FORM 10-Q
SECURlTlES AND EXCHANGE COMMlSSlON
WASHINGTON, D. C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended
September 30, 1998 Commission File Number 1-3132-2
INDIANAPOLIS POWER & LIGHT COMPANY
(Exact name of Registrant as specified in its charter)
Indiana 35-0413620
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Monument Circle
Indianapolis, Indiana 46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 317-261-8261
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days. Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding At September 30, 1998
----- ---------------------------------
Common (Without Par Value) 17,206,630 Shares
<PAGE>
INDIANAPOLIS POWER & LIGHT COMPANY
----------------------------------
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
- ------- ---------------------
Statements of Income - Three Months Ended and
Nine Months Ended September 30, 1998 and 1997 2
Balance Sheets - September 30, 1998 and
December 31, 1997 3
Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 4
Notes to Financial Statements 5-6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-13
PART II. OTHER INFORMATION 14-16
- -------- -----------------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
INDIANAPOLIS POWER & LIGHT COMPANY
Statements of Income
(In Thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Electric $ 215,246 $ 196,221 $ 592,694 $ 555,275
Steam 6,782 7,651 26,361 27,673
------------ ------------ ----------- ------------
Total operating revenues 222,028 203,872 619,055 582,948
------------ ------------ ----------- ------------
OPERATING EXPENSES:
Operation:
Fuel 49,645 44,475 133,894 123,597
Other 38,801 36,269 112,147 104,524
Power purchased 2,899 1,365 6,748 6,655
Purchased steam 1,042 1,223 4,158 5,126
Maintenance 15,132 14,765 50,167 48,076
Depreciation and amortization 26,696 25,733 77,359 77,977
Taxes other than income taxes 9,429 8,194 26,887 25,194
Income taxes - net 26,719 23,028 66,690 59,353
------------ ------------ ----------- ------------
Total operating expenses 170,363 155,052 478,050 450,502
------------ ------------ ----------- ------------
OPERATING INCOME 51,665 48,820 141,005 132,446
------------ ------------ ----------- ------------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used during construction 359 893 884 3,174
Other - net 163 (475) 288 (1,069)
Gain on termination of agreement 12,500 - 12,500 -
Income taxes - net (4,576) 232 (4,567) 502
------------ ------------ ----------- ------------
Total other income - net 8,446 650 9,105 2,607
------------ ------------ ----------- ------------
INCOME BEFORE INTEREST CHARGES 60,111 49,470 150,110 135,053
------------ ------------ ----------- ------------
INTEREST CHARGES:
Interest 10,193 10,190 30,568 31,349
Allowance for borrowed funds used during construction (229) (227) (625) (699)
------------ ------------ ----------- ------------
Total interest charges 9,964 9,963 29,943 30,650
------------ ------------ ----------- ------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 50,147 39,507 120,167 104,403
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - - - 18,347
------------ ------------ ----------- ------------
NET INCOME 50,147 39,507 120,167 122,750
------------ ------------ ----------- ------------
PREFERRED DIVIDEND REQUIREMENTS 802 795 2,315 2,386
------------ ------------ ----------- ------------
INCOME APPLICABLE TO COMMON STOCK $ 49,345 $ 38,712 $ 117,852 $ 120,364
============ ============ =========== ============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
INDIANAPOLIS POWER & LIGHT COMPANY
Balance Sheets
(In Thousands)
(Unaudited)
<CAPTION>
September 30 December 31
1998 1997
--------------- ---------------
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
Utility plant in service $ 2,836,355 $ 2,800,446
Less accumulated depreciation 1,182,314 1,121,317
--------------- ---------------
Utility plant in service - net 1,654,041 1,679,129
Construction work in progress 84,724 77,030
Property held for future use 10,224 10,224
--------------- ---------------
Utility plant - net 1,748,989 1,766,383
--------------- ---------------
OTHER PROPERTY -
At cost, less accumulated depreciation 5,719 5,171
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents 7,382 4,950
Accounts receivable and unbilled revenue (less allowance
for doubtful accounts 1998, $1,289 and 1997, $1,005) 37,836 43,053
Fuel - at average cost 29,667 35,000
Materials and supplies - at average cost 48,581 47,648
Prepayments and other current assets 4,242 8,486
--------------- ---------------
Total current assets 127,708 139,137
--------------- ---------------
DEFERRED DEBITS:
Regulatory assets 118,929 126,784
Miscellaneous 11,233 12,297
--------------- ---------------
Total deferred debits 130,162 139,081
