to customer requests.

Civeralfication:

l The practice ofinvesting in a variety of businesses to spread Standby generatlon:

economic risk and encourage growth. Electric energy production that is used on an as-needed basis, and w hich is available in place of,or in addition to the usual source Eosnamic development of supply. Standby generation is used to allow customers to take

. The process of attracting new business and encouraging existing advantage of a utility's interniptiole pricing programs or to ensure I businesses to expand in a specific geographic area, particularly a uninterrupted service, utility service teiritory. Economic development etr - orts can include activities such as trade missions, incentives for business locations Transloadingi and relocations or community marketing support. Moving products or packages of products from one vessel or container to another, such as from a railcar to a truck.

l = l Encrgy solutions:

A package that combines an appropriate mix of products and ser- Weather normallaed l, vices tailored to an individual customer. An adjustment to energy sales or consumption figures which 1

climinates the effect of that particular period's weather impacts, Fodsral Energy Regulatory Commis~sion (FERC): by reflecting what the sales would have been under " norma"'

A federal agency with broad regulatory authority over the interstate weather conditions.

electric power and natural gas industries.

l Ocnoration:

~

The large-scale production of electricity in a central power plant.

l l

l

Ohoroholdor t o t o r em o t l o o l

52 Stock Exchange Listing Where to Buy and Sell Stock

• W IES Industries Inc. common stock is listed on the New York Stock Common stock may be purchased and sold prisately or on the Exchange under the symbol IES. Newspaper listings often use the open market through a brokerage firm. A shareholder enrolled in symbol IES IND. the Dividend Reinsestment and Stock Purchase Plan can purchase additional common stock with no brokerage fees through the Generai inquIriee optional cash feature of the Plan.

, Shareholder inquires, including the replacement of dividend checks, Shares held in the Dividend Reinvestment and Stock Purchase address changes, transfer or reissuance of stock certificates, and Plan can be sold through the Plan Administrator upon written request requests from the general public for any financial publications may of the shareholder, who will receive all proceeds of the sales less be directed to: any brokerage commission.

IES Industries Inc., Attn: Shareholder Services, if you are an IES Utilities Inc. customer you may purchase P.O. Box 351, Cedar Rapids, Iowa 52406 stock directly from the Company and be enrolled in the Dividend l-800-247-9785 or 319 398-7755 Reinvestment and Stock Purchase Plan. Contact Shareholder e-mail: http:#ies-energy.com Services to receive a Direct Purchase form.

Dividend Reinvestment and Duplicate Accounts and Mallings Stock Purchase Plan Shareholders sometimes receive more than one Annual Report The Company has a Dividend Reinvestment and Stock Purchase because shares owned by one shareholder may be registered with Plan which allows shareholders to automatically reinvest their cash slight variations in names. The Company is required to mail an dividend 3 in additional shares of common stock. IES Industries Inc., Annual Report to each name on the shareholders list unless the Shareholder Services, P.O. Box 351, Cedar Rapids, lowa 52406 acts shareholder requests that duplicates can be eliminated. To eliminate as the Plan Administrator. A prospectus describing the Disidend duplicate mailings, please send a w ritten request to Shareholder Reinvestment and Stock Purchase Plan can be obtained by writing Services.

to Shareholder Ser ices.

1996 Form 10.K Available on Request Safekeeping The Company files annually with the Securities and Exchange Safekeeping is a convenient feature of the Dividend Reinvestment Commission an Annual Report Form 10-K. This required report and Stock Purchase Plan designed for shareholders w ho prefer to contains certain other information not made a part of this report, hase their shares held on account rather than receive a stock certiti- The Company will be happy to send you a copy of our 1996 Form cate. You do not have to reinvest your dividends to take advantage 10-K without charge. Requests should be made to Shareholder a of Safekeeping. When you sign up for Safekeeping, you will receive Services P.O. Box 351, Cedar Rapids. Iowa 52406 -

a Safekeeping receipt in place of your certificate. Contact Share-holder Services for a Safekeeping form and additional information.

