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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, 1996 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. ( )
As of January 31, 1997, the aggregate market value of the voting
stock held by non-affiliates of the registrant was: $1,399,383,042
based on the average of the high and low price of the common stock
on such date. As of January 31, 1997, there were 57,036,540 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 May 21, 1997
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
and has 15 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 1927
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. No private or municipally-owned electric
public utility companies are competing with IPL in the territory it
serves. Existing Indiana law provides for public utilities to have an
exclusive retail service area.
IPL's business is not dependent on any single customer or group of
customers. IPL's historical retail sales to ultimate consumers for 1992-
1996 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 9 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 substantially 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 annual expenditures for all air, solid
waste and water environmental compliance measures are $11 million and $5
million in 1997 and 1998, 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 initiated by IPL. 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 levelized fuel
costs embedded in base tariffs. Additionally, all such retail tariffs
provide for billing of "lost revenue margins" on estimated kilowatt-hours
(KWH) sales reductions resulting from IPL's approved demand side
manangement program. 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 1996, approximately 99.8% of the total KWH sold by IPL were
generated from coal, 0.1% from middle distillate fuel oil and 0.1% from
gas. 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 the fuel 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, assuming existing
environmental regulations can be met. The long-term coal agreements are
with three unaffiliated suppliers and the coal is mined entirely in the
state of Indiana. See Exhibits listed under Part IV Item 14(a)2(20.1).
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 90-day supply when strikes are anticipated in
the coal industry.
EMPLOYEE RELATIONS
As of December 31, 1996, IPL had 2,144 employees of whom 1,081 were
represented by the International Brotherhood of Electrical Workers, AFL-
CIO (IBEW) and 379 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 provided 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. The 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.
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) and Mid-America Energy Resources, Inc. (Energy
Resources). Energy Resources operates a district cooling system in
downtown Indianapolis, Indiana and has as subsidiaries Cleveland Thermal
Energy Corporation (Cleveland Thermal) and Cleveland District Cooling
Corporation (Cleveland Cooling). During 1995, Mid-America established
Vital Resource Management (VRM) as an operating division within the
holding company.
Cleveland Thermal operates a district heating system in dowtown
Cleveland. Cleveland Cooling operates a self-constructed district
cooling system also located in downtown Cleveland. Operations at
Cleveland Cooling commenced in April 1993, and the system obtained full
subscription during 1996. Both Cleveland Thermal and Cleveland Cooling
jointly conduct business under the name Cleveland Energy Resources.
During 1995, the plant capacity for Energy Resource's Indianapolis
district cooling system was expanded to 27,250 tons to meet existing
customer loads and is fully subscribed.
At December 31, 1995, Mid-America held 70% of the common stock of
SHAPE and acquired an additional 10% on January 1, 1996, resulting in Mid-
America holding 80% of the common stock of SHAPE at December 31, 1996.
SHAPE conducts research and development of energy storage technology.
ICE was formed to construct, own and operate an energy system in an
industrial complex. During 1993, ICE entered into a contractual
agreement with 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.
In 1995, Mid-America began providing energy services through VRM to
commercial, industrial and institutional customers from sales offices in
Indianapolis, Cleveland, Kansas City and northern Indiana.
EMPLOYEES
As of December 31, 1996, Mid-America and its subsidiaries had 136
employees. There were 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,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Operating Revenues (In Thousands):
Residential $ 261,819 $ 243,055 $ 230,805 $ 225,138 $ 212,757
Small industrial and commercial 132,361 130,780 129,346 127,551 126,588
Large industrial and commercial 298,720 275,803 266,703 255,945 243,446
Public lighting 8,147 7,598 6,949 7,186 7,133
Miscellaneous 9,264 8,289 7,186 7,373 6,018
--------------- --------------- --------------- --------------- ---------------
Revenues - ultimate consumers 710,311 665,525 640,989 623,193 595,942
Sales for resale - REMC 1,141 1,105 1,098 897 861
Sales for resale - other 13,312 6,758 7,680 5,237 2,400
--------------- --------------- --------------- --------------- ---------------
Total electric revenues $ 724,764 $ 673,388 $ 649,767 $ 629,327 $ 599,203
=============== =============== =============== =============== ===============
Kilowatt-hour Sales (In Millions):
Residential 4,367 4,277 4,077 4,014 3,675
Small industrial and commercial 2,130 2,209 2,207 2,202 2,171
Large industrial and commercial 6,772 6,509 6,306 6,169 5,843
Public lighting 58 61 64 62 64
--------------- --------------- --------------- --------------- ---------------
Sales - ultimate consumers 13,327 13,056 12,654 12,447 11,753
Sales for resale - REMC 29 28 26 24 23
Sales for resale - other 725 394 456 321 169
--------------- --------------- --------------- --------------- ---------------
Total kilowatt-hours sold 14,081 13,478 13,136 12,792 11,945
=============== =============== =============== =============== ===============
Customers at End of Year:
Residential 370,029 365,163 360,347 356,015 352,139
Small industrial and commercial 40,403 39,781 38,849 38,359 38,171
Large industrial and commercial 3,657 3,557 3,525 3,342 3,163
Public lighting 303 281 266 252 239
--------------- --------------- --------------- --------------- ---------------
Total ultimate consumers 414,392 408,782 402,987 397,968 393,712
Sales for resale - REMC 1 1 1 1 1
--------------- --------------- --------------- --------------- ---------------
Total electric customers 414,393 408,783 402,988 397,969 393,713
=============== =============== =============== =============== ===============
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 five primarily coal-fired generating plants,
three of which are used for only electric generation and two of which are
used for a combination of electric and steam generation. In relation to
electric generation, there exists a total gross nameplate rating of 3,035
MW, a winter capability of 3,046 MW and a summer capability of 2,968 MW.
In relation to steam generation, there exists a gross capacity of 2,290
Mlbs. (thousands of pounds) per hour.
Total Electric Stations:
H. T. Pritchard plant (Pritchard), 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 and 1,672 MW, respectively.
Combination Electric and Steam Stations:
C.C. Perry Section K plant (Perry K), in the city of 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.
C.C. Perry Section W plant (Perry W), in the city of 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.
Net electrical generation during 1996, at the Petersburg, Stout and
Pritchard stations accounted for about 74.6%, 20.4% and 5.0%,
respectively, of IPL's total net generation. All steam generation by IPL
for the steam system was produced by the Perry K and Perry W stations.
In addition, IPL purchases steam from an independent resource recovery
system located within the city of Indianapolis.
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 269 miles of 34,500
volt lines. Distribution facilities include 4,693 pole miles and 19,826
wire miles of overhead lines. Underground distribution and service
facilities include 477 miles of conduit and 5,276 wire miles of
conductor. Underground street lighting facilities include 109 miles of
conduit and 682 wire miles of conductor. Also included in the system are
74 bulk power substations and 76 distribution substations.
Steam distribution properties include 23 miles of mains with 253
services. Other properties include coal and other minerals, underlying
798 acres in Sullivan County and coal underlying about 6,215 acres in
Pike and Gibson Counties, Indiana. Additional land, approximately 4,722
acres in Morgan County, Indiana and approximately 884 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 is designed to distribute 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 nine boilers having a gross capacity of 1,050 Mlbs.
per hour. The distribution system includes 17 miles of mains with 230
services.
Cleveland Cooling owns and operates a district cooling facility
located near downtown Cleveland, which is designed to distribute 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
is contracted to service 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.
Mid-America, through its operating division Vital Resource Management
(VRM), began providing energy services to commercial, industrial and
institutional customers during 1995. This energy services effort has two
major activities: (1) energy accounts, focusing on the energy needs of
commercial and governmental buildings and (2) major projects,
concentrating on the development of large heating and/or cooling projects
in commercial, industrial or institutional settings.
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
-----------------
None to be reported
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
EXECUTIVE OFFICERS OF THE REGISTRANT AT FEBRUARY 25, 1997.
Name, age (at December 31, 1996), and positions and offices held for
the past five years:
From To
---- --
John R. Hodowal (51)
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 (64)
Vice Chairman of IPALCO May, 1991
President and Chief Operating
Officer of IPL February, 1990
John R. Brehm (43)
Vice President and Treasurer
of IPALCO May, 1989
Senior Vice President -
Finance and Information
Services of IPL May, 1991
N. Stuart Grauel (52)
Vice President - Public Affairs
of IPALCO May, 1991
Joseph A. Gustin (49)
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 (55)
Senior Vice President -
Electric Production of IPL May, 1991
Bryan G. Tabler (53)
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 (57)
Senior Vice President -
Electric Delivery of IPL May, 1996
Senior Vice President -
Business Development of IPL May, 1991 May, 1996
Paul S. Mannweiler (47)
Senior Vice President -
External Affairs of IPL January, 1997
Max Califar (43)
Vice President - Human
Resources of IPL December, 1992
Assistant Treasurer of IPALCO May, 1989 December, 1992
Treasurer of IPL May, 1989 December, 1992
Steven L. Meyer (38)
Assistant Treasurer of IPALCO May, 1993
Treasurer of IPL December, 1992
Stephen J. Plunkett (48)
Controller of IPALCO
and IPL May, 1991
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
---------------------------------------------------
SECURITY HOLDER MATTERS
-----------------------
At December 31, 1996, IPALCO had 23,858 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 1996 and 1995 as reported on the Composite Tape in The
Wall Street Journal were as follows:
1996 1995
High Low High Low
Sale Price Sale Price Sale Price Sale Price
--------------------- ---------------------
First Quarter $27 3/8 $25 $22 1/2 $19 7/8
Second Quarter 26 3/4 24 5/8 22 20 5/8
Third Quarter 27 5/8 25 1/8 24 1/8 21
Fourth Quarter 28 1/4 26 1/8 25 3/4 23 5/8
The high and low sale prices for IPALCO's common stock as
reported on the Composite Tape in The Wall Street Journal for the
period January 1, 1997, through February 21, 1997, were: High -
$28 3/8, Low - $26 1/2.