--------------- ---------------
TOTAL $ 2,012,578 $ 2,049,772
=============== ===============
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common shareholder's equity:
Common stock $ 324,537 $ 324,537
Premium and net gain on preferred stock 2,642 2,329
Retained earnings 442,915 508,626
--------------- ---------------
Total common shareholder's equity 770,094 835,492
Cumulative preferred stock (Note 3) 59,135 9,135
Long-term debt (less current maturities
and sinking fund requirements) 627,880 627,840
--------------- ---------------
Total capitalization 1,457,109 1,472,467
--------------- ---------------
CURRENT LIABILITIES:
Notes payable - banks and commercial paper 4,750 23,700
Accounts payable and accrued expenses 55,500 63,970
Dividends payable 13,177 13,290
Taxes accrued 30,408 18,674
Interest accrued 9,686 13,258
Other current liabilities 13,663 12,556
--------------- ---------------
Total current liabilities 127,184 145,448
--------------- ---------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Accumulated deferred income taxes - net 326,574 325,386
Unamortized investment tax credit 42,691 44,783
Accrued postretirement benefits 12,363 17,144
Accrued pension benefits 41,342 39,821
Miscellaneous 5,315 4,723
--------------- ---------------
Total deferred credits and other long-term liabilities 428,285 431,857
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
TOTAL $ 2,012,578 $ 2,049,772
=============== ===============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
INDIANAPOLIS POWER & LIGHT COMPANY
Statements of Cash Flows
(In Thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 120,167 $ 122,750
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 75,301 73,897
Amortization of regulatory assets 8,941 12,800
Deferred income taxes and investment tax credit adjustments - net (3,106) 8,101
Allowance for funds used during construction (1,509) (3,873)
Cumulative effect of accounting change - before taxes (Note 4) - (29,915)
Change in certain assets and liabilities:
Accounts receivable 5,217 9,676
Fuel, materials and supplies 4,400 4,942
Accounts payable (8,470) (7,442)
Taxes accrued 11,734 (2,271)
Accrued pension benefits 1,521 3,033
Other - net (969) (4,350)
-------------- --------------
Net cash provided by operating activities 213,227 187,348
-------------- --------------
CASH FLOWS FROM INVESTING:
Construction expenditures (55,642) (47,801)
Other 480 (2,642)
-------------- --------------
Net cash used in investing activities (55,162) (50,443)
-------------- --------------
CASH FLOWS FROM FINANCING:
Short-term debt - net (18,950) (11,250)
Issuance of preferred stock (Note 3) 50,000 (34,000)
Dividends paid (186,193) (83,886)
Other (490) 36
-------------- --------------
Net cash used in financing activities (155,633) (129,100)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 2,432 7,805
Cash and cash equivalents at beginning of period 4,950 8,840
-------------- --------------
Cash and cash equivalents at end of period $ 7,382 $ 16,645
============== ==============
- ----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 32,638 $ 33,711
============== ==============
Income taxes $ 53,938 $ 56,142
============== ==============
See notes to financial statements.
</TABLE>
<PAGE>
INDIANAPOLIS POWER & LIGHT COMPANY
----------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. COMPANY
Indianapolis Power & Light Company (IPL) is a subsidiary of
IPALCO Enterprises, Inc.
2. GENERAL
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. The reported amounts of revenues and
expenses during the reporting period may also be affected by the
estimates and assumptions management is required to make. Actual results
may differ from those estimates.
In the opinion of management these statements reflect all adjustments,
consisting of only normal recurring accruals, which are necessary to a
fair statement of the results for the interim periods covered by such
statements. Due to the seasonal nature of the electric utility business,
the annual results are not generated evenly by quarter during the year.
Certain amounts from prior year financial statements have been
reclassified to conform to the current year presentation. Certain
amounts have been restated due to the change to the unbilled revenue
method of accounting (see note 4). These financial statements and notes
should be read in conjunction with the audited financial statements
included in IPL's 1997 Annual Report on Form 10-K.
3. PREFERRED STOCK
On January 13, 1998, IPL issued $50 million of cumulative preferred
stock with a rate of 5.65%. 500,000 shares were issued at $100 par value
each. The stock will be redeemable at par value, subject to certain
restrictions, in whole or in part, at any time on or after January 1,
2008, at the option of IPL.
4. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Effective January 1, 1997, IPL adopted the unbilled revenue method of
accounting for all electric and steam sales to more closely match
revenues with expenses. Under this method, IPL accrues revenues for all
electric and steam energy delivered to customers during the period,
whether billed or not. Previously IPL recognized these revenues only as
customers were billed, with the service rendered after monthly meter
reading dates through the end of a calendar month recognized as revenues
in the following month. The cumulative effect of accounting change, net
of taxes, was a one-time increase of $18.3 million, which is reported as
a separate component of net income in the nine months ended September
30, 1997. The change had the effect of decreasing income before
cumulative effect of accounting change in the third quarter and nine
months ended of 1997 by $4.1 million. The results of 1997 were restated
for the accounting change.
5. COMPREHENSIVE INCOME
On January 1, 1998, IPL adopted SFAS No. 130, "Comprehensive Income,"
which requires that changes in the amounts of certain items, including
foreign currency translation adjustments and gains and losses on certain
securities be shown in the financial statements. It has been determined
that IPL has no amounts which require classification under comprehensive
income.
6. NEW ACCOUNTING STANDARD
Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," was issued in June 1998 and is
effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial condition and measures those
instruments at fair value. If certain conditions are met, a derivative
may be specifically designated as a fair value hedge, a cash flow hedge,
or a hedge of a foreign currency exposure. The accounting for changes in
the fair value of a derivative (that is, gains and losses) depends of
the intended use of the derivative and the resulting designation.
Management has not yet quantified the effect of the new standard on the
financial statements.
7. GAIN FROM TERMINATION OF AGREEMENT
During the third quarter of 1998, a gain of $12.5 million ($7.8 million
after-tax) resulted from the liquidation and termination of an agreement
to purchase up to 150 megawatts of power during the summer months
through the year 2000. IPL plans to ultimately replace this supply
resource and is considering several alternatives.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the Reform Act), IPL is hereby filing cautionary
statements identifying important factors that could cause IPL's actual results
to differ materially from those projected in forward-looking statements of IPL.
This Form 10-Q, and particularly Management's Discussion and Analysis, contains
forward-looking statements. The Reform Act defines forward-looking statements as
statements that express an expectation or belief and contain a projection, plan
or assumption with regard to, among other things, future revenues, income,
earnings per share or capital structure. Such statements of future events or
performance are not guarantees of future performance and involve estimates,
assumptions, and uncertainties and are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause
IPL's actual results to differ materially from those contained in
forward-looking statements made by or on behalf of IPL. The words "anticipate,"
"believe," "estimate," "expect," "forecast," "project," "objective" and similar
expressions are intended to identify forward-looking statements.
Some important factors that could cause IPL's actual results or
outcomes to differ materially from those discussed in the forward-looking
statements include, but are not limited to, fluctuations in customer growth and
demand, weather, fuel and purchased power costs and availability, regulatory
action, Federal and State legislation, interest rates, labor strikes,
maintenance and capital expenditures and local economic conditions. In addition,
IPL's ability to have available an appropriate amount of electric supply
capacity in a timely manner can significantly impact IPL's financial
performance. The timing of deregulation and competition, product development and
introductions of technology changes are also important potential factors.
All such factors are difficult to predict, contain uncertainties which
may materially affect actual results and are beyond the control of IPL.
IPL's ability to predict results or effects of issues related to the
Year 2000 is inherently uncertain, and is subject to factors that may cause
actual results to differ materially from those projected. Factors that could
affect the actual results include the possibility that contingency plans or
remediation efforts will not operate as intended; IPL's failure to timely or
completely identify all software, hardware, or embedded chip devices requiring
remediation; unexpected costs; and the uncertainty associated with the impact of
Year 2000 issues on the utility industry and on IPL's customers, vendors, and
others with whom it does business. Please see the discussion about Year 2000,
below, for information about IPL's efforts.
LIQUIDITY AND CAPITAL RESOURCES
Overview
- --------
The Board of Directors of Indianapolis Power & Light Company (IPL)
declared dividends on common stock of $22 million and $42.4 million on July 28,
1998, and August 25, 1998, respectively. The dividends were paid by IPL to
IPALCO Enterprises, Inc.
IPL's capital requirements are primarily related to construction
expenditures needed to meet customers' needs for electricity and steam, for
environmental compliance and for the implementation of an integrated information
system. Construction expenditures (excluding allowance for funds used during
construction) totaled $23.1 million during the third quarter of 1998,
representing a $5.9 million increase from the comparable period in 1997.