. . . ~ - . - . . , ~ . - .

I e

- l l

Olvidend Payment Dates Trustee sa '

Scheduled Dividend Record and Pay' ment Dates for 1997 are: The First National Bank of Chicago, Chicago, Illinois M ,

Record Dates Payment Dates IES Utilities Inc.  !

March 14,1997 ' April 1,1997 lowa Electric Light and Power Company-June 13,1997 July 1,1997 l

Mortgage and Deed of Trust - dated August 1,1940 )

September 12,1997 October I,1997 Mortgage and Deed of Trust - dated September 1,1993 i December 12.1997 January 1,1998 lowa Southern Utilities Company - Deed of Trust )

' Dividends paid on common block in 1996 were fully taxable for federal income tax purposes. .s SpecIai Notice J In June 1995, the period allowedfor the settlement of most stock DiviCend Direct Deposit transactions was reduced to three daysfrom the previousfive .;

We can send your dividend electronically to your financial institu- days. As a result, many bivAers are urging customers to move their ,

tion for depmit. Contact Shareholder Services to receive a Dividend securitiesfmm registered ownership to street name ownership. ,

Deposit Form. There is no requirement that securities be held in street name l vn nership by a broker As an investor; you retain the power to >

Tranater Aeent and Reeulred Reeietrar choose theform of ownership best suited to your needs. The choice

' IES Industries Inc., Stock Transfer Dept., is stillyours. We encourage you to keep your lES industries ine.

200 First Street SE. Cedan Rapids, Iowa $2401 '

Common Stock registered with the Compcmy. {fyou have questions l-800-247-9785 or 3l9-398-7755 or concerns callIES Industries Inc. Shareholder Services at lES Industries Inc.-Common Stock 1-800-247-9785 or J19-398-7755.

l {

LES Utihties 1 : :.-Preferred Stock How to Reach Us Stook Held in Brokerage Aecounts - IES industries Shareholder Services:

"Stroet Namo" l-800-247-9785 on 319-398-7755 When you purchase your stock and it is held for you by your broker, IES Utilities Customer Sersice Center: 1 800-822-4348 it is listed w ith the Company in the broker's name, or " street name?' IES Industries World Wide Web Address: http://ies-energy.com IES Industries Inc. does not know the identity of individual share- IES Industries Corporate Coramunications: 319-398-4350 holders who hold their shares in this manner-we simply know that a broker holds a certain number of shares which may be for any  !

, number of customers.

Accounts held in street nam, are not eligible to participate in

, IES '.adustries Inc. Dividend Reimestment and Stock Purchase i

! Tian. Also, you receive all dividend payments, annual reports and

} proxy materials through your broker. Other financial reports may be obtained directly from the Company by contacting Shareholder

. Services. P.O. Ilox 351, Cedar Rapids, low 52406. ,

1 i i

1 4

E t

s I

Ooord of Ottlooro 00o o4100 Oompooy atteetore Leederehty a

g IES Industries Inc. lES Industries Inc. IES Industries Inc. Jay W. Dixson .

C.R.S. Anderson a a Ise I,lu (63,39) 1.arry J. Duncan Sutherland Generating Station Retired Clutirman of the Board Chairman of the Board Assistant Treasurer / Manager Cash Facihty leader of the Company, Sanibel. Florida & Chief Executive Officer Management RM He J. Way ne Hevis a e I.arry D. Root W) 25)* Susan C. Hinds Sixth Street Generating Station Vice Chairman, Pella Corporat on President & Chief Operating Otticer Assirstant Secret.sy Facihty leader

(% indow and Door Manufacturing),

James E. Iloffman (44,2) John K. Helbling Michael F. McDermott Executive Vice President Director of Economic Development General Manager, Technical

""'* Thomas M. Walker (49,0) "PP" " #"""

Christopher J. I,indell Chairman of the Board tive Vice President & Chief Director of Quality improvement Jay A.Thordsen e cu n Omcu g g ,

Financial Officer (egertive 12//WJ

• Dietrich (57,9)

Diane H. Ramsey Director of Corporate f"'; [ j'"#* "8 Jack R.Newman e a .