Quarterly dividends paid on the common stock during 1996 and
1995 were as follows:
1996 1995
----- -----
First Quarter $.36 $.353
Second Quarter .37 .36
Third Quarter .37 .36
Fourth Quarter .37 .36
At its meeting on February 25, 1997, IPALCO's Board of Directors
declared a regular quarterly dividend on common stock of $.25 per share
($1.00 annually), payable April 15, 1997, to shareholders of record
March 21, 1997. This is a reduction from the previous year's quarterly
dividend which was $.37 per share ($1.48 annually). Future dividend
action will be guided by, among other factors, a policy of paying out
45 to 50 percent of the prior year's earnings. 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 IPALCO's Board of Directors.
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, 1996, 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) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Total utility operating revenues $ 762,503 $ 709,206 $ 686,076 $ 664,303 $ 633,203
Utility operating income 163,219 147,588 143,310 142,368 134,240
Allowance for funds used during
construction 9,321 11,370 9,381 5,527 5,081
Net income (1) 114,275 98,778 92,994 75,422 88,342
Utility plant - net 1,787,969 1,792,007 1,711,772 1,608,871 1,532,964
Total assets 2,183,069 2,231,197 2,099,361 1,966,023 1,894,427
Utility construction expenditures 78,543 166,874 178,295 145,765 112,037
Nonutility construction expenditures 4,187 34,745 9,402 8,788 29,842
Common shareholders' equity 857,726 822,803 801,945 787,211 787,739
Cumulative preferred stock 51,898 51,898 51,898 51,898 51,898
Long-term debt (less current
maturities and sinking
fund requirements) 662,591 698,600 665,971 541,760 550,141
Earnings per share of common stock
(based on weighted average number
of shares outstanding) (1,2) 2.01 1.74 1.64 1.33 1.57
Dividends declared per share of
common stock (2) 1.48 1.44 1.41 1.36 1.31
See consolidated financial statements.
(1) During 1993, IPALCO incurred a one-time charge against earnings of $21.1 million, net of applicable income
taxes, for costs pertaining to IPALCO's efforts to acquire PSI Resources, Inc.
(2) Per share amounts for 1992 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 Enterprise's actual results to differ materially from those
projected in forward-looking statements of Enterprises. Management's
Discussion and Analysis contains forward-looking statements, and 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 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.
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 and 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 includes:
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 will be accomplished through a self-tender
offer (Offer) to purchase up to 12 million shares, or 21 percent of
IPALCO's outstanding common stock. The Offer, which is scheduled to
commence February 28, 1997 will be effected through a "Dutch auction"
at a price of not less than $29.00 nor more than $34.00 per share. The
transaction of up to $410 million will be financed with a five-
year bank debt facility. The recapitalization is being effected by the
parent company, IPALCO Enterprises, Inc. and will not affect the
capitalization of its wholly owned subsidiary, IPL.
A reduction in the quarterly dividend to $.25 per share ($1.00 annually)
from the previous $.37 per share ($1.48 annually). The dividend is payable
April 15, 1997 to shareholders of record on March 21, 1997 regardless of
whether or when such shares are tendered. Future dividend action will be
guided by, among other factors, a policy of paying out 45 to 50 percent of
the prior year's earnings.
A target consolidated maximum debt-to-capital ratio of 45 percent which
IPALCO believes can be achieved within the next five years.
Purchasing common stock at a premium to its recent market value
enables IPALCO to increase and accelerate the cash received by shareholders.
In fact, the payment of cash amounts through a $410 million repurchase offer
equals nearly five years of dividends based on the previous dividend rate.
Reducing the common stock dividend rate improves IPALCO's financial
flexibility going forward. A dividend payout ratio of 45 to 50 percent of
prior year earnings is more consistent with companies operating today in a
competitive environment compared to the traditional utility payout ratio of
70 percent or more. 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 IPALCO's Board of Directors.
IPALCO expects to incur up to $410 million of debt in connection with
the Offer. A reduction in common shareholders' equity will result from
purchasing the common stock according to the Offer and when combined with
the newly incurred debt, will increase IPALCO's debt-to-capital ratio from
42.6 percent at December 31, 1996 to a pro forma level of 68.4 percent.
IPALCO believes that in a competitive environment a target debt-to-total
capital ratio of 45 percent is appropriate. IPALCO believes its earnings
and cash flow will be sufficient to allow it to retain earnings and
reduce debt so that such a target ratio can be achieved within five
years. 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.
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, 4, 9 and 11 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
1997.
Competition and Industry Changes
--------------------------------
As of year end 1996, 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
- -----------------------
Federal Energy Regulatory Commission (FERC) Orders 888 and 889:
In April of 1996, the FERC issued orders 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 the 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. The FERC orders
also provide for the recovery of utility stranded costs. Stranded
cost is 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 the 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 kilowatt-hour (KWH)
requirements of electric energy 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 electric 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. Such
wholesale sales have historically been and will continue to be made
at market rates. Existing Indiana law provides for public
utilities 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.
During January 1997, a new bill to revise the complete Indiana
code for electric utilities was introduced into the Indiana
legislature. As proposed, this very complex bill requires, among
other things, the mandatory reorganization of all Indiana electric
utilities, a transition period ending in 2004, revenue reductions
during the transition period for utilities with production costs
exceeding the Indiana state average for 1995 and exit fees for
customers electing to purchase energy from new suppliers. On
February 20, 1997, the Indiana Senate sponsor announced his intention
to amend the bill to form a legislative committee to study this issue,
rather than immediately enact retail wheeling.
IPALCO, as explained later, is opposed to the proposed
legislation, as well as to any such legislation on a state-by-state
basis. IPALCO believes that "Senate Bill 637" already provides the
forum for Indiana public utilities to properly address the issues
created from competition and deregulation until comprehensive
federal legislation is enacted.
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.
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 new markets as they open.
In 1995, IPL formed four Strategic Business Units: Electric
Production, Electric Delivery, Marketing and Steam, to better
evaluate and control costs and to prepare for the transition to a
more competitive environment.
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, 1996, 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 will retire $11.3 million of maturing long-term debt during
1997. In addition, other existing higher rate debt may be
refinanced depending upon market conditions. See following section
for discussion of construction program.
During the next five years, IPL is forecasted to meet its cash
requirements without 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 full year of new
tariffs implemented on July 1, 1996, a projected five-year 1.5%
forecasted compound annual increase in retail KWH sales, increasing
sales opportunities in the wholesale power market and expected
annual increases in steam therm sales.
The 1.5% annual KWH sales growth estimate compares to growth
rates IPL actually achieved of 2.2% and 2.6% for the periods 1991
through 1996 and 1986 through 1996, respectively, weather adjusted.
The Indianapolis economy grew at annual rates of 1.9% and 2.0% for
those same periods and is expected to grow 2.0% from 1996 through
2001.
Operating and maintenance expenses were $394.9 million in 1996.
These expenses in 1997 will be influenced by inflation, ongoing
cost controls and increased overhaul expenses of about $7 million.
Purchased power costs are expected to decrease approximately $9
million in 1997 due to a new contract effective in May 1997
Depreciation will increase in 1997 due to a full year's
depreciation on new SO2 removal facilities (scrubbers) placed in
service during 1996, as well as other plant additions. IPL's long-
term interest expense should decrease due to the retirement of $50
million 9 5/8% First Mortgage Bonds in December 1996 and $11.3
million 5 5/8% First Mortgage Bonds in May 1997 partially offset by
a $20 million variable rate note issued in November 1996.
IPL's construction program for the three-year period 1997-1999,
is estimated to cost $225.2 million including AFUDC. The estimated
cost of the program by year (in millions) is $86.2 in 1997, $73.0
in 1998 and $66.0 in 1999. It includes $137.7 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, 1996, IPL had completed installation
of substantially all of its Environmental Compliance Plan
facilities.
IPL will amortize approximately $34.3 million of its nontax-
regulatory assets at December 31, 1996, over the next three years.
Other
-----
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 proforma 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 twelve months ended December 31, 1996,
the ratios under the Articles and the Mortgage are 3.90 and 10.15,
respectively. IPL believes these requirements will not restrict
any anticipated future financings. See Note 5 in the Notes to
Consolidated Financial Statements. At December 31, 1996, and
considering all existing restrictions, IPL had the capacity to
issue approximately $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 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, 1996, and Mid-America Energy Resources, Inc. (Energy
Resources). Energy Resources, in addition to its own operations,
has as subsidiaries Cleveland Thermal Energy Corporation (Cleveland
Thermal) and Cleveland District Cooling Corporation (Cleveland
Cooling), which jointly do business as Cleveland Energy Resources.
Energy Resources operates a fully subscribed district cooling
system in downtown Indianapolis, Indiana. Cleveland Thermal
operates a district heating system in downtown Cleveland, Ohio.
Cleveland Cooling operates a district cooling system in downtown
Cleveland, Ohio. ICE provides chilled water to the Lilly
Technology Center located near downtown Indianapolis. SHAPE became
a majority-owned subsidiary of Mid-America during 1993. During
1995, Mid-America established Vital Resource Management (VRM) as an
operating division within the holding company.
On December 14, 1994, Mid-America's Board of Directors approved
a Long-Term Incentive Plan (the Incentive Plan) that covers key
executives of Mid-America and certain officers of IPALCO effective
January 1, 1995. See Note 12 in the Notes to Consolidated
Financial Statements.
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 $1.5 million, $5.4 million
and $1.3 million during the next three years. Such 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 existing liquid assets,
future cash flows from operations and from project-specific debt
financing.
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 Enterprises.
All per share information for 1995 presented herein has been
restated to reflect the 3-for-2 common stock split in March 1996.
Earnings per share during 1996 were $2.01, or $.27 above the
$1.74 attained in 1995. Earnings per share during 1995 were $1.74,
or $0.10 above the $1.64 attained in 1994. The following
discussion highlights the factors contributing to these results.
