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FORM 10-K
SECURlTlES AND EXCHANGE COMMlSSlON
WASHINGTON, D. C. 20549
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 1997 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
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
IPALCO Enterprises, Inc. New York Stock Exchange
Common Stock (without par value) Chicago Stock Exchange
Common Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of January 31, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was: $1,635,286,835 based on the average
of the high and low price of the common stock on such date. As of
January 31, 1998, there were 44,863,302 shares of the registrant's common
stock (without par value)outstanding.
-------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the IPALCO Enterprises, Inc. definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 15, 1998, are incorporated by
reference into Part III of this Report.
PART I
------
Item 1. BUSINESS
--------
ORGANIZATION
IPALCO Enterprises, Inc. (IPALCO) is a holding company and was
incorporated under the laws of the state of Indiana on September 14, 1983. It
has 14 employees. IPALCO has two (2) subsidiaries: Indianapolis Power & Light
Company (IPL), a regulated electric and steam service utility, and Mid-America
Capital Resources, Inc. (Mid-America), a holding company for unregulated
businesses.
DESCRIPTION OF BUSINESS OF SUBSIDIARIES
INDIANAPOLIS POWER & LIGHT COMPANY
GENERAL
IPL was incorporated under the laws of the state of Indiana in 1926 and
is a wholly-owned subsidiary of IPALCO. IPL is engaged primarily in generating,
transmitting, distributing and selling electric energy in the city of
Indianapolis and neighboring cities, towns, communities, and adjacent rural
areas, all within the state of Indiana, the most distant point being about 40
miles from Indianapolis. It also produces, distributes and sells steam within a
limited area in such city. There have been no significant changes in the
services rendered, or in the markets or methods of distribution, since the
beginning of the fiscal year. IPL intends to do business of the same general
character as that in which it is now engaged. Existing Indiana law provides for
electricity suppliers to have an exclusive retail service area.
IPL's business is not dependent on any single customer or group of a few
customers. IPL's historical retail sales to ultimate consumers for 1993-1997 are
depicted at page I-5.
The electric utility business is affected by the various seasonal weather
patterns throughout the year and, therefore, the operating revenues and
associated operating expenses are not generated evenly by months during the
year.
IPL's generation, transmission and distribution facilities (electric
system) are described in Item 2, "PROPERTIES." IPL's electric system is directly
interconnected with the electric systems of Indiana Michigan Power Company, PSI
Energy, Inc., Southern Indiana Gas and Electric Company, Wabash Valley Power
Association, Hoosier Energy Rural Electric Cooperative, Inc. and the Indiana
Municipal Power Agency.
Also, IPL is a member of the East Central Area Reliability Group (ECAR),
and is cooperating under an agreement which provides for coordinated planning of
generating and transmission facilities and the operation of such facilities to
promote reliability of bulk power supply in the nine-state region served by
ECAR. Smaller electric utility systems, independent power producers and power
marketers participate as associate members.
REGULATION
IPL is subject to regulation by the Indiana Utility Regulatory Commission
(IURC) as to its services and facilities, valuation of property, the
construction, purchase or lease of electric generating facilities,
classification of accounts, rates of depreciation, rates and charges, issuance
of securities (other than evidences of indebtedness payable less than twelve
months after the date of issue), the acquisition and sale of public utility
properties or securities and certain other matters. See Note 10 in the Notes to
Consolidated Financial Statements.
In addition, IPL is subject to the jurisdiction of the Federal Energy
Regulatory Commission (FERC), in respect of short-term borrowings not regulated
by the IURC, the sale and transmission of electric energy in interstate
commerce, the classification of its accounts and the acquisition and sale of
utility property in certain circumstances as provided by the Federal Power Act.
IPL is also subject to federal, state and local environmental laws and
regulations, particularly as to generating station discharges affecting air and
water quality. The impact of compliance with such regulations on the capital and
operating costs of IPL has been and will continue to be substantial. IPL has
developed and implemented a plan to reduce sulfur dioxide and nitrogen oxide
emissions from several generating units. This plan was approved by the
Environmental Protection Agency (EPA) in 1994. Estimated new annual capital
expenditures for all other air, solid waste and water environmental compliance
measures are $10 million, $1 million and $.5 million in 1998, 1999 and 2000,
respectively.
RETAIL RATEMAKING
IPL's tariffs for electric and steam service to retail customers (basic
rates and charges) are set and approved by the IURC after public hearings. Such
proceedings, which have occurred at irregular intervals, involve IPL, the staff
of the IURC, the Office of the Indiana Utility Consumer Counselor, as well as
other interested consumer groups and IPL customers. In Indiana, basic rates and
charges are determined after giving consideration, on a proforma basis, to all
allowable costs for ratemaking purposes including a fair return on the fair
value of the utility property dedicated to providing service to customers. Once
set, the basic rates and charges authorized do not assure the realization of a
fair return on the fair value of property. Other numerous factors including
weather, inflation, customer growth and usage, the level of actual maintenance
and capital expenditures and IURC restrictions on the level of operating income
can impact the return realized. Substantially all of IPL's retail tariffs
provide for the monthly billing or crediting to customers of increases or
decreases, respectively, in the actual costs of fuel consumed from estimated
fuel costs embedded in base tariffs. Additionally, all such retail tariffs
provide for billing of "lost revenue margins" on estimated kilowatt-hour (KWH)
sales reductions along with current and deferred costs resulting from IPL's IURC
approved demand side management programs (DSM). IPL maintains its books and
records consistent with generally accepted accounting principles reflecting the
impact of regulation (see Note 1 in the Notes to Consolidated Financial
Statements and Item 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" under "Nature of Operations and Regulatory
Matters").
Future events, including the advent of retail competition within IPL's
service territory, could result in the deregulation of all or part of IPL's
existing regulated businesses. Upon deregulation, adjustments to IPL's
accounting records may be required to eliminate the historical impact of
regulatory accounting. Such adjustments, as required by Statement of Financial
Accounting Standards No. 101 (SFAS 101), "Regulated Enterprises - Accounting for
the Discontinuation of Application of FASB Statement No. 71," would eliminate
the "effects of any actions of regulators that have been recognized as assets
and liabilities...." Required adjustments could include expensing of any
unamortized net regulatory assets, elimination of certain tax liabilities and a
write down of any impaired utility plant balances. IPL does not expect to be in
a position to be required to adopt SFAS 101 in the near term and accordingly has
not attempted to estimate the impact of adopting SFAS 101.
FUEL
In 1997, approximately 99.5% of the total KWH sold by IPL were generated
from coal, .2% from middle distillate fuel oil, .2% from gas and .1% from
purchased steam. In addition to use in oil-fired generating units, fuel oil is
used for start up and flame stabilization in coal-fired generating units as well
as for coal thawing and coal handling. Gas is used in IPL's newer combustion
turbines.
IPL's long-term coal contracts provide for the supply of the major
portion of its burn requirements through the year 1999. The long-term coal
agreements are with three suppliers and the coal is mined entirely in the state
of Indiana. See Exhibits listed under Part IV Item 14(a)2 of IPL's Form 10-K. It
is presently believed that all coal used by IPL will be mined by others. IPL
normally carries fuel oil and a 60-day supply of coal to offset unforeseen
occurrences such as labor disputes, equipment breakdowns and power sales to
other utilities. IPL increases its stockpile to an approximate 80-day supply
when strikes are anticipated in the coal industry.
EMPLOYEE RELATIONS
As of December 31, 1997, IPL had 2,095 employees of whom 1,050 were
represented by the International Brotherhood of Electrical Workers, AFL-CIO
(IBEW) and 350 were represented by the Electric Utility Workers Union (EUWU), an
independent labor organization. In December 1996, the membership of the IBEW
ratified a new labor agreement which remains in effect until December 13, 1999.
The agreement provides for general pay adjustments of 3.5% in 1996 and 3.0% in
both 1997 and 1998, and changes in pension and health care coverage. In March
1995, the membership of the EUWU ratified a new labor agreement which remains in
effect until February 23, 1998. Negotiations are currently underway for a new
contract with the EUWU. The old agreement provided for general pay adjustments
of 2% in 1995, 1996 and 1997; lump sum payments of $500 in both 1995 and 1996;
and changes in pension and health care coverage.
DISPOSITION OF ASSETS
In 1997, IPL retired and sold its CC Perry W Plant site, including land
and improvements, to the State of Indiana White River State Park Commission.
MID-AMERICA CAPITAL RESOURCES, INC. (Mid-America)
GENERAL
Mid-America, the holding company for the unregulated activities of
IPALCO, has as subsidiaries Indianapolis Campus Energy, Inc. (ICE), Store Heat
And Produce Energy, Inc., which conducts business as SHAPE Energy Resources
(SHAPE), Cleveland Thermal Energy Corporation (Cleveland Thermal), Cleveland
District Cooling Corporation (Cleveland Cooling) and Mid-America Energy
Resources, Inc. (Energy Resources). Energy Resources operates a district cooling
system in downtown Indianapolis, Indiana.
Cleveland Thermal owns and operates a district heating system in downtown
Cleveland, Ohio. Cleveland Cooling owns and operates a district cooling system
also located in downtown Cleveland. Operations at Cleveland Cooling commenced in
April 1993, and the system became fully subscribed during 1996. Both Cleveland
Thermal and Cleveland Cooling jointly conduct business under the name Cleveland
Energy Resources.
At December 31, 1997, Mid-America held 80% of the common stock of SHAPE.
SHAPE conducts research and development of energy storage technology.
