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 1-8644
IPALCO ENTERPRISES, INC.
(Exact name of Registrant as specified in its charter)
Indiana 35-1575582
(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) 45,190,399 Shares
<PAGE>
IPALCO ENTERPRISES, INC. AND SUBSIDIARIES
-----------------------------------------
INDEX
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Page No.
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PART I. FINANCIAL INFORMATION
- ------- ---------------------
Statements of Consolidated Income - Three Months Ended
and Nine Months Ended September 30, 1998 and 1997 2
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 3
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-17
PART II. OTHER INFORMATION 18-19
- -------- -----------------
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Statements of Consolidated Income
(In Thousands Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
UTILITY 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
----------- ----------- ----------- -----------
UTILITY 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
----------- ----------- ----------- -----------
UTILITY 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 2,134 (1,420) 2,856 (4,194)
Gain on termination of agreement (Note 8) 12,500 - 12,500 -
Income taxes - net (3,395) 3,434 1,275 7,353
----------- ----------- ----------- -----------
Total other income - net 11,598 2,907 17,515 6,333
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST AND OTHER CHARGES 63,263 51,727 158,520 138,779
----------- ----------- ----------- -----------
INTEREST AND OTHER CHARGES:
Interest 15,390 17,744 48,697 46,440
Allowance for borrowed funds used during construction (229) (227) (625) (699)
Preferred stock transactions 803 795 2,003 2,386
----------- ----------- ----------- -----------
Total interest and other charges - net 15,964 18,312 50,075 48,127
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 47,299 33,415 108,445 90,652
CUMULATIVE EFFECT OF ACCOUNTING CHANGE -
NET OF TAXES (Note 4) - - - 18,347
----------- ----------- ----------- -----------
NET INCOME $ 47,299 $ 33,415 $ 108,445 $ 108,999
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE (Note 2)
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 1.05 $ 0.75 $ 2.41 $ 1.85
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 4) - - - 0.37
----------- ----------- ----------- -----------
NET INCOME $ 1.05 $ 0.75 $ 2.41 $ 2.22
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE (Note 2)
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 1.04 $ 0.74 $ 2.38 $ 1.84
CUMULATVE EFFECT OF ACCOUNTING CHANGE (Note 4) - - - 0.37
----------- ----------- ----------- -----------
NET INCOME $ 1.04 $ 0.74 $ 2.38 $ 2.21
=========== =========== =========== ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
<CAPTION>
September 30 December 31
ASSETS 1998 1997
------
-------------- ---------------
<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 ASSETS:
Nonutility property - at cost, less accumulated depreciation 72,995 72,865
Other investments 12,425 13,023
-------------- ---------------
Other assets - net 85,420 85,888
-------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents 18,013 17,293
Accounts receivable and unbilled revenue
(less allowance for doubtful accounts
1998, $1,431 and 1997, $1,202) 45,647 47,033
Fuel - at average cost 29,852 35,257
Materials and supplies - at average cost 49,215 48,416
Prepayments and other current assets 7,297 9,100
-------------- ---------------
Total current assets 150,024 157,099
-------------- ---------------
DEFERRED DEBITS:
Regulatory assets 118,929 126,784
Miscellaneous 17,374 19,404
-------------- ---------------
Total deferred debits 136,303 146,188
-------------- ---------------
TOTAL $ 2,120,736 $ 2,155,558
============== ===============
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common shareholders' equity:
Common stock $ 416,547 $ 395,851
Unearned compensation - restricted stock awards (5,965) (1,583)
Premium on 4% cumulative preferred stock 649 649
Retained earnings 603,613 532,730
Treasury stock, at cost (403,719) (403,101)
-------------- ---------------
Total common shareholders' equity 611,125 524,546
Cumulative preferred stock of subsidiary (Note 2) 59,135 9,135
Long-term debt (less current maturities and
sinking fund requirements) 887,961 1,032,846
-------------- ---------------
Total capitalization 1,558,221 1,566,527
-------------- ---------------
CURRENT LIABILITIES:
Notes payable - banks and commercial paper 10,750 33,700
Current maturities and sinking fund requirements 1,425 3,094
Accounts payable and accrued expenses 59,107 66,105
Dividends payable 13,418 11,523
Taxes accrued 34,045 22,126
Interest accrued 10,566 15,493