Utility Operating Revenues
- --------------------------
Operating revenues in 1996 and 1995 increased from the prior
year by $53.3 million and by $23.1 million, respectively. The
increases in revenues resulted from the following:
Increase (Decrease)
-------------------------------
1996 over 1995 1995 over 1994
-------------------------------
(Millions of Dollars)
Electric:
Increase in retail base rate revenues $ 40.8 $ 12.2
Additional retail KWH sales - net of fuel 11.7 14.1
Fuel revenues (8.7) (2.9)
Wholesale revenues 6.6 (0.9)
Steam revenues 1.9 (0.5)
Other revenues 1.0 1.1
------ ------
Total change in operating revenues $ 53.3 $ 23.1
====== ======
The increase in electric retail base rate revenue 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 additional KWH sales in both
periods reflect customer growth and the impact of weather on KWH
sales used for heating and cooling. Actual and percentage changes
in electric customers and in heating and cooling degree days for
these periods are as follows:
Increase (Decrease)
-------------------------------
1996 over 1995 1995 over 1994
-------------------------------
Electric Residential Customers 4,866 1.3% 4,816 1.3%
Commercial & Industrial Customers 722 1.7% 964 2.3%
Heating Degree Days 315 5.7% 384 7.4%
Cooling Degree Days (223) (18.4)% 157 14.9%
The changes in fuel revenues in 1996 and 1995 from the prior
year reflect changes in total fuel costs billed customers. The
changes in wholesale revenues in 1996 and 1995 reflect increased
wholesale marketing efforts and energy requirements of other
utilities in those years. Increases in other revenues in both
periods are primarily from increased customer collection charges
effective in 1995.
Utility Operating Expenses
- --------------------------
Fuel costs decreased by $4.9 million and by $0.6 million from
the prior year during 1996 and 1995, respectively. The decrease in
fuel costs during 1996 was due to decreased unit costs of coal and
oil of $9.7 million and decreased deferred fuel costs of $2.5
million, partially offset by increased fuel consumption of $7.3
million. The decrease in 1995 was due to decreased unit costs of
coal and oil of $6.5 million and decreased deferred fuel costs of
$1.2 million, partially offset by increased fuel consumption of
$7.1 million.
Other operating expenses in 1996 and 1995 increased from the
prior year by $20.8 million and by $12.2 million, respectively.
The increases for both 1996 and 1995 are primarily due to increased
administrative and general expenses of $13.5 million and $8.5
million, respectively, resulting from postretirement benefit
expenses recognized since the 1995 electric rate order. Also
contributing to the increased operating expenses in 1996 were
increased electric plant operations of $4.0 million, increased
amortization of Demand Side Management (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. Factors contributing to increased other operating
expenses in 1995 were an increase in distribution expenses of $1.5
million, miscellaneous steam power and other production operating
expenses of $1.7 million and an increase in customer accounts
expense of $0.5 million.
Purchased steam increased in 1996 and decreased in 1995
resulting from comparable changes in the volume of therms purchased
from an independent resource recovery system located within the
city of Indianapolis.
Maintenance expenses increased by $4.8 million and decreased by
$5.5 million from the prior year during 1996 and 1995,
respectively. The increase in maintenance expenses in 1996 was
mostly due to increased planned outage expenses of $4.6 million for
Unit 3 at IPL's Petersburg generating plant. The decrease for 1995
reflected decreased unit overhaul expenses of $4.2 million and
decreased distribution and transmission expenses of $1.3 million.
Depreciation and amortization expense increased in 1996 and 1995
from the prior year by $1.8 million and by $14.0 million,
respectively. These changes resulted primarily from increases in
the depreciable utility plant balances, the amortization of
property-related regulatory deferrals effective with the September
1, 1995, electric rate increase, adjustments to spare parts
inventory in 1996 and to property held for future use in 1995.
Depreciable utility plant reflects the addition of new SO2 removal
facilities at IPL's Petersburg generating plant starting in June
1996. An adjustment of $4.5 million was made in 1996 to spare
parts inventory resulting from the recognition of impairment in
value of excess spare parts. The adjustment to property held for
future use was $12.3 million in 1995 reflecting expired regulatory
permits and specific design and engineering costs of a future
generating station in Patriot, Indiana.
Taxes other than income taxes increased $1.7 million and $0.8
million in 1996 and 1995, respectively. These increases were due
primarily to an increase in property and gross income taxes.
Income taxes - net, increased in 1996 and decreased in 1995 from
the prior year by $13.7 million and $1.0 million, respectively.
These changes reflect an increase in pretax operating income in
both years with 1995 being offset by a $2.0 million adjustment to
deferred taxes for removal costs.
Other Income And Deductions
- ---------------------------
Allowance for equity funds used during construction was
unchanged in 1996, while increasing in 1995 from the prior year by
$1.3 million. These amounts reflect carrying charges on regulatory
assets of $2.8 million and $1.4 million in 1996 and 1995,
respectively, and the impact of new environmental facilities placed
in service in June 1996.
Other - net, which includes the pretax operating and investment
income from operations other than IPL, decreased by $0.6 million
and increased by $4.6 million from the prior year during 1996 and
1995, respectively. The increased income for 1995 was the result
of an increase in customers and revenues for Energy Resources and
due to the sale of investment securities at Mid-America.
Operations other than IPL, in total, experienced a net loss of $5.1
million during 1996. This compares to a net loss of $4.3 million
and $7.6 million during 1995 and 1994, respectively.
Interest and Other Charges
- --------------------------
Interest on long-term debt decreased by $1.1 million in 1996 and
slightly decreased in 1995 from the prior year. 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 $1.1 million during 1996
from the prior year and increased by $3.6 million during 1995 from
the prior year. The decrease during 1996 was primarily due to
decreased short-term debt borrowings, whereas, the increase during
1995 was due to increased short-term debt borrowings.
As compared to the prior year, the allowance for borrowed funds
used during construction decreased in 1996 and increased in 1995 by
$2.0 million and by $0.7 million, respectively. These changes
reflect a comparable change in the construction base in those years
and decreased carrying charges on regulatory assets in 1996 and
1995.
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
To the 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,
1996 and 1995, 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, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Indianapolis, Indiana
January 24, 1997
(February 25, 1997 as to Note 14)
IPALCO ENTERPRISES, INC. AND SUBSIDIARIES
Statements of Consolidated Income
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- ------------- -------------
(In Thousands Except Per Share Amounts)
UTILITY OPERATING REVENUES (Note 9):
Electric $ 724,764 $ 673,388 $ 649,767
Steam 37,739 35,818 36,309
------------- ------------- -------------
Total operating revenues 762,503 709,206 686,076
------------- ------------- -------------
UTILITY OPERATING EXPENSES:
Operation:
Fuel 164,339 169,206 169,756
Other 137,192 116,428 104,273
Power purchased 18,365 19,102 19,060
Purchased steam 7,240 6,680 7,653
Maintenance 67,768 63,013 68,562
Depreciation and amortization 102,769 100,984 87,028
Taxes other than income taxes 33,363 31,706 30,891
Income taxes - net (Note 8) 68,248 54,499 55,543
------------- ------------- -------------
Total operating expenses 599,284 561,618 542,766
------------- ------------- -------------
UTILITY OPERATING INCOME 163,219 147,588 143,310
------------- ------------- -------------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used during construction 5,967 6,003 4,672
Other - net (8,056) (7,407) (12,005)
Income taxes - net (Note 8) 3,645 3,097 4,536
------------- ------------- -------------
Total other income and (deductions) - net 1,556 1,693 (2,797)
------------- ------------- -------------
INCOME BEFORE INTEREST AND OTHER CHARGES 164,775 149,281 140,513
------------- ------------- -------------
INTEREST AND OTHER CHARGES:
Interest on long-term debt 45,110 46,170 46,248
Other interest 4,202 5,293 1,685
Allowance for borrowed funds used during construction (3,354) (5,367) (4,709)
Amortization of redemption premiums and expenses on
debt - net 1,360 1,225 1,113
Preferred dividend requirements of subsidiary 3,182 3,182 3,182
------------- ------------- -------------
Total interest and other charges - net 50,500 50,503 47,519
------------- ------------- -------------
NET INCOME $ 114,275 $ 98,778 $ 92,994
============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 56,924 56,745 56,611
(Note 5) ============= ============= =============
EARNINGS PER SHARE OF COMMON STOCK $ 2.01 $ 1.74 $ 1.64
(Note 5) ============= ============= =============
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
- ---------------------------------------------------------------------------------------------------------
ASSETS 1996 1995
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
UTILITY PLANT:
Utility plant in service (Note 2) $ 2,763,305 $ 2,517,790
Less accumulated depreciation 1,048,492 984,910
----------------- -----------------
Utility plant in service - net 1,714,813 1,532,880
Construction work in progress 63,243 249,249
Property held for future use 9,913 9,878
----------------- -----------------
Utility plant - net 1,787,969 1,792,007
----------------- -----------------
OTHER ASSETS:
Nonutility property (Note 2) 121,443 117,215
Less accumulated depreciation 13,153 8,884
----------------- -----------------
Nonutility property - net 108,290 108,331
Other investments 5,371 6,256
----------------- -----------------
Other assets - net 113,661 114,587
----------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents 19,317 11,554
Accounts receivable (less allowance for doubtful
accounts - 1996, $1,159,000 and 1995, $851,000) 11,099 59,073
Fuel - at average cost 30,625 30,250
Materials and supplies - at average cost 52,727 57,605
Prepayments and other current assets 9,931 4,412
----------------- -----------------
Total current assets 123,699 162,894
----------------- -----------------
DEFERRED DEBITS:
Regulatory assets (Note 4) 137,974 142,711
Miscellaneous 19,766 18,998
----------------- -----------------
Total deferred debits 157,740 161,709
----------------- -----------------
TOTAL $ 2,183,069 $ 2,231,197
================= =================
See notes to consolidated financial statements.
