UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
IPALCO ENTERPRISES, INC. (Exact name of Registrant as specified in its Charter)
Commission file number 1-8644
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One Monument Circle
Indianapolis, IN 46204
(Address of Principal Executive Offices including Zip Code)
(317) 261-8261
(Registrant's Telephone Number, Including Area Code)
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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES [ ] NO [X]
On November 10, 2003, 89,685,177 shares of IPALCO Enterprises, Inc. common stock were outstanding. All of such shares were owned by The AES Corporation.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
IPALCO ENTERPRISES, INC.
FORM 10-Q
INDEX
| PART I - Financial Information | Page No. |
| Item 1: Financial Statements: |
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Unaudited Consolidated Statements of Income for the Three-month and Nine-month Periods Ended September 30, 2003 and 2002 |
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Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002 |
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Unaudited Consolidated Statements of Cash Flows for the Nine-month Periods Ended September 30, 2003 and 2002 |
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| Notes to Unaudited Consolidated Financial Statements |
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Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 4: Controls and Procedures |
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| PART II - Other Information |
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| Item 1: Legal Proceedings |
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| Item 6: Exhibits and Reports on Form 8-K |
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| Signature |
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Unaudited Consolidated Statements of Income
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
2003 2002 2003 2002
--------- --------- --------- ---------
ELECTRIC UTILITY OPERATING REVENUES $220,990 $226,755 $628,727 $621,393
UTILITY OPERATING EXPENSES:
Operation:
Fuel 48,700 46,737 133,762 129,401
Other operating expenses 30,646 31,067 87,308 79,849
Power purchased 6,032 9,753 15,565 16,962
Maintenance 16,086 11,665 59,997 45,488
Depreciation and amortization 29,778 28,373 89,374 84,309
Taxes other than income taxes 6,001 6,261 22,085 24,516
Income taxes-net 32,432 31,771 81,201 81,489
--------- --------- --------- ---------
Total operating expenses 169,675 165,627 489,292 462,014
--------- --------- --------- ---------
UTILITY OPERATING INCOME 51,315 61,128 139,435 159,379
--------- --------- --------- ---------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used during construction 1,263 151 3,193 3,091
Gain (loss) on sales of assets, net -- 0 (842) 2,455
Other-net (223) (113) (732) (1,235)
Income tax benefit-net 6,711 5,582 19,783 16,152
--------- --------- --------- ---------
Total other income (deductions)-net 7,751 5,620 21,402 20,463
--------- --------- --------- ---------
INCOME BEFORE INTEREST AND OTHER CHARGES 59,066 66,748 160,837 179,842
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES:
Interest on long-term debt 27,080 24,146 77,268 72,438
Other interest 241 121 461 382
Allowance for borrowed funds used during construction (608) (72) (1,536) (1,451)
Amortization of redemption premiums and expense on
debt-net 737 905 2,213 2,794
Preferred dividends of subsidiary 803 803 2,410 2,410
--------- --------- --------- ---------
Total interest and other charges-net 28,253 25,903 80,816 76,573
--------- --------- --------- ---------
NET INCOME $ 30,813 $ 40,845 $ 80,021 $103,269
========= ========= ========= =========
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
September 30, December 31,
2003 2002
--------------- ------------
ASSETS (Unaudited)
UTILITY PLANT:
Utility plant in service $ 3,175,040 $ 3,144,472
Less accumulated depreciation 1,615,622 1,536,986
--------------- ------------
Utility plant in service - net 1,559,418 1,607,486
Construction work in progress 143,012 73,696
Property held for future use 7,708 7,708
--------------- ------------
Utility plant - net 1,710,138 1,688,890
--------------- ------------
OTHER ASSETS:
Nonutility property - at cost, less
accumulated depreciation 1,451 1,497
Other investments 9,411 10,033
--------------- ------------
Other assets - net 10,862 11,530
--------------- ------------
CURRENT ASSETS:
Cash and cash equivalents 34,821 31,429
Restricted cash 21,905 --
Accounts receivable and unbilled revenue
(less allowance for doubtful accounts
of $1,806 and $1,556, respectively) 41,539 41,601
Fuel - at average cost 28,441 22,023
Materials and supplies - at average cost 46,696 47,874
Net income tax refunds receivable 3,006 3,305
Prepayments and other current assets 7,604 4,458
--------------- ------------
Total current assets 184,012 150,690
--------------- ------------
DEFERRED DEBITS:
Regulatory assets 164,291 140,768
Miscellaneous 29,637 29,037
--------------- ------------
Total deferred debits 193,928 169,805
--------------- ------------
TOTAL $ 2,098,940 $ 2,020,915
=============== ============
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's deficit:
Premium on 4% cumulative preferred stock $ 649 $ 649
Paid in capital 70 --
Accumulated deficit (52,918) (40,477)
Accumulated other comprehensive loss (51,546) (52,621)
--------------- ------------
Total common shareholder's deficit (103,745) (92,449)
Cumulative preferred stock of subsidiary 59,135 59,135
Long-term debt (less current maturities
and sinking fund requirements) 1,401,994 1,372,006
--------------- ------------
Total capitalization 1,357,384 1,338,692
CURRENT LIABILITIES:
Current maturities and sinking
fund requirements 80,294 300
Accounts payable 30,367 31,929
Accrued expenses 18,081 17,258
Dividends payable 880 874
Accrued taxes 28,893 26,009
Accrued interest 36,993 22,788
