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, 2000 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, 2000
----- ---------------------------------
Common (Without Par Value) 87,926,569 Shares
<PAGE>
IPALCO ENTERPRISES, INC. AND SUBSIDIARIES
-----------------------------------------
INDEX
-----
Page No.
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PART I. FINANCIAL INFORMATION
------- ---------------------
Statements of Consolidated Income - Three Months Ended and
Nine Months Ended September 30, 2000 and 1999 2
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 3
Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5-10
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-16
PART II. OTHER INFORMATION 17-18
-------- -----------------
<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
2000 1999 2000 1999
------------- ------------ ------------- ------------
UTILITY OPERATING REVENUES:
<S> <C> <C> <C> <C>
Electric $ 218,392 $ 221,844 $ 617,108 $ 607,299
Steam 6,328 6,671 23,401 25,057
------------- ------------ ------------- ------------
Total operating revenues 224,720 228,515 640,509 632,356
------------- ------------ ------------- ------------
UTILITY OPERATING EXPENSES:
Operation:
Fuel 49,141 43,026 141,295 131,969
Other 38,171 33,728 108,562 97,248
Power purchased 8,672 25,427 11,694 29,455
Purchased steam 1,238 1,218 4,469 4,581
Maintenance 19,432 18,906 60,601 55,733
Depreciation and amortization 28,141 27,008 83,445 80,362
Taxes other than income taxes 9,066 8,660 27,643 26,281
Income taxes - net 25,917 22,128 67,904 65,628
------------- ------------ ------------- ------------
Total operating expenses 179,778 180,101 505,613 491,257
------------- ------------ ------------- ------------
UTILITY OPERATING INCOME 44,942 48,414 134,896 141,099
------------- ------------ ------------- ------------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used during construction 293 270 1,843 940
Other - net (3,311) 1,253 94,490 589
Income taxes - net 2,705 1,405 (34,853) 6,053
------------- ------------ ------------- ------------
Total other income - net (313) 2,928 61,480 7,582
------------- ------------ ------------- ------------
INCOME BEFORE INTEREST AND OTHER CHARGES 44,629 51,342 196,376 148,681
------------- ------------ ------------- ------------
INTEREST AND OTHER CHARGES:
Interest 13,915 15,335 43,489 47,235
Allowance for borrowed funds used during construction (134) (175) (875) (592)
Preferred stock transactions 803 803 2,410 2,410
------------- ------------ ------------- ------------
Total interest and other charges - net 14,584 15,963 45,024 49,053
------------- ------------ ------------- ------------
NET INCOME $ 30,045 $ 35,379 $ 151,352 $ 99,628
============= ============ ============= ============
BASIC EARNINGS PER SHARE $ 0.35 $ 0.41 $ 1.76 $ 1.16
============= ============ ============= ============
DILUTED EARNINGS PER SHARE $ 0.34 $ 0.41 $ 1.75 $ 1.15
============= ============ ============= ============
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 2000 1999
------ -------------- -------------
UTILITY PLANT:
<S> <C> <C>
Utility plant in service $ 2,988,001 $ 2,922,338
Less accumulated depreciation 1,361,958 1,299,122
-------------- -------------
Utility plant in service - net 1,626,043 1,623,216
Construction work in progress 95,542 116,478
Property held for future use 10,718 10,718
-------------- -------------
Utility plant - net 1,732,303 1,750,412
-------------- -------------
OTHER ASSETS:
Nonutility property - at cost, less accumulated depreciation 66,879 69,056
Available-for-sale securities 89 175,202
Other investments 15,906 13,970
-------------- -------------
Other assets - net 82,874 258,228
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents 34,108 23,935
Accounts receivable and unbilled revenue
(less allowance for doubtful accounts
2000, $1,680 and 1999, $1,360) 49,544 51,357
Fuel - at average cost 34,841 52,016
Materials and supplies - at average cost 49,557 48,694
Tax refund receivable - 770
Prepayments and other current assets 1,755 9,465
-------------- -------------
Total current assets 169,805 186,237
-------------- -------------
DEFERRED DEBITS:
Regulatory assets 100,310 107,948
Miscellaneous 9,656 13,012
-------------- -------------
Total deferred debits 109,966 120,960
-------------- -------------
TOTAL $ 2,094,948 $ 2,315,837
============== =============
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common shareholders' equity:
Common stock $ 447,053 $ 439,066
Unearned compensation - restricted stock awards (698) (1,979)
Premium on 4% cumulative preferred stock 649 649
Retained earnings 799,645 690,455
Accumulated other comprehensive income 51 106,733
Treasury stock, at cost (522,504) (557,178)
-------------- -------------
Total common shareholders' equity 724,196 677,746
Cumulative preferred stock of subsidiary 59,135 59,135
Long-term debt (less current maturities and
sinking fund requirements) 783,495 870,050
-------------- -------------
Total capitalization 1,566,826 1,606,931
-------------- -------------
CURRENT LIABILITIES:
Notes payable - banks and commercial paper 4,000 57,578
Current maturities and sinking fund requirements 3,577 52,477