ICE owns and operates an energy system under contract to Eli Lilly and
Company (Lilly) to provide cooling capacity to the Lilly Technology Center, in
Indianapolis, Indiana. This chilled water facility, located near Morris Street
and Kentucky Avenue in Indianapolis began providing chilled water to Lilly in
1996.
EMPLOYEES
As of December 31, 1997, Mid-America and its subsidiaries had 93
employees. There are no labor organizations.
IPALCO ENTERPRISES, INC.
STATISTICAL INFORMATION - ELECTRIC
The following table of statistical information presents additional data on IPL's
operation.
Year Ended December 31,
-----------------------------------------------------------------------------------------------
Operating Revenues (In Thousands): 1997 (1) 1996 1995 1994 1993
- ---------------------------------------------------- --------------- --------------- --------------- ---------------
Residential $ 261,832 $ 261,819 $ 243,055 $ 230,805 $ 225,138
Small industrial and commercial 125,998 132,361 130,780 129,346 127,551
Large industrial and commercial 306,761 298,720 275,803 266,703 255,945
Public lighting 8,457 8,147 7,598 6,949 7,186
Miscellaneous 12,050 9,264 8,289 7,186 7,373
---------------- --------------- --------------- --------------- ---------------
Revenues - ultimate consumers 715,098 710,311 665,525 640,989 623,193
Sales for resale - REMC 1,082 1,141 1,105 1,098 897
Sales for resale - other 21,954 13,312 6,758 7,680 5,237
---------------- --------------- --------------- --------------- ---------------
Total electric revenues $ 738,134 $ 724,764 $ 673,388 $ 649,767 $ 629,327
================ =============== =============== =============== ===============
Kilowatt-hour Sales (In Millions):
Residential 4,255 4,367 4,277 4,077 4,014
Small industrial and commercial 1,972 2,130 2,209 2,207 2,202
Large industrial and commercial 6,834 6,772 6,509 6,306 6,169
Public lighting 57 58 61 64 62
---------------- --------------- --------------- --------------- ---------------
Sales - ultimate consumers 13,118 13,327 13,056 12,654 12,447
Sales for resale - REMC 29 29 28 26 24
Sales for resale - other 1,111 725 394 456 321
---------------- --------------- --------------- --------------- ---------------
Total kilowatt-hours sold 14,258 14,081 13,478 13,136 12,792
================ =============== =============== =============== ===============
Customers at End of Year:
Residential 374,686 370,029 365,163 360,347 356,015
Small industrial and commercial 41,148 40,403 39,781 38,849 38,359
Large industrial and commercial 3,960 3,657 3,557 3,525 3,342
Public lighting 346 303 281 266 252
---------------- --------------- --------------- --------------- ---------------
Total ultimate consumers 420,140 414,392 408,782 402,987 397,968
Sales for resale - REMC 1 1 1 1 1
---------------- --------------- --------------- --------------- ---------------
Total electric customers 420,141 414,393 408,783 402,988 397,969
================ =============== =============== =============== ===============
(1) 1997 includes estimated electric operating revenue and kilowatt-hour sales
for services delivered but not billed during the period (see Note 3 in the Notes
to Consolidated Financial Statements).
Item 2. PROPERTIES
----------
IPL
IPL's executive offices are in the IPALCO Corporate Center located at One
Monument Circle, Indianapolis, Indiana. This facility contains approximately
201,300 square feet of space and contains certain administrative operations of
IPALCO's subsidiaries.
IPL also owns two distribution service centers located at 1230 West
Morris Street and 3600 North Arlington Avenue, both in Indianapolis, Indiana.
IPL's customer service center is located at 2102 North Illinois Street in
Indianapolis.
IPL owns and operates four primarily coal-fired generating plants, three
of which are used for only electric generation and one which is used for a
combination of electric and steam generation. For electric generation, the total
gross nameplate rating is 3,024 MW, winter capability is 3,036 MW and summer
capability is 2,956 MW. For steam generation, gross capacity is 1,990 Mlbs.
(thousands of pounds) per hour.
Total Electric Stations:
H. T. Pritchard plant (Pritchard), located 25 miles southwest of
Indianapolis (seven units in service - one in 1949, 1950, 1951, 1956 and 1967
and two in 1953) with 367 MW nameplate rating and net winter and summer
capabilities of 344 MW and 341 MW, respectively.
E. W. Stout plant (Stout) located in the southwest part of Marion County
(eleven units in service - one each in 1941, 1947, 1958, 1961, 1967, 1994 and
1995 and four in 1973) with 921 MW nameplate rating and net winter and summer
capabilities of 1,000 MW and 924 MW, respectively.
Petersburg plant (Petersburg), located in Pike County, Indiana (seven units
in service - four in 1967 and one each in 1969, 1977 and 1986) with 1,716 MW
nameplate rating and net winter and summer capabilities of 1,672 MW.
Combination Electric and Steam Station:
C.C. Perry Section K plant (Perry K), located in Indianapolis with 20 MW
nameplate rating (net winter capability 20 MW, summer 19 MW) for electric and
a gross capacity of 1,990 Mlbs. per hour for steam.
Net electrical generation during 1997, at the Petersburg, Stout and
Pritchard stations accounted for about 72.9%, 20.3% and 6.7%, respectively, of
IPL's total net generation. Perry K and Perry W produced .1% net electrical
generation and all of the steam generated by IPL for the steam system. In
addition, IPL purchases steam from an independent resource recovery system
located within the city of Indianapolis. During 1997, the C.C. Perry Section W
plant (Perry W), located in downtown, Indianapolis, with 11 MW nameplate rating
(net winter capability 10 MW, summer 12 MW) for electric and a gross capacity of
300 Mlbs. per hour for steam was retired in place and subsequently sold to the
State of Indiana White River State Park Commission.
Included in the above totals are three gas turbine units at the Stout
station added in 1973, one gas turbine added in 1994 and one gas turbine added
in 1995 with a combined nameplate rating of 214 MW, one diesel unit each at
Pritchard and Stout stations and three diesel units at Petersburg station, all
added in 1967. Each diesel unit has a nameplate rating of 3 MW.
IPL's transmission system includes 457 circuit miles of 345,000 volt
lines, 359 circuit miles of 138,000 volt lines and 268 miles of 34,500 volt
lines. Distribution facilities include 4,709 pole miles and 19,877 wire miles of
overhead lines. Underground distribution and service facilities include 505
miles of conduit and 5,520 wire miles of conductor. Underground street lighting
facilities include 109 miles of conduit and 686 wire miles of conductor. Also
included in the system are 73 bulk power substations and 76 distribution
substations.
Steam distribution properties include 22 miles of mains with 257
services. Other properties include coal and other minerals, underlying 798 acres
in Sullivan County, Indiana, and coal underlying about 6,215 acres in Pike and
Gibson Counties, Indiana. Additional land, approximately 4,882 acres in Morgan
County, Indiana and approximately 876 acres in Switzerland County, Indiana has
been purchased for future plant sites.
All of the facilities owned by IPL are well-maintained, in good condition
and meet the present needs of IPL.
The Mortgage and Deed of Trust of IPL, together with the Supplemental
Indentures thereto (the "Mortgage"), secure first mortgage bonds issued by IPL.
Pursuant to the terms of the Mortgage, substantially all property owned by IPL
is subject to a direct first mortgage lien.
OTHER SUBSIDIARIES
Energy Resources owns and operates a district cooling facility located
near downtown Indianapolis, which distributes chilled water to subscribers
located downtown for their air conditioning needs. The plant is equipped with
five 5,000 ton chillers powered by steam purchased from IPL and one 2,250 ton
chiller powered by electricity purchased from IPL.
Cleveland Thermal owns and operates two steam plants in Cleveland, Ohio,
with a total of eight boilers having a gross capacity of 1,131 Mlbs. per hour.
The distribution system includes 15.5 miles of mains with 230 services.
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 plant is equipped with two 5,000
ton chillers powered by electricity.
ICE owns and operates a chilled water facility in Indianapolis, which
serves the chilled water requirements of Eli Lilly and Company's Lilly
Technology Center. The plant is equipped with three 5,000 ton chillers powered
by electricity purchased from IPL.
Substantially all the Mid-America property is subject to the lien of
existing debt and/or credit agreements of Mid-America, Energy Resources and ICE.
Item 3. LEGAL PROCEEDINGS
-----------------
On August 18, 1997, Region V of the U. S. Environmental Protection Agency
issued to IPL a Notice of Violation (NOV) under the Clean Air Act. The NOV
alleged that particulate matter emissions from IPL's Perry K Units 11 and 12
exceeded applicable limits on three dates in 1995, that particulate matter
emissions from Perry K Units 15 and 16 exceeded applicable limits on a single
date in each of 1994 and 1995, and that sulfur dioxide emissions exceeded the
applicable limit on four days in the first quarter of 1997. IPL disagrees with
the Agency's interpretations of the applicable rules and believes that the Perry
K Plant has been in compliance with applicable limits. Representatives of IPL
met with the Agency on September 24, 1997, in an attempt to resolve the matter
and have subsequently provided the Agency with additional information on the
operation of the Plant. If IPL were adjudged to have violated applicable
emission limits, it could be subject to maximum penalties of $27,500 per day of
violation. While the results of this proceeding cannot be predicted with
certainty, management, based upon the advice of counsel, believes that the final
outcome will not have a material adverse effect on the consolidated financial
statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
EXECUTIVE OFFICERS OF THE REGISTRANT AT FEBRUARY 24, 1998.