Other current liabilities 13,663 12,555
-------------- ---------------
Total current liabilities 142,974 164,596
-------------- ---------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Accumulated deferred income taxes - net 317,047 314,869
Unamortized investment tax credit 42,691 44,783
Accrued postretirement benefits 12,363 17,144
Accrued pension benefits 41,342 39,821
Miscellaneous 6,098 7,818
-------------- ---------------
Total deferred credits and other long-term liabilities 419,541 424,435
-------------- ---------------
COMMITMENTS AND CONTINGENCIES
TOTAL $ 2,120,736 $ 2,155,558
============== ===============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Statements of Consolidated Cash Flows
(In Thousands)
(Unaudited)
Nine Months Ended
September 30
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 108,445 $ 108,999
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 77,907 77,640
Amortization of regulatory assets 8,941 12,800
Deferred income taxes and investment tax credit adjustments - net (2,116) 8,685
Allowance for funds used during construction (1,509) (3,873)
Cumulative effect of accounting change - before taxes - (29,915)
Change in certain assets and liabilities:
Accounts receivable - excluding cumulative effect of accounting 1,386 9,250
change
Fuel, materials and supplies 4,606 4,908
Accounts payable and accrued expenses (6,998) (9,155)
Taxes accrued 11,919 (2,588)
Accrued pension benefits 1,521 3,033
Other - net (7,390) (2,457)
-------------- --------------
Net cash provided by operating activities 196,712 177,327
-------------- --------------
CASH FLOWS FROM INVESTING:
Construction expenditures - utility (55,642) (47,801)
Construction expenditures - nonutility (1,947) (1,260)
Other 1,804 (12,139)
-------------- --------------
Net cash used in investing activities (55,785) (61,200)
-------------- --------------
CASH FLOWS FROM FINANCING:
Issuance of long-term debt - 451,300
Retirement of long-term debt (146,594) (79,250)
Short-term debt - net (22,950) (36,000)
Common dividends paid (35,869) (46,514)
Issuance of preferred stock (Note 2) 50,000 -
Issuance of common stock related to incentive compensation plans 12,940 2,919
Reacquired common stock (618) (401,262)
Other 2,884 576
-------------- --------------
Net cash used in financing activities (140,207) (108,231)
-------------- --------------
Net increase in cash and cash equivalents 720 7,896
Cash and cash equivalents at beginning of period 17,293 19,317
-------------- --------------
Cash and cash equivalents at end of period $ 18,013 $ 27,213
============== ==============
- ----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest (net of amount capitalized) $ 51,929 $ 46,567
============== ==============
Income taxes $ 48,159 $ 49,353
============== ==============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
IPALCO ENTERPRISES, INC. AND SUBSIDIARIES
-----------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. GENERAL
IPALCO Enterprises, Inc. (IPALCO) owns all of the outstanding common
stock of its subsidiaries (collectively referred to as Enterprises). The
consolidated financial statements include the accounts of IPALCO, its
utility subsidiary, Indianapolis Power & Light Company (IPL) and its
unregulated subsidiary, Mid-America Capital Resources, Inc.
(Mid-America). Mid-America is the parent company of nonutility
energy-related businesses.
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, including elimination of
all significant intercompany balances and transactions, 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 consolidated
financial statements included in Enterprises' 1997 Annual Report on Form
10-K.
2. CAPITAL STOCK
Common Stock
Shares Amount
------ ------
Balance at December 31, 1997 44,649,844 $395,851,016
Compensation plans 173,629 7,946,020
Exercise of stock options 385,753 12,940,315
Restricted stock canceled (4,543) (190,397)
Balance at September 30, 1998 $416,546,954
============
Less shares reacquired by Treasury (14,284)
----------
Shares issued and outstanding at
September 30, 1998 45,190,399
==========
<PAGE>
The following is a reconciliation of the weighted average common shares
for the basic and diluted earnings per share computations:
<TABLE>
<CAPTION>
For the Period Ended September 30,
----------------------------------
Three Months Ended Nine Months Ended
1998 1997 1998 1997
-------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Weighted average common shares 44,954 44,582 44,906 49,042
Dilutive effect of stock options 651 284 666 222
------- ------- ------- -------
Weighted average common
and incremental shares 45,605 44,866 45,572 49,264
======= ======= ======= =======
</TABLE>
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.