- ---------------------------------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES 1996 1995
- ---------------------------------------------------------------------------------------------------------
(In Thousands)
CAPITALIZATION:
Common shareholders' equity (Note 5):
Common stock, no par, authorized - 145,000,000 shares,
issued and outstanding - 57,034,912 shares in 1996,
56,802,256 shares in 1995 (Note 5) $ 389,966 $ 385,032
Premium on 4% cumulative preferred stock 1,363 1,363
----------------- -----------------
Retained earnings 466,397 436,408
Total common shareholders' equity 857,726 822,803
Cumulative preferred stock of subsidiary (Note 5) 51,898 51,898
Long-term debt of subsidiaries (Notes 2 and 6) 662,591 698,600
----------------- -----------------
Total capitalization 1,572,215 1,573,301
----------------- -----------------
CURRENT LIABILITIES:
Notes payable - banks and commercial paper (Note 7) 46,000 69,122
Current maturities and sinking fund requirements (Note 6) 11,250 17,500
Accounts payable and accrued expenses 62,222 81,984
Dividends payable 22,212 21,567
Taxes accrued 23,159 21,225
Interest accrued 13,354 14,719
Other current liabilities 14,519 16,092
----------------- -----------------
Total current liabilities 192,716 242,209
----------------- -----------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Accumulated deferred income taxes - net (Note 8) 303,473 292,417
Unamortized investment tax credit 47,722 50,636
Accrued postretirement benefits (Note 11) 23,635 30,517
Accrued pension benefits (Note 10) 37,283 31,834
Miscellaneous 6,025 10,283
----------------- -----------------
Total deferred credits and other long-term liabilities 418,138 415,687
----------------- -----------------
COMMITMENTS AND CONTINGENCIES (Note 13)
TOTAL $ 2,183,069 $ 2,231,197
================= =================
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Statements of Consolidated Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
-------------- -------------- --------------
(In Thousands)
CASH FLOWS FROM OPERATIONS:
Net income before preferred dividend requirements
of subsidiary $ 117,457 $ 101,960 $ 96,176
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 102,677 103,045 91,713
Amortization of regulatory assets 17,680 6,748 -
Deferred income taxes and investment tax credit adjustments 3,145 (4,517) 2,685
Allowance for funds used during construction (9,321) (11,370) (9,381)
Premiums on redemptions of debt (3,128) (2,506) (1,363)
Change in certain assets and liabilities:
Accounts receivable 47,974 (10,414) 1,107
Fuel, materials and supplies 4,503 7,130 (2,205)
Accounts payable (19,762) 6,727 20,296
Taxes accrued 1,934 2,656 (4,484)
Accrued pension benefits 5,449 4,731 4,563
Other - net (17,484) 4,684 20,612
-------------- -------------- --------------
Net cash provided by operating activities 251,124 208,874 219,719
-------------- -------------- --------------
CASH FLOWS FROM INVESTING:
Proceeds from maturities of marketable securities 3,810 7,984 -
Construction expenditures - utility (78,543) (166,874) (178,295)
Construction expenditures - nonutility (4,187) (34,745) (9,402)
Other (16,607) (19,416) (7,657)
-------------- -------------- --------------
Net cash used in investing activities (95,527) (213,051) (195,354)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING:
Issuance of long-term debt 36,000 130,100 202,350
Retirement of long-term debt (78,300) (80,350) (85,928)
Short-term debt - net (23,122) 39,369 (60,247)
Dividends paid (86,811) (84,471) (82,421)
Issuance of common stock related to incentive compensation plans 4,524 1,549 1,768
Other (125) 1,386 (2,452)
-------------- -------------- --------------
Net cash provided by (used in) financing activities (147,834) 7,583 (26,930)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,763 3,406 (2,565)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,554 8,148 10,713
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,317 $ 11,554 $ 8,148
============== ============== ==============
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 47,857 $ 47,310 $ 41,429
============== ============== ==============
Income taxes $ 64,650 $ 50,557 $ 54,103
============== ============== ==============
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Statements of Consolidated Common Shareholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Premium on 4%
-------------------- Cumulative Retained
Shares Amount Preferred Stock Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
(In Thousands)
Balance at January 1, 1994 56,539 $ 379,460 $ 1,363 $ 406,388 $ 787,211
Net income 92,994 92,994
Cash dividends declared ($1.41 per share) (80,028) (80,028)
Exercise of stock options 95 1,768 1,768
------- ------------ ------------ ------------- -------------
Balance at December 31, 1994 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
======= ============ ============ ============= =============
See notes to consolidated financial statements.
Per share amounts and the number of shares have been adjusted for 1994 and 1995 to reflect the three-for-two
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, 1996, 1995 and 1994
- --------------------------------------------------------------------------
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) 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 $33.6 million, $23.0 million and $16.5 million for 1996, 1995
and 1994, 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 65% of Enterprises' employees are covered by
collective bargaining agreements.
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: Utility operating revenues are recorded as billed to
customers on a monthly cycle billing basis. Revenue is not accrued for
energy delivered but unbilled at the end of the year. A fuel adjustment
charge provision, which is established after public hearing, is applicable
to substantially all 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 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 1996, 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, 1996, IPL's most recent
quarterly measurement date, IPL had a cumulative net operating deficiency
of $93 million, of which $63.5 million expires at varying amounts during
the five-year 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 7.3%, 8.5% and 9.5% during 1996,
1995 and 1994, 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 which 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 3.4% during 1996 and
3.5% during 1995 and 1994. Depreciation expense for 1996 includes an
adjustment to spare parts inventory of $4.5 million resulting from
recognition of the impairment in value of excess spare parts.
Depreciation expense for 1995 and 1994 includes adjustments to property
held for future use of approximately $12.3 million and $3.9 million,
respectively. The adjustments in 1995 and 1994 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
by the straight-line method over the estimated service lives of the
related property. Nonutility depreciation expense was $4.5 million, $3.1
million and $2.3 million for 1996, 1995 and 1994, respectively.
Sale of Accounts Receivable: In late December 1996, IPL entered into
an agreement to sell, on a revolving basis, undivided percentage interests
in certain of its accounts receivable, including accounts receivable for
KWH delivered but not billed, up to an aggregate maximum at any one time
of $50 million. Accounts receivable on the Consolidated Balance Sheets
are net of the $50 million interest sold under the IPL agreement at
December 31, 1996. The gross amount of receivables sold was $55.6
million, of which $5.6 million was replaced with a receivable from the
purchasing party.
The Financial Accounting Standards Board has issued Statement No. 125
relating to the accounting for transfers of financial assets. Enterprises
anticipates adopting this standard on its effective date of January 1,
1997, and does not expect that it will have a material effect on its
financial position or results of operations.
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 4. As of December 31, 1996, all nontax-related
regulatory assets have been included as allowable costs in orders of the
IURC authorizing IPL to increase customer tariffs except for approximately
$10 million in costs for Demand Side Management (DSM) incurred subsequent
to January 1995 (see Note 9). IPL is amortizing such regulatory assets to
expense over periods authorized by these orders. Tax-related regulatory
assets represent the net income tax liability for deferred costs and
revenues to be considered in future regulatory proceedings.
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 9), IPL, effective September
1, 1995, is amortizing this deferral to expense over a life which
generally approximates the useful life of the related facility.
Also in accordance with regulatory treatment, IPL defers as regulatory
assets nonsinking 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: IPL has limited involvement with derivative financial
instruments, and these financial instruments are not used for trading
purposes. They are used to manage well-defined interest rate risks as
more fully discussed in Note 6.
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 which 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 purchased with original maturities of 90 days or
less to be cash equivalents.
Employee Benefit Plans: Substantially all employees of IPALCO and IPL
and certain management employees of Mid-America are covered by a defined
benefit pension plan, a defined contribution plan and a postretirement
benefit plan.
The defined benefit pension plan is noncontributory and is funded
through two trusts. Additionally, a select group of management employees
of IPALCO, IPL and Mid-America are covered under a funded supplemental
retirement plan. Collectively, these two plans are referred to as Plans.
Benefits are based on each individual employee's years of service and
compensation. IPL's funding policy is to contribute annually not less
than the minimum required by applicable law, nor more than the maximum
amount which can be deducted for federal income tax purposes.
The defined contribution plan is sponsored by IPL as the Employees'
Thrift Plan of Indianapolis Power & Light Company (Thrift Plan).
Employees elect to make contributions to the Thrift Plan based on a
percentage of their annual base compensation. IPL matches each employee's
contributions in amounts up to, but not exceeding, 4% of the employee's
annual base compensation.
The postretirement benefit plan is sponsored by IPL and provides
certain health-care and life insurance benefits to employees who retire
from active service on or after attaining age 55 and have rendered at
least 10 years of service. This plan is funded through a Voluntary
Employee Beneficiary Association (VEBA) Trust. IPL's policy is to fund
the annual actuarially determined postretirement benefit cost.
Substantially all non-management employees of Mid-America and its
subsidiaries are covered by a contributory 401(k) plan.
Long-Lived Assets: Effective January 1, 1996, Enterprises adopted the
provision of Financial Accounting Standards Board, Statement of Financial
Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
adoption of this new standard did not have a material impact on
Enterprises' financial position or results of operations. As competitive
factors influence pricing in the utility industry, this opinion may change
in the future. The general requirements of SFAS 121 apply to property,
plant and equipment of Enterprises and require impairment to be considered
whenever evidence suggests that it is no longer probable that future cash
flows are at least equal to the carrying amount of the asset.
Stock-Based Compensation: Effective January 1, 1996, Enterprises
adopted the provisions of Financial Accounting Standards Board, Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." The accounting requirements of this
pronouncement are applicable to all new employee awards granted after the
adoption of SFAS 123. The new standard provides for the adoption, at the
option of IPALCO, of a fair value method of accounting for stock options
and similar equity instruments. IPALCO has elected to continue to account
for such transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The adoption of SFAS 123 has
no effect on the net income, earnings per share or the cash flows of
IPALCO.
Use of Management Estimates: The preparation of financial statements
in conformity with generally accepted accounting principles requires that
management make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. The reported amounts
of revenues and expenses during the reporting period may also be affected
by the estimates and assumptions management is required to make. Actual
results may differ from those estimates.