Name, age (at December 31, 1997), and positions and offices held for the
past five years:
From To
John R. Hodowal (52)
Chairman of the Board and
President of IPALCO May, 1989
Chairman of the Board of IPL February, 1990
Chief Executive Officer of IPL May, 1989
Ramon L. Humke (65)
Vice Chairman of IPALCO May, 1991
President and Chief Operating
Officer of IPL February, 1990
John R. Brehm (44)
Vice President and Treasurer
of IPALCO May, 1989
Senior Vice President -
Finance and Information
Services of IPL May, 1991
N. Stuart Grauel (53)
Vice President - Public Affairs
of IPALCO May, 1991
Joseph A. Gustin (50)
President of Mid-America December, 1994
President of ICE April, 1993
President of Energy Resources May, 1991
Vice President of SHAPE May, 1993 January, 1995
Vice President of Mid-America May, 1991 December, 1994
Robert W. Rawlings (56)
Senior Vice President -
Electric Production of IPL May, 1991
Bryan G. Tabler (54)
Vice President -
Secretary and General Counsel of IPALCO January, 1995
Senior Vice President -
Secretary and General Counsel of IPL January, 1995
Partner, Barnes & Thornburg January, 1979 October, 1994
Gerald D. Waltz (58)
Senior Vice President -
Electric Delivery of IPL May, 1996
Senior Vice President -
Business Development of IPL May, 1991 May, 1996
Paul S. Mannweiler (48)
Senior Vice President -
External Affairs of IPL January, 1997
Partner, Locke Reynolds Boyd and Weisell July, 1980 December,1996
Max Califar (44)
Vice President - Human
Resources of IPL December, 1992
Michael P. Holstein (40)
Vice President - Corporate
Strategy and Marketing April, 1996
Corporate Strategies of IPL July, 1995 April, 1996
Senior Manager, Deloitte & Touche, LLP March, 1994 July, 1995
Vice President, EDS/
Energy Management Associates April, 1984 March, 1994
Steven L. Meyer (39)
Assistant Treasurer of IPALCO May, 1993
Treasurer of IPL December, 1992
Stephen J. Plunkett (49)
Controller of IPALCO
and IPL May, 1991
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On February 25, 1997, IPALCO's Board of Directors (Board) authorized the
repurchase of up to 12 million shares of IPALCO's common stock through a "Dutch
Auction" self-tender offer. On March 27, the Dutch Auction ended with 12,539,428
shares of common stock having been tendered to the Company and not withdrawn at
or below $32 dollars per share. The Board subsequently elected to purchase all
shares tendered at or below $32 per share for $32 per share. All 12,539,428
shares remain in Treasury stock.
IPALCO reduced dividends paid during 1997 compared to the previous year
to be more consistent with companies operating today in a competitive
environment. This policy was established at the same time as the
recapitalization described above.
At December 31, 1997, IPALCO had 20,862 holders of common stock of record
(including shareholders whose shares are held in IPALCO PowerInvest, the
Dividend Reinvestment and Direct Stock Purchase Plan of IPALCO Enterprises,
Inc.). IPALCO's common stock is principally traded on the New York Stock
Exchange and the Chicago Stock Exchange. The high and low sale prices for
IPALCO's common stock during 1997 and 1996 as reported on the Composite Tape in
The Wall Street Journal were as follows:
---- ------ -------
1997 1996
---------------------------- ---------------------------
High Low High Low
Sale Price Sale Price Sale Price Sale Price
First Quarter $32 5/8 $26 1/2 $27 3/8 $25
Second Quarter 32 29 3/8 26 3/4 24 5/8
Third Quarter 34 1/2 30 13/16 27 5/8 25 1/8
Fourth Quarter 42 5/16 32 5/8 28 1/4 26 1/8
The high and low sale prices for IPALCO's common stock reported on the
Composite Tape in The Wall Street Journal for the period January 1, 1998,
through February 20, 1998, were: High - $43 9/16, Low - $39 13/16.
Quarterly dividends paid on the common stock during 1997 and 1996 were as
follows:
1997 1996
---- ----
First Quarter $.37 $.36
Second Quarter .25 .37
Third Quarter .25 .37
Fourth Quarter .25 .37
At its meeting on February 24, 1998, the Board declared a regular
quarterly dividend on common stock of $.275 per share, payable April 15, 1998,
to shareholders of record on March 20, 1998.
Dividend Restrictions
- ---------------------
The following restrictions pertain to IPL but, to the extent that the
dividends of IPALCO depend upon IPL earnings, may have an effect on IPALCO. So
long as any of the several series of bonds of IPL issued under the Mortgage and
Deed of Trust, dated as of May 1, 1940, as supplemented and modified, executed
by IPL to American National Bank and Trust Company of Chicago, as Trustee,
remain outstanding, IPL is restricted in the declaration and payment of
dividends, or other distribution on shares of its capital stock of any class, or
in the purchase or redemption of such shares, to the aggregate of its net
income, as defined in Section 47 of such Mortgage, after December 31, 1939. The
amount which these Mortgage provisions would have permitted IPL to declare and
pay as dividends at December 31, 1997, exceeded retained earnings at that date.
Such restrictions do not apply to the declaration or payment of dividends upon
any shares of capital stock of any class to an amount in the aggregate not in
excess of $1,107,155, or to the application to the purchase or redemption of any
shares of capital stock of any class of amounts not to exceed in the aggregate
the net proceeds received by IPL from the sale of any shares of its capital
stock of any class subsequent to December 31, 1939. In addition, pursuant to
IPL's Articles of Incorporation, no dividends may be paid or accrued and no
other distribution may be made on IPL's common stock unless dividends on all
outstanding shares of IPL preferred stock have been paid or declared and set
apart for payment. The management of IPL believes these restrictions will not
materially restrict anticipated dividends.
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
------------------------------------
(In Thousands Except Per Share Amounts) 1997 1996 1995 1994 1993
- ---------------------------------------
--------------- -------------- -------------- -------------- --------------
Total utility operating revenues (1) $ 776,427 $ 762,503 $ 709,206 $ 686,076 $ 664,303
Utility operating income 167,315 163,219 147,588 143,310 142,368
Allowance for funds used during
construction 4,407 9,321 11,370 9,381 5,527
Income before cumulative effect of
accounting change 95,699 114,275 98,778 92,994 75,422
Cumulative effect of accounting change (1) 18,347 - - - -
Net income (2) 114,046 114,275 98,778 92,994 75,422
Utility plant - net 1,766,383 1,787,969 1,792,007 1,711,772 1,608,871
Total assets 2,154,349 2,183,069 2,231,197 2,099,361 1,966,023
Common shareholders' equity 526,129 857,726 822,803 801,945 787,211
Cumulative preferred stock of subsidiary 9,135 51,898 51,898 51,898 51,898
Long-term debt (less current
maturities and sinking
fund requirements) 1,032,846 662,591 698,600 665,971 541,760
Utility construction expenditures 73,130 78,543 166,874 178,295 145,765
Nonutility construction expenditures 1,569 4,187 34,745 9,402 8,788
BASIC EARNINGS PER SHARE (3)
Income before cumulative effect of
accounting change 2.00 2.01 1.74 1.64 1.33
Cumulative effect of accounting change (1) .38 - - - -
Net Income (2,4) 2.38 2.01 1.74 1.64 1.33
DILUTED EARNINGS PER SHARE (3)
Income before cumulative effect of
accounting change 1.98 2.00 1.74 1.64 1.33
Cumulative effect of accounting change (1) .38 - - - -
Net Income (2,4) 2.36 2.00 1.74 1.64 1.33
Dividends declared per share of
common stock (4) 1.00 1.48 1.44 1.41 1.36
See consolidated financial statements.
(1) In 1997, IPL adopted the unbilled revenues method of accounting for
electricity and steam delivered during the period. Revenues are accrued for
services provided but unbilled at the end of each month (see Note 3 in the
Notes to Consolidated Financial Statements).
(2) During 1993, IPALCO incurred a one-time charge against earnings of $21.1
million, net of income taxes, for costs pertaining to IPALCO's efforts to
acquire PSI Resources, Inc.
(3) See Note 6 in the Notes to Consolidated Financial Statements
(4) Per share amounts for 1993 through 1995 have been adjusted to reflect the
3-for-2 common stock split issued in March 1996.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
IPALCO Enterprises, Inc. (IPALCO) is a holding company incorporated under
the laws of the state of Indiana. Indianapolis Power & Light Company (IPL) and
Mid-America Capital Resources, Inc. (Mid-America) are subsidiaries of IPALCO.
Mid-America is the holding company for the unregulated activities of IPALCO. IPL
represents the regulated subsidiary.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the Reform Act), IPALCO Enterprises, Inc. and
subsidiaries (collectively, Enterprises) is hereby filing cautionary statements
identifying important factors that could cause Enterprises' actual results to
differ materially from those projected in forward-looking statements of
Enterprises. This Form 10-K, and particularly Management's Discussion and
Analysis, contains forward-looking statements. Many of these statements are
contained in this Item 7 under the IPALCO section entitled "Recapitalization and
Dividend Change," and the IPL section entitled "Future Performance." The Reform
Act defines forward-looking statements as statements that express an expectation
or belief and contain a projection, plan or assumption with regard to, among
other things, future revenues, income, earnings per share or capital structure.
Such statements of future events or performance are not guarantees of future
performance and involve estimates, assumptions, and uncertainties and are
qualified in their entirety by reference to, and are accompanied by, the
following important factors that could cause Enterprises' actual results to
differ materially from those contained in forward-looking statements made by or
on behalf of Enterprises. The words "anticipate," "believe," "estimate,"
"expect," "forecast," "project," "objective" and similar expressions are
intended to identify forward-looking statements.