Internally generated cash provided by operations was used for construction
expenditures during the third quarter of 1998. Construction expenditures
(excluding allowance for funds used during construction) totaled $55.6 million
during the first nine months ended September 30, 1998, representing a $7.8
million increase from the comparable period in 1997. Internally generated cash
provided by operations was used for construction expenditures during the first
nine months of 1998.
The three-year construction program has not changed from that
previously reported in IPL's 1997 Form 10-K report. (See "Future Performance" in
Item 7 of Management's Discussion and Analysis of Financial Condition and
Results of Operations in IPL's 1997 Form 10-K report for further discussion).
Year 2000
- ---------
IPL is potentially subject to operational problems associated with the
inability of various computer hardware, software, and devices containing
embedded chips to properly process the year change from 1999 to 2000. Such
problems could conceivably affect IPL's ability to deliver electricity or
steam to its customers, as well as IPL's internal operations such as billing
or payroll functions. Further, Year 2000 problems experienced by other
entities, over which IPL has no control, such as certain suppliers or other
electric utilities with which IPL is interconnected, could adversely affect
IPL's operations.
In 1997, IPL established a Year 2000 Committee. IPL currently manages
the Year 2000 project through two employee committees, the Compliance Testing
Committee and the Contingency Planning Committee, each headed by corporate
officers. Each of those committees reports to a Year 2000 Steering Committee
also composed of officers. The Year 2000 Steering Committee reports to the
Office of the Chairman.
The Compliance Testing Committee is engaged in inventorying, reviewing,
analyzing, correcting, and testing computer-related systems and embedded chip
devices. The Contingency Planning Committee is in the process of assessing
various operating scenarios associated with potential Year 2000 problems and
formulating plans by which to operate the Company in the event of such problems.
Both the Compliance Testing Committee and the Contingency Planning Committee are
concentrating first on systems critical to the continuity of IPL's business.
Non-critical systems have lower priorities.
IPL is participating in an Electric Power Research Institute (EPRI)
program on the Year 2000 issue as well as the North American Electric
Reliability Council (NERC) system readiness assessments.
IPL's Year 2000 Plan includes attention to its generating facilities,
energy management systems, telecommunications systems, substation control and
protection systems, transmission and distribution systems, business information
systems, financial systems and business partners. It includes efforts such as
assessing Year 2000 risks to computer hardware, software and embedded systems;
identifying options and solutions; evaluating solutions; repairing, upgrading
and replacing systems; testing systems; and contingency planning.
State of Readiness
A. Identification and Assessment
The Compliance Testing Committee is coordinating and reviewing the
enterprise-wide use of information technology and assessing potential Year 2000
problems. That effort involves making an inventory of applications and systems
and evaluating exposures associated with, for example, vendor-provided software
and hardware, IPL-developed software, and various devices containing embedded
chips. The Committee is also in contact with vendors to determine product
compliance and vendors' timeframes for compliance. Computer systems being
reviewed include hardware, machine microcode and firmware, operating systems,
generic applications software, billing software, communications software, and
financial software.
The Compliance Testing Committee continues to assess computer systems
and embedded chip devices related to IPL's:
- Electricity generating stations and plants producing steam;
- Energy management systems;
- Substation controls, system protection, and transmission and
distribution systems;
- Telecommunications systems; and
- Business information systems.
IPL currently expects to complete the identification/inventory phase
for critical systems by the end of the fourth quarter of 1998 and estimates the
phase to be approximately 95% complete.
IPL currently expects to complete the assessment phase for critical
systems by the end of the fourth quarter of 1998 and estimates the phase to be
approximately 75% complete.
B. Remediation and Testing
The Compliance Testing Committee is coordinating, modifying, or
replacing legacy systems which may not be Year 2000 compliant. IPL will be
replacing most of its key financial software applications during 1998 and 1999.
Although that project was not specifically initiated as a Year 2000 effort, it
will coincidentally result in replacement of non-compliant software.
The Compliance Testing Committee is also engaged in establishing and
operating appropriate testing environments to determine, to the extent possible,
the Year 2000 compliance of existing systems and/or devices and the compliance
of replacement or upgraded systems and devices. IPL may employ one or more of
the following techniques: component tests, simulations, outside testing, vendor
verifications, or upgrades or change-outs. Some devices or systems, such as
satellite communication links, may not be susceptible to testing, in which cases
IPL must rely on the service providers' verifications.