Other current liabilities 12,915 12,827
--------------- ------------
Total current liabilities 208,423 111,985
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DEFERRED CREDITS AND OTHER
LONG-TERM LIABILITIES:
Accumulated deferred income taxes - net 390,984 337,936
Unamortized investment tax credit 28,862 30,927
Accrued postretirement benefits 5,917 5,965
Accrued pension benefits 100,441 186,761
Miscellaneous 6,929 8,649
--------------- ------------
Total deferred credits and other
long-term liabilities 533,133 570,238
--------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL $ 2,098,940 $ 2,020,915
=============== ============
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
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2003 2002
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Cash Flows from Operations:
Net income $ 80,021 $ 103,269
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 89,291 84,966
Amortization of regulatory assets 2,142 2,257
Deferred income taxes and investment tax credit
adjustments - net 27,277 29,186
(Gain) loss on sales of assets, net 842 (2,455)
Impairment on investment 165 --
Allowance for funds used during construction (4,729) (4,542)
Change in certain assets and liabilities:
Accounts receivable 62 (3,887)
Fuel, materials and supplies (5,240) 1,314
Net income taxes receivable or payable 2,341 (25,522)
Accounts payable and accrued expenses 152 (16,497)
Accrued other taxes 842 (5,679)
Accrued pension benefits (86,320) (8,088)
Accrued interest 14,205 11,045
Other - net (3,675) (4,038)
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Net cash provided by operating activities 117,376 161,329
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CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures - utility (104,753) (74,622)
Construction expenditures - nonutility -- (107)
Long term borrowings invested in a restricted account (21,905) --
Proceeds from sales of assets -- 4,220
Other (3,862) (883)
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Net cash used in investing activities (130,520) (71,392)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Long term borrowings 108,998 --
Dividends on common stock (92,462) (111,286)
Other -- (816)
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Net cash provide by (used in) financing activities 16,536 (112,102)
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Net change in cash and cash equivalents 3,392 (22,165)
Cash and cash equivalents at beginning of period 31,429 28,933
--------- ---------
Cash and cash equivalents at end of period $ 34,821 $ 6,768
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 61,997 $ 60,341
========= =========
Income taxes $ 42,603 $ 65,976
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See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. ORGANIZATION
IPALCO Enterprises, Inc. (IPALCO) is a wholly-owned subsidiary of The AES Corporation (AES). IPALCO owns all of the outstanding common stock of its subsidiaries. These include its regulated utility subsidiary, Indianapolis Power & Light Company (IPL) and its unregulated subsidiary, Mid-America Capital Resources, Inc. (Mid-America). IPL is an electric utility with its customer base concentrated in Indianapolis, Indiana and is the primary subsidiary of IPALCO. Mid-America conducts IPALCO's unregulated activities.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of IPALCO, IPL and Mid-America. All significant intercompany amounts have been eliminated. The accompanying financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for fair presentation, consisting of only normal recurring adjustments, have been included. Due to the seasonal nature of the electric utility business, the annual results are not generated evenly by quarter during the year. Certain amounts from prior year financial statements have been reclassified to conform to the current year presentation. These unaudited financial statements have been prepared in accordance with the accounting policies described in IPALCO's audited financial statements for the year ended December 31, 2002 included in its annual report on Form 10-K and should be read in conjunction therewith.
The preparation of financial statements in conformity with GAAP requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may also be affected by the estimates and assumptions management is required to make. Actual results may differ from those estimates.
3. NEW ACCOUNTING PRONOUNCEMENTS
In 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated asset retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. IPALCO implemented this statement beginning January 1, 2003. The adoption of SFAS 143 did not impact our consolidated financial position or results of operations, but does require us to provide additional disclosure.
Included in IPL's retail electric rates are removal costs for certain assets that do not have legal obligations relating to the asset's retirement. As of September 30, 2003, IPL estimates that approximately $356 million related to removal costs is included in accumulated depreciation.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS 149), "Amendment of Statement 133 (SFAS 133) on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30, 2003. SFAS 149 does not impact the accounting for any of IPALCO nor its consolidated subsidiaries current contracts, but could impact the accounting of contracts entered into or modified in the future.
In May 2003, the FASB issued Statement of Financial Accounting Standards SFAS No. 150 (SFAS 150), "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS 150 requires certain financial instruments that have historically been classified as equity to be classified as debt (or as an asset in certain circumstances). SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. Neither IPALCO nor any of its consolidated subsidiaries has any financial instruments that are within the scope of SFAS 150.