Some important factors that could cause Enterprises' actual results or
outcomes to differ materially from those discussed in the forward-looking
statements include, but are not limited to, fluctuations in customer growth and
demand, weather, fuel costs and availability, regulatory action, Federal and
State legislation, interest rates, labor strikes, maintenance and capital
expenditures and local economic conditions. In addition, IPL's ability to have
available an appropriate amount of production capacity in a timely manner can
significantly impact IPL's financial performance. The timing of deregulation and
competition, product development and introductions of technology changes are
also important potential factors. Most of these factors impact Enterprises
through its wholly-owned subsidiary, IPL.
All such factors are difficult to predict, contain uncertainties which
may materially affect actual results and are beyond the control of Enterprises.
LIQUIDITY AND CAPITAL RESOURCES
IPALCO
- ------
Recapitalization and Dividend Change
------------------------------------
On February 25, 1997, the Board of Directors of IPALCO approved a new
financial strategy designed to maximize shareholder value and position it for an
increasingly competitive business environment.
The plan included:
A recapitalization of IPALCO to employ a higher degree of leverage in the
capital structure while the electric utility industry is in a transition
period between regulation and competition. The leveraged recapitalization
was accomplished through a self-tender offer (Offer) resulting in the
purchase of 12,539,428 shares, representing about 21% of IPALCO's
outstanding common stock. The Offer was effected through a "Dutch Auction"
which resulted in a price of $32.00 per share. The transaction was financed
through the issuance of long-term debt in the amount of $401 million. The
recapitalization was effected by the parent company, IPALCO Enterprises,
Inc. and did not affect the capitalization of its subsidiaries.
A reduced quarterly dividend of $.25 per share ($1.00 annually) compared
to the previous $.37 per share ($1.48 annually). Future dividend action
will be guided by, among other factors, a policy of paying out 45% to 50%
of the prior year's earnings.
A target consolidated maximum debt-to-capital ratio of 45% which IPALCO
believes can be achieved on or before 2002.
Reducing the common stock dividend rate improves IPALCO's financial
flexibility going forward. A dividend payout ratio of 45% to 50% of prior year
earnings is more consistent with companies operating today in a competitive
environment compared to the traditional utility payout ratio of 70% or more.
IPALCO increased the quarterly dividend declared to an amount of $.275 per share
($1.10 annually) on February 24, 1998, compared to $.25 per quarter
($1.00 annually) in 1997. The declaration and payment of future dividends will
be dependent on IPALCO's earnings and financial condition, economic and market
conditions and other factors deemed relevant by the Board.
IPALCO incurred $401 million of debt in connection with the Offer. A
reduction in common shareholders' equity resulted from purchasing the common
stock according to the Offer and when combined with the newly incurred debt,
increased IPALCO's debt-to-capital ratio from 42.6% at December 31, 1996 to
65.9% at December 31, 1997. IPALCO believes that, in a competitive environment a
target debt-to-total capital ratio of 45% is appropriate. During 1997, IPALCO
reduced the original debt amount by a net $78 million, resulting in a
recapitalization debt balance of $323 million at December 31, 1997. Per the
credit agreement, $80.2 million was due to mature in each of the years 1998,
1999, 2000, 2001 and 2002. As a result of payments made during 1997, only $2.2
million remains due on the March 31, 1998, anniversary date. IPALCO believes its
earnings and cash flow will be sufficient to allow it to retain earnings and
reduce debt so that a target ratio of 45% can be achieved on or before the
predicted 2002 date. There can be no assurances, however, that such a target
ratio can be achieved or that economic or industry factors will not make
achieving such a ratio impractical or undesirable.
IPALCO believes its financial strategy will enable it to raise sufficient
funds, when necessary, to replace existing assets and undertake investments in
new growth while maintaining a prudent balance between debt and equity in the
capital structure. IPALCO believes its actions preserve the financial
flexibility necessary to accommodate unexpected future cash needs. The increased
use of debt is a tangible expression of management's confidence in IPALCO.
Sustaining investment grade debt ratings is also a key element for having
adequate liquidity and financial flexibility. As of December 31, 1997, IPALCO's
credit rating was A+ as rated by Standard & Poor's.
IPL
- ---
Nature of Operations and Regulatory Matters
-------------------------------------------
Regulation
- ----------
IPL is a regulated public utility and is principally engaged in providing
electric and steam service to the Indianapolis metropolitan area. As a regulated
entity, IPL is required to use certain accounting methods prescribed by
regulatory bodies which may differ from those accounting methods required to be
used by nonregulated entities (see Note 1 in the Notes to Consolidated Financial
Statements).
Electric Rate Settlement Agreement
- ----------------------------------
On August 24, 1995, the Indiana Utility Regulatory Commission (IURC)
issued an order approving, without amendment, a Stipulation and Settlement
Agreement (Settlement Agreement) resolving all issues in IPL's then pending
electric general rate proceeding. The Settlement Agreement authorized IPL to
increase its basic rates and charges for electric service in two steps, to begin
the amortization of certain regulatory assets and approved IPL's plan to expense
and to fund its annual postretirement benefits. These issues are discussed
further in Notes 1, 5, 10 and 12 in the Notes to Consolidated Financial
Statements.
Demand Side Management Agreement
- --------------------------------
On July 30, 1997, the IURC issued an order approving, without amendment,
a new settlement agreement for IPL's DSM program. The new agreement resulted in
a reduction in required DSM expenditures, authorization to amortize certain
deferred DSM regulatory assets and the recovery of certain additional DSM costs
through a tracker (see Note 10 in the Notes to Consolidated Financial
Statements).
Authorized Annual Operating Income
- ----------------------------------
During quarterly fuel adjustment clause proceedings, the annual operating
income of IPL's electric and steam businesses is subject to review. Customer
refunds could result if actual annual operating income exceeds levels authorized
by the IURC (see Note 1 in the Notes to Consolidated Financial Statements). IPL
does not anticipate any customer refunds to result from such reviews during
1998.
Optional Pricing and Service Plan
- ---------------------------------
During 1997, IPL filed with the IURC a plan that, if approved, will allow
IPL to offer customers with less than 2,000 kilowatts of demand an opportunity
to choose from three new payment options. This plan would allow eligible IPL
customers to enter into written agreements for:
Fixed Rate - Pay a guaranteed fixed rate per unit of consumption for up to
three years.
Green Power - Purchase environmentally friendly or "green" power.
Additionally, residential customers may choose a "Sure Bill" option, paying the
same bill amount each month for 12 months regardless of how much electricity is
used. All customers may also opt to continue paying for electricity in the same
way as in the past.
In January 1998, a Settlement Agreement between IPL and the parties
intervening in this filing was reached, and subsequently filed with the IURC. If
approved by the IURC, IPL can begin to offer the option programs.
Competition and Industry Changes
--------------------------------
In recent years, various forms of proposed industry restructuring
legislation and/or rulemakings have been introduced at the federal level and by
some states. Generally, the intent of these initiatives is to encourage an
increase in competition within the regulated electric utility industry. While
federal rulemaking to date has addressed only the electric wholesale market,
various state legislatures are considering or have enacted new laws impacting
the retail energy markets within their respective states. A discussion of the
legislative and regulatory initiatives most likely to impact IPL follows:
Wholesale Energy Market
- -----------------------
In April 1996, the Federal Energy Regulatory Commission (FERC) issued
Orders 888 and 889 concerning open access transmission service for wholesale
sales. These orders require all utilities under FERC jurisdiction to: 1. file
open, nondiscriminatory transmission access tariffs with FERC; 2. offer
transmission to eligible customers comparable to service they provide
themselves; and 3. take service under the tariffs for their own wholesale sales
and purchases of electricity. FERC order 888 also provides for the recovery of
utility stranded costs. Stranded cost is defined by FERC as the difference
between revenues received by utilities under traditional ratemaking and
market-based prices.
IPL requested and was initially denied a waiver from compliance with
orders 888 and 889. On October 11, 1996, IPL was granted a stay by FERC pending
disposition of its request for rehearing. IPL requested a waiver because, among
other reasons, the estimated costs of compliance are expected to exceed revenue
derived from its transmission service for others.
Retail Energy Market
- --------------------
The legislatures of a few states have enacted, and many other states are
considering, new laws that would allow various forms of competition, at the
retail level, for the energy requirements of electricity consumers within their
respective states. While each state proposal is different, most provide for some
recovery of a utility's stranded costs and require an extended transition period
before the intended full competition is fully effective. Additionally, a few
states have implemented pilot "limited direct access" programs that experiment
with allowing some form of customer choice of electricity suppliers.
In Indiana, competition among electric energy providers for sales has
primarily focused on the wholesale power markets or the sale of bulk power to
other public and municipal utilities. Existing Indiana law provides for
electricity suppliers to have an exclusive retail service area.
In 1995, the Indiana General Assembly, anticipating increasing
competitive forces in the regulated public utility industry, enacted into law
legislation codified at I.C. 8-1-2.5 and commonly referred to as "Senate Bill
637." This new law enables the IURC to consider and approve, on an individual
utility basis, utility company initiated proposals providing nontraditional
forms of determining customer tariffs. The IPL "Optional Pricing and Service
Plan" presently under consideration by the IURC was filed under this law.
During 1997, the Indiana General Assembly authorized a legislative study
committee to assess the issue of electric utility competition and restructuring.
A comprehensive restructuring bill was introduced in the Indiana Senate in 1998,
but was subsequently amended to deal only with authorizing Indiana utilities to
participate in a transmission independent system operator organization. This
bill failed to pass the Senate.