Reclassification: Certain amounts from prior years' financial
statements have been reclassified to conform to the current year
presentation.
2. PLANT IN SERVICE AND OTHER PROPERTY
Utility Plant in Service
------------------------
The original cost of utility plant in service at December 31,
segregated by functional classifications, follows:
1996 1995
- --------------------------------------------------------------------------
(In Thousands)
Production $1,684,705 $1,490,958
Transmission 235,218 231,410
Distribution 712,391 676,240
General 130,991 119,182
---------- ----------
Total utility plant in service $2,763,305 $2,517,790
========== ==========
Substantially all of IPL's property is subject to the lien of the
indentures securing IPL's First Mortgage Bonds.
Nonutility Property
-------------------
The original cost of nonutility property at December 31 follows:
1996 1995
- --------------------------------------------------------------------------
(In Thousands)
District Cooling $100,294 $ 97,537
District Heating 16,984 15,884
General 4,165 3,794
-------- --------
Total nonutility property $121,443 $117,215
======== ========
Substantially all the District Cooling and Heating property is subject
to the lien of existing debt and/or credit agreements.
3. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments have been
determined by Enterprises using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that Enterprises could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have an effect on the estimated fair value
amounts.
Cash, Cash Equivalents, Marketable Securities and Notes Payable: The
carrying amount approximates fair value due to the short maturity of these
instruments.
Long-Term Debt, Including Current Maturities and Sinking Fund
Requirements: Interest rates that are currently available to IPL and Mid-
America for issuance of debt with similar terms and remaining maturities
are used to estimate fair value. The variable rate debt has been included
at the face amount for both carrying amount and fair value. The fair
value of the interest rate swap agreement has been estimated to be $1.2
million and $3.6 million, which represents the amount IPL would have to
pay to enter into an equivalent agreement at December 31, 1996 and 1995,
respectively, with a swap counter party. The fair value of the debt
outstanding has been determined on the basis of the specific securities
issued and outstanding. Accordingly, the purpose of this disclosure is
not to approximate the value on the basis of how the debt might be
refinanced. At December 31, 1996 and 1995, the consolidated carrying
amount of Enterprises' long-term debt, including current maturities and
sinking fund requirements, and the approximate fair value are as follows:
1996 1995
- ------------------------------------------------------
(In Thousands)
Carrying amount $673,841 $716,100
Approximate fair value $680,532 $751,100
4. REGULATORY ASSETS
The amounts of regulatory assets at December 31, 1996 and 1995, are as
follows:
1996 1995
- ----------------------------------------------------------------------------
(In Thousands)
Related to Deferred Taxes (Note 1) $ 39,175 $ 34,178
Postretirement Benefit Costs in Excess of Cash Payments
and Amounts Capitalized (Note 11) 23,584 30,016
Unamortized Reacquisition Premium on Debt (Note 1) 25,151 22,600
Unamortized Petersburg Unit 4 Carrying Charges
and Certain Other Costs (Note 1) 34,005 39,143
Demand Side Management Costs (Note 9) 13,841 10,853
Other 2,218 5,921
--------- ---------
Total Regulatory Assets $ 137,974 $ 142,711
========= =========
5. CAPITAL STOCK
Stock Split: In February 1996, the IPALCO Board of Directors
authorized a 3-for-2 stock split of IPALCO's common stock issued to
shareholders in March 1996. All references to share amounts of common
stock and per share information have been restated to reflect the stock
split.
Common Stock: IPALCO has a Rights Agreement designed to protect
IPALCO's shareholders against unsolicited attempts to acquire control of
IPALCO that do not offer what the Board believes is a fair and adequate
price to all shareholders. The Board declared a dividend of one Right for
each share of common stock to shareholders of record on July 11, 1990.
The Rights will expire at the time of redemption or exchange, or on July
11, 2000, whichever occurs earliest. At this time, the Rights are
attached to and trade with the common stock. The Rights are not taxable
to shareholders or to IPALCO, and they do not affect reported earnings per
share. Under the Rights Agreement, IPALCO has authorized and reserved 60
million shares for issuance.
IPALCO PowerInvest, IPALCO's Dividend Reinvestment and Direct Stock
Purchase Plan, allows participants to purchase shares of common stock and
to reinvest dividends. The plan provides that such shares may be
purchased on the open market or directly from IPALCO at the option of
IPALCO. IPALCO is authorized to issue 1,396,208 additional shares as of
December 31, 1996, pursuant to this plan. All purchases in 1996 were made
on the open market.
Under the Thrift Plan, shares may be purchased either on the open
market or, if available, as original issue shares directly from IPALCO.
There are 1,573,093 additional shares available for issue under the Thrift
Plan as of December 31, 1996. All purchases in 1996 were made on the open
market.
IPALCO is authorized to issue 123,731 additional shares of common stock
pursuant to the Energy Resources 401(k) plan. All purchases in 1996 were
made on the open market.
IPALCO has a stock option plan (1990 Plan) for key employees under
which options to acquire shares of common stock may be granted. One and
one-half million shares of common stock were authorized for issuance under
the 1990 Plan and 65,250 shares are available for future grants. The
maximum period for exercising an option may not exceed 10 years and one
day after grant or 10 years for incentive stock options. Upon the first
anniversary date after the grant, and each anniversary date thereafter,
these options are exercisable in proportion to the number of years expired
in a three-year period.
During 1991, the 1991 Directors' Stock Option Plan (1991 Plan) was
established. This plan provides to the nonemployee Directors of IPALCO
options to acquire shares of common stock. These options are exercisable
for the period beginning on the six-month anniversary of, and ending on
the 10-year anniversary of, the grant date. Under the 1991 Plan, 375,000
shares of common stock were authorized for issuance and 168,000 are
available for future grants.
A summary of options issued under both plans is as follows:
Weighted Average Range of Option Number of
Price per Share Price per Share Shares
- ----------------------------------------------------------------------------
Outstanding, January 1, 1994 $22.08 $16.8317 - $25.3725 1,305,750
Granted 21.29 21.2895 30,000
Canceled 16.83 16.8317 (15,000)
Exercised 17.14 16.8317 - 18.7481 (94,500)
---------
Outstanding, December 31, 1994 22.51 16.8317 - 25.3725 1,226,250
Granted 20.91 20.9146 45,000
Reinstated 16.83 16.8317 15,000
Exercised 17.19 16.8317 - 18.7481 (81,000)
---------
Outstanding, December 31, 1995 22.74 16.8317 - 25.3725 1,205,250
Granted 25.25 25.25 45,000
Exercised 17.02 16.8317 - 25.3308 (226,680)
---------
Outstanding, December 31, 1996 24.12 16.8317 - 25.3725 1,023,570
=========
The number of shares exercisable at December 31, 1996, 1995 and 1994
were: 1,023,570, 983,012 and 781,767, respectively and had a weighted
average exercised price of $24.12, $22.15 and $20.91, respectively. The
weighted average remaining contractual life of the options outstanding at
December 31, 1996 and 1995 was 6.3 years and 6.7 years, respectively.
As approved by the Board of Directors on October 25, 1994, and approved
by the shareholders at the April 19, 1995, Annual Meeting, the 1990 Long-
Term Performance Incentive Plan was amended and restated effective January
1, 1995, as the IPALCO Enterprises, Inc. Long-Term Performance and
Restricted Stock Incentive Plan (1995 Plan). Pursuant to the 1995 Plan,
600,000 shares of common stock of IPALCO have been authorized and reserved
for issuance, and initial awards of 87,304 shares of restricted common
stock were made to participating employees on January 1, 1995. On January
1, 1997 and 1996, an additional 1,628 and 7,319 shares were issued under
this plan. Under the 1995 Plan, shares of restricted common stock with
value equal to a stated percentage of participants' base salary are
initially awarded at the beginning of a three-year performance period,
subject to adjustment to reflect the participants' actual base salary for
the first year of each performance period (except for the first
performance period for which the average of the three years is used). The
shares remain restricted and nontransferable throughout each three-year
performance period, vesting in one-third increments on July 1 of each of
the three years following the end of the performance period. The first
performance period is from January 1, 1995, to December 31, 1997, with
subsequent three-year performance periods commencing annually on January 1
of each year from 1998 to 2004. At the end of a performance period,
awards are subject to adjustment to reflect Enterprises' performance
compared to peer companies under two performance criteria, cost-effective
service and total return to shareholders. Depending on Enterprises'
performance under these criteria, final awards may range from 200% of the
initial awards to zero.
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for the stock based plans have been
applied by Enterprises. No compensation cost has been recognized for the
1990 and 1991 option plans because the stock option price is equal to the
fair value of the underlying common stock at the date of grant.
Compensation expense of $1.2 million and $1.1 million for 1996 and 1995,
respectively, as measured by the market value of the common stock at the
balance sheet date, has been recognized in accordance with the vesting
period for the 1995 Plan.
IPALCO estimated the SFAS 123 fair value by utilizing the binomial
options pricing model with estimated values for risk-free rate of 6.75%,
volatility rate of 15.02%, dividend rates of 6.88% and 5.86% and life
ranges from May 1, 1995 to May 1, 2006. The pro forma compensation
effects of this calculation were insignificant.
Restrictions on the payment of cash dividends or other distributions of
IPL common stock held by IPALCO and on the purchase or redemption of such
shares by IPL are contained in the indentures securing IPL's First
Mortgage Bonds. 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's
preferred stock have been paid or declared and set apart for payment. All
of IPL's retained earnings at December 31, 1996, were free of such
restrictions. There are no other restrictions on the retained earnings of
IPALCO.
Cumulative Preferred Stock of Subsidiary: Preferred stock shareholders
are entitled to two votes per share for IPL matters, and if four full
quarterly dividends are in default on all shares of the preferred stock
then outstanding, they are entitled to elect the smallest number of IPL
Directors to constitute a majority. Preferred stock is redeemable solely
at the option of IPL and can be redeemed in whole or in part at any time
at the call prices stated below.