IPL has inquired of its suppliers and vendors of software,
computer-related equipment, devices, and services about Year 2000 compliance.
Some provided the required information and/or assurances and some did not. IPL
has elected to test not only existing systems but also new purchases and
upgrades in its efforts to minimize Year 2000 problems.
IPL's operations could be adversely affected by Year 2000-related
failures of other companies, such as telecommunication providers, that supply
IPL with mission-critical services. Similarly, Year 2000 failures of other
utilities with which IPL is interconnected could adversely impact IPL's ability
to deliver services to its customers.
IPL currently expects to complete the remediation and testing phases
for critical systems by the end of the second quarter 1999 and estimates that it
is now approximately 50% complete.
Costs to Address IPL's Year 2000 Issues
Not including the cost of replacing IPL's business software, a project
not initiated specifically for Year 2000 reasons but which will provide Year
2000 benefits through replacing non-compliant software, IPL currently estimates
that its costs of the phases of identification, assessment, remediation and
testing may be approximately $4,000,000, which IPL believes is not material to
its results of operations, liquidity and financial condition. Of that figure,
IPL has currently expended approximately $950,000. A substantial proportion of
the costs of remediation are associated with functional areas of IPL other than
Information Services. IPL currently estimates that its costs of contingency
planning efforts may be approximately $1,500,000.
Risks of IPL's Year 2000 Issues
In light of the numerous computer-related systems and embedded chip
devices present in business and production equipment used by an electric
utility, and the interdependent nature of control systems, a large number of
potential Year 2000 failure scenarios exists, potentially involving IPL's
internal functions (such as billing) as well as its steam and electricity
generation and distribution functions. Consequences could conceivably range from
essentially no operational problems to a massive disruption of steam and
electric service lasting for a significant period of time. Further, since IPL
does not stand alone but is electrically interconnected with other utilities
across a substantial portion of the nation, even if IPL experiences no
significant Year 2000 problems associated with its own equipment, its ability
to deliver electricity could be adversely affected by Year 2000 failures
experienced by other interconnected utilities. IPL currently expects to
experience at least some, hopefully minor, problems associated with Year 2000.
Some particularly bleak yet conceivable Year 2000 failure scenarios could be
material to IPL's results of operations.
There are both external and internal risks associated with Year 2000
that could affect IPL's steam and electricity generation, transmission and
distribution operations. Potential internal risk factors include increased risk
of generator trips, inability to start or restart generators, increased risk of
transmission facility trips, loss of energy management systems, loss of
Company-owned voice/data communications, system protection (relay) failures
resulting in cascading outages or facility damage, failure of load-shedding
controls to operate properly, failure of load management systems to operate
properly, loss of or incorrect critical operating data, failure of environmental
control systems, loss of distribution systems, or failure of voltage control
devices to operate properly. Occurrences of those internal problems, alone or in
combination, could result in varying impacts on IPL's operations.
External risk factors include loss of customer load, uncharacteristic
load patterns, loss of leased communication facilities, failure of delivery
systems to maintain supplies of fuel, and severe or cold weather. Occurrences of
various of those events, alone or in combination, could result in varying
impacts on IPL.
Particularly with respect to responding to contingencies that might
occur, unavailability of skilled labor could exacerbate Year 2000 problems. The
current collective bargaining agreement between Indianapolis Power & Light
Company (IPL) and the International Brotherhood of Electrical Workers, the union
representing IPL's production, distribution, construction and maintenance
employees, expires on December 13, 1999. That union recently rejected a proposed
one-year extension of the collective bargaining agreement which was proposed
by management so that negotiation would not be occurring near the end of
calendar year 1999.
IPL's insurance policies, including policies for liability and property
damage, currently expire or are up for renewal during 1999. IPL currently
expects that, in line with a general trend in the insurance industry, insurance
policies purchased by IPL during 1999 may exclude coverage of Year 2000 events
or certain elements of damage potentially flowing therefrom.
In light of the many adverse circumstances that could happen to IPL
associated with Year 2000, along with the speculation that some or many of them
may not happen, it is extremely difficult to hypothesize a most reasonably
likely worst case Year 2000 scenario with any degree of certainty. With that in
mind, IPL currently believes the most reasonably likely worst case scenario
would be the temporary loss of one or more generation units resulting in
interruptions of power to IPL customers. IPL does not believe that the worst
case scenario will occur, and, should it occur, IPL believes that the
consequences of that scenario, with regard to either costs of repair or lost
revenues, are not likely to have a material effect on IPL's results of
operations, liquidity, and financial condition.