IPALCO's Position on Industry Deregulation
- ------------------------------------------
In general, the foregoing FERC wholesale and state-by-state retail
initiatives are inconsistent with IPALCO beliefs. IPALCO favors federal
legislation to deregulate the industry for all companies and all customers
across the country at the same time. IPALCO believes that customers,
particularly residential and small businesses, are best served by the creation
of large diverse markets. Such markets enable the development of residential
aggregators who can deliver the same benefits of volume purchasing to
residential customers as are enjoyed by large industrial customers. IPALCO
advocates a single, nondistance based transmission access price over wide
geographic areas to maximize competition; turning over transmission system
operation to an independent system operator to avoid gamesmanship by incumbents
who own both transmission and generation assets; rejecting the piecemeal opening
of markets in favor of national access to all markets and rejecting recovery of
"stranded costs" due to competition because such recovery would subsidize
certain high-cost generators to the detriment of competition. Absent a
comprehensive national approach, IPALCO believes state policy makers must
recognize and make allowances for the distorted markets that will inevitably be
created by state-by-state approaches.
There can be no assurance as to the outcome of the debate on electric
utility industry restructuring. IPALCO intends to remain competitive in the face
of increasing competition through maintaining its low cost structure and
continuing to serve existing customers well, while accessing the wholesale
market as it continues to open.
New Environmental Standards
- ---------------------------
On July 16, 1997, the United States Environmental Protection Agency
promulgated final regulations which amended the National Ambient Air Quality
Standards by introducing standards for fine particulate matter and creating new
ozone standards. Existing sources that cause or contribute to nonattainment
regions will likely be subject to additional regulatory requirements, including
possible emission reductions. New facilities in nonattainment areas may also be
subject to additional control requirements and may be required to offset their
emissions. Because power plants emit certain air pollutants that could
contribute to the formation of ambient ozone and fine particulate matter, there
is a possibility that existing IPL sources will be required to be retrofitted
with additional air pollution controls in the future. Congressional intervention
and/or litigation regarding the standards are probable. Due to these
uncertainties, it is not presently possible to predict the potential impacts
associated with implementation of these standards on IPL's facilities.
Year 2000 System Requirements
- -----------------------------
IPALCO is performing an analysis of its systems and is working with
suppliers and service organizations with whom we interact electronically in
order to determine the impact of year 2000 issues. Management is unable to
predict at this time the full impact year 2000 issues will have on IPALCO's
operations or future financial condition. Management presently estimates that
the total cost of required changes to systems owned or controlled by IPALCO to
allow for year 2000 issues should not exceed $3 million.
Liquidity, Financing Requirements and Capital Market Access
-----------------------------------------------------------
Liquidity is the ability of an entity to meet its short-term and
long-term cash needs. IPL's liquidity is a function of its ability to generate
internal funds, its construction program, its mortgage covenants and loan
agreements and its access to external capital markets.
Sustaining investment grade debt ratings is also a key element for having
adequate liquidity and financial flexibility. As of December 31, 1997, IPL's
senior secured debt was rated AA- by Standard & Poor's, Aa2 by Moody's Investor
Services and AA by Duff & Phelps, and IPL's commercial paper was rated A-1+ by
Standard & Poor's and P-1 by Moody's Investor Services. IPL expects to be able
to maintain investment grade debt ratings into the foreseeable future.
IPL has no long-term debt which matures during 1998. However, other
existing higher-rate debt may be refinanced depending upon market conditions.
See the following section for discussion of the construction program.
IPALCO purchased shares of IPL's preferred stock on October 17, 1997,
pursuant to the terms of a tender offer concluded October 8, 1997. Such shares
were subsequently purchased from IPALCO by IPL at cost and canceled. On October
28, 1997, the Board of Directors of IPL called for redemption of all remaining
shares of IPL's 6.0% and 8.2% Cumulative Preferred Stock issued and outstanding
on December 15, 1997, at a price per share, payable to shareholders of record of
$102 and $101, respectively, together with dividends accrued through the date of
redemption.
On January 13, 1998, IPL issued $50 million of Cumulative Preferred Stock
with a rate of 5.65%. The stock will be redeemable at par value, subject to
certain restrictions, in whole or in part, at any time on or after January 1,
2008, at the option of IPL.
During the next five years, IPL is forecasted to meet its cash
requirements without any additional permanent financing. Cash flows from
operations and temporary short-term borrowings are forecasted to provide the
funds required for IPL's construction program and the retirement of maturing
long-term debt.
Future Performance
------------------
IPL expects operating revenue growth based on a projected five-year 2.3%
forecasted compound annual increase in retail KWH sales and increasing sales
opportunities in the wholesale power market.
The 2.3% annual KWH sales growth estimate compares to growth rates IPL
actually achieved of 2.2% and 2.2% for the periods 1992 through 1997 and 1987
through 1997, respectively, weather adjusted. The Indianapolis economy grew at
annual rates of 2.7% and 2.6% for those same periods and is expected to grow
2.4% from 1997 through 2002.
Operating and maintenance expenses were $399.5 million in 1997.
These expenses in 1998 will be influenced by inflation, as well as ongoing
cost controls.
IPL's construction program for the three-year period 1998-2000 is
estimated to cost $237.2 million including AFUDC. The estimated cost of the
program by year (in millions) is $102.2 in 1998, $69.4 in 1999 and $65.6 in
2000. It includes $149.1 million for additions, improvements and extensions to
transmission and distribution lines, substations, power factor and voltage
regulating equipment, distribution transformers and street lighting
distribution. At December 31, 1997, IPL had completed installation of all of its
Environmental Compliance Plan facilities.
IPL will amortize approximately $35.4 million of its nontax-regulatory
assets at December 31, 1997, over the next three years.
Other
-----
Cumulative Effect of Accounting Change
- --------------------------------------
On December 31, 1997, effective January 1, 1997, IPL adopted the unbilled
revenues method of accounting for all electric and steam sales to more closely
match revenues with expenses. Under this method, IPL accrues revenues for all
electric and steam energy delivered to customers during the period, whether
billed or not. Previously IPL recognized these revenues only as customers were
billed, with the service rendered after monthly meter reading dates through the
end of a calendar month recognized as operating revenues in the following month.
The cumulative effect of this change in accounting method as of January 1, 1997,
net of taxes, is a one-time income increase of $18.3 million ($.38 per common
share) and is reported as a separate component of net income for 1997. This
accounting change does not impact IPL's cash flow or liquidity (see Note 3 of
Notes to Consolidated Financial Statements for additional information concerning
this accounting change).
Preferred Stock and Debt Issuance Restrictions and Dividend Restrictions
- ------------------------------------------------------------------------
IPL is limited in its ability to issue certain securities by restrictions
under its Mortgage and Deed of Trust (Mortgage) and its Amended Articles of
Incorporation (Articles). The restriction under the Articles requires that the
net income of IPL, as specified therein, shall be at least one and one-half
times the total interest on the funded debt and the pro forma dividend
requirements on the outstanding preferred stock and on any preferred stock
proposed to be issued, before any additional preferred stock can be issued. The
Mortgage restriction requires that net earnings as calculated thereunder be two
and one-half times the annual interest requirements before additional bonds can
be authenticated on the basis of property additions. Based on IPL's net earnings
for the 12 months ended December 31, 1997, the ratios under the Articles and the
Mortgage are 5.03 and 10.68, respectively. IPL believes these requirements will
not restrict any anticipated future financings (see Note 6 in the Notes to
Consolidated Financial Statements). At December 31, 1997, and considering all
existing restrictions, IPL had the capacity to issue approximately $1.1 billion
of additional long-term debt.
MID-AMERICA
- -----------
Nature of Operations
--------------------
Mid-America, the holding company for the unregulated activities of
IPALCO, has as subsidiaries Cleveland Thermal Energy Corporation (Cleveland
Thermal) and Cleveland District Cooling Corporation (Cleveland Cooling), which
jointly do business as Cleveland Energy Resources, Indianapolis Campus Energy,
Inc. (ICE), Store Heat and Produce Energy, Inc., which conducts business as
SHAPE Energy Resources (SHAPE) and was 80%-owned as of December 31, 1997, and
Mid-America Energy Resources, Inc. (Energy Resources). Energy Resources owns and
operates a fully subscribed district cooling system in downtown Indianapolis,
Indiana. Cleveland Thermal owns and operates a district heating system in
downtown Cleveland, Ohio. Cleveland Cooling owns and operates a district cooling
system in downtown Cleveland. ICE provides chilled water to the Lilly Technology
Center located near downtown Indianapolis. SHAPE became a majority-owned
subsidiary of Mid-America during 1993.
Capital and Financing Requirements
----------------------------------
Total capital requirements of Mid-America and its subsidiaries, including
funds needed for construction and the establishment of product inventories, are
estimated to be $ 3.4 million, $1.9 million and $.4 million during the next
three years. Energy Resources' construction expenditures in 1998 are forecasted
to include $2.5 million for a 5,000-ton chiller expansion to meet future load
requirements. Other Mid-America expenditures are highly contingent upon the
development of markets for the products and services offered by the Mid-America
family of companies. The cash requirements of Mid-America subsidiaries are
expected to be funded by Mid-America from its existing liquid assets, future
cash flows from its operations and from temporary short-term borrowings.
During 1997, Energy Resources, a subsidiary of Mid-America, issued $50
million of long-term notes payable which were used to repay intercompany debt,
make an intercompany loan and return capital to Mid-America.