Accounts payable and accrued expenses 55,484 56,798
Dividends payable 15,200 13,859
Taxes accrued 33,282 22,237
Interest accrued 10,390 13,767
Other current liabilities 14,142 13,356
-------------- -------------
Total current liabilities 136,075 230,072
-------------- -------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Accumulated deferred income taxes - net 322,336 400,588
Unamortized investment tax credit 37,150 39,226
Accrued postretirement benefits - 4,338
Accrued pension benefits 26,127 29,018
Miscellaneous 6,434 5,664
-------------- -------------
Total deferred credits and other long-term liabilities 392,047 478,834
-------------- -------------
COMMITMENTS AND CONTINGENCIES
TOTAL $ 2,094,948 $ 2,315,837
============== =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Statements of Consolidated Cash Flows
(In Thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $ 151,352 $ 99,628
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 85,740 83,012
Amortization of regulatory assets 9,931 10,768
Gain from sale of available for sale securities (112,638) -
Deferred income taxes and investment tax credit adjustments - net (15,056) (351)
Allowance for funds used during construction (2,718) (1,532)
Change in certain assets and liabilities:
Accounts receivable 1,813 (8,333)
Fuel, materials and supplies 16,312 111
Accounts payable and accrued expenses (1,314) (15,657)
Taxes accrued 11,045 16,048
Accrued pension benefits (2,891) (1,800)
Other - net 2,532 (5,403)
-------------- --------------
Net cash provided by operating activities 144,108 176,491
-------------- --------------
CASH FLOWS FROM INVESTING:
Construction expenditures - utility (62,346) (52,888)
Construction expenditures - nonutility (144) (306)
Proceeds from sale of available for sale securities 113,833 -
Other 632 (4,071)
-------------- --------------
Net cash provided by (used in) investing activities 51,975 (57,265)
-------------- --------------
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 29,650 140,900
Retirement of long-term debt (165,152) (95,485)
Special deposit for retirement of debt - (23,500)
Short-term debt - net (53,578) (18,600)
Common dividends paid (40,716) (38,061)
Issuance of common stock related to incentive compensation plans 6,728 8,709
Reacquired common stock 34,674 (88,482)
Other 2,484 (380)
-------------- --------------
Net cash used in financing activities (185,910) (114,899)
-------------- --------------
Net increase in cash and cash equivalents 10,173 4,327
Cash and cash equivalents at beginning of period 23,935 9,075
-------------- --------------
Cash and cash equivalents at end of period $ 34,108 $ 13,402
============== ==============
----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest (net of amount capitalized) $ 44,510 $ 48,882
============== ==============
Income taxes $ 105,606 $ 36,878
============== ==============
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 present 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. These financial statements and notes should be read in
conjunction with the audited consolidated financial statements included
in Enterprises' 1999 Annual Report on Form 10-K.
2. CAPITAL STOCK
Common Stock
Shares Amount
-------- --------
Balance at December 31, 1999 85,727,614 $439,066,102
Exercise of stock options 2,231,100 6,727,389
Restricted stock issues / adjustments 25,433 2,561,484
Restricted stock redeemed (57,578) (1,302,210)
---------- ------------
Balance at September 30, 2000 87,926,569 $447,052,765
========== ============
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
2000 1999 2000 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Weighted average common shares 86,353 85,720 85,923 86,219
Dilutive effect of stock options 912 648 786 776
------ ------ ------ ------
Weighted average common
and incremental shares 87,265 86,368 86,709 86,995
====== ====== ====== ======
</TABLE>
3. 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 Price per Share Shares
--------------- --------------- ------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1999................ $15.170 $8.416 - $23.380 2,349,980
Issued..................................... 16.568 16.410 - 20.530 2,033,000
Exercised.................................. 15.446 8.416 - 23.380 (2,231,100)
----------
Outstanding, September 30, 2000............... 16.202 10.460 - 23.380 2,151,880
===========
</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 IPALCO. No compensation cost has
been recognized for the stock option plans because the option price was
equal to fair value at the grant dates. 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, 2000, would have decreased from
$151.4 million ($1.75 per share) to the pro forma amount of $147.4
million ($1.70 per share). Enterprises' net income and earnings per
share for the similar period in 1999 would have decreased from $99.6
million ($1.15 per share) to the pro forma amount of $99.4 million
($1.14 per share). Enterprises estimated the SFAS No. 123 fair value by
utilizing the binomial options pricing model with the following
assumptions: dividend yields of 2.5% to 4.0%, risk-free rates of 5.2% to
6.7%, volatility of 13% to 22% and expected lives of 5 years.