3. LONG-TERM DEBT
IPALCO's Revolving Credit Facility (RCF) was issued in April 1997 in the
amount of $401 million. The proceeds were used to purchase, through a
self-tender offer, shares of IPALCO's outstanding common stock.
On July 15, 1998, IPALCO replaced the RCF with commercial paper by
repaying the balance of $234 million on the RCF through the issuance of
$230 million in commercial paper and a cash payment of $4 million.
During the first nine months of 1998, IPALCO reduced its debt amount by
a net of $146 million resulting in a debt balance of $177 million as of
September 30, 1998.
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 $18.3 million ($.37) per share,
which is reported as a separate component of net income in the restated
nine months ended September 30, 1997. The change had the effect of
decreasing income before cumulative effect of accounting change in third
quarter and nine months ended September 30, 1997 by $4.1 million
resulting in a decrease to diluted earnings per share of $.09 and $.08
for the third quarter and nine months ended periods, respectively.
The results of 1997 were restated for the accounting change.
5. COMPREHENSIVE INCOME
On January 1, 1998, Enterprises 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 Enterprises has no amounts that require classification
under comprehensive income.
<PAGE>
6. STOCK-BASED COMPENSATION
A summary of options issued under IPALCO's stock option plans is as
follows:
<TABLE>
<CAPTION>
Weighted Average Range of Option Number of
Price per Share Exercise Price per Share Shares
--------------- ------------------------ ------
<S> <C> <C> <C>
Outstanding, December 31, 1997................ $28.27 $16.8317 - $31.37 52,045,338
Issued..................................... 42.26 40.69 - 43.34 126,000
Exercised.................................. 27.32 16.8317 - 31.375 (385,753)
----------
Outstanding, September 30, 1998............... 29.46 16.8317 - 43.34 1,785,585
==========
</TABLE>
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for the
stock based plan have been applied by Enterprises. No compensation cost
has been recognized for the plans because the stock options exercise
price is equal to fair value at the grant date. Had compensation cost
for the plans been determined based on the fair value at the grant dates
for awards under the plans consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation," Enterprises' net income for
the nine months ended September 30, 1998, would have decreased from
$108.4 million ($2.38 per share) to the pro forma amount of $107.9
million ($2.37 per share). Enterprises' net income and earnings per
share for the similar period in 1997 would have decreased from $109.0
million ($2.21 per share) to the pro forma amount of $105.4 million
($2.14 per share). Enterprises estimated the SFAS No. 123 fair value by
utilizing the binomial options pricing model with the following
assumptions: dividend yields of 2.54% to 6.88%, risk-free rates of 6.38%
to 6.88%, volatility of 12% to 13% and expected lives of 5 years.
Earnings per share amounts presented in this paragraph are diluted.
On January 27, 1998, the Board of Directors amended the Long-Term
Performance and Restricted Stock Incentive Plan as the Long Term
Performance and Restricted Stock Incentive Plan (As Amended and Restated
effective January 1, 1998) also referred to as the 1998 Plan. Pursuant
to the 1998 Plan, an additional 900,000 shares of common stock of IPALCO
have been authorized and reserved for issuance, for a total of 1.5
million shares. Initial awards of 112,691 shares of restricted common
stock were made to participating employees on January 27, 1998. These
initial grants were made subject to shareholder approval of the 1998
Plan, which approval was received on April 15, 1998. Awards are made on
established targets for the participants to reflect the participant's
actual base salary. The shares remain restricted and non-transferable
throughout each three-year performance period, vesting in one-third
increments in each of the three years following the end of the
performance period. At the end of a performance period, awards are
subject to adjustment to reflect Enterprises' performance compared to
companies in the S&P 500 Index with regard to cumulative total return to
shareholders during the three-year performance period. Depending on
Enterprises' performance, final awards may range from 400% of the
initial awards to zero.
<PAGE>
7. 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
consolidated financial statements.
8. GAIN FROM TERMINATION OF AGREEMENT
During the third quarter of 1998, a gain of $12.5 million ($7.8 million
after-tax) or $.17 per share 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.