During 1997, IPALCO initiated a plan to sell Cleveland Thermal and
Cleveland Cooling. Based on fair market value estimates, IPALCO recorded a
charge of $32 million to adjust the carrying amounts of these businesses to
estimated fair value less cost to sell (see Note 2 in the Consolidated Financial
Statements). IPALCO anticipates completing this divestiture in 1998.
IPALCO ENTERPRISES CONSOLIDATED
- -------------------------------
Additional information regarding IPALCO's historical cash flows from
operations, investing and financing for the past three years, including the
capital expenditures of IPL and Mid-America, are disclosed in the Statements of
Consolidated Cash Flows and in the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following discussion pertains to the consolidated financial
statements of IPALCO.
All per share information for 1995 presented herein has been restated to
reflect the 3-for-2 common stock split in March 1996.
Diluted earnings per share during 1997 were $2.36, or $.36 above the
$2.00 attained in 1996. Diluted earnings per share during 1996 were $2.00, or
$0.26 above the $1.74 attained in 1995. The following discussion highlights the
factors contributing to these results.
The 1997 weighted average shares used to calculate basic and diluted
earnings per share were substantially impacted by the April 1997 purchase by
IPALCO of approximately 12.5 million shares of its outstanding common stock
representing approximately 21%. (See "Recapitalization and Dividend Change.")
The 1997 earnings per share includes a one-time cumulative effect adjustment
of $18.3 million, net of taxes ($.38 per share) resulting from IPL's change to
the unbilled revenue method of accounting. The 1997 earnings also include a
charge of $32 million ($20.8 million, net of tax) to write down the carrying
values of Cleveland Thermal and Cleveland Cooling.The effect of this adjustment,
net of tax, was $.43 per share. The 1997 earnings also include a $5.7 million
($3.5 million, net of taxes or $.07 per share) gain from the sale of a retired
IPL plant site(see Notes 2 and 3 in Notes to Consolidated Financial Statements).
Utility Operating Revenues
- --------------------------
Operating revenues in 1997 and 1996 increased from the prior year by $13.9
million and $53.3 million, respectively. The increases in revenues resulted from
the following:
Increase (Decrease)
-------------------
1997 over 1996 1996 over 1995
-------------- --------------
(Millions of Dollars)
Electric:
Increase in retail basic rates $ 12.7 $ 40.8
Change in retail KWH sales - net of fuel (7.4) 9.3
Fuel revenue (4.7) (8.7)
Wholesale revenue 8.6 6.6
DSM tracker revenue 1.3 2.4
Steam revenue .6 1.9
Other revenue 2.8 1.0
------ ------
Total change in operating revenues $ 13.9 $ 53.3
====== ======
The increase in retail basic rates is the result of new tariffs,
effective July 1, 1996, and September 1, 1995, designed to produce additional
annual base revenues of $25 million and $35 million, respectively. The decrease
in retail KWH sales in 1997 reflects a decrease in cooling and heating degree
days in 1997, compared to 1996, due to milder weather. During 1996, retail KWH
sales increased as a result of customer growth and the net impact of weather. In
both years, total KWH sales, including wholesale KWH sales, increased. Actual
and percentage changes in electric customers and in heating and cooling degree
days for these periods are as follows:
Increase (Decrease)
-------------------
1997 over 1996 1996 over 1995
-------------- --------------
Electric Residential Customers 4,657 1.3% 4,866 1.3%
Commercial & Industrial Customers 1,048 2.4% 722 1.7%
Heating Degree Days (203) (3.4)% 315 5.7%
Cooling Degree Days (121) (12.2)% (223) (18.4)%
The changes in fuel revenues in 1997 and 1996 from the prior year reflect
decreases in fuel costs billed to customers. The changes in wholesale revenues
in 1997 and 1996 reflect increased wholesale marketing efforts and energy
requirements of other utilities in those years. The changes in other revenues
represent increased service revenues.
Utility Operating Expenses
- --------------------------
Fuel expense increased slightly in 1997 while decreasing in 1996 by $4.9
million from the prior years. The 1997 increase was due to increased total KWH
sales. The decrease in 1996 was due to decreased unit costs of coal and oil of
$9.7 million and decreased deferred fuel expense of $2.5 million, partially
offset by increased fuel consumption of $7.3 million.
Other operating expenses in 1997 and 1996 increased from the prior year
by $6.1 million and by $20.8 million, respectively. The increase in 1997 was
primarily due to increased administrative and general expense of $6.0 million
resulting from increased outside services and labor costs. Also contributing to
the 1997 increase was increased amortization of Demand Side Management (DSM)
program expenses of $2.3 million partially offset by decreased expense at the
production plants. The increase during 1996 was due to increased administrative
and general expenses of $13.5 million resulting from postretirement benefit
expenses recognized since the 1995 electric rate order. Other factors
contributing to increased other operating expenses in 1996 were increased
electric plant operations of $4.0 million, increased amortization of DSM program
expenses of $1.2 million, increased uncollectible expenses of $1.3 million and
increased electric distribution operating expense of $1.2 million, partially
offset by $2.0 million of gain from the sale of emission allowances.
Power purchased decreased in 1997 compared to 1996 by $10.5 million. This
decrease was primarily due to reduced demand charges as a result of a new power
purchase contract that became effective in May 1997.
Maintenance expenses increased by $8.9 million during 1997 and increased
by $4.8 million during 1996. The increase in 1997 was primarily due to an
overhaul of Unit 3 at Petersburg, as well as repairs to Unit 7 at the Stout
plant. The increase for 1996 maintenance expenses was mostly due to increased
planned outage expenses of $4.6 million for Unit 3 at IPL's Petersburg
generating plant.
Depreciation and amortization expense increased in 1997 and 1996 from the
prior year by $.5 million and by $1.8 million, respectively. These changes
resulted primarily from increases in the depreciable utility plant balances, the
1995 electric rate order and adjustments to spare parts inventory in 1997 and
1996. Depreciable utility plant reflects the addition of new SO2 removal
facilities at IPL's Petersburg generating plant in June 1996. Adjustments of $.6
million and $4.5 million were made in 1997 and 1996, respectively, to spare
parts inventory resulting from the recognition of impairment in value of excess
spare parts.
Taxes other than income taxes decreased $.3 million in 1997 due to
decreased property and gross income taxes. During 1996, these other taxes
increased $1.7 million due primarily to an increase in property and gross income
taxes.
Income taxes - net, increased in both 1997 and 1996 from the prior years by
$5.1 million and $13.7 million, respectively. These changes reflect increases in
pretax operating income.
Other Income And Deductions
- ---------------------------
Allowance for equity funds used during construction decreased by $2.5
million in 1997, while remaining unchanged in 1996. In 1997, the amortization of
deferred carrying charges on a plant asset ended, and carrying charges on other
regulatory assets decreased $1.2 million.
Other - net, which includes the pretax operating and investment income
from operations other than IPL, as well as non-operating income from IPL,
increased by $10.2 million and decreased by $0.6 million from the prior year
during 1997 and 1996, respectively. The change during 1997 was due to a $5.7
million pretax gain from the sale of a retired IPL plant site, and a $4.5
million increase in the pretax operating results of IPALCO's non-utility
operations. Contributing to this increase was decreased operating costs at
Mid-America of $4.5 million, partially offset by decreased revenues and
decreased miscellaneous income. Also contributing to the increase in other - net
in 1997 was an increase in net revenues for contract work by IPL. The decrease
in 1996 was due to decreased non-operating income at IPL.
The provision for impairment of nonutility property reflects a charge of
$32 million to write down the carrying values of Cleveland Thermal and Cleveland
Cooling (see Note 2 in the Notes to Consolidated Financial Statements).
Interest and Other Charges
- --------------------------
Interest on long-term debt increased by $15.3 million in 1997 and
decreased by $1.1 million in 1996 from the prior years. The increase during 1997
was primarily due to interest expense of $17.1 million by the IPALCO holding
company for the recapitalization debt facility. Also contributing to the
increase was an increase in interest expense at Mid-America of $2.6 million for
a $50 million long-term note issued in 1997, partially offset by a decrease in
long-term interest expense of $4.6 million at IPL due to the retirement of debt
in late 1996 and early 1997. The decrease in interest for 1996 was due to the
refinancing of two of the higher rate First Mortgage Bonds, 10 5/8% Series and 9
5/8% Series in 1995, with debt instruments carrying lower interest rates,
partially offset by interest paid on the ICE construction loan.
Other interest charges decreased by $2.4 million during 1997 from the
prior year and decreased by $1.1 million during 1996 from the prior year. The
decreases during 1997 and 1996 were primarily due to decreased short-term debt
borrowings.
As compared to the prior year, the allowance for borrowed funds used
during construction decreased in 1997 and 1996 by $2.4 million and by $2.0
million, respectively. These decreases reflect a comparable change in the
construction base in those years, as well as decreased carrying charges on
regulatory assets in 1996.
Amortization of redemption premiums and expenses on debt - net increased
in 1997 compared to 1996 by $.5 million. This increase was a result of costs
associated with the early retirement of IPL's $50 million, 9 5/8% Series in
December 1996, as well as the amortization of costs associated with IPALCO's
debt used to finance the stock repurchase.
Cumulative Effect of Accounting Change
- --------------------------------------
A cumulative effect of accounting change in the amount of $18.3 million,
net of taxes, was recorded during 1997. Effective January 1, 1997, IPL adopted
the unbilled revenues method of accounting for electricity and steam delivered
during the period. Revenues are accrued for services provided but unbilled at
the end of each month (see Note 3 in the Notes to Consolidated Financial
Statements).