IPL's Contingency Plans
The Contingency Planning Committee is engaged in reviewing hypothetical
scenarios involving various system or device failures and preparing plans by
which to operate the Company in the event those failures occur. IPL's
contingency planning efforts are not yet complete but are underway within the
scope of an overall outline. IPL's contingency planning involves the phases of
plan development, testing, execution, and recovery after Year 2000 events. As
with compliance testing, contingency planning touches essentially every area of
the Company's operations, as well as interactions with interconnected utilities,
customers, critical vendors, emergency and other governmental authorities.
The planning phase includes identifying and evaluating potential
impacts on business operations, life, property, and the environment; developing
emergency plans including establishing procedures for mitigation of failures and
evaluating contingency planning being done on systems that interface with IPL's
systems; identifying dates of action for various contingencies; establishing
responsibility and authority for various response efforts; and establishing and
performing a training program with respect to responding to contingencies,
including practicing and testing the contingency plans and coordinating the
efforts with governmental functions.
Contingency planning will include consideration of potential
interruptions in the supply chain or transportation of critical fuel, water,
chemicals, material supplies etc., and acquisition of appropriate extra
supplies, as well as potential failures of or other problems associated with the
interconnected electricity grid. Similarly, consideration will be given to
cooperative arrangements with other utilities in the event that Year 2000
problems impact the supply of skilled labor to effect remediation actions. The
Company's existing disaster recovery plans may form bases for some Year 2000
contingency plans.
In the testing phase, various drills will be conducted to test the
plan's effectiveness. Modifications will be made where testing indicates a need.
In the execution phase, IPL will operate its contingency plans in response to
events actually occurring.
After Year 2000 events, if any, IPL will execute its post-event
contingency plans as required. It will test its system functions, review the
results, restore and restart systems, and notify appropriate authorities of the
resolution of problems.
<PAGE>
RESULTS OF OPERATIONS
Comparison of Third Quarter and Nine Months Ended September 30, 1998
--------------------------------------------------------------------
With Third Quarter and Nine Months Ended September 30, 1997
-----------------------------------------------------------
Income applicable to common stock increased $10.6 million during the
third quarter of 1998 compared to the third quarter of 1997. Income applicable
to common stock decreased $2.5 million during the nine months ended 1998
compared to the same period last year. Income applicable to common stock for the
first nine months of 1997 included a one-time positive after-tax increase of
$18.3 million. See "Cumulative Effect of Accounting Change" below. The following
discussion highlights additional factors contributing to the variances.
Operating Revenues
- ------------------
Operating revenues during the third quarter and nine months ended of
1998 increased from the comparable 1997 periods by $18.2 million and $36.1
million, respectively. The increases in revenues resulted from the following:
<TABLE>
<CAPTION>
Increase (Decrease) from Comparable Period
------------------------------------------
September 30, 1998
Three Months Ended Nine Months Ended
------------------ -----------------
(Millions of Dollars)
<S> <C> <C>
Electric:
Change in retail KWH sales $10.4 $14.9
Fuel revenue 0.7 0.9
Wholesale revenue 7.5 19.2
DSM Tracker revenue 0.3 1.1
Steam revenue (0.9) (1.3)
Other revenue 0.2 1.3
-------- --------
Total change in operating revenues $ 18.2 $ 36.1
======== ========
</TABLE>
The third quarter increase in retail KWH sales compared to the same
period in 1997 was due in part to warmer weather. Cooling degree days increased
36% during the third quarter compared to the same period in 1997. The nine
months ended increase was due in part to a 50% increase in cooling degree days
partially offset by a decrease of 24% in heating degree days compared to the
same period last year. Economic growth in IPL's service territory also
contributed to the increase in sales for both the third quarter and nine months
ended. The changes in fuel revenues in 1998 from the prior year reflect changes
in total fuel costs billed to customers. The increased wholesale sales during
the third quarter and nine months ended of 1998, as compared to the same periods
in 1997, reflect increased wholesale marketing efforts and energy requirements
of other utilities.
Operating Expenses
- ------------------
Fuel expenses in the third quarter and nine months ended of 1998
increased by $5.2 million and $10.3 million, respectively compared to the same
periods during 1997. The primary reason for both variances from the prior
periods was a result of increased total KWH sales.