9. CLEVELAND ENERGY RESOURCES
In 1997, Enterprises initiated a plan to sell during 1998, two
subsidiaries of Mid-America, Cleveland District Cooling Corporation and
Cleveland Thermal Energy Corporation (collectively referred to as CER)
and ceased recording depreciation. During the third quarter of 1998,
Enterprises determined that it was not probable that CER would be sold
during 1998. Enterprises continues to have the ability to remove the
assets from operations. Due to the delay in disposal, Enterprises
resumed depreciation on the CER assets during September 1998.
Enterprises' plan currently anticipates disposal of CER in 1999.
<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), IPALCO Enterprises, Inc. and
subsidiaries (collectively, Enterprises) is hereby filing cautionary statements
identifying important factors that could cause Enterprises' actual results to
differ materially from those projected in forward-looking statements of
Enterprises. 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 Enterprises' actual results to
differ materially from those contained in forward-looking statements made by or
on behalf of Enterprises. 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 Enterprises' 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 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. Most of these factors
impact Enterprises through its wholly-owned subsidiary IPL.
All such factors are difficult to predict, contain uncertainties which
may materially affect actual results and are beyond the control of Enterprises.
Enterprises' 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; Enterprises' 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 Enterprises'
customers, vendors, and others with whom it does business. Please see the
discussion about Year 2000, below, for information about Enterprises' efforts.
LIQUIDITY AND CAPITAL RESOURCES
Material changes in the consolidated financial condition and results of
operations of IPALCO Enterprises, Inc. (Enterprises), except where noted, are
attributed to the operations of Indianapolis Power & Light Company (IPL).
Consequently, the following discussion is centered on IPL.
<PAGE>
Overview
- --------
The Board of Directors of Enterprises on August 25, 1998, declared a
quarterly dividend on common stock of 27.5 cents per share compared to 25 cents
per share declared in the third quarter of 1997. The dividend was paid October
15, 1998, to shareholders of record September 18, 1998.
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. Enterprises' construction expenditures (excluding allowance for funds
used during construction) totaled $23.2 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. Enterprises' construction
expenditures (excluding allowance for funds used during construction) totaled
$57.6 million during the first nine months ended September 30, 1998,
representing a $8.5 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 Enterprises' 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 Enterprises' 1997 Form 10-K report for
further discussion).
IPALCO's Revolving Credit Facility was issued in April 1997 in the
amount of $401 million. The proceeds were used to purchase, through a
self-tender offer, shares of IPALCO's outstanding common capital stock. On July
15, 1998, IPALCO repaid the outstanding balance of $234 million on the Revolving
Credit Facility through the issuance of $230 million in commercial paper and a
cash payment of $4 million. During the first nine months of 1998, IPALCO reduced
its debt amount by a net of $146 million resulting in a debt balance of $177
million as of September 30, 1998.
Year 2000
- ---------
Enterprises 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 Enterprises' ability to deliver
electricity, steam, or chilled water to its customers, as well as Enterprises'
internal operations such as billing or payroll functions. Further, Year 2000
problems experienced by other entities, over which Enterprises has no
control, such as certain suppliers or other electric utilities with which
Enterprises is interconnected, could adversely affect Enterprises' operations.
In 1997, Enterprises established a Year 2000 Committee. Enterprises
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. Enterprises has a formal Year 2000 Plan
currently under review by the Board of Directors.
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 Enterprises'
business.
Non-critical systems have lower priorities in terms of committee efforts.
Enterprises 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.
Enterprises' 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, Enterprises-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 Enterprises':
- Electricity generating stations and plants producing steam and/or chilled
water;
- Energy management systems;
- Substation controls, system protection, and transmission and
distribution systems;
- Telecommunications systems; and
- Business information systems.
Enterprises currently expects to complete the identification and
inventory phase for critical systems by the end of the fourth quarter of 1998
and estimates the phase to be approximately 95% complete.
Enterprises 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. Enterprises 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. Enterprises 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 Enterprises must rely on the service providers' verifications.
Enterprises 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.
Enterprises has elected to test not only existing systems but also new purchases
and upgrades in its efforts to minimize Year 2000 problems.
Enterprises' operations could be adversely affected by Year
2000-related failures of other companies, such as telecommunication providers,
that supply Enterprises with mission-critical services. Similarly, Year 2000
failures of other utilities with which Enterprises is interconnected could
adversely impact Enterprises' ability to deliver services to its customers.