Preferred stock consists of the following:
December 31, 1996
-----------------
Shares Call December 31,
Outstanding Price 1996 1995
----------- ------- ------- -------
(Thousands of Dollars)
Cumulative - IPL, $100 Par Value,
authorized 2,000,000 shares
4% Series 100,000 $118.00 $10,000 $10,000
4.20% Series 39,000 103.00 3,900 3,900
4.60% Series 30,000 103.00 3,000 3,000
4.80% Series 50,000 101.00 5,000 5,000
6% Series 100,000 102.00 10,000 10,000
8.20% Series 199,985 101.00 19,998 19,998
------- ------- -------
Total cumulative preferred stock 518,985 $51,898 $51,898
======= ======= =======
Variable class - IPL, Par Value undetermined,
authorized 3,000,000 shares, none issued
6. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
----------------
1996 1995
-------- --------
Series Due (Thousands of Dollars)
------ -----
IPL First Mortgage Bonds:
5 1/8% April 1996 (redeemed April 1996) $ - $ 15,000
5 5/8% May 1997 11,250 11,400
6.05% February 2004 (issued February 1994) 80,000 80,000
8% October 2006 58,800 58,800
7 3/8% August 2007 80,000 80,000
6.10% * January 2016 41,850 41,850
5.40% * August 2017 24,650 24,650
9 5/8% June 2019 (redeemed December 1996) - 50,000
7.45% August 2019 23,500 23,500
5.50% * October 2023 30,000 30,000
7.05% February 2024 (issued February 1994) 100,000 100,000
6 5/8% * December 2024 (issued February 1995) 40,000 40,000
Unamortized discount - net (1,009) (1,050)
-------- --------
Total first mortgage bonds 489,041 554,150
IPL Variable Series Notes * Due
--------------------------- -----
1991 August 2021 40,000 40,000
1994A December 2024 (issued December 1994) 20,000 20,000
1995B January 2023 (issued October 1995) 40,000 40,000
1995C December 2029 (issued December 1995) 30,000 30,000
1996 November 2029 (issued November 1996) 20,000 -
Current maturities and sinking fund requirements (11,250) (15,150)
-------- --------
Total long-term debt - IPL 627,791 669,000
Long-Term Debt - Other:
Energy Resources-7.25% note, due December 2011 9,500 9,500
Energy Resources-variable note,due September 2030
(issued September 1995) 9,300 9,300
ICE-project loan (redeemed December 1996) - 13,150
ICE-7.59% note, due February 2016
(issued December 1996) 16,000 -
Current maturities - (2,350)
-------- --------
Total long-term debt - other 34,800 29,600
Total long-term debt $662,591 $698,600
======== ========
* Notes are issued to the city of Petersburg, Indiana (City), by IPL to
secure the loan of proceeds from various tax-exempt instruments issued by
the City.
IPL redeemed the $33.2 million, 7.4% Series, the $19.75 million, 7 1/8%
Series and the $25.2 million, 7.65% Series First Mortgage Bonds in March
1994; the $40.0 million, 10 5/8% Series in March 1995; and the $40.0
million, 9 5/8% Series in December 1995.
The Series 1991 note provides for an interest rate which varies with
the tax-exempt commercial paper rate. The 1994A, 1995B, 1995C and 1996
notes provide for an interest rate which varies with the tax-exempt weekly
rate. IPL, at its option, can change the interest rate mode for these
notes to be based on other short-term rates. Additionally, the IPL
variable rate notes can be converted into long-term fixed interest rate
instruments by the issuance of an IPL First Mortgage Bond. The notes are
classified as long-term liabilities because IPL maintains long-term credit
facilities supporting these agreements, which were unused at December 31,
1996. Energy Resources' 1995 variable long-term note due 2030 was issued
to the Indiana Development Finance Authority and bears interest which
varies with the tax-exempt weekly rate.
The average interest rates and the year-end interest rates for the
variable rate notes are as follows:
Average Interest Rate for Interest Rate at
the Year Ended December 31, December 31,
1996 1995 1996 1995
- ---------------------------------------------------------------
Series 1991 3.53% 3.91% 3.47% 3.72%
Series 1994A 3.53% 3.94% 4.10% 5.10%
Series 1995B 5.21% 5.14% 5.21% 5.21%
Series 1995C 3.52% 4.41% 4.10% 5.10%
Series 1996 3.72% -- 4.05% --
Energy Resources
variable note 3.64% 4.20% 4.35% 5.80%
In conjunction with the issuance of the 1995B note, IPL entered into an
interest rate swap agreement. Pursuant to the swap agreement, IPL will
pay interest at a fixed rate of 5.21% to a swap counter party and will
receive a variable rate of interest in return, which is identical to the
variable rate payment made on the 1995B note. The result is to
effectively establish a fixed rate of interest on the 1995B note of 5.21%.
On October 7, 1994, ICE entered into an $18 million project loan which
was converted to a $11.3 million fully amortizing 15-year secured term
loan on July 1, 1996. On December 31, 1996, a 7.59% long-term note was
used to redeem the project loan. The net proceeds from the project loan
provided funds to construct a chilled water facility. The facility is
used to provide chilled water for delivery to a customer under a long-term
contract.
There are no maturities or sinking fund requirements on long-term debt
for the five years subsequent to December 31, 1996, other than as shown in
the balance sheet for December 31, 1996.
7. LINES OF CREDIT
IPL has committed lines of credit with banks of $100 million at
December 31, 1996, to provide loans for interim financing and also require
the payment of commitment fees. These lines of credit, based on separate
formal and informal agreements, have expiration dates ranging from January
31, 1997, to December 31, 1997. Lines of credit used to support
commercial paper were $20 million at December 31, 1996. IPL has a
Liquidity facility in the amount of $150 million to support certain
floating rate tax-exempt facilities (see Note 6).
IPL has an uncommitted line of credit with a bank in the amount of $25
million which does not require the payment of a commitment fee. At
December 31, 1996, $11 million was unused.
Mid-America has a line of credit of $30 million which requires the
payment of a commitment fee. At December 31, 1996, $18 million was
unused.
IPALCO has a line of credit of $2 million, of which $2 million was
unused at December 31, 1996. The line of credit requires the payment of a
commitment fee and expires July 1, 1997.
The weighted average interest rate on notes payable and commercial
paper outstanding was 6.08% and 5.82% at December 31, 1996 and 1995,
respectively.
8. INCOME TAXES
Federal and state income taxes charged to income are as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
(In Thousands)
Utility Operating Expenses:
Current income taxes:
Federal $56,676 $51,331 $45,919
State 8,378 7,732 6,919
------- ------- -------
Total current taxes 65,054 59,063 52,838
------- ------- -------
Deferred federal income taxes 6,507 (1,748) 4,896
Deferred state income taxes (398) 309 1,077
------- ------- -------
Total deferred income taxes 6,109 (1,439) 5,973
Net amortization of investment credit (2,915) (3,125) (3,268)
------- ------- -------
Total charge to utility operating expenses 68,248 54,499 55,543
Net credit to other income and deductions (3,645) (3,097) (4,536)
------- ------- -------
Total federal and state income tax provisions $64,603 $51,402 $51,007
======= ======= =======
The provision for federal income taxes (including net investment tax
credit adjustments) is less than the amount computed by applying the
statutory tax rate to pretax income. The reasons for the difference,
stated as a percentage of pretax income, are as follows:
1996 1995 1994
- ---------------------------------------------------------------
Federal statutory tax rate 35.0% 35.0% 35.0%
Effect of state income taxes (1.5) (1.8) (1.9)
Amortization of investment tax credits (1.6) (2.0) (2.2)
Removal cost adjustments - (1.8) (0.8)
Preferred dividends of subsidiary 0.6 0.7 0.8
Other - net (1.4) (1.8) (1.6)
---- ---- ----
Effective tax rate 31.1% 28.3% 29.3%
==== ==== ====
The significant items comprising Enterprises' net deferred tax
liability recognized in the consolidated balance sheets as of December 31,
1996 and 1995, are as follows:
1996 1995
- ------------------------------------------------------------------
(In Thousands)
Deferred tax liabilities:
Relating to utility property $376,121 $366,801
Other 21,070 16,335
-------- --------
Total deferred tax liabilities 397,191 383,136
Deferred tax assets: -------- --------
Relating to utility property 28,298 24,934
Investment tax credit 29,156 30,936
Employee benefit plans 15,388 14,734
Unbilled revenue 10,517 11,157
Other 10,359 8,958
-------- --------
Total deferred tax assets 93,718 90,719
-------- --------
Net deferred tax liability $303,473 $292,417
======== ========
9. RATE MATTERS
Electric Rate Settlement Agreement: On August 24, 1995, the 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.
As provided for by the Settlement Agreement, IPL increased its basic
rates and charges for retail electric service in two steps. It is
estimated that these rate increases will provide the following additional
annual revenues:
Step 1 - $35,000,000 on September 1, 1995
Step 2 - $25,000,000 on July 1, 1996
Effective with the implementation of new tariffs in Step 1, IPL was
authorized to begin amortization of certain regulatory assets.
Additionally, IPL's existing depreciation rates were reapproved.
Under terms of the Settlement Agreement, IPL will not seek another
general increase in its basic rates and charges until after July 1, 1997,
except in the event of an emergency. IPL also has agreed not to file a
request to build any large, base-load generating capacity before January
1, 2000. This provision can be waived in extreme circumstances. In
addition, the parties agreed to, and subsequently resolved, pending
litigation involving IPL's Clean Air Act compliance plan.
Steam Rate Order: By an order dated January 13, 1993, the IURC
authorized IPL to increase its steam system rates and charges over a six-
year period. Accordingly, IPL will implement new steam tariffs designed
to produce estimated additional annual steam operating revenues as
follows:
Additional
Annual
Year Revenues
---- -----------
January 13, 1997 $ 2,384,000
January 13, 1998 370,000
Demand Side Management Program: In compliance with an order dated
September 8, 1993, IPL is deferring certain approved DSM costs and
carrying charges. In the Settlement Agreement approved by the IURC on
August 24, 1995, IPL was authorized to amortize $5.3 million of such costs
deferred prior to February 1995, over a four-year period beginning
September 1, 1995. On December 19, 1996, IPL filed a petition with the
IURC requesting review, modification and/or termination of, and related
regulatory treatment for, DSM programs approved in the order dated
September 8, 1993.