IPALCO has a Long-Term Performance and Restricted Stock Incentive Plan.
On January 3 and January 21, 2000, an additional 2,933 and 22,500
shares, respectively, were issued to reflect the addition of new
participants. On January 3 and August 7, 2000, 2,066 and 5,000 shares of
restricted stock, respectively, were redeemed as a result of a reduction
in participants. During the first quarter of 2000, 50,512 shares of
restricted stock were redeemed in order to pay taxes on behalf of
participants or as a result of a participant electing to receive cash in
lieu of stock.
4. SEGMENT REPORTING
Operating segments are components of an enterprise for which separate
financial information is available and is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and
in assessing performance. Enterprises' reportable business segments are
electric and "all other." Steam operations of IPL and all subsidiaries
other than IPL are combined in the "all other" category. The accounting
policies of the identified segments are consistent with those policies
and procedures described in the summary of significant accounting
policies (see Note 1in Enterprises' 1999 Annual Report on Form 10-K).
The following tables provide information about Enterprises' business
segments:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
All All All All
Electric Other Total Electric Other Total Electric Other Total Electric Other Total
-------- ----- ----- -------- ----- ----- -------- ----- ----- -------- ----- -----
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues $218 $ 15 $233 $222 $ 16 $238 $617 $ 49 $666 $607 $ 52 $659
Depreciation and
Amortization 27 2 29 26 2 28 81 5 86 78 5 83
Pre-tax Operating
Income (Loss) 71 (3) 68 70 2 72 201 (5) 196 203 4 207
Income Taxes 26 (3) 23 22 (1) 21 67 36 103 65 (5) 60
Capital Expenditures 18 - 18 20 - 20 65 - 65 53 2 55
</TABLE>
Property - net of Depreciation is $1.799 billion and $1.819 billion in
total for the periods ending September, 2000 and December, 1999,
respectively. Within Property - net of Depreciation, the Electric
segment is $1.659 billion and $1.674 billion for 2000 and 1999,
respectively. The All Other segment is $140 million and $145 million for
2000 and 1999, respectively. Included within Property - net of
Depreciation for the All Other segment is IPL steam plant of $73 million
and $76 million for the periods ending September, 2000 and December,
1999, respectively.
Included within Depreciation and Amortization for the All Other segment
is IPL steam depreciation of $1 million for both the third quarters 2000
and 1999. For each of the nine months ended September 30, 2000 and 1999,
IPL steam depreciation of $2 million is included within Depreciation and
Amortization for the All Other segment.
Pre-tax Operating Income for the All Other segment contains less than
$.1 million IPL steam pre-tax operating income for the third quarter
2000, but includes $.5 million for the same period in 1999. For the nine
months ended September 30, 2000 and 1999, IPL steam pre-tax operating
income of $2 million and $4 million, respectively, is included within
Pre-tax Operating Income for the All Other segment.
Included within Income Taxes for the All Other segment is IPL steam
income taxes of $(.2) million for the third quarter of 2000 compared to
$.1 million for the same period in 1999. For each of the nine months
ended September 30, 2000 and 1999, IPL steam income taxes of $1 million
is included within Income Taxes for the All Other segment.
5. INVESTMENTS
During 1998 and 1999, Enterprises, through its subsidiary Mid-America,
invested $1.2 million in Internet Capital Group, Inc. (Nasdaq:ICGE), an
internet holding company, which went public in August 1999. At December
31, 1999, Mid-America held 1,030,600 shares of ICGE. During February
2000, Mid-America sold 1 million shares of ICGE resulting in a realized
gain of $111.95 million. During May 2000, Mid-America sold another 25,500
shares of ICGE resulting in a realized gain of $.7 million. The total
realized gain is offset by related compensation of $9.0 million and is
included in Other Income and Deductions. The after-tax proceeds from
these sales were applied primarily to the reduction of IPALCO's
outstanding unsecured debt.
6. NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities," was
issued in June 1998 and was to be effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999. The effective date for
this standard was delayed one year by SFAS 137. The standard is now
effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. It requires that
an entity recognize 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 on the
intended use of the derivative and the resulting designation. In June
2000, SFAS 138 was issued to amend the accounting and reporting
standards of Statement 133 for certain derivative instruments and
certain hedging activities. The amendment to SFAS 133 includes expansion
of the normal purchases and sales exception to most contracts for which
physical delivery of the asset being sold or purchased is probable. This
amendment has substantially reduced the scope of SFAS 133 implementation
efforts by IPALCO. Based on IPALCO's understanding of the amended normal
purchases and sales exception, it has not expected SFAS 133 to have a
significant impact on its financial position or results of operations.
Recently, however, a number of issues have arisen in the industry with
regard to whether or not certain power contracts fall within the scope
of SFAS 133. These issues are expected to be addressed by the SFAS 133
task force of the Financial Accounting Standards Board during the fourth
quarter of 2000. IPALCO will continue SFAS 133 implementation efforts
during the last quarter of 2000, including monitoring developments
regarding the recent SFAS 133 scope issues discussed above.
7. SALE OF STEAM ASSETS, MID-AMERICA ENERGY RESOURCES AND INDIANAPOLIS
CAMPUS ENERGY
During March, 2000, Enterprises announced an agreement for the sale of
certain assets (the "Assets") to Citizens Gas & Coke Utility. The Assets
include the Perry K Steam Plant and downtown steam distribution system
(Steam) operated by IPL; the central city chilled water cooling and
distribution system owned by Mid-America Energy Resources, Inc. (MAER),
and the chilled water cooling system owned by Indianapolis Campus
Energy, Inc. (ICE) that provides services to Eli Lilly & Company. The
anticipated selling price of the Assets is $161.7 million. The selling
price allocated to Steam, MAER and ICE is approximately $54.6 million,
$88.4 million and $18.7 million, respectively. Taxes payable on the
transaction are estimated to be $26.3 million. This transaction is
expected to result in a net gain to IPALCO on a consolidated basis. The
1999 EBITDA (earnings before interest, taxes, depreciation and
amortization) and net income of the combined entities (Steam, MAER, ICE)
was $18.7 million and $3.0 million, respectively. Approximately $90
million of the net proceeds will be used to retire debt specifically
assignable to the Assets. Government approvals for the sale have been
obtained and the transaction is expected to be completed in the fourth
quarter of 2000.
8. AES ACQUISITION OF IPALCO
On July 15, 2000, IPALCO and The AES Corporation, a Delaware corporation
("AES"), entered into an Agreement and Plan of Share Exchange (the
"Share Exchange Agreement") whereby AES will acquire IPALCO for $25.00
per share (subject to adjustment as described at the end of the next
paragraph) in a stock-for-stock transaction valued at approximately
$2.15 billion plus the assumption of $890 million of debt and preferred
stock.
Under the terms of the agreement, the final exchange ratio will be
determined five business days prior to closing, based on the average
daily closing prices of AES common stock for the preceding twenty
trading days. Upon closing, each share of IPALCO common stock will be
exchanged for AES shares with a market value of $25.00, so long as the
average price of AES common stock (determined as described above) is not
below $31.50. If the average price of AES common stock is below $31.50
per share, IPALCO shareholders will receive a fixed ratio of .794 shares
of AES common stock per share of IPALCO common stock. If the average
price of AES common stock is below $26.45 (an effective price to IPALCO
shareholders of $21.00 per share of IPALCO common stock), IPALCO has the
right to terminate the transaction. The transaction is expected to be
tax free to IPALCO shareholders. Upon closing, IPALCO will become a
wholly-owned subsidiary of AES with its headquarters remaining in
Indianapolis.
On October 20, 2000, IPALCO shareholders approved the Agreement and Plan
of Share Exchange with AES at a Special Meeting of Shareholders.
Completion of the transaction remains subject to certain other
conditions, including receipt of certain regulatory approvals including
that of the Federal Energy Regulatory Commission and the Securities and
Exchange Commission. The parties anticipate receiving regulatory
approvals and closing the transaction by early 2001. Additionally, as
part of the SEC approval process, AES expects to restructure its
ownership interests in CILCORP, another subsidiary of AES, within a
specified period of time in order to continue as an exempt holding
company under the Public Utility Holding Company Act of 1935. If the
closing of the transaction is delayed beyond March 31, 2001 for failure
to receive necessary SEC approvals, the purchase price per IPALCO share,
determined as outlined above, will be increased by $0.15 plus a daily
"ticking fee" equal to $0.375 per calendar quarter.