Partner, Morgan, lewis & Hockius cc eu&nt. Corporate Commumcations David I Wilson (I.aw Firm), Washington, DC

'I P**"' David K.Stevens

• * #""" "8 """

Facihty Leader Dean F. Estnnn W, i O Nector oMnfonnahon and Robert D. Ray a +

Vice Preudent Administration Measurement Systems Retired twsident and Chief Executive 1ES Utlll ties inc.

Ofhccr,IASD flealth Services Inc., Stephen W.Southwick (50,21) "*

• Des Moines, Iowa Vice President, IES Utill ties inc. Mnen C. Mer p,,;,, g,, yg,,cg p,g g pg , , General Counsel & Secretary #"# '"" *"*' '"

Assistant Vice President, Corporate Attorney and Counselor at Law, John F. Ehright (53.0) Engineering Edward C. Greiner Kansas City, Missouri Controller & Chief Accounting #"#'" ""*8" * """ #

Dundeana K. Langer

" I'#" #

llenry Royer a o Assistant Vice President, Field Christopher A.llampsher President and Chief Executive Dennis H. Vass (47,6) Operations referrive 3//Ai71 General Manager-Busmens Process Officer, River City Hank, Treasurer Erik C. Madsen Scott V, Jones Sacramento, Cahforn a Director of Pricing, Marketing and General Manager-Construction Robert W. Schlutz a

• 1ES Uti1Ities Inc. Process Redesign g, President Schlutz Ente pri,es lee Uu (63,39)

Grant G. Harper General Manager-Integrated (Diversified Farnuna Chairman of the Board & General Manager Key Accounu Resources and Retailingh Chief Executive Officer Columbus Junction, lowa Theresa M. Mulford IES Energy Inc.

Anthony R. Weiler + e '"""I 3""8"- 8 "I AC "Un*5 Daild Frawley President & Chief Operating Officer Senior Vice Piesident. Kenneth V. Ricck President & Chief Executive Officer, Merrhandising, James E. PoHmany,2) General Manager, Supply Cham Whiting Petroleum Corp.

Ileilig Meyers Company (Furniture Executive Vice Preudent Customer Retailer), Richmond, Vlrginia Service & Enugy Delivery Gary VanMiddlesworth Timothy J. Elbes Plant Manager, Nuclear and General Managa, Industrial Energy Thomas M. Walker (49,0)

Asa.istant Plant Superintendent. Appheations, Inc, e Member bcruthe Gmimnier Executive Vice President & Chief Financial Officer (rgerrive 12//W> Duane Arnold Energy Center a 4rember Auda crmur, 1ES TranaportatIon e Member nmipenmuum om-ner John E Franz,Jr. (57,5) 1ES UtiIitieo Inc. Inc.

• Member Manana, Gemmmer Vice Prnident, Nuclear GenCo Paul H. Treangen Douglas A. Alexander Vice President .

Harold W. Rchrauer (59,24)

S Vice President Field Operations 1ES Inveatmenis

"**

• C'['"'I"8 '" .

Stephen W. Southwick (50.21) Inc.

Alan J. Arnold

• Vice Preudent, Thomas L. Aller General Counwl & Secretary enua anagu, Regulatory Vice President Management k Philip D. Ward (56,23) Kenneth R. Whiting g Vice President, Generation John J. Blaw Vice President, General ManaFer, Energy International Business John E. Ehright t53,0) Transactions Controller & Chief Accounting William J. Cherrier I

Officer (rgectite 7/W)

General Manager, Business Dennis H. Vans (47,6) Operations Treasurer a

figwrs in ghsrenthesis vrpersent age und [

wars of sornce

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