10. EMPLOYEE PENSION BENEFIT PLANS
Pension expense is comprised of the following components:
1996 1995 1994
- ----------------------------------------------------------------------------
(In Thousands)
Service cost-benefits earned during the period $ 6,482 $ 6,375 $ 7,832
Interest cost on projected benefit obligation 16,335 15,348 15,358
Actual (return) loss on plan assets (23,307) (29,529) 10,366
Net amortization and deferral 5,758 13,499 (27,297)
------- ------- -------
Net periodic pension cost 5,268 5,693 6,259
Less amount capitalized 1,061 1,199 1,365
------- ------- -------
Amount charged to expense $ 4,207 $ 4,494 $ 4,894
======= ======= =======
A summary of the Plans' funding status at its October 31, 1996 plan
year-end, evaluation date and the amount recognized in the consolidated
balance sheets at December 31, 1996 and 1995, follows:
1996 1995
- -----------------------------------------------------------------------------
(In Thousands)
Actuarial present value of benefit obligations:
Vested benefit obligation $(173,654) $(148,124)
Nonvested benefit obligation (32,705) (27,883)
--------- ---------
Accumulated benefit obligation $(206,359) $(176,007)
========= =========
Projected benefit obligation $(229,937) $(223,137)
Plan assets at fair value 235,250 220,978
Funded status--plan assets less than projected --------- ---------
benefit obligation 5,313 (2,159)
Unrecognized net gain from past experience
different from that assumed (36,126) (30,174)
Unrecognized past service costs 8,132 14,495
Unrecognized net asset at January 1, 1987, being
amortized over an original life of 18.9 years (12,583) (13,996)
Adjustment required to recognize minimum liability (2,019) -
--------- --------
Net accrued pension benefits included in other
long-term liabilities at December 31 $ (37,283) $(31,834)
========= ========
Approximately 41% of the Plans' assets were in equity securities at
October 31, 1996, with the remainder in fixed income securities.
Assumptions used in determining the information presented were:
1996 1995 1994
- ------------------------------------------------------------------------
Discount rate 7.50% 7.50% 8.00%
Rate of increase in future compensation levels 5.10% 5.10% 6.10%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
11. EMPLOYEE POSTRETIREMENT BENEFIT PLAN
Postretirement benefit expense is comprised of the following components:
1996 1995 1994
- --------------------------------------------------------------------------------------------
(In Thousands)
Service cost -- benefits earned during the period $ 3,969 $ 3,941 $ 5,144
Interest cost on accumulated postretirement benefit obligation 10,494 10,838 11,097
Actual (return) loss on plan assets 1,280 (319) (435)
Net amortization and deferral 2,220 4,665 5,767
------- ------- ------
Net periodic postretirement benefit cost 17,963 19,125 21,573
Less:
Amount capitalized 3,511 3,891 4,464
Regulatory asset deferral - 6,978 12,289
------- ------- -------
Amount charged to expense $14,452 $ 8,256 $ 4,820
======= ======= =======
Also, during 1996 and 1995, IPL expensed postretirement regulatory
asset amortization of $6.4 million and $2.1 million, respectively.
A summary of the retiree health-care and life insurance plan's funding
status, and the amount recognized in the consolidated balance sheets at
December 31, 1996 and 1995, follows:
1996 1995
- -------------------------------------------------------------------------------------------
(In Thousands)
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees $ (62,856) $ (60,442)
Fully eligible active plan participants (21,486) (20,802)
Other active plan participants (62,702) (62,134)
--------- ---------
Total (147,044) (143,378)
Plan assets at fair value 49,852 30,269
--------- ---------
Funded status--accumulated postretirement benefit obligation in excess
of plan assets (97,192) (113,109)
Unrecognized net gain from past experience different from that assumed (24,363) (21,447)
Unrecognized net obligation at January 1, 1993, being amortized over
an original life of 20 years 97,920 104,039
--------- ---------
Net accrued postretirement benefit cost included in deferred
liabilities at December 31 $ (23,635) $ (30,517)
========= =========
Enterprises has expensed its nonconstruction related postretirement
benefits costs associated with its unregulated and regulated steam
businesses and, subsequent to August 1995, with its regulated electric
business. IPL's electric business postretirement benefit costs incurred
prior to September 1, 1995, net of amounts capitalized for construction
and benefits paid to participants, were deferred as a regulatory asset on
the consolidated balance sheets. The Settlement Agreement approved the
amortization to operating expense of this regulatory asset over five years
beginning September 1, 1995. The annual amortization is $6.4 million.
IPL funds its annual postretirement benefit costs in excess of actual
benefits paid to participants to an irrevocable VEBA Trust. Annual
funding is discretionary and is based on the projected cost over time of
benefits to be provided to covered persons consistent with acceptable
actuarial methods. The VEBA Trust provides for full funding of
Enterprises' accumulated postretirement benefit obligation in the event of
certain change of control transactions. During 1996 and 1995, Enterprises
contributed $20.9 million and $19.0 million, respectively, of these costs
to the VEBA.
Plan assets consist of the cash surrender value of life insurance
policies on certain active and retired IPL employees.
The assumed health-care cost trend rate used in measuring the
accumulated postretirement benefit obligation is 8.8% for 1997, gradually
declining to 4.5% in 2003. A 1% increase in the assumed health-care cost
trend rate for each year would increase the accumulated postretirement
benefit obligation, as of December 31, 1996, by approximately $21.0
million and the combined service cost and interest cost for 1996 by
approximately $2.5 million.
Assumptions used in determining the information above were:
1996 1995 1994
- ----------------------------------------------------------------------------
Discount rate 7.50% 7.25% 8.00%
Rate of increase in future compensation levels 5.10% 5.10% 6.10%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
12. OTHER EMPLOYEE BENEFIT PLANS
Enterprises' contributions to the Thrift Plan were $3.4 million, $3.2
million and $3.3 million in 1996, 1995 and 1994, respectively.
On December 14, 1994, Mid-America's Board of Directors approved a Long-
Term Incentive Plan (the Incentive Plan) that covers key executives of Mid-
America and certain officers of IPALCO effective January 1, 1995.
Pursuant to the Incentive Plan, whole or fractions of eight shares of an
award pool are available to be granted. The value of such shares is zero
at the inception of the Incentive Plan and can grow in value during the
performance period (January 1, 1995 - December 31, 1999). The reward pool
to be distributed to the holders of such shares on December 31, 1999, will
be determined based upon the increase in the valuation of the respective
Mid-America businesses during the performance period and can amount to
.85% up to 15% of the total increase during the performance period. A
minimum increase in value above $34 million is required before any reward
is payable.
Participation in the Incentive Plan will be reviewed on an annual basis
and during the performance period as necessary. The Compensation
Committee of IPALCO's Board of Directors may add or delete participants
from the Incentive Plan and may make modifications to the distribution of
shares during the performance period.
13. COMMITMENTS AND CONTINGENCIES
In 1997, Enterprises anticipates the cost of its subsidiaries'
construction programs to be approximately $88 million.
Enterprises is 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 the consolidated
financial position and results of operations. With respect to
environmental issues, IPL has ongoing discussions with various regulatory
authorities and continues to believe that IPL is in compliance with its
various permits.
14. SUBSEQUENT EVENT
On February 25, 1997, the Board of Directors authorized the repurchase
of up to 12 million shares of IPALCO's common stock for approximately $410
million through a "Dutch auction" self-tender offer. The Board of Directors
also: (a) Approved the borrowing of up to $410 million to finance the stock
repurchase, and (b) declared a quarterly dividend in the amount of 25 cents
per share of common stock compared to a dividend of 37 cents per share of
common stock paid in the previous quarter.
15. QUARTERLY RESULTS (UNAUDITED)
Operating results for the years ended December 31, 1996 and 1995, by
quarter, are as follows (in thousands except per share amounts):
1996
- ------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Utility operating revenues $196,446 $177,621 $205,672 $182,764
Utility operating income $ 44,844 $ 36,122 $ 51,163 $ 31,090
Net income $ 35,548 $ 24,459 $ 37,168 $ 17,100
Weighted average common shares 56,863 56,906 56,930 56,999
Earnings per share of common stock $ .63 $ .43 $ .65 $ .30
1995
- ------------------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
Utility operating revenues $175,518 $159,652 $199,873 $174,163
Utility operating income $ 38,278 $ 30,405 $ 50,802 $ 28,103
Net income $ 25,903 $ 17,884 $ 39,543 $ 15,448
Weighted average common shares 56,721 56,728 56,745 56,784
Earnings per share of common stock $ .46 $ .32 $ .70 $ .27
The quarterly figures reflect seasonal and weather-related fluctuations
which are normal to IPL's operations. Colder weather was experienced in
the first and second quarters of 1996 as compared to the same periods in
1995. In addition, during the fourth quarter of 1995, IPL expensed
approximately $12.3 million of property held for future use. See Note 9
regarding rate increases.
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share may not
equal the total for the year.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None.
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information relating to the directors of the registrant, set
forth in the Proxy Statement of IPALCO Enterprises, Inc. dated
April 15, 1997 (the registrant's Proxy Statement), under
"Proposal 1-Election of Five Directors" at pages 4-7 is
incorporated herein by reference. Information relating to the
registrant's executive officers is set forth at pages I-9 -
I-10 of this Form 10-K under "Executive Officers of the
Registrant at February 25, 1997."