New Accounting Pronouncements
- -----------------------------
The Financial Accounting Standards Board has issued Statements 130 and
131 that IPALCO will be required to adopt in future periods (see Note 1 in the
Notes to Consolidated Financial Statements for further discussion).
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Shareholders and Board of Directors of IPALCO Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of IPALCO
Enterprises, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
related statements of consolidated income, common shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of IPALCO Enterprises, Inc. and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 3 to the Consolidated Financial Statements, in 1997 the
Company changed its method of accounting for unbilled revenue.
Deloitte & Touche LLP
Indianapolis, Indiana
January 23, 1998
IPALCO ENTERPRISES, INC. AND SUBSIDIARIES
Statements of Consolidated Income
For the Years Ended December 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
UTILITY OPERATING REVENUES (Note 3 and 10):
Electric $ 738,134 $ 724,764 $ 673,388
Steam 38,293 37,739 35,818
------------- ------------- -------------
Total operating revenues 776,427 762,503 709,206
------------- ------------- -------------
UTILITY OPERATING EXPENSES:
Operation:
Fuel 164,578 164,339 169,206
Other 143,311 137,192 116,428
Power purchased 7,833 18,365 19,102
Purchased steam 7,075 7,240 6,680
Maintenance 76,679 67,768 63,013
Depreciation and amortization 103,230 102,769 100,984
Taxes other than income taxes 33,071 33,363 31,706
Income taxes - net (Note 9) 73,335 68,248 54,499
------------- ------------- -------------
Total operating expenses 609,112 599,284 561,618
------------- ------------- -------------
UTILITY OPERATING INCOME 167,315 163,219 147,588
------------- ------------- -------------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used during construction 3,462 5,967 6,003
Other - net 2,124 (8,056) (7,407)
Provision for impairment of nonutility property (Note 2) (32,000) - -
Income taxes - net (Note 9) 19,004 3,645 3,097
------------- ------------- -------------
Total other income and (deductions) - net (7,410) 1,556 1,693
------------- ------------- -------------
INCOME BEFORE INTEREST AND OTHER CHARGES 159,905 164,775 149,281
------------- ------------- -------------
INTEREST AND OTHER CHARGES:
Interest on long-term debt 60,385 45,110 46,170
Other interest 1,783 4,202 5,293
Allowance for borrowed funds used during construction (945) (3,354) (5,367)
Amortization of redemption premiums and expenses on
debt - net 1,903 1,360 1,225
Preferred dividend requirements of subsidiary 1,080 3,182 3,182
------------- ------------- -------------
Total interest and other charges - net 64,206 50,500 50,503
------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 95,699 114,275 98,778
CUMULATIVE EFFECT OF ACCOUNTING CHANGE-
NET OF TAXES (Note 3) 18,347 - -
------------- ------------- -------------
NET INCOME $ 114,046 $ 114,275 $ 98,778
============= ============= =============
BASIC EARNINGS PER SHARE (Note 6)
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 2.00 $ 2.01 $ 1.74
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 3)
.38 - -
------------- ------------- -------------
NET INCOME $ 2.38 $ 2.01 $ 1.74
============= ============= =============
DILUTED EARNINGS PER SHARE (Note 6)
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 1.98 $ 2.00 $ 1.74
CUMULATIVE EFFECT OF ACCOUNTING CHANGE (Note 3)
.38 - -
------------- ------------- -------------
NET INCOME $ 2.36 $ 2.00 $ 1.74
============= ============= =============
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
- -----------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------
(In Thousands)
UTILITY PLANT:
Utility plant in service (Note 2) $ 2,800,446 $ 2,763,305
Less accumulated depreciation 1,121,317 1,048,492
---------------- ----------------
Utility plant in service - net 1,679,129 1,714,813
Construction work in progress 77,030 63,243
Property held for future use 10,224 9,913
---------------- ----------------
Utility plant - net 1,766,383 1,787,969
---------------- ----------------
OTHER ASSETS:
Nonutility property (Note 2) 90,344 121,443
Less accumulated depreciation 17,479 13,153
---------------- ----------------
Nonutility property - net 72,865 108,290
Other investments 13,023 5,371
---------------- ----------------
Other assets - net 85,888 113,661
---------------- ----------------
CURRENT ASSETS:
Cash and cash equivalents 17,293 19,317
Accounts receivable and unbilled
revenue (less allowance for doubtful
accounts - 1997, $1,202,000 and
1996, $1,159,000) (Note 3) 47,033 11,099
Fuel - at average cost 35,257 30,625
Materials and supplies - at average cost 48,416 52,727
Prepayments and other current assets 9,100 9,931
---------------- ----------------
Total current assets 157,099 123,699
---------------- ----------------
DEFERRED DEBITS:
Regulatory assets (Note 5) 126,784 137,974
Miscellaneous 18,195 19,766
---------------- ----------------
Total deferred debits 144,979 157,740
---------------- ----------------
TOTAL $ 2,154,349 $ 2,183,069
================ ================
See notes to consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES 1997 1996
- ----------------------------------------------------------------------------------------------------------
(In Thousands)
CAPITALIZATION:
Common shareholders' equity (Note 6):
Common stock, no par, authorized - 290,000,000 shares,
57,189,272 issued and 44,649,844 outstanding in 1997,
57,034,912 shares issued and outstanding in 1996 $ 395,851 $ 389,966
Premium on 4% cumulative preferred stock 649 1,363
Retained earnings 532,730 466,397
Treasury stock, at cost (403,101) -
---------------- ----------------
Total common shareholders' equity 526,129 857,726
Cumulative preferred stock of subsidiary (Note 6) 9,135 51,898
Long-term debt (Notes 2 and 7) 1,032,846 662,591
---------------- ----------------
Total capitalization 1,568,110 1,572,215
---------------- ----------------
CURRENT LIABILITIES:
Notes payable - banks and commercial paper (Note 8) 33,700 46,000
Current maturities and sinking fund requirements (Note 7) 3,094 11,250
Accounts payable and accrued expenses 66,105 62,222
Dividends payable 11,523 22,212
Taxes accrued 22,126 23,159
Interest accrued 15,493 13,354
Other current liabilities 12,555 14,519
---------------- ----------------
Total current liabilities 164,596 192,716
---------------- ----------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Deferred income taxes - net (Note 9) 314,869 303,473
Unamortized investment tax credit 44,783 47,722
Accrued postretirement benefits (Note 12) 17,144 23,635
Accrued pension benefits (Note 11) 39,821 37,283
Miscellaneous 5,026 6,025
---------------- ----------------
Total deferred credits and other long-term liabilities 421,643 418,138
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 14)
TOTAL $ 2,154,349 $ 2,183,069
================ ================
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Statements of Consolidated Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
CASH FLOWS FROM OPERATIONS:
Net income $ 114,046 $ 114,275 $ 98,778
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 103,841 102,677 103,045
Amortization of regulatory assets 15,405 17,680 6,748
Deferred income taxes and investment tax credit adjustments - net 3,533 3,145 (4,517)
Allowance for funds used during construction (4,407) (9,321) (11,370)
Cumulative effect of accounting change - before taxes (Note 3) (29,915) - -
Provision for impairment of nonutility property (Note 2) 32,000 - -
Premiums on redemptions of debt - (3,128) (2,506)
Change in certain assets and liabilities:
Accounts receivable - excluding cumulative effect
of accounting change (6,019) 47,974 (10,414)
Fuel, materials and supplies (321) 4,503 7,130
Accounts payable and accrued expenses 3,883 (19,762) 6,727
Taxes accrued (1,033) 1,934 2,656
Accrued pension benefits 2,538 5,449 4,731
Other - net (5,944) (17,484) 4,684
---------------- ---------------- ----------------
Net cash provided by operating activities 227,607 247,942 205,692
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING:
Proceeds from maturities of marketable securities - 3,810 7,984
Construction expenditures - utility (73,130) (78,543) (166,874)
Construction expenditures - nonutility (1,569) (4,187) (34,745)
Other (6,566) (16,607) (19,416)
---------------- ---------------- ----------------
Net cash used in investing activities (81,265) (95,527) (213,051)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 451,300 37,600 130,100
Retirement of long-term debt (89,250) (79,900) (80,350)
Reacquired common stock (Note 6) (403,101) - -
Preferred stock redemptions (Note 6) (41,814) - -
Short-term debt - net (12,300) (23,122) 39,369
Common dividends paid (57,653) (83,629) (81,289)
Issuance of common stock related to incentive compensation plans 4,089 4,524 1,549
Other 363 (125) 1,386
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities (148,366) (144,652) 10,765
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,024) 7,763 3,406
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 19,317 11,554 8,148
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,293 $ 19,317 $ 11,554
================ ================ ================
- ----------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 59,761 $ 47,857 $ 47,310
================ ================ ================
Income taxes $ 63,915 $ 64,650 $ 50,557
================ ================ ================
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Statements of Consolidated Common Shareholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
Outstanding Premium on 4%
----------------------- Cumulative Retained Treasury
Shares Amount Preferred Stock Earnings Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Balance at January 1, 1995 56,634 $ 381,228 $ 1,363 $ 419,354 $ 801,945
Net income 98,778 98,778
Cash dividends declared ($1.44 per share) (81,724) (81,724)
Exercise of stock options 81 1,549 1,549
Restricted stock grants 87 2,255 2,255
---------- ------------- ----------- ------------- -------------
Balance at December 31, 1995 56,802 385,032 1,363 436,408 822,803
Net income 114,275 114,275
Cash dividends declared ($1.48 per share) (84,286) (84,286)
Post-split fractional shares (1) (36) (36)
Exercise of stock options 227 4,560 4,560
Restricted stock grants 7 410 410
---------- ------------- ----------- ------------- -------------
Balance at December 31, 1996 57,035 389,966 1,363 466,397 857,726
Net income 114,046 114,046
Cash dividends declared ($1.00 per share) (47,713) (47,713)
Reacquired Common Stock (Note 6) (12,539) $ (403,101) (403,101)
Reacquired and retired Preferred Stock (714) (714)
Exercise of stock options 153 4,089 4,089
Restricted stock grants 1 1,796 1,796
---------- ------------- ----------- ------------- ------------- -------------
Balance at December 31, 1997 44,650 $ 395,851 $ 649 $ 532,730 $ (403,101) $ 526,129
========== ============= =========== ============= ============= =============
See notes to consolidated financial statements.