Other expenses in the third quarter and nine months ended of 1998
increased by $2.5 million and $7.6 million, respectively. The third quarter and
nine month ended increases resulted from increased administrative and general
expenses and electric distribution expense. The third quarter increase was
partially offset by decreased amortization of demand side management costs.
Power purchased expense increased in the third quarter by $1.5 million
while increasing only slightly during the nine months ended of 1998, as compared
to the similar periods last year. The increase during the third quarter resulted
from increased KWH purchases.
Steam purchased expense decreased by $0.2 million and $1.0 million
during the third quarter and nine months ended periods ended of 1998,
respectively, compared to the similar periods last year. The third quarter
decrease was primarily due to decreased unit prices of steam. The nine month
ended decrease resulted from decreased steam purchases as well as decreased unit
prices of steam.
Maintenance expenses increased $0.4 million in the third quarter and
$2.1 million for the nine months ended of 1998 compared to the similar periods
in 1997. The increase for the nine months ended period resulted primarily from
the overhaul of unit 6 at the Pritchard plant as well as increased boiler and
electric plant maintenance at the Petersburg plant.
Taxes other than income taxes increased $1.2 million and $1.7 million
in the third quarter and nine months ended periods, respectively, compared to
the similar periods last year. These increases resulted primarily from increased
real estate and personal property taxes as well as increased gross receipts tax.
Income taxes - net, increased $3.7 million and $7.3 million in the
third quarter and nine months ended periods, respectively due to an increase in
pretax operating income.
As a result of the foregoing, utility operating income increased 5.8%
during the third quarter of 1998 from the comparable 1997 period, to $51.7
million. Utility operating income during the nine months ended of 1998 increased
6.5% from the comparable 1997 period, to $141.0 million.
Other Income and Deductions
- ---------------------------
Allowance for equity funds used during construction decreased $0.5
million and $2.3 million in the third quarter and nine months ended periods,
respectively compared to the same periods last year. In August 1997, the
amortization of deferred equity carrying charges on a plant asset ended
resulting in these decreases.
Other - net increased $0.6 million and $1.4 million in the third
quarter and nine months ended, respectively. The third quarter and nine months
increases were due in part to decreased miscellaneous non-operating expenses.
During the third quarter of 1998, a gain from the termination of an
agreement to purchase power was recognized by IPL in the amount of $12.5 million
(See note 7).
Interest and Other Charges
- --------------------------
Interest expense decreased $0.8 million during the nine months ended of
1998 while unchanging for the third quarter compared to the similar periods last
year. The nine months variance was due to decreased interest on tax assessments
and short-term borrowings as well as decreased long-term interest. The decrease
in long-term interest was due to the retirement of an $11.3 million first
mortgage bond in May 1997.
Cumulative Effect of Accounting Change
- --------------------------------------
A cumulative effect of accounting change in the amount of $18.3
million, net of taxes, was effectively recorded during the first quarter of
1997. Effective January 1, 1997, IPL adopted the unbilled revenues method of
accounting for electricity and steam delivered during the period. Revenues are
accrued for services provided but unbilled at the end of each month(see note 4).
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
- ------- -----------------
On August 15, 1997, Region V of the U. S. Environmental Protection
Agency issued to IPL a Notice of Violation (NOV) under the Clean Air Act. The
NOV alleged that particulate matter emissions from IPL's Perry K Units 11 and 12
exceeded applicable limits on three dates in 1995, that particulate matter
emissions from Perry K Units 15 and 16 exceeded applicable limits on a single
date in each of 1994 and 1995, and that sulfur dioxide emissions exceeded the
applicable limit on four days in the first quarter of 1997. IPL disagrees with
the Agency's interpretations of the applicable rules and believes that the Perry
K Plant has been in compliance with applicable limits. Representatives of IPL
met with the Agency on several occasions in 1997 and 1998, in an attempt to
resolve the matter and have subsequently provided the Agency with additional
information on the operation of the Plant. IPL has reached agreement with the
Agency and has executed a Consent Order to resolve this matter. IPL agreement to
the Order is not an admission of a violation. No penalties or fines will result
from the Order. IPL will conduct additional particulate testing. Failure to
demonstrate compliance will result in additional expenditures for engineering
and corrective measures. IPL will submit additional opacity reports and
additional coal analysis results to EPA. Compliance with the Order resolves all
alleged civil violations related to the U.S. EPA's August 15, 1997, Notice of
Violation.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits. Copies of documents listed below which are identified
with an asterisk (*) are incorporated herein by reference and made a
part hereof. Management contracts or compensatory plans are marked with
a double asterisk (**) after the description of the contract or plan.
