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
June 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 June 30, 2000
----- ----------------------------
Common (Without Par Value) 85,722,469 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
Six Months Ended June 30, 2000 and 1999 2
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999 3
Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-15
PART II. OTHER INFORMATION 16-18
-------- -----------------
<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 Six Months Ended
June 30 June 30
2000 1999 2000 1999
------------- ------------ ------------- ------------
UTILITY OPERATING REVENUES:
<S> <C> <C> <C> <C>
Electric $ 198,188 $ 195,843 $ 398,716 $ 385,455
Steam 6,512 7,167 17,073 18,386
------------- ------------ ------------- ------------
Total operating revenues 204,700 203,010 415,789 403,841
------------- ------------ ------------- ------------
UTILITY OPERATING EXPENSES:
Operation:
Fuel 44,577 43,029 92,154 88,943
Other 34,552 32,762 70,391 63,520
Power purchased 2,520 3,367 3,022 4,028
Purchased steam 1,557 1,668 3,231 3,363
Maintenance 23,907 13,847 41,169 36,827
Depreciation and amortization 27,749 26,775 55,304 53,354
Taxes other than income taxes 9,277 8,685 18,577 17,621
Income taxes - net 18,777 23,443 41,987 43,500
------------- ------------ ------------- ------------
Total operating expenses 162,916 153,576 325,835 311,156
------------- ------------ ------------- ------------
UTILITY OPERATING INCOME 41,784 49,434 89,954 92,685
------------- ------------ ------------- ------------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used during construction 869 319 1,550 670
Other - net (385) (536) 97,801 (664)
Income taxes - net 1,658 2,592 (37,558) 4,648
------------- ------------ ------------- ------------
Total other income - net 2,142 2,375 61,793 4,654
------------- ------------ ------------- ------------
INCOME BEFORE INTEREST AND OTHER CHARGES 43,926 51,809 151,747 97,339
------------- ------------ ------------- ------------
INTEREST AND OTHER CHARGES:
Interest 14,550 16,549 29,574 31,900
Allowance for borrowed funds used during construction (408) (196) (741) (417)
Preferred stock transactions 804 804 1,607 1,607
------------- ------------ ------------- ------------
Total interest and other charges - net 14,946 17,157 30,440 33,090
------------- ------------ ------------- ------------
NET INCOME $ 28,980 $ 34,652 $ 121,307 $ 64,249
============= ============ ============= ============
BASIC EARNINGS PER SHARE $ 0.34 $ 0.40 $ 1.42 $ 0.74
============= ============ ============= ============
DILUTED EARNINGS PER SHARE $ 0.33 $ 0.40 $ 1.40 $ 0.74
============= ============ ============= ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
(Unaudited)
<CAPTION>
June 30 December 31
ASSETS 2000 1999
------
-------------- -------------
UTILITY PLANT:
<S> <C> <C>
Utility plant in service $ 2,962,262 $ 2,922,338
Less accumulated depreciation 1,350,589 1,299,122
-------------- -------------
Utility plant in service - net 1,611,673 1,623,216
Construction work in progress 120,212 116,478
Property held for future use 10,718 10,718
-------------- -------------
Utility plant - net 1,742,603 1,750,412
-------------- -------------
OTHER ASSETS:
Nonutility property - at cost, less accumulated depreciation 67,611 69,056
Available-for-sale securities 189 175,202
Other investments 15,525 13,970
-------------- -------------
Other assets - net 83,325 258,228
-------------- -------------
CURRENT ASSETS:
Cash and cash equivalents 21,251 23,935
Accounts receivable and unbilled revenue
(less allowance for doubtful accounts
2000, $1,521 and 1999, $1,360) 49,349 51,357
Fuel - at average cost 43,759 52,016
Materials and supplies - at average cost 49,076 48,694
Tax refund receivable - 770
Prepayments and other current assets 3,774 9,465
-------------- -------------
Total current assets 167,209 186,237
-------------- -------------
DEFERRED DEBITS:
Regulatory assets 102,157 107,948
Miscellaneous 10,208 13,012
-------------- -------------
Total deferred debits 112,365 120,960
-------------- -------------
TOTAL $ 2,105,502 $ 2,315,837
============== =============
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common shareholders' equity:
Common stock $ 439,234 $ 439,066
Unearned compensation - restricted stock awards (1,659) (1,979)
Premium on 4% cumulative preferred stock 649 649
Retained earnings 783,904 690,455
Accumulated other comprehensive income 112 106,733
Treasury stock, at cost (556,754) (557,178)
-------------- -------------
Total common shareholders' equity 665,486 677,746
Cumulative preferred stock of subsidiary 59,135 59,135
Long-term debt (less current maturities and
sinking fund requirements) 789,532 870,050
-------------- -------------
Total capitalization 1,514,153 1,606,931
-------------- -------------
CURRENT LIABILITIES:
Notes payable - banks and commercial paper 6,000 57,578
Current maturities and sinking fund requirements 34,431 52,477
Accounts payable and accrued expenses 59,031 56,798
Dividends payable 14,921 13,859
Taxes accrued 50,948 22,237
Interest accrued 13,688 13,767
Other current liabilities 13,049 13,356