4. SEGMENT INFORMATION
IPALCO's operations are made up almost entirely of its ownership of IPL, its consolidated electric utility, which is a reportable business segment. In addition, IPALCO has outstanding $750 million of Senior Secured Notes (the IPALCO Notes); approximately $4.3 million and $6.4 million of nonutility cash and cash equivalents, as of September 30, 2003 and December 31, 2002, respectively; nonutility investments at Mid America of $5.8 million and $6.4 million at September 30, 2003 and December 31, 2002, respectively; and income taxes related to those items. There was no operating income for any nonutility activities during the periods covered by this report. Nonutility assets represented less than 2% of IPALCO's total assets as of September 30, 2003 and December 31, 2002 and nonutility capital expenditures represented less than 1% of IPALCO's total capital expenditures for the nine month periods ended September 30, 2003 and 2002.
5. INDEBTEDNESS AND RESTRICTED CASH
In May 2003, IPL extended the maturity of its $45 million committed line of credit to May 21, 2004. In June 2003, IPL executed an agreement which combined its existing $40.6 million liquidity facility (related to $40 million of IPL variable rate bonds, which are remarketed weekly) and its $30 million committed line of credit into one two-tranche agreement. The new agreement matures June 3, 2004.
On August 6, 2003, IPL issued $110 million of 6.30% first mortgage bonds due July 1, 2013. The net proceeds of approximately $109 million were used primarily to finance a portion of IPL's capital expenditure program, to reimburse IPL's treasury for expenditures previously incurred in connection with the capital expenditure program and to repay amounts outstanding on IPL's credit lines. In addition, $21.9 million remained in a restricted account as of September 30, 2003 to be used only for capital expenditures in accordance with an order issued by the Indiana Utility Regulatory Commission approving IPL's 2003-2006 financing program.
On October 29, 2003, IPL Funding Corporation extended the maturity of its Receivables Sale Agreement to October 27, 2004. The agreement provides for unrelated parties to purchase, on a revolving basis, up to $50.0 million of accounts receivable that IPL Funding purchased from IPL.
6. COMMITMENTS AND CONTINGENCIES
Legal
In March 2002, IPALCO and certain former officers and directors of IPALCO were named as defendants in an Employment Retirement Income Security Act (ERISA) class action lawsuit filed in the U.S. District Court for the Southern District of Indiana. In May 2002, an amended complaint was filed asserting that the former members of the pension committee breached their fiduciary duties to the plaintiffs under ERISA by investing assets of the Thrift Plan in the common stock of IPALCO prior to the acquisition of IPALCO by AES. On September 30, 2003, the court certified a class consisting of the Thrift Plan and all plan participants and beneficiaries who held a beneficial interest in IPALCO stock on or about March 27, 2001, which was exchanged for shares of AES common stock. On October 31, 2003, the plaintiffs and defendants both moved for summary judgment as to liability. The court has not yet ruled on those motions. We do not believe the suit is meritorious. While we cannot predict the outcome, we do not believe that the suit will have a material adverse effect on IPALCO's financial condition, results of operations or liquidity.
Since May, 2003, IPALCO, IPL, AES and certain former directors and officers of IPALCO and/or IPL received subpoenas from the Securities Division of the Indiana Secretary of State seeking information focused largely on circumstances surrounding the acquisition of IPALCO by AES. The Secretary of State's inquiry is ongoing. IPALCO, IPL, AES and the individuals have produced various materials in response to the subpoenas.
In September 2002, IPALCO and certain of its former officers and directors were sued in the U.S. District Court for the Southern District of Indiana in connection with IPALCO's acquisition by AES. The lawsuit purports to be filed on behalf of all persons who exchanged their shares of IPALCO common stock for shares of AES common stock. The complaint alleges violations of Section 11 of the Securities Act; Sections 10(b), 14(a) and 20(a) of the Exchange Act and Rules 10b-5 and 14a-9. In August 2003, the suit was consolidated with three other actions pending in the same court against, generally, AES and several former and current AES officers. We believe that the suit is without merit. While we cannot predict the outcome, we do not believe that the suit will have a material adverse effect on IPALCO's financial condition, results of operations or liquidity.
In November 2002, IPL, IPALCO, and AES were named as defendants in a Fair Labor Standards Act (FLSA) collective action lawsuit filed in the U.S. District Court for the Southern District of Indiana. The complaint alleges that certain former IPL supervisors were not paid overtime pay at the rate required by the FLSA. IPALCO and AES have been dismissed from the suit. We believe that IPL did not violate the FLSA. While we cannot predict the outcome, we do not believe the suit will have a material adverse effect on IPALCO's financial condition, results of operations or liquidity.
IPL has been named as a defendant in approximately 61 pending lawsuits alleging personal injury or wrongful death stemming from exposure to asbestos and asbestos containing products formerly located in IPL power plants. IPL has been named as a "premises defendant" in that IPL did not mine, manufacture, distribute or install asbestos or asbestos containing products. These suits have been brought on behalf of persons who worked for contractors or subcontractors hired by IPL. Many of the original primary defendants¾ the asbestos manufacturers¾ have filed for bankruptcy protection. IPL has insurance coverage for many of these claims; currently, these cases are being defended by counsel retained by various insurers who wrote policies applicable to the period of time during which much of the exposure has been alleged. Although we do not believe that any of the pending asbestos suits in which IPL is a named defendant will have a material adverse effect on IPALCO's business or operations, we are unable to predict the number or effect any additional suits may have. Accordingly, we cannot assure that the pending or any additional suits will not have a material effect on our business or operations.