9. SALE OF CLEVELAND ENERGY RESOURCES
On November 2, 2000, Enterprises signed an agreement with Dominion
Cleveland Thermal, Inc., a subsidiary of Dominion Energy, Inc., to sell
the assets of Cleveland Energy Resources (CER). CER includes two
subsidiaries of Mid-America, Cleveland Thermal Energy Corporation
(Cleveland Thermal) and Cleveland District Cooling Corporation
(Cleveland Cooling). Cleveland Thermal owns and operates two steam
plants in Cleveland, Ohio. Cleveland Cooling owns and operates a
district cooling facility located near downtown Cleveland, which
distributes chilled water to subscribers located downtown for their air
conditioning needs. The anticipated selling price for the assets is
$14.6 million. The sale is subject to certain approvals and is expected
to be completed in the first quarter of 2001.
10. VOLUNTARY EARLY RETIREMENT PROGRAM
On November 9, 2000, IPALCO and AES approved a special one-time
Voluntary Early Retirement Program (VER Program).
IPALCO announced the special one-time VER Program in a letter
distributed to its employees. This program offers enhanced retirement
benefits upon early retirement to eligible employees. The VER Program
is available to all employees, except officers, whose combined age and
years of service total at least 75 on June 30, 2001. Participation is
limited to the first 400 qualified employees who accept the VER Program
and complete required waiting and revocation periods. Participants can
elect actual retirement dates of March 1, 2001, April 1, 2001, May 1,
2001, June 1, 2001 or July 1, 2001. IPALCO expects the VER Program to be
completed, including the expiration of all revocation periods by
December 30, 2000.
IPALCO will recognize the estimated $63 million pre-tax non-cash pension
and other post-retirement benefit costs of the VER Program in the fourth
quarter 2000. IPALCO anticipates VER Program related cash contributions
for pension and other post-retirement benefits of $9 million in 2001 and
$3 million in 2002. These estimates are based on actuarial assumptions
using an 8.0% discount rate.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Enterprises hereby files 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. Forward-looking statements 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. 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, the pending transaction with AES,
including the conditions thereto, fluctuations in customer growth and demand,
weather, fuel costs, generating unit availability, purchased power costs and
availability, regulatory action, environmental matters, 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 production capacity in a timely manner can significantly
affect IPL's financial performance. The timing of deregulation and competition,
product development and technology changes are also important potential factors.
Most of these factors affect Enterprises through its wholly owned subsidiary,
IPL.
All such factors are difficult to predict, contain uncertainties that may
materially affect actual results and are beyond the control of Enterprises.
LIQUIDITY AND CAPITAL RESOURCES
Material changes in the consolidated financial condition and results of
operations of Enterprises, except where noted, are attributed to the operations
of IPL. Consequently, the following discussion is centered on IPL.
Overview
--------
The Board of Directors of Enterprises on July 14, 2000, declared a
quarterly dividend on common stock of 16.25 cents per share compared to 15.00
cents per share declared in the third quarter of 1999. The dividend was paid
October 15, 2000, to shareholders of record September 15, 2000. In addition, the
Board of Directors of Enterprises on October 20, 2000, declared a quarterly
dividend on common stock of 16.25 cents per share compared to 15.00 cents per
share declared in the fourth quarter of 1999. The dividend will be paid January
15, 2001, to shareholders of record December 15, 2000.
IPL's capital requirements are primarily related to construction
expenditures needed to meet customers' needs for electricity and steam and for
environmental compliance. Enterprises' construction expenditures (excluding
allowance for funds used during construction) totaled $17.3 million during the
quarter ended September 30, 2000, representing a $1.9 million decrease from the
comparable period in 1999. Internally generated cash provided by operations
funded construction expenditures during the third quarter of 2000. Enterprises'
construction expenditures (excluding allowance for funds used during
construction) totaled $62.5 million during the nine months ended September 30,
2000, representing a $9.3 million increase from the comparable period in 1999.
Internally generated cash provided by operations funded construction
expenditures during the first nine months of 2000.
IPL's construction program for the three-year period 2000-2002 is
estimated to cost $294.0 million including AFUDC. The estimated cost of the
program by year (in millions) is $106.5 in 2000, $103.9 in 2001 and $83.6 in
2002. It includes $152.2 million for additions, improvements and extensions to
transmission and distribution lines, substations, power factor and voltage
regulating equipment, distribution transformers and street lighting facilities.
The construction program also includes $6.6 million in 2000 for construction of
a 100-megawatt combustion turbine. The turbine was placed in service during May
2000, and less than 1% of related construction costs remain unexpended as of
September 30, 2000. These projected amounts also include $20.7 million of costs
during the period associated with new environmental standards promulgated by the
EPA which are currently expected to be appealed to the United States Supreme
Court. (See also "NOx SIP Call" below.)