-------------- -------------
Total current liabilities 192,068 230,072
-------------- -------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Accumulated deferred income taxes - net 328,209 400,588
Unamortized investment tax credit 37,842 39,226
Accrued postretirement benefits 1,072 4,338
Accrued pension benefits 26,939 29,018
Miscellaneous 5,219 5,664
-------------- -------------
Total deferred credits and other long-term liabilities 399,281 478,834
-------------- -------------
COMMITMENTS AND CONTINGENCIES
TOTAL $ 2,105,502 $ 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>
Six Months Ended
June 30
2000 1999
-------------- --------------
CASH FLOWS FROM OPERATIONS:
<S> <C> <C>
Net income $ 121,307 $ 64,249
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,838 55,322
Amortization of regulatory assets 7,163 7,002
Gain from sale of available for sale securities (112,638) -
Deferred income taxes and investment tax credit adjustments - net (7,703) 1,562
Allowance for funds used during construction (2,291) (1,087)
Change in certain assets and liabilities:
Accounts receivable 2,008 1,883
Fuel, materials and supplies 7,875 1,484
Accounts payable and accrued expenses 2,233 (14,828)
Taxes accrued 28,711 15,720
Accrued pension benefits (2,079) (1,372)
Other - net 2,533 2,002
-------------- --------------
Net cash provided by operating activities 103,957 131,937
-------------- --------------
CASH FLOWS FROM INVESTING:
Construction expenditures - utility (45,136) (33,761)
Construction expenditures - nonutility (103) (317)
Proceeds from sale of available for sale securities 113,833 -
Other 816 (4,117)
-------------- --------------
Net cash provided by (used in) investing activities 69,410 (38,195)
-------------- --------------
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 29,100 117,400
Retirement of long-term debt (127,695) (70,400)
Short-term debt - net (51,578) (18,577)
Common dividends paid (26,786) (25,203)
Issuance of common stock related to incentive compensation plans 288 8,592
Reacquired common stock 424 (88,482)
Other 196 (948)
-------------- --------------
Net cash used in financing activities (176,051) (77,618)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (2,684) 16,124
Cash and cash equivalents at beginning of period 23,935 9,075
-------------- --------------
Cash and cash equivalents at end of period $ 21,251 $ 25,199
============== ==============
----------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 27,940 $ 30,075
============== ==============
Income taxes $ 65,735 $ 16,730
============== ==============
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 22,000 288,427
Restricted stock issues / adjustments 25,433 1,065,161
Restricted stock redeemed (52,578) (1,185,646)
---------- ------------
Balance at June 30, 2000 85,722,469 $439,234,044
========== ============
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 June 30,
-----------------------------
Three Months Ended Six Months Ended
2000 1999 2000 1999
-------------------- --------------------
(In thousands)
<S> <C> <C> <C> <C>
Weighted average common shares 85,713 85,718 85,708 86,468
Dilutive effect of stock options 888 784 722 840
------ ------ ------ ------
Weighted average common
and incremental shares 86,601 86,502 86,430 87,308
====== ====== ====== ======
</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..................................... 16.570 16.410 - 20.530 2,033,000
Exercised.................................. 9.580 8.416 - 12.670 (22,000)
---------
Outstanding, June 30, 2000.................... 15.850 9.380 - 23.380 4,360,980
=========
</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 six months ended June 30, 2000, would have decreased from $121.3
million ($1.40 per share) to the pro forma amount of $121.2 million
($1.40 per share). Enterprises' net income and earnings per share for
the similar period in 1999 would have decreased from $64.2 million ($.74
per share) to the pro forma amount of $64.1 million ($.73 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, 2000, 2,066 shares of restricted stock 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 Six Months Ended
June 30, June 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 $198 $ 15 $213 $196 $ 15 $211 $399 $ 34 $433 $385 $ 36 $421
Depreciation and
Amortization 27 2 29 26 2 28 53 3 56 51 3 54
Pre-tax Operating Income 60 (3) 57 72 - 72 130 (2) 128 133 2 135
Income Taxes 19 (2) 17 23 (2) 21 41 39 80 43 (4) 39
Capital Expenditures 26 - 26 18 1 19 47 - 47 33 2 35
</TABLE>
Property - net of Depreciation is $1.810 billion and $1.819 billion in
total for the periods ending June, 2000 and December, 1999,
respectively. Within Property - net of Depreciation, the Electric
segment is $1.668 billion and $1.674 billion for 2000 and 1999,
respectively. The All Other segment is $142 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 $75 million
and $76 million for the periods ending June, 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 second quarter 2000
and 1999. For each of the six months ended June 30, 2000 and 1999, IPL
steam depreciation of $2 million is included within Depreciation and
Amortization for the All Other segment.