In addition, IPALCO and its consolidated subsidiaries are involved in litigation arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, based upon advice of counsel, believes that the final outcome will not have a material adverse effect on IPALCO's consolidated financial statements.
Environmental
With respect to environmental issues, IPL has ongoing discussions with various regulatory authorities and we continue to believe that IPL is in compliance with its various permits. On October 27, 1998, the U.S. Environmental Protection Agency issued a final rule, referred to as the NOx SIP call, which imposes more stringent limits on nitrogen oxide (NOx) emissions from fossil fuel-fired steam electric generators. IPL's current estimates are that the NOx SIP call will necessitate capital expenditures of approximately $227 million during 2003-2005 to achieve substantially all of the required NOx emission reductions.
Other
As of September 30, 2003, Mid-America had a commitment to invest additional capital of up to $4.6 million, upon the call of the general partner, in EnerTech Capital Partners II L.P., a venture capital fund.
In connection with the sale of certain thermal assets held by subsidiaries of IPALCO in November 2000, the IPALCO subsidiaries agreed to indemnify the buyer on an after-tax basis from and against all losses arising out of any liabilities excluded from the sale and certain litigation and environmental matters existing at the closing date, November 2, 2000. IPALCO has guaranteed this indemnification up to $14.6 million. Claims regarding a breach of an environmental representation or regarding an excluded liability must be brought on or before November 2, 2004.
7. RELATED PARTY TRANSACTIONS
Effective September 1, 2003, IPALCO and IPL entered into a property insurance program in which AES and other AES subsidiaries also participate. The program includes a policy issued by a third party insurance company for funding losses of the participants up to a total aggregate amount of $20 million. Funds to pay claims within this limit will be derived from premiums paid to this third party carrier by the participants and will be deposited into a trust fund owned by AES Global Insurance Company, a wholly-owned subsidiary of AES, but controlled by the third party carrier. Claims above the $20 million aggregate will be covered by separate insurance policies issued by a syndicate of third party carriers. These policies will provide coverage of $600 million per occurrence.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q includes "forward-looking statements" including, in particular, the statements about our plans, strategies and prospects under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements express an expectation or belief and contain a projection, plan or assumption with regard to, among other things, future revenues, income or capital structure. Such statements of future events or performance are not guarantees of future performance and involve estimates, assumptions and uncertainties. The words "could," "may," "predict," "anticipate," "would," "should," "believe," "estimate," "expect," "forecast," "project," "objective," and similar expressions are intended to identify forward-looking statements.
Some important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to; our ownership by AES, changes in our credit ratings, fluctuations in customer growth and demand, weather and weather- related damage, fuel costs, generating unit availability and capacity, purchased power costs and availability, regulatory action, environmental matters, federal and state legislation, interest rates, availability and cost of capital, capital market performance of pension plan assets, labor strikes, the timing of deregulation and competition, product development and technology changes, construction cost overruns, local economic conditions, the ultimate disposition of litigation and the specific needs of plants to perform unanticipated facility maintenance or repairs or outages. Most of these factors affect us through our consolidated subsidiary, IPL.
Overview
IPALCO Enterprises, Inc. (IPALCO) is a holding company incorporated under the laws of the state of Indiana. Our principal subsidiary, Indianapolis Power & Light Company (IPL), is engaged primarily in generating, transmitting, distributing and selling electric energy to approximately 450,000 customers in the City of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, the most distant point being approximately forty miles from Indianapolis. IPL has an exclusive right to provide retail electric service to those customers. IPL owns and operates four generating stations. Two of the generating stations are primarily coal-fired stations. The third station has a combination of units that use coal (base load capacity) and natural gas and/or oil (peaking capacity) for fuel to produce electricity. The fourth station is a small peaking station that uses gas-fired combustion turbine technology for the production of electricity. IPL's net electric generation capability for winter is 3,342 megawatts and net summer capability is 3,224 megawatts.
RESULTS OF OPERATIONS
Comparison of Quarters Ended September 30, 2003 and September 30, 2002
Our third quarter 2003 net income of $30.8 million decreased $10.0 million from net income of $40.8 million in the third quarter of 2002. The following discussion highlights the factors contributing to this change.