IPALCO's Revolving Credit Facility (Revolver) 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. During 1998,
IPALCO repaid the Revolver with a commercial paper facility. The Revolver
currently has no outstanding balance but is available for future borrowings.
According to the credit agreement, IPALCO could borrow up to $160.4 million
until March 31, 2001. The final step down provides for the available borrowings
to decrease to $80.2 million on March 31, 2001, and remain available until March
31, 2002. The balance of the commercial paper facility was $77.1 million and
$211.2 million on September 30, 2000 and December 31, 1999, respectively.
OTHER
Market Risk Sensitive Instruments and Positions
-----------------------------------------------
The primary market risk to which Enterprises is exposed is interest
rate risk. Enterprises uses long-term debt as a primary source of capital in its
business. A portion of this debt has an interest component that resets on a
periodic basis to reflect current market conditions. The following table
presents the principal cash repayments and related weighted average interest
rates by maturity date for Enterprises' long-term fixed-rate debt and its other
types of long-term debt at September 30, 2000:
<TABLE>
<CAPTION>
Maturity Schedule
Period Ending September 30
Fair
(Dollars in Millions) 2001 2002 2003 2004 2005 Thereafter Total Value
-----------------------------------------------------------------------------------------------------------
Long-term debt
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate $3.5 $3.5 $3.8 $84.1 $4.4 $419.2 $518.5 $513.1
Average rate 7.9% 7.9% 7.9% 6.1% 7.9% 7.0% 6.9%
Variable - - - - - $192.3 $192.3 $192.3
Average rate - - - - - 4.3% 4.3%
Recapitalization debt - $77.1 - - - - $77.1 $77.1
Average rate - 6.7% - - - - 6.7%
</TABLE>
To manage Enterprises' exposure to fluctuations in interest rates and to
lower funding costs, Enterprises constantly evaluates the use of, and has
entered into, interest rate swaps. Under these swaps, Enterprises or its
subsidiaries agree with counterparties to exchange, at specified intervals, the
difference between fixed-rate and floating-rate interest amounts calculated on
an agreed notional amount. This interest differential paid or received is
recognized in the consolidated statements of income as a component of interest
expense.
At September 30, 2000, IPALCO had an interest rate swap agreement
outstanding with a notional amount of $75 million, of which the notional amount
decreases $25 million each quarter. Enterprises has agreed to pay a fixed rate
of 6.3575% and receive a floating rate based on applicable LIBOR. The fair value
of IPALCO's swap agreement was $0.1 million at September 30, 2000.
At September 30, 2000, IPL had an interest rate swap agreement with a
notional amount of $40 million, which expires in January 2023. IPL agrees to pay
interest at a fixed rate of 5.21% to a swap counter party and receive a variable
rate based on the tax-exempt weekly rate. The fair value of IPL's swap agreement
was $(0.8) million at September 30, 2000.
National Ambient Air Quality Standards
--------------------------------------
On July 16, 1997, the United States Environmental Protection Agency (EPA)
promulgated final rules tightening the National Ambient Air Quality Standards
for ozone and creating new fine particulate matter standards. On October 29,
1999, after conducting a rehearing of its initial decision of May 14, 1999, the
United States Court of Appeals for the District of Columbia Circuit determined
that the new ozone standards were not issued lawfully, but left open the
question of future remedy. The Court also determined that the standards for fine
particulate matter were legally deficient in certain respects. The Supreme Court
has accepted EPA's petition to review the Court of Appeals' decision, and a
decision is expected by summer 2001.
NOx SIP Call
------------
On October 27, 1998, EPA issued a final rule calling for Indiana, along
with 22 other jurisdictions in the eastern third of the United States, to impose
more stringent limits on nitrogen oxides (NOx) from fossil-fuel fired steam
electric generators, such as those operated by IPL. This rule (the NOx SIP Call)
was based in part on the new ozone standards that were later held unlawful in
the Court of Appeals' decision discussed above. In a separate decision on May
25, 1999, the Court of Appeals stayed the compliance deadlines in the NOx SIP
Call. On March 3, 2000, the Court of Appeals issued a decision largely upholding
the NOx SIP Call, and a petition for rehearing in the Court of Appeals was later
denied. Litigants, including IPL, have petitioned for review by the United
States Supreme Court.
Because power plants emit nitrogen oxides, as well as fine particulate
matter, existing IPL sources may be required to be retrofitted with additional
air pollution controls in the future, either as a result of the EPA regulations
discussed above or future regulatory actions.