Included within Pre-tax Operating Income for the All Other segment is
IPL steam pre-tax operating income of $.2 million for the second quarter
of 2000 compared to $.6 million for the same period in 1999. For the six
months ended June 30, 2000 and 1999, IPL steam pre-tax operating income
of $2 million and $3 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 $(.1) million for the second quarter of 2000 compared to
$.1 million for the same period in 1999. For each of the six months
ended June 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. Management has not yet quantified the effect
of the new standards on the consolidated financial statements.
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. The sale is subject to certain government
approvals and the satisfaction of certain conditions precedent in the
agreement and is expected to be completed during 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 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.
The transaction is subject to certain conditions, including receipt of
the approval of IPALCO shareholders and receipt of 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.
<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 April 25, 2000, declared a
quarterly dividend on common stock of 16.25 cents per share compared to 15.00
cents per share declared in the second quarter of 1999. The dividend was paid
July 15, 2000, to shareholders of record June 16, 2000.
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 $25.0 million during the quarter ended June
30, 2000, representing a $6.3 million increase from the comparable period in
1999. Internally generated cash provided by operations funded construction
expenditures during the second quarter of 2000. Enterprises' construction
expenditures (excluding allowance for funds used during construction) totaled
$45.2 million during the six months ended June 30, 2000, representing an $11.2
million increase from the comparable period in 1999. Internally generated cash
provided by operations funded construction expenditures during the first six
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 only $.3 million of related construction costs remain unexpended as of
June 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 $112.6 million and
$211.2 million on June 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 June 30, 2000:
<TABLE>
<CAPTION>
Maturity Schedule
Period Ending June 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 $3.0 $3.4 $3.6 $83.9 $4.2 $421.8 $519.9 $509.8
Average rate 7.8% 7.9% 7.9% 6.1% 7.9% 7.0% 6.9%
Variable - - - - - $192.3 $192.3 $192.3
Average rate - - - - - 4.1% 4.1%
Recapitalization debt $32.4 $80.2 - - - - $112.6 $112.6
Average rate 6.7% 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 June 30, 2000, IPALCO had an interest rate swap agreement outstanding
with a notional amount of $100 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 $0.2 million at June 30, 2000.
At June 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
$.1 million at June 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, are considering seeking review in 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 2003. 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.
<PAGE>
RESULTS OF OPERATIONS
Comparison of Second Quarter and Six Months Ended June 30, 2000
---------------------------------------------------------------
with Second Quarter and Six Months Ended June 30, 1999
------------------------------------------------------
Diluted earnings per share during the second quarter of 2000 was $.33,
or $.07 below the $.40 attained in the comparable 1999 period. Weighted average,
diluted shares for the second quarter of 2000 were 86.6 million compared to 86.5
million for the same period in 1999. Diluted earnings per share during the first
six months of 2000 was $1.40, or $.66 above the $.74 attained in the comparable
1999 period. Weighted average, diluted shares for the six months ended June 30,
2000, were 86.4 million compared to 87.3 million for the same period in 1999.
The following discussion highlights the factors contributing to the second
quarter and six months ended results.