Operating Revenues
Operating revenues decreased by $5.8 million during the three-month period ended September 30, 2003 compared to the prior year as a result of the following (dollars in thousands):
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2003 |
2002 |
Increase (Decrease) |
Percentage Change |
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Retail Revenues |
$ 209,847 |
$ 216,256 |
$ (6,409) |
(3.0)% |
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Wholesale Revenues |
8,740 |
7,963 |
777 |
9.8% |
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Miscellaneous Revenues |
2,403 |
2,536 |
(133) |
(5.2)% |
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Total Operating Revenues |
$ 220,990 |
$ 226,755 |
$ (5,765) |
(2.5)% |
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Heating Degree Days |
89 |
22 |
67 |
304.5% |
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Cooling Degree Days |
685 |
1,029 |
(344) |
(33.4)% |
The decrease in operating revenues in the third quarter of 2003 as compared to the same period in 2002 was primarily due to the $6.4 million decrease in retail revenues, partially offset by the $0.8 million increase in wholesale revenues. The decrease in retail revenues was primarily the result of a 6.0% decrease in the number of retail kWh's sold, primarily due to the decrease in cooling degree days, partially offset by the increase in heating degree days. The increase in wholesale revenues was due to a 3.9% increase in the number of wholesale kWh's sold and a 5.7% increase in the average price per wholesale kWh sold. The price of wholesale kWh's is primarily impacted by the regional demand and supply for electricity coupled with the short term cost for natural gas and fuel oil.
Operating Expenses
Operating expenses increased $4.0 million, or 2.4% during the three months ended September 30, 2003, as compared to the same period in 2002. This is primarily the result of a $4.4 million increase in maintenance expenses, a $2.0 million increase in fuel costs and a $1.4 million increase in depreciation and amortization, partially offset by a $3.8 million decrease in power purchased. The maintenance expense increase is primarily the result of $1.9 million spent in the third quarter of 2003 to repair damage caused by severe storms, an insurance settlement in 2002, which reduced maintenance expenses by $1.1 million and increases associated with the plant maintenance schedule of the third quarter of 2003 compared to 2002. Maintenance expenses are expected to continue to be higher in 2003 as more scheduled plant maintenance outages are planned to coincide with our NOx compliance construction program. The increase in depreciation and amortization is primarily due to a $1.5 million increase in depreciation resulting primarily from a $144.9 million increase in the beginning utility plant in service balances between the two periods. The $2.0 million increase in fuel costs results primarily from a $5.3 million increase in deferred fuel adjustments in the third quarter of 2003 compared to the same period in 2002, partially offset by decreases of $1.7 million and $1.1 million in the cost of natural gas and coal burned during the comparative periods, respectively. The actual costs of natural gas and coal used in the third quarter of 2003 was lower due to a 5.0% decrease in the number of kWh's produced by IPL during the comparative periods resulting primarily from the milder temperatures in the third quarter of 2003. The $5.3 million increase in the deferred fuel adjustments resulted primarily from IPL underestimating the cost of fuel in 2002 in its fuel adjustment clause. IPL is permitted to recover this underestimate in future rates through the fuel cost adjustment proceeding and therefore the costs are deferred and amortized into expense in the same period that IPL's rates are adjusted. The $3.8 million decrease in power purchased was primarily due to a 40.4% decrease in the number of kWh's purchased during the third quarter of 2003 as compared to the same period in 2002, resulting primarily from a milder summer in 2003.
In addition, total operating income taxes remained relatively constant, but was the result of a $3.1 million decrease in federal income tax expense and a $3.8 million increase in state income tax expense. The decrease in federal income tax expense was due to a decrease in operating federal taxable income, while the increase in state income tax expense was primarily the effect ($3.7 million) of the increase in the state income tax rate from 4.5% to 8.5%.
Primarily as a result of the foregoing, utility operating income decreased $9.8 million or 16.1% during the third quarter of 2003 from the same period in 2002.
Other Income and Deductions
Other income and deductions increased 37.9% from income of $5.6 million in 2002 to $7.8 million in 2003. Included in this increase is a $1.1 million increase in the income tax benefit and a $1.1 million increase in the allowance for equity funds used during construction. The income tax benefit increase resulted primarily from the increase in the state income tax rate ($0.7 million) and a $0.4 million favorable variance in federal income taxes resulting from less nonoperating federal taxable income. The allowance for equity funds used during construction includes $0.6 million related to NOx expenditures in 2003.
Interest and Other Charges
Interest and other charges increased to $28.3 million in the third quarter of 2003 from $25.9 million in the same period in 2002. The increase includes $1.1 million in interest on the $110 million 6.30% first mortgage bonds issued August 6, 2003 and a $1.9 million increase in interest expense on the IPALCO Notes due to a 50 basis point increase, beginning November 15, 2002, and another 50 basis points increase, beginning May 15, 2003, in the interest rate on the IPALCO Notes as a result of ratings downgrades. The allowance for borrowed funds used during construction includes $0.3 million related to NOx expenditures in 2003.
Comparison of Nine Month Periods Ended September 30, 2003 and September 30, 2002
Net income for the nine months ended September 30, 2003 was $80.0 million, as compared to $103.3 million for the same period in 2002. The following discussion highlights the factors contributing to the decrease.