Enterprises 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 Enterprises' Year 2000 Issues
Not including the cost of replacing Enterprises' business software, a
project not initiated specifically for Year 2000 reasons but which will provide
Year 2000 benefits through replacing non-compliant software, Enterprises
currently estimates that its costs of the phases of identification, assessment,
remediation and testing may be approximately $4,000,000, which Enterprises
believes is not material to its results of operations, liquidity and financial
condition. Of that figure, Enterprises has currently expended approximately
$950,000. A substantial proportion of the costs of remediation are associated
with functional areas of Enterprises other than Information Services.
Enterprises currently estimates that its cost of contingency planning efforts
may be approximately $1,500,000.
Risks of Enterprises' 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 Enterprises'
internal functions (such as billing) as well as its chilled water, steam and
electricity generation and distribution functions. Consequences could
conceivably range from essentially no operational problems to a massive
disruption of chilled water, steam and electric service lasting for a
significant period of time. Further, since Enterprises does not stand alone but
is electrically interconnected with other utilities across a substantial portion
of the nation, even if Enterprises 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. Enterprises 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 Enterprises'
results of operations.
There are both external and internal risks associated with Year 2000
that could affect Enterprises' chilled water, 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 Enterprises' 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 Enterprises.
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 negotiations would not be occurring near the end of
calendar year 1999.
Enterprises' insurance policies, including policies for liability and
property damage, currently expire or are up for renewal during 1999. Enterprises
currently expects that, in line with a general trend in the insurance industry,
insurance policies purchased by Enterprises during 1999 may exclude coverage of
Year 2000 events or certain elements of damage potentially flowing therefrom.
In light of the many adverse conditions that could happen to
Enterprises 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, Enterprises 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 Enterprises' customers.
Enterprises does not believe that the worst case scenario will occur and, should
it occur, Enterprises believes tht the consequences of that scenario, with
regard to either costs of repair or lost revenues, are not likely to have a
material effect on Enterprises' results of operations, liquidity, and financial
condition.
Enterprises' 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. Enterprises'
contingency planning efforts are not yet complete but are underway within the
scope of an overall outline. Enterprises' 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
Enterprises' 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, Enterprises will operate its contingency plans in
response to events actually occurring.
After Year 2000 events, if any, Enterprises 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
-----------------------------------------------------------
Diluted earnings per share during the third quarter of 1998 were $1.04,
or $0.30 above the $0.74 attained in the comparable 1997 period. Diluted
earnings per share during the nine months ended September 30, 1998, were $2.38,
or $0.17 above the $2.21 attained in the comparable 1997 period. Net income for
the first nine months of 1997 included a one-time positive after-tax increase of
$18.3 million ($0.37 per share). See "Cumulative Effect of Accounting Change"
below. Also, weighted average, diluted shares for the nine months ended
September 30, 1998, were 45.6 million compared to 49.3 million for the similar
period in 1997 due to Enterprises' repurchase of 12.5 million common shares in
April 1997. The following discussion highlights the factors contributing to the
third quarter and nine months ended results.
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)
Electric:
<S> <C> <C>
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. The nine months ended variance resulted from
increased KWH purchases partially offset by decreased demand charges.
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, which includes the pretax operating and investment income
from operations other than IPL, as well as non-operating income from IPL,
increased $3.6 million and $7.1 million in the third quarter and nine months
ended, respectively. The third quarter and nine months increases were due in
part to decreased non-operating expenses at IPL and decreased pretax losses,
excluding interest, at Mid-America.
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 8).
Interest and Other Charges
- --------------------------
Interest expense decreased $2.4 million during the third quarter of
1998 while increasing $2.3 million for the nine months ended of 1998 compared to
the same periods in 1997. The decrease in the third quarter is a result of the
decreased debt balance in the third quarter of 1998 compared to 1997 on
Enterprises' recapitalization debt facility. The nine months ended variance was
primarily a result of interest on the recapitalization debt facility of
Enterprises that was issued in April 1997. There was no interest associated with
this debt during the first quarter of 1997. Also contributing to the nine months
ended variance was increased long-term interest expense at Mid-America,
partially offset by decreased interest expense at IPL.
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).