Operating Revenues
------------------
Operating revenues increased $1.6 million during the second quarter
ended June 2000 compared to the similar period last year. Operating revenues for
the six months ended June 2000 increased $11.9 million from the comparable 1999
period. These results were due to the following:
Increase (Decrease) from Comparable 1999 Period
-----------------------------------------------
June 30, 2000
-------------
Three Months Ended Six Months Ended
------------------ ----------------
(Millions of Dollars)
Electric:
Change in retail KWH sales - net of fuel 0.5 6.3
Fuel revenue 2.8 3.0
Wholesale revenue (1.9) 2.7
DSM Tracker revenue (0.2) 0.2
Steam revenue (0.6) (1.3)
Other revenue 1.0 1.0
-------- --------
Total change in operating revenues $ 1.6 $ 11.9
======== ========
The second quarter and six months ended June 30, 2000 increase in
retail KWH sales compared to the similar periods in 1999 resulted from economic
growth in Indianapolis impacted by changed weather conditions. The second
quarter of 2000 experienced milder temperatures compared to last year. As a
result, cooling degree days decreased 16.3%. The changes in fuel revenues in
2000 from the prior year reflect changes in total fuel costs billed to
customers. Wholesale revenue decreased during the second quarter of 2000 due to
reduced generating unit availability related to a planned overhaul outage of
IPL's Stout unit 7. Steam revenue decreased during the six months ended 2000
primarily due to a decrease in heating degree days.
Operating Expenses
------------------
Fuel costs increased by $1.5 million and $3.2 million in the second
quarter and six months ended June 30, 2000, respectively, compared to the
similar periods last year. These increases were primarily due to increased
kilowatt-hour sales.
Other operating expenses increased $1.8 million and $6.9 million in the
second quarter and six months ended June 30, 2000, respectively, compared to the
similar periods in 1999. The second quarter increase was primarily due to
decreased sales of emission allowances of $1.7 million, which was recorded as a
credit to operating expenses in 1999, and rental costs of $1.1 million for
portable diesel generators used to supplement generation during the summer
months. Also contributing to the variance for the second quarter were increased
transmission and distribution expenses of $.7 million, increased customer
accounts expense of $.4 million, and increased customer service and information
expense of $.2 million, offset by decreased administrative and general expense
of $2.6 million. The six months ended increase was primarily due to decreased
sales of emission allowances of $4.7 million, which was recorded as a credit to
operating expenses in 1999, and rental costs of $1.1 million for portable diesel
generators used to supplement generation during the summer months. Also
contributing to the six months ended variance were increased transmission and
distribution expenses of $1.6 million, increased customer service and
information expense of $1.1 million, increased other miscellaneous operating
expenses of $.9 million, increased customer accounts expense of $.8 million,
offset by decreased administrative and general expense of $3.9 million.
Power purchased decreased $.8 million and $1.0 million during the
second quarter and six months ended June 30, 2000, respectively, compared to the
similar periods last year. These decreases were primarily due to the milder
temperatures in the second quarter 2000 versus 1999 resulting a reduced need to
purchase power.
Maintenance expense increased $10.1 million and $4.3 million during the
second quarter and six months ended June 30, 2000, respectively, compared to the
similar periods last year. The increase in expense was due primarily to costs
associated with the timing of planned generating unit overhauls and outages.
Income taxes-net decreased $4.7 million and $1.5 million in the second
quarter and six months ended periods, respectively, due to decreases in pretax
operating income.
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,
increased $.2 million and $98.5 million during the second quarter and six months
ended June 30, 2000, respectively, compared to the similar periods last year.
The second quarter variance was primarily a result of a favorable net change in
miscellaneous non utility pretax revenue and expense items of $4.0 million
offset by increased outside service expenditures on IPALCO parent company of
$3.8 million. The six 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).
Interest and Other Charges
--------------------------
Interest expense decreased $2.3 million for the six months ended June
30, 2000, 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
------- ---------------------------------------------------
The Annual Meeting of shareholders of IPALCO Enterprises, Inc. was held
on April 19, 2000. The following five directors in Class II were elected to
terms of three years each which expire in April, 2003. Each director received
the following number of votes as shown opposite his or her name:
Director Votes for Votes Withheld
-------- ----------- ---------------
Joseph D. Barnette, Jr. 72,883,315 1,493,126
Max L. Gibson 72,827,332 1,499,109
Ramon L. Humke 67,518,182 6,808,259
Andrew J. Paine, Jr. 72,656,395 1,670,046
Sallie W. Rowland 72,484,265 1,842,176
A shareholder proposal regarding executive compensation was defeated. The vote
was 7,636,243 in favor, and 51,813,274 against, with 2,650,293 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 dated 6-30-97.)
3.2* Bylaws of IPALCO Enterprises, Inc, as amended. (Exhibit 3.2 to the
Form 10-Q dated 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.
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 July 17, 2000, reporting item 5, Other
Events, to report 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: August 11, 2000 /s/ John R. Brehm
--------------------- --------------------------------
John R. Brehm
Vice President and Treasurer
Date: August 11, 2000 /s/ Stephen J. Plunkett
--------------------- --------------------------------
Stephen J. Plunkett
Controller