Operating Revenues
Operating revenues increased by $7.3 million to $628.7 million during the nine-month period ended September 30, 2003 compared to the prior year as a result of the following (dollars in thousands):
|
2003 |
2002 |
Increase (Decrease) |
Percentage Change |
||
Retail Revenues |
$ 590,007 |
$ 589,259 |
$ 748 |
0.1% |
|
Wholesale Revenues |
31,252 |
24,389 |
6,863 |
28.1% |
|
Miscellaneous Revenues |
7,468 |
7,745 |
(277) |
(3.6)% |
|
Total Operating Revenues |
$ 628,727 |
$ 621,393 |
$ 7,334 |
1.2% |
|
Heating Degree Days |
3,704 |
3,088 |
616 |
19.9% |
|
Cooling Degree Days |
878 |
1,404 |
(526) |
(37.5)% |
The increase in operating revenues in the nine months ended September 30, 2003 as compared to the same period in 2002 was primarily due to the $6.9 million increase in wholesale revenues. The increase in wholesale revenues was primarily due to a 34.7% increase in the average price per wholesale kWh sold, partially offset by a 4.9% decrease in the number of wholesale kWh's sold. The price of wholesale kWh's is primarily impacted by the regional demand and supply for electricity coupled with the short term cost for natural gas and fuel oil.
Operating expenses increased $27.3 million, or 5.9% during the nine months ended September 30, 2003, as compared to the same period in 2002. This is primarily the result of a $14.5 million increase in maintenance expenses, a $7.5 million increase in other operating expenses and a $5.1 million increase in depreciation and amortization. The maintenance expense increase is primarily the result of increases associated with the plant maintenance schedule of 2003 compared to 2002, $1.9 million spent in the third quarter of 2003 to repair damage caused by severe storms and an insurance settlement in the third quarter of 2002, which reduced maintenance expenses by $1.1 million. Maintenance expenses are expected to continue to be higher in 2003 as more scheduled plant maintenance outages are planned to coincide with our NOx compliance construction program. The increase in other operating expenses is primarily due to a $7.0 million increase in salaries and wages, a $2.5 million increase in pension and other postretirement expenses and a $1.9 million increase in IPL's annual property insurance premiums effective September 1, 2002, partially offset by a $1.0 million increase in gains from the sale of sulfur dioxide allowances. The increase in depreciation and amortization is primarily due to a $5.6 million increase in depreciation resulting primarily from a $138.3 million increase in the beginning utility plant in service balances between the two periods and an additional $30.6 million of utility plant placed in service during 2003, net of dispositions.
In addition, total operating income taxes remained relatively constant, but was the result of a $9.9 million decrease in federal income tax expense and a $9.6 million increase in state income tax expense. The decrease in federal income tax expense was due to a decrease in operating federal taxable income, while the increase in state income tax expense was primarily the effect ($9.3 million) of the increase in the state income tax rate from 4.5% to 8.5%.
Primarily as a result of the foregoing, utility operating income decreased $19.9 million or 12.5% during the nine months ended September 30, 2003 from the same period in 2002.
Other Income and Deductions
Other income and deductions increased slightly from income of $20.5 million in the nine months ended September 30, 2002 to $21.4 million for the same period in 2003. This increase was primarily due to a $3.6 million increase in the income tax benefit, which resulted primarily from the increase in the state income tax rate ($1.9 million) and a $1.2 million favorable variance in federal income taxes resulting from less nonoperating federal taxable income. The decrease in nonoperating federal taxable income was primarily due to the additional interest expense on the IPALCO Notes (see below) and the $110 million first mortgage bonds issued August 6, 2003. The income tax benefit increase was partially offset by a $2.5 million gain in 2002 from the sales of noncore real estate assets and a $0.8 million loss in 2003 on the sale of 1/3 of our ownership interest in EnerTech Capital Partners II L.P. The allowance for equity funds used during construction includes $1.5 million related to NOx expenditures in 2003 and $2.2 million in 2002 related to a gas combustion turbine placed in service during 2002.
Interest and Other Charges
Interest and other charges increased $4.2 million for the nine months ended September 30, 2003 from the same period in 2002. The increase includes $1.1 million in interest on the $110 million 6.30% first mortgage bonds issued August 6, 2003 and a $3.8 million increase in interest expense on the IPALCO Notes due to a 50 basis point increase, beginning November 15, 2002, and another 50 basis points increase beginning May 15, 2003 in the interest rate as a result of ratings downgrades. In addition, the allowance for borrowed funds used during construction includes $0.7 million related to NOx expenditures in 2003 and $1.0 million in 2002 related to a gas combustion turbine placed in service during 2002.
LIQUIDITY AND CAPITAL RESOURCES
Overview. Material changes in the consolidated financial condition and results of our operations, except where noted, are attributed to the operations of IPL. Consequently, the following discussion is centered on IPL.