EPA's NOx SIP Call would require operators of coal-fired electric utility
boilers in the affected states to limit NOx emissions to 0.15 pounds per million
BTUs of heat input as a system-wide average. That limit calls for a reduction of
about 85% from 1990 average emissions from coal-fired electric utility boilers,
and a reduction of about 57% from IPL's current emissions.
It is not possible to predict whether EPA's NOx SIP Call will ultimately
survive judicial review. Nor is it possible at this time to predict accurately
the costs of compliance. Enterprises' preliminary estimates are that the NOx SIP
Call would necessitate capital expenditures of about $160 million. Only $20.7
million of such amount has been included in IPL's 2000-2002 construction
program; consequently, such program could change substantially.
As to timing, if the requirements of the NOx SIP Call became effective,
they would likely do so during the 2000-2001 period and would probably
necessitate deployment of capital during the period between 2000 and 2004. There
can be no certainty about these estimates.
Enterprises expects to refine the above estimates as engineering studies
progress and when, as, and if such rules become effective.
Sale of Steam Assets, Mid-America Energy Resources and Indianapolis Campus
---------------------------------------------------------------------------
Energy
------
See Note 7 in the Notes to Consolidated Financial Statements.
AES Acquisition of IPALCO
-------------------------
See Note 8 in the Notes to Consolidated Financial Statements.
Sale of Cleveland Energy Resources
----------------------------------
See Note 9 in the Notes to Consolidated Financial Statements.
Voluntary Early Retirement Program
----------------------------------
See Note 10 in the Notes to Consolidated Financial Statements.
<PAGE>
RESULTS OF OPERATIONS
Comparison of Third Quarter and Nine Months Ended September 30, 2000
--------------------------------------------------------------------
with Third Quarter and Nine Months Ended September 30, 1999
-----------------------------------------------------------
Diluted earnings per share during the third quarter of 2000 was $.34,
or $.07 below the $.41 attained in the comparable 1999 period. Weighted average,
diluted shares for the third quarter of 2000 were 87.3 million compared to 86.4
million for the same period in 1999. Diluted earnings per share during the first
nine months of 2000 was $1.75, or $.60 above the $1.15 attained in the
comparable 1999 period. Weighted average, diluted shares for the nine months
ended September 30, 2000, were 86.7 million compared to 87.0 million for the
same period in 1999. The following discussion highlights the factors
contributing to the third quarter and nine months ended results.
Operating Revenues
------------------
Operating revenues decreased $3.7 million during the third quarter
ended September 2000 compared to the similar period last year. Operating
revenues for the nine months ended September 2000 increased $8.2 million from
the comparable 1999 period. These results were due to the following:
Increase (Decrease) from Comparable 1999 Period
-----------------------------------------------
September 30, 2000
------------------
Three Months Ended Nine Months Ended
------------------ -----------------
(Millions of Dollars)
Electric:
Change in retail KWH sales mix - net of fuel 1.9 8.2
Change in estimate for unbilled revenue (8.0) (8.0)
Fuel revenue 0.8 3.8
Wholesale revenue 3.2 5.9
DSM Tracker revenue (0.3) (0.1)
Steam revenue (0.4) (1.7)
Other revenue (0.9) 0.1
--------- ---------
Total change in operating revenues $ (3.7) $ 8.2
========= =========
The third quarter and nine months ended September 30, 2000 increase in
retail revenue compared to the similar periods in 1999 resulted from economic
growth in Indianapolis offset by milder temperatures compared to last year.
Cooling degree days fell 22.0% compared to 1999 and were 6.5% below normal. The
nine months ended increase in retail revenue compared to the same period in 1999
reflects a higher realization per kilowatt-hour sold partially offset by milder
weather during the summer. Both the third quarter and nine months ended
variances from prior year reflect the change in the estimate for unbilled
revenue recorded during 1999. The changes in fuel revenues in 2000 from the
prior year reflect changes in total fuel costs billed to customers. Wholesale
revenue increased during the third quarter of 2000 due to favorable wholesale
market conditions and generating unit availability. Steam revenue decreased
during the nine months ended 2000 primarily due to a decrease in heating degree
days.
Operating Expenses
------------------
Fuel costs increased by $6.1 million and $9.3 million in the third
quarter and nine months ended September 30, 2000, respectively, compared to the
similar periods last year. These increases were primarily due to higher KWH
generation due to generating unit availability and increases in deferred fuel.