<PAGE>
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. IPL has reached agreement
with the Agency and has executed a Consent Order to resolve the matter without
admission that violations occurred. No penalties or fines result from the Order.
IPL is required to conduct additional particulate testing. Failure to
demonstrate compliance may result in additional expenditures for engineering and
corrective measures. IPL will submit additional opacity reports and additional
coal analysis results to EPA. The Order remains in effect until July 28, 2001.
Compliance with the Order resolves all alleged civil violations related to the
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. The 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 IPALCO Enterprises, Inc., as amended.
(Exhibit 3.1 to the Form 10-Q dated 6-30-97.)
3.2* Bylaws of IPALCO Enterprises, Inc. (Exhibit 3.2 to the Form 10-Q
dated 3-31-98).
4.1* IPALCO Enterprises, Inc. IPALCO PowerInvest Dividend Reinvestment
and Direct Stock Purchase Plan.(Exhibit 4.1 to the Form 10-Q dated
9-30-96.)
4.2* IPALCO Enterprises, Inc. and First Chicago Trust Company of New York
(Rights Agreement as amended and restated). (Exhibit B to the Form
8-K dated 4-29-98.)
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.) **
11.1 Computation of Per Share Earnings.
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.
IPALCO ENTERPRISES, INC.
------------------------
(Registrant)
Date: November 13, 1998 /s/ John R. Brehm
------------------------- ----------------------------
John R. Brehm
Vice President and Treasurer
Date: November 13, 1998 /s/ Stephen J. Plunkett
-------------------------- ----------------------------
Stephen J. Plunkett
Controller
<TABLE>
IPALCO ENTERPRISES, INC.
Exhibit 11.1 - Computation of Per Share Earnings
For the Quarter Ended September 30, 1998
<CAPTION>
QUARTER ENDED SEPTEMBER 30, 1998:
Basic Diluted
---------------- -------------
Weighted average number of shares
<S> <C> <C>
Average common shares outstanding at September 30, 1998 44,954,149 44,954,149
Dilutive effect for stock options at September 30, 1998 - 651,262
---------------- -------------
Adjusted weighted average shares at September 30, 1998 44,954,149 45,605,411
================ =============
Net income to be used to compute
diluted earnings per share (Dollars in
thousands)
Net income $47,299 $47,299
================ =============
Earnings Per Share $1.05 $1.04
================ =============
For the Nine Months Ended September 30, 1998
NINE MONTHS ENDED SEPTEMBER 30, 1998:
Basic Diluted
---------------- -------------
Weighted average number of shares
Average common shares outstanding at September 30, 1998 44,905,675 44,905,675
Dilutive effect for stock options at September 30, 1998 - 666,075
---------------- -------------
Adjusted weighted average shares at September 30, 1998 44,905,675 45,571,750
================ =============
Net income to be used to compute
diluted earnings per share (Dollars in
thousands)
Net income $108,445 $108,445
================ =============
Earnings Per Share $2.41 $2.38
================ =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000728391
<NAME> IPALCO ENTERPRISES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,748,989
<OTHER-PROPERTY-AND-INVEST> 85,420
<TOTAL-CURRENT-ASSETS> 150,024
<TOTAL-DEFERRED-CHARGES> 136,303
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,120,736
<COMMON> 416,547
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 603,613
<TOTAL-COMMON-STOCKHOLDERS-EQ> 611,125
0
59,135
<LONG-TERM-DEBT-NET> 887,961
<SHORT-TERM-NOTES> 10,750
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,425
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 550,340
<TOT-CAPITALIZATION-AND-LIAB> 2,120,736
<GROSS-OPERATING-REVENUE> 619,055
<INCOME-TAX-EXPENSE> 66,690
<OTHER-OPERATING-EXPENSES> 411,360
<TOTAL-OPERATING-EXPENSES> 478,050
<OPERATING-INCOME-LOSS> 141,005
<OTHER-INCOME-NET> 17,515
<INCOME-BEFORE-INTEREST-EXPEN> 158,520
<TOTAL-INTEREST-EXPENSE> 50,075
<NET-INCOME> 108,445
2,315
<EARNINGS-AVAILABLE-FOR-COMM> 108,445
<COMMON-STOCK-DIVIDENDS> 35,869
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 196,712
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.38
</TABLE>