Information relating to Section 16(a) Beneficial Ownership
Reporting Compliance, set forth in the registrant's Proxy
Statement at page 8 is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
----------------------
Information relating to executive compensation, set forth in
the registrant's Proxy Statement under "Compensation of
Executive Officers" at pages 15-17, "Compensation of Directors"
at page 9, "Compensation Committee Interlocks and Insider
Participation" at page 9, "Pensions Plans" at pages 19-20, and
"Employment Contracts and Termination of Employment and Change
in Control Arrangements" at pages 20-21, is incorporated herein
by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information relating to ownership of the registrant's common
stock by persons known by the registrant to be the beneficial
owners of more than 5% of the outstanding shares of common
stock and by management, set forth in the registrant's Proxy
Statement under "Voting Securities and Beneficial Owners" at
pages 2-3 is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information relating to certain relationships and related
transactions, set forth in the registrant's Proxy Statement
under "Certain Business Relationships" at pages 9-10, is
incorporated herein by reference.
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
--------------------------------------------------------------
(a) The Consolidated Financial Statements under this Item 14 (a) 1
filed in this Form 10-K are those of IPALCO Enterprises, Inc.
and subsidiaries.
1. Consolidated Financial Statements
---------------------------------
Included in Part II of this report:
Independent Auditors' Report
Statements of Consolidated Income for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Balance Sheets, December 31, 1996 and 1995
Statements of Consolidated Cash Flows
for the Years Ended December 31, 1996,
1995 and 1994
Statements of Consolidated Common Shareholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Exhibits
--------
The Exhibit Index beginning on page IV-5 of this Annual
Report on Form 10-K lists the exhibits that are filed as part
of this report.
(b) Reports on Form 8-K
-------------------
None
IPALCO ENTERPRISES, INC. EXHIBIT 11.1
Computation of Per Share Earnings
For the Years Ended December 31, 1996, 1995 and 1994
YEAR ENDED DECEMBER 31, 1996: Fully
Primary Diluted
Weighted Average Number of Shares ----------- -----------
Average Common Shares Outstanding at 12/31/96 56,924,411 56,924,411
Dilutive (Anti-Dilutive) Effect for Stock Options at 12/31/96 87,881 117,754
----------- -----------
Weighted Average Shares at 12/31/96 57,012,292 57,042,165
=========== ===========
Net Income To Be Used To Compute Fully
Diluted Earnings Per Average Common Share (Dollars in thousands)
Net Income $114,275 $114,275
=========== ===========
Earnings Per Average Common Share $2.00 (a) $2.00 (a)
=========== ===========
YEAR ENDED DECEMBER 31, 1995: Fully
Primary Diluted
Weighted Average Number of Shares ----------- -----------
Average Common Shares Outstanding at 12/31/95 56,744,699 56,744,699
Dilutive (Anti-Dilutive) Effect for Stock Options at 12/31/96 (12,762) 127,151
----------- -----------
Weighted Average Shares at 12/31/95 56,731,937 56,871,850
Net Income To Be Used To Compute Fully
Diluted Earnings Per Average Common Share (Dollars in thousands)
Net Income $98,778 $98,778
=========== ===========
Earnings Per Average Common Share $1.74 (a) $1.74 (a)
=========== ===========
YEAR ENDED DECEMBER 31, 1994: Fully
Primary Diluted
Weighted Average Number of Shares ----------- -----------
Average Common Shares Outstanding at 12/31/94 56,610,877 56,610,877
Anti-Dilutive Effect for Stock Options at 12/31/94 (13,206) (13,206)
----------- -----------
Weighted Average Shares at 12/31/94 56,597,671 56,597,671
Net Income To Be Used To Compute Fully
Diluted Earnings Per Average Common Share (Dollars in thousands)
Net Income $92,994 $92,994
=========== ===========
Earnings Per Average Common Share $1.64 (a) $1.64 (a)
=========== ===========
Note:
(a) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required
by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ John R. Hodowal
-----------------------
(John R. Hodowal, Chairman of the
Board and President)
Date: February 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
(i) Principal Executive Officer:
/s/ John R. Hodowal Chairman of the Board February 25, 1997
-------------------- and President
(John R. Hodowal)
(ii) Principal Financial Officer:
/s/ John R. Brehm Vice President February 25, 1997
----------------- and Treasurer
(John R. Brehm)
(iii) Principal Accounting Officer:
/s/ Stephen J. Plunkett Controller February 25, 1997
------------------------
(Stephen J. Plunkett)
(iv) A majority of the Board of Directors of IPALCO Enterprises, Inc.:
/s/ Mitchell E. Daniels, Jr. Director February 25, 1997
----------------------------
(Mitchell E. Daniels, Jr.)
/s/ Rexford C. Early Director February 25, 1997
---------------------------
(Rexford C. Early)
/s/ Otto N. Frenzel III Director February 25, 1997
---------------------------
(Otto N. Frenzel III)
/s/ Max L. Gibson Director February 25, 1997
---------------------------
(Max L. Gibson)
/s/ Dr. Earl B. Herr, Jr. Director February 25, 1997
---------------------------
(Dr. Earl B. Herr, Jr.)
/s/ John R. Hodowal Director February 25, 1997
---------------------------
(John R. Hodowal)
/s/ Ramon L. Humke Director February 25, 1997
---------------------------
( Ramon L. Humke)
/s/ Sam H. Jones Director February 25, 1997
---------------------------
(Sam H. Jones)
/s/ Andre B. Lacy Director February 25, 1997
---------------------------
(Andre B. Lacy)
/s/ L. Ben Lytle Director February 25, 1997
---------------------------
(L. Ben Lytle)
/s/ Michael S. Maurer Director February 25, 1997
---------------------------
(Michael S. Maurer)
/s/ Sallie W. Rowland Director February 25, 1997
---------------------------
(Sallie W. Rowland)
/s/ Thomas H. Sams Director February 25, 1997
---------------------------
(Thomas H. Sams)
EXHIBIT INDEX
Copies of documents listed below which are identified with an asterisk (*)
are incorporated herein by reference and made a part hereof. The management
contracts or compensatory plans are marked with a double asterisk (**) after
the description of the contract or plan.
Exhibit
No. Description
- ------- -----------
3.1* Articles of Incorporation of IPALCO Enterprises, Inc., as
amended. (Form 10-K for year ended 12-31-90.)
3.2* Bylaws of IPALCO Enterprises, Inc. dated April 26, 1994.
(Exhibit 3.2 to the Form 10-Q dated 3-31-96.)
4.1* IPALCO PowerInvest Dividend Reinvestment and Direct Stock
Purchase Plan. (Exhibit 4.1 to the Form 10-Q dated 9-30-96.)
4.2* IPALCO Enterprises, Inc. and First Chicago Trust Company of New
York (Rights Agent) - Rights Agreement. (Exhibit 4.2 to the
Form 10-K dated 12-31-94.)
10.1* IPALCO Enterprises, Inc. Unfunded Deferred Compensation Plan
for Directors dated December 27, 1983, as amended. (Exhibit
10.1 to the Form 10-K dated 12-31-94.) **
10.2 IPALCO Enterprises, Inc. Unfunded Deferred Compensation Plan
for Officers effective January 1, 1994, as amended
December 1, 1996. **
10.3 Directors' and Officers' Liability Insurance Policy No.DO392B1A96
effective June 1, 1996 to June 1, 1997. **
10.4* IPALCO Enterprises, Inc. Benefit Protection Fund and Trust
Agreement effective November 1, 1988. (Form 10-K for year
ended 12-31-88.) **
10.5* Exhibit A to IPALCO Enterprises, Inc. Benefit Protection Fund
and Trust Agreement dated July 1, 1995. (Exhibit 10.5 to the
Form 10-K dated 12-31-95.) **
10.6* IPALCO Enterprises, Inc. Annual Incentive Plan and Administrative
Guidelines effective January 1, 1990. (Form 10-K for year
ended 12-31-89.) **
10.7* IPALCO Enterprises, Inc. Long-Term Performance and Restricted
Stock Incentive Plan (as amended and restated effective
January 1, 1995). (Exhibit 10.7 to the Form 10-K dated
12-31-94.) **
10.8* IPALCO Enterprises, Inc. 1990 Stock Option Plan. (Exhibit 10.8
to the Form 10-K dated 12-31-94.) **
10.9* IPALCO Enterprises, Inc. 1991 Directors' Stock Option Plan.
(Exhibit 10.9 to the Form 10-K dated 12-31-94.) **
10.10 Form of Termination Benefits Agreement together with schedule
of parties to, and dates of, the Termination Benefits
Agreements. **
10.11* Employment Agreement between IPALCO Enterprises, Inc.,
Indianapolis Power & Light Company and John R. Hodowal dated
July 29, 1986. (Exhibit 10.11 to the Form 10-K dated
12-31-94.) **
10.12* Voluntary Employee Beneficiary Association (VEBA) Trust
Agreement. (Exhibit 10.12 to the Form 10-K dated 12-31-94.) **
10.13* Mid-America Capital Resources Long-Term Incentive Plan.
(Exhibit 10.13 to the Form 10-K dated 12-31-95.) **
11.1 Computation of Per Share Earnings.
20.1* Form 10-K of Indianapolis Power & Light Company for the year
ended December 31, 1996, and all exhibits thereto. (SEC File
No. 1-3132-2.)
21.1 Subsidiaries of the Registrant.
23.1 Independent Auditors' Consent.
27.1 Financial Data Schedule.
99.1* Agreement dated as of October 27, 1993, by and among IPALCO
Enterprises, Inc., Indianapolis Power & Light Company, PSI
Resources, Inc., PSI Energy, Inc., The Cincinnati Gas &
Electric Company, CINergy Corp., James E. Rogers, John R.
Hodowal and Ramon L. Humke. (Form 10-Q for quarter ended 9-30-93.)
99.2* Amendment to Agreement, dated October 27, 1994, by and among
IPALCO Enterprises, Inc., Indianapolis Power & Light Company,
PSI Resources, Inc., PSI Energy, Inc., The Cincinnati Gas &
Electric Company, CINergy Corp., James E. Rogers, John R.
Hodowal and Ramon L. Humke. (Exhibit 99.2 to the Form 10-K
dated 12-31-94.)