Per share amounts and the number of shares have been adjusted for 1995 to
reflect the 3-for-2 no par value
common stock split issued in March 1996.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
-----------------------------------------
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1997, 1996 and 1995
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: 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 regulated utility subsidiary, Indianapolis Power & Light Company
(IPL), and its unregulated subsidiary, Mid-America Capital Resources, Inc.
(Mid-America). Mid-America conducts its businesses through various wholly-owned
subsidiaries, including Mid-America Energy Resources, Inc. (Energy Resources),
Indianapolis Campus Energy, Inc. (ICE), Cleveland Thermal Energy Corporation
(Cleveland Thermal), Cleveland District Cooling Corporation (Cleveland Cooling)
and Store Heat and Produce Energy, Inc. (SHAPE), an 80%-owned subsidiary. All
significant intercompany items have been eliminated in consolidation.
The operating components of all subsidiaries other than IPL which had
revenue of $33.0 million, $33.6 million and $23.0 million for 1997, 1996 and
1995, respectively, are included under the captions OTHER INCOME AND
(DEDUCTIONS), "Other-net" and "Income taxes-net" and INTEREST AND OTHER CHARGES,
"Interest on long-term debt," "Other Interest" and "Amortization of redemption
premiums and expenses on debt-net" in the Statements of Consolidated Income.
Nature of Operations: IPL is engaged principally in providing electric
and steam service to the Indianapolis metropolitan area. Mid-America operates
energy-related businesses in Indianapolis, Indiana and Cleveland, Ohio.
Concentrations of Risk: Substantially all of Enterprises' business
activity is with customers located within the Indianapolis area. In addition,
approximately 64% of Enterprises' employees are covered by collective bargaining
agreements. On February 23, 1998, the contract of approximately 25% of those
employees covered by collective bargaining agreements will expire.
Regulation: The retail utility operations of IPL are subject to the
jurisdiction of the Indiana Utility Regulatory Commission (IURC). IPL's
wholesale power transactions are subject to the jurisdiction of the Federal
Energy Regulatory Commission. These agencies regulate IPL's utility business
operations, tariffs, accounting, depreciation allowances, services, security
issues and the sale and acquisition of utility properties. The financial
statements of IPL are based on generally accepted accounting principles,
including the provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation," which gives
recognition to the ratemaking and accounting practices of these agencies.
Revenues: Effective January 1, 1997, IPL adopted the unbilled revenues
method of accounting for electricity and steam delivered during the period (see
Note 3). Revenues are accrued for services provided but unbilled at the end of
each month.
A fuel adjustment charge provision, which is established after public
hearing, is applicable to most of the rate schedules of IPL, and permits the
billing or crediting of estimated fuel costs above or below the levels included
in such rate schedules. Actual fuel costs in excess of or under estimated fuel
costs billed are deferred or accrued, respectively.
Authorized Annual Operating Income: Indiana law requires electric
utilities under the jurisdiction of the IURC to meet operating expense and
income requirements as a condition for approval of requested changes in fuel
adjustment charges. Additionally, customer refunds may result if the utilities'
rolling 12-month operating income, determined at quarterly measurement dates,
exceeds the utilities' authorized annual operating income and cannot be offset
by applicable cumulative net operating income deficiencies. In such a
circumstance, the required customer refund for the quarterly measurement period
is calculated to be one-fourth of the excess annual operating income grossed up
for federal and state taxes.
Effective July 1, 1996, IPL's authorized annual electric net operating
income, for purposes of quarterly operating income tests, is $163 million, as
established in an IURC order dated August 24, 1995. This level will be
maintained until changed by an IURC order. During 1997, IPL's rolling annual
electric operating income was less than the authorized annual operating income
at each of the quarterly measurement dates (January, April, July and October).
At October 31, 1997, IPL's most recent quarterly measurement date, IPL had a
cumulative net operating deficiency of $78.9 million, of which $39.9 million
expires at varying amounts during the period ending September 1, 2000. The
operating deficiency is calculated by summing the 20 most recent quarterly
measurement period annual results. As a consequence, IPL could, for a period of
time, earn above $163 million of electric net operating income without being
required to make a customer refund.
Through the date of IPL's next general electric rate order, IPL is
required to file upward and downward adjustments in fuel cost credits and
charges on a quarterly basis, based on changes in the cost of fuel, irrespective
of its level of earnings.
Pursuant to an order of the IURC, IPL's authorized annual steam net
operating income is $6.2 million, plus any cumulative annual underearnings
occurring during the five-year period subsequent to the implementation of the
new rate tariffs.
Allowance For Funds Used During Construction: In accordance with the
prescribed uniform system of accounts, IPL capitalizes an allowance for the net
cost of funds (interest on borrowed funds and a reasonable rate on equity funds)
used for construction purposes during the period of construction with a
corresponding credit to income. IPL capitalized amounts using pretax composite
rates of 9.1%, 7.3% and 8.5% during 1997, 1996 and 1995, respectively.
Utility Plant and Depreciation: Utility plant is stated at original cost
as defined for regulatory purposes. The cost of additions to utility plant and
replacements of retirement units of property, as distinct from renewals of minor
items that are charged to maintenance, are charged to plant accounts. Units of
property replaced or abandoned in the ordinary course of business are retired
from the plant accounts at cost; such amounts plus removal costs, less salvage,
are charged to accumulated depreciation. Depreciation is computed by the
straight-line method based on functional rates approved by the IURC and averaged
3.5% during 1997, 3.4% during 1996 and 3.5% during 1995. Depreciation expense
for 1997 and 1996 include adjustments to spare parts inventory of $0.6 million
and $4.5 million, respectively, resulting from recognition of the impairment in
value of excess spare parts. Depreciation expense for 1995 includes adjustments
to property held for future use of approximately $12.3 million. The adjustments
in 1995 reflect incurred costs of expired regulatory permits and for designing
and engineering a future generating station in Patriot, Indiana.
Nonutility property is recorded at cost, and depreciation is calculated
using the straight-line method over the estimated service lives of the related
property (see Note 2). Nonutility depreciation expense was $4.4 million, $4.5
million and $3.1 million for 1997, 1996 and 1995, respectively.
Sale of Accounts Receivable: At December 31, 1997, IPL had sold, on a
revolving basis, an undivided percentage interest in $50 million of its accounts
receivable.
Regulatory Assets: Regulatory assets represent deferred costs that have
been, or that are expected to be, included as allowable costs for ratemaking
purposes. IPL has recorded regulatory assets relating to certain costs as
authorized by the IURC. Specific regulatory assets are disclosed in Note 5. As
of December 31, 1997, all nontax-related regulatory assets have been included as
allowable costs in orders of the IURC (see Note 10). IPL is amortizing such
regulatory assets to expense over periods authorized by these orders.
Tax-related regulatory assets represent the net income tax costs to be
considered in future regulatory proceedings generally as the related tax amounts
are paid.
In accordance with regulatory treatment, IPL deferred as a regulatory
asset certain post in-service date carrying charges and certain other costs
related to its investment in Petersburg Unit 4. As authorized in the 1995
Electric Rate Settlement (see Note 10), IPL, effective September 1, 1995, is
amortizing this deferral to expense over a life that generally approximates the
useful life of the related facility.
Also in accordance with regulatory treatment, IPL defers as regulatory
assets non-sinking fund debt and preferred stock redemption premiums and
expenses, and amortizes such costs over the life of the original debt or, in the
case of preferred stock redemption premiums, over 20 years.
Derivatives: IPALCO has only limited involvement with derivative
financial instruments and does not use them for trading purposes. IPALCO entered
into interest rate swap agreements as a means of managing the interest rate
exposure on certain of its debt facilities. These interest rate swaps are
accounted for under the accrual method. Under this method, the differential to
be paid or received on the interest rate swap agreement is recognized over the
life of the agreement in interest expense. Changes in market value of interest
swaps accounted for under the accrual method are not reflected in the
accompanying financial statements.
Income Taxes: Deferred taxes are provided for all significant temporary
differences between book and taxable income. The effects of income taxes are
measured based on enacted laws and rates. Such differences include the use of
accelerated depreciation methods for tax purposes, the use of different book and
tax depreciable lives, rates and in-service dates and the accelerated tax
amortization of pollution control facilities. Deferred tax assets and
liabilities are recognized for the expected future tax consequences of existing
differences between the financial reporting and tax reporting basis of assets
and liabilities.
IPL has recorded as regulatory assets and net deferred tax liabilities,
income taxes payable and includable in allowable costs for ratemaking purposes
in future years.
Investment tax credits that reduced federal income taxes in the years
they arose have been deferred and are being amortized to income over the useful
lives of the properties in accordance with regulatory treatment.
Statements of Cash Flows - Cash Equivalents: Enterprises considers all
highly liquid investments purc