3.1* Articles of Incorporation of Indianapolis Power & Light Company, as
amended. (Form 10-K for the year ended 12-31-97.)
3.2* Bylaws of Indianapolis Power & Light Company, as amended. (Form 10-Q
for the quarter ended March 31, 1998.)
4.1* Mortgage and Deed of Trust, dated as of May 1, 1940, between
Indianapolis Power & Light Company and American National Bank and Trust
Company of Chicago, Trustee, as supplemented and modified by 42
Supplemental Indentures.
Exhibits D in File No. 2-4396; B-1 in File No. 2-6210; 7-C
File No. 2-7944; 7-D in File No.2-72944; 7-E in File No. 2-8106; 7-F
in File No. 2-8749; 7-G in File No. 2-8749; 4-Q in File No. 2-10052;
2-I in File No. 2-12488; 2-J in File No. 2-13903; 2-K in File
No. 2-22553; 2-L in File No. 2-24581; 2-M in File No. 2-26156; 4-D in
File No. 2-26884; 2-D in File No. 2-38332; Exhibit A to Form 8-K for
October 1970; Exhibit 2-F in File No. 2-47162; 2-F in File No. 2-50260;
2-G in File No. 2-50260; 2-F in File No. 2-53541; 2E in File
No. 2-55154; 2E in File No. 2-60819; 2F in File No. 2-60819; 2-G in
File No. 2-60819; Exhibit A to Form 10-Q for the quarter ended 9-30-78
File No.1-3132; 13-4 in File No. 2-73213; Exhibit 4 in File No.2-93092.
Twenty-eighth, Twenty-ninth and Thirtieth Supplemental Indentures.
(Form 10-K dated for the year ended December 31, 1985.)
4.2* Thirty-First Supplemental Indenture dated as of October 1, 1986.
(Form 10-K for year ended 12-31-86.)
4.3* Thirty-Second Supplemental Indenture dated as of June 1, 1989. (Form
10-K for year ended 12-31-89.)
4.4* Thirty-Third Supplemental Indenture dated as of August 1, 1989. (Form
10-K for year ended 12-31-89.)
4.5* Thirty-Fourth Supplemental Indenture dated as of October 15, 1991.
(Form 10-K for year ended 12-31-91.)
4.6* Thirty-Fifth Supplemental Indenture dated as of August 1, 1992. (Form
10-K for year ended 12-31-92.)
4.7* Thirty-Sixth Supplemental Indenture dated as of April 1, 1993. (Form
10-Q for quarter ended 9-30-93.)
4.8* Thirty-Seventh Supplemental Indenture dated as of October 1, 1993.
(Form 10-Q for quarter ended 9-30-93.)
4.9* Thirty-Eighth Supplemental Indenture dated as of October 1, 1993.
(Form 10-Q for quarter ended 9-30-93.)
4.10* Thirty-Ninth Supplemental Indenture dated as of February 1, 1994.
(Form 8-K, dated 1-25-94.)
4.11* Fortieth Supplemental Indenture dated as of February 1, 1994. (Form
8-K, dated 1-25-94.)
4.12* Forty-First Supplemental Indenture dated as of January 15, 1995.
(Exhibit 4.12 to the Form 10-K dated 12-31-94.)
4.13* Forty-Second Supplemental Indenture dated as of October 1, 1995.
(Exhibit 4.12 to the Form 10-K dated 12-31-95.)
10.1* Form of Termination Benefits Agreement together with schedule of
parties to, and dates of, the Termination Benefits Agreements.
(Exhibit 10.1 to the Form 10-Q dated 6-30-98.) **
10.2* Amendment No. 7 dated June 11, 1998, to Interconnection Agreement
dated May 1, 1992, among Indianapolis Power & Light Company, PSI
Energy, Inc. and CINERGY Services, Inc. (Exhibit 10.2 to the Form 10-Q
dated 6-30-98.)
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
None
<PAGE>
Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDIANAPOLIS POWER & LIGHT COMPANY
----------------------------------
(Registrant)
Date: November 13, 1998 /s/ John R. Brehm
-------------------- --------------------------
John R. Brehm
Senior Vice President, Finance
Date: November 13, 1998 /s/ Stephen J. Plunkett
-------------------- ---------------------------
Stephen J. Plunkett
Controller
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