As of September 30, 2003, IPALCO had cash and cash equivalents of $34.8 million and an additional $21.9 million of cash and cash equivalents restricted for the purpose of funding IPL's capital expenditures. In addition, IPL has available borrowing capacity of $74.3 million under its existing $75 million committed credit facilities. All long-term borrowings by IPL must first be approved by the Indiana Utility Regulatory Commission (IURC) and the aggregate amount of IPL's short-term borrowings must be approved by the Federal Energy Regulatory Commission. Also, IPL and IPALCO have restrictions on the amount of new debt they may issue by contractual obligations of the parent company, AES, and by financial covenant restrictions under existing debt obligations at IPL and IPALCO. Under such restrictions, IPL is generally allowed to fully draw the amounts available on IPL's committed credit facilities, refinance existing debt, issue up to $50 million of new long term debt approved by the IURC and incur certain other indebtedness. We believe that existing cash balances, cash generated from operating activities and borrowing capacity on IPL's committed credit facilities will be adequate on a short-term and long-term basis to meet anticipated operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures and dividends to AES. Sources for principal payments on outstanding indebtedness and nonrecurring capital expenditures, including our NOx emissions reduction program, are expected to be obtained from: (i) existing cash balances; (ii) excess cash generated from operating activities; (iii) borrowing capacity on IPL's committed credit facilities and (iv) additional debt financing.
In May, IPL extended the maturity of its $45 million committed line of credit to May 21, 2004. In June, IPL executed an agreement which combined its existing $40.6 million liquidity facility (related to $40 million of IPL variable rate bonds, which are remarketed weekly) and its $30 million committed line of credit into one two-tranche agreement. The new agreement matures June 3, 2004.
On August 6, 2003, IPL issued $110 million of 6.30% first mortgage bonds due July 1, 2013. The net proceeds of approximately $109 million were used primarily to finance a portion of IPL's capital expenditure program, to reimburse IPL's treasury for expenditures previously incurred in connection with the capital expenditure program and to repay amounts outstanding on IPL's credit lines. In addition, $21.9 million remained in a restricted account as of September 30, 2003 to be used only for capital expenditures, pursuant to the IURC 2003 Financing Order, as defined below.
On October 29, 2003, IPL Funding Corporation extended the maturity of its Receivables Sale Agreement to October 27, 2004. The agreement provides for unrelated parties (the "Purchasers") to purchase, on a revolving basis, up to $50.0 million of accounts receivable that IPL Funding purchased from IPL.
IURC Orders. On February 12, 2003, the IURC issued an order approving IPL's 2003- 2006 financing program (the IURC 2003 Financing Order), including, among other things, the issuance of up to $160 million of additional long-term debt to pay, in part, for IPL's construction program during 2003-2005, and the refinancing of $80 million of long-term debt, which matures in February 2004. In addition, the IURC 2003 Financing Order set forth a process whereby IPL must file a report with the IURC, prior to declaring or paying a dividend, that sets forth (1) the amount of any proposed dividend, (2) the amount of dividends distributed during the prior twelve months, (3) an income statement for the same twelve-month period, (4) the most recent balance sheet, and (5) IPL's capitalization as of the close of the preceding month, as well as a pro forma capitalization giving effect to the proposed dividend, with sufficient detail to indicate the amount of unappropriated retained earnings. If within twenty (20) calendar days the IURC does not initiate a proceeding to further explore the implications of the proposed dividend, the proposed dividend will be deemed approved. The IURC 2003 Financing Order stated that such process should continue in effect during the term of the financing authority, which expires December 31, 2006.
On February 28, 2003, IPL filed a petition for reconsideration, or in the alternative, for rehearing with the IURC. This petition sought clarification of certain provisions of the IURC 2003 Financing Order. In addition, the petition requested that the IURC establish objective criteria in connection with the reporting process related to IPL's long term debt capitalization ratio. On March 14, 2003, IPL filed a Notice of Appeal of the IURC 2003 Financing Order, as amended, in the Indiana Court of Appeals. We subsequently filed a motion to dismiss such appeal.
On April 16, 2003, the IURC issued its order in response to IPL's petition for reconsideration. The IURC declined to provide objective criteria relating to the dividend reporting process, and did not set a definitive time frame within which an investigation of a proposed dividend would be concluded. The IURC did make certain requested clarifications and corrections with regard to the IURC 2003 Financing Order, including the following: (1) the dividend reporting process applies only to dividends on IPL's common stock, not on its preferred stock; (2) a confidentiality process is established to maintain confidentiality of information filed under the dividend reporting process until such information has been publicly released and is no longer confidential; (3) dividends are not to be paid until after the twenty calendar days have passed, or the IURC approves the dividend after initiating a proceeding to explore the implications of a proposed dividend; and (4) certain technical corrections.
All of the reports IPL has filed with the IURC under the dividend reporting process were deemed approved after twenty days had elapsed and the IURC did not initiate any proceeding to explore the implications of the proposed dividends. We continue to believe that IPL will not be prevented from paying future dividends in the ordinary course of prudent business operations.
Capital Requirements. Our capital requirements are primarily related to IPL's construction expenditures needed to meet customers' needs for electricity, for environmental compliance and for energy and outage management systems. IPL's construction expenditures totaled $104.8 million during the nine months ended September 30, 2003. This represented an increase of $30.1 million from the comparable period in 2002, primarily due to expenditures associated with new environmental standards imposed by the EPA relating to NOx emission reductions. Construction expenditures during the first nine months of 2003 were financed with internally generated cash provided by operations, borrowings on IPL's committed credit facilities and the issuance of $110 million of first mortgage bonds by IPL. We estimate total capital expenditures of approximately $160 million in 2003, $170 million in 2004 and $115 million in 2005. These amounts include approximately $227 million for construction associated with NOx emission reductions.