Other operating expenses increased $4.4 million and $11.3 million in
the third quarter and nine months ended September 30, 2000, respectively,
compared to the similar periods in 1999. The third quarter increase was
primarily due to rental costs of $2.2 million for portable diesel generators
used to supplement generation during the summer months. The nine months ended
increase was primarily due to decreased sales of emission allowances of $4.5
million, which was recorded as a credit to operating expenses in 1999, and
rental costs of $3.2 million for portable diesel generators used to supplement
generation during the summer months.
Power purchased decreased $16.8 million and $17.8 million during the
third quarter and nine months ended September 30, 2000, respectively, compared
to the similar periods last year primarily because the prior year totals reflect
an unusually high level of purchases caused by generating unit outages during
peak demand conditions and higher market prices for scheduled summer peaking
power.
Maintenance expense increased $.6 million and $4.9 million during the
third quarter and nine months ended September 30, 2000, respectively, compared
to the similar periods last year. The increase in expense was due primarily to
costs associated with the timing of generating unit overhauls and outages.
Income taxes-net increased $3.8 million and $2.3 million in the third
quarter and nine months ended periods, respectively, due to increases in pretax
operating income and a $3.2 million adjustment to the income tax accrual offset
by a decrease in deferred taxes.
Other Income and Deductions
---------------------------
Other - net, which includes the pretax operating and investment income
from operations other than IPL, as well as non-operating income from IPL,
decreased $4.6 million and increased $93.9 million during the third quarter and
nine months ended September 30, 2000, respectively, compared to the similar
periods last year. The third quarter variance was primarily a result of
decreased insurance recoveries of $1.8 million, which were recorded as income to
Other-net in 1999, as well as increased outside service expenditures of $3.3
million related to legal and financial advisory costs of IPALCO's pending
acquisition by AES. These amounts are offset by a decrease in civic
expenditures. The nine months ended increase was primarily due to the $103.6
million gain on the sale of the ICGE investment less related compensation. (See
Note 5 in the Notes to Consolidated Financial Statements). The gain was offset
by a $7.6 million increase in outside service expenditures also related to the
pending acquisition by AES.
Interest and Other Charges
--------------------------
Interest expense decreased $1.4 million and $3.7 million for the third
quarter and nine months ended September 30, 2000, respectively, compared to the
similar period last year primarily as a result of the reduction of the principal
amount on the recapitalization debt facility of IPALCO.
New Accounting Pronouncement
----------------------------
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," that Enterprises will be required to adopt in 2001 (see
Note 6 in the Notes to Consolidated Financial Statements for further
discussion).
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
------- -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------
A Special Meeting of Shareholders of IPALCO Enterprises, Inc. was held
on October 20, 2000. Shareholders voted on a proposal to approve an Agreement
and Plan of Share Exchange between IPALCO and The AES Corporation pursuant to
which shares of IPALCO common stock will be exchanged for shares of AES common
stock and IPALCO will become a wholly-owned subsidiary of AES. The vote was
56,537,810 in favor, and 10,046,566 against, with 1,078,194 abstaining.
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.
3.1* Articles of Incorporation of IPALCO Enterprises, Inc., as amended.
(Exhibit 3.1 to the Form 10-Q for the quarter ended 6-30-97.)
3.2* Bylaws of IPALCO Enterprises, Inc, as amended. (Exhibit 3.2 to the
Form 10-Q for the quarter ended 3-31-99.)
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 4-28-98.)
4.3* Amendment No. 1 dated as of July 15, 2000, to the Rights Agreement
dated as of June 28, 1990, as amended and restated as of April 28, 1998
between IPALCO Enterprises, Inc. and First Chicago Trust Company of New
York, as Rights Agent. (Exhibit C to Form 8-A/A filed 7-19-00.)
10.1* Second Amendment to the IPALCO Enterprises, Inc. Voluntary Employee
Beneficiary Association Trust Agreement. (Exhibit 10.1 to the Form 10-Q
for the quarter ended 6-30-00.)
11.1 Computation of Per Share Earnings.
21.1* Subsidiaries of the Registrant. (Exhibit 21.1 to the Form 10-K dated
12-31-99.)
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
A Form 8-K was filed on October 20, 2000, reporting item 5,
Other Events, to report shareholder approval of the Agreement
and Plan of Share Exchange whereby The AES Corporation will
acquire IPALCO Enterprises, Inc. in a stock-for-stock
transaction.
<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, 2000 /s/ John R. Brehm
---------------------- ------------------------------
John R. Brehm
Vice President and Treasurer
Date: November 13, 2000 /s/ Stephen J. Plunkett
---------------------- ------------------------------
Stephen J. Plunkett
Controller