Pension Plan. Pension plan assets consist of investments in equity, real estate, fixed income securities and cash. Funding for the qualified defined benefit pension plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended, as well as targeted funding levels necessary to qualify under standards of the Pension Benefit Guaranty Corporation for exemption from certain administrative requirements. Due to the decline in market value of the investment portfolio over the last few years, assets held in trust to satisfy plan obligations have decreased. Additionally, recent decreases in long-term interest rates have the effect of increasing the measured liability for funding purposes. As a result of these events, together with Voluntary Early Retirement Programs offered in recent years, our estimate of future funding obligations has increased substantially.
During 2003, we funded $96.0 million to the pension plan. Depending on the timing of contributions and other factors, to meet our funding target, we anticipate additional program- related cash contributions for pension benefits of approximately $43.0 to $74.0 million through 2005. These estimates are based on actuarial assumptions using discount rates of 6.65% for 2003, 5.52% for 2004 and 5.32% for 2005. The discount rate assumption is based on our estimate of the four-year weighted average of 30-year treasury rates and the assumption that pension relief, as enacted by the United States Congress, will expire after 2003. Such estimates are also based on the market value of our pension plan assets at December 31, 2002, and an assumed rate of return on our pension plan assets of 9.0% during 2003 and 2004. If the rate of return on our pension plan assets for 2003 and 2004 were 0%, our anticipated pension contributions through 2005 that would be necessary for us to meet the same funding target would increase to a range of $56.0 million to $88.0 million.
Dividends. IPALCO did not pay any dividends during the first quarter of 2003, however we did pay total dividends of $63.3 million to AES in the second quarter of 2003 and $29.2 million in the third quarter of 2003. Future distributions will be determined at the discretion of the Board of Directors of IPALCO and will depend primarily on dividends received from IPL and such other factors as the Board of Directors of IPALCO deems relevant. Dividends from IPL are affected by IPL's results of operations, cash flows, financial condition, capital requirements, regulatory considerations (including compliance with the IURC 2003 Financing Order described above) and such other factors as the Board of Directors of IPL deems relevant.
Related Party Transactions. Effective September 1, 2003, IPALCO and IPL entered into a property insurance program in which AES and other AES subsidiaries also participate. The program includes a policy issued by a third party insurance company for funding losses of the participants up to a total aggregate amount of $20 million. Funds to pay claims within this limit will be derived from premiums paid to this third party carrier by the participants and will be deposited into a trust fund owned by AES Global Insurance Company, a wholly-owned subsidiary of AES, but controlled by the third party carrier. Claims above the $20 million aggregate will be covered by separate insurance policies issued by a syndicate of third party carriers. These policies will provide coverage of $600 million per occurrence. Management believes that the combined cost of these policies is less than comparable insurance in the marketplace.
Other. In December, 2003, IPL plans to offer 4,050 acres of undeveloped property near Martinsville, Indiana for sale through public auction. The site was being held as a possible site for a future power plant. IPL holds an option to purchase 876 acres at a more optimal location for IPL for use as a potential power plant site.
Item 4. Controls and Procedures
Our chief executive officer and our chief financial officer, based on the evaluation of IPALCO's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) or 15d-15(e)) required by paragraph (b) of Rules 13a-15 or 15d-15, have concluded that as of September 30, 2003, our disclosure controls and procedures were effective and designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.- Disclosure Controls and Procedures.
There have been no changes in IPALCO's internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during IPALCO's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, IPALCO's internal control over financial reporting.- Internal Control over Financial Reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to Note 6 of the accompanying consolidated financial statements for a summary of significant legal proceedings involving IPALCO and/or IPL. We are also subject to routine litigation, claims and administrative proceedings arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial position or results of operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
| Exhibit No. | Document |
| 10.1 |
Forty-Seventh Supplemental Indenture dated as of August 1, 2003 to the Mortgage and
Deed of Trust, dated as of May 1, 1940 between IPL and Bank One, National Association, as successor
in interest to American National Bank & Trust Company of Chicago, Trustee |
| 10.2 |
Tenth amendment dated as of October 29, 2003, to Receivables Sale Agreement among IPL
Funding Corporation as the Seller, ABN AMRO Bank N.V., as the agent, the Liquidity Providers from
time to time party thereto, ABN AMRO Bank N.V. as the enhancer and Windmill Funding Corporation
dated as of December 20, 1996 |
| 31.1 |
Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a). |
| 31.2 |
Certification by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a). |
| 32 |
Certification required by Rule 13a-14(b) or 15d-14(b). |
(b) Reports on Form 8-K -No reports on Form 8-K were filed during the period covered by this report.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
| IPALCO ENTERPRISES, INC. |
|
| |
| (Registrant) |
Date: November 11, 2003
| By: | /s/ Hamsa Shadaksharappa |
|
| |
| Hamsa Shadaksharappa | |
|
Senior Vice President-Financial Services, Chief Financial Officer and Secretary | |
|
(Principal Financial and Accounting Officer and Duly Authorized Officer) |