UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
IPALCO ENTERPRISES, INC.
(Exact name of Registrant as specified in its Charter)
Commission file number 1-8644
One Monument Circle
Indianapolis, IN 46204
(Address of Principal Executive Offices including Zip Code)
(317) 261-8261
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) YES [ ] NO [X]
On August 9, 2004, 89,685,177 shares of IPALCO Enterprises, Inc. common stock were outstanding. All of such shares were owned by The AES Corporation.
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
IPALCO ENTERPRISES, INC.
FORM 10-Q
INDEX
| PART I - Financial Information | Page No. |
| Item 1: Financial Statements: | |
| Unaudited Consolidated Statements of Income for the Three-month and Six-month Periods Ended June 30, 2004 and 2003 | |
| Unaudited Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 | |
| Unaudited Consolidated Statements of Cash Flows for the Six-month Periods Ended June 30, 2004 and 2003 | |
| Notes to Unaudited Consolidated Financial Statements | |
| Item 4: Controls and Procedures | |
| Signature |
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Unaudited Consolidated Statements of Income
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
ELECTRIC UTILITY OPERATING REVENUES $ 212,740 $ 187,694 $ 427,368 $ 407,737
UTILITY OPERATING EXPENSES:
Operation:
Fuel 49,414 40,020 95,269 85,062
Other operating expenses 28,890 29,990 55,507 56,662
Power purchased 3,181 4,390 5,864 9,533
Maintenance 20,384 24,616 40,075 43,911
Depreciation and amortization 29,350 29,978 58,846 59,596
Taxes other than income taxes 8,175 7,175 17,104 16,084
Income taxes-net 24,202 16,877 52,279 48,769
---------- ---------- ---------- ----------
Total utility operating expenses 163,596 153,046 324,944 319,617
---------- ---------- ---------- ----------
UTILITY OPERATING INCOME 49,144 34,648 102,424 88,120
---------- ---------- ---------- ----------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used during construction 299 1,000 1,338 1,930
Gain (loss) on sales of assets, net (2) - 852 (842)
Other-net (1,302) (243) (290) (509)
Income tax benefit-net 7,074 6,551 13,288 13,072
---------- ---------- ---------- ----------
Total other income and (deductions)-net 6,069 7,308 15,188 13,651
---------- ---------- ---------- ----------
INTEREST AND OTHER CHARGES:
Interest on long-term debt 28,198 25,563 56,579 50,188
Other interest 144 97 269 220
Allowance for borrowed funds used during construction (534) (483) (1,254) (928)
Amortization of redemption premiums and expense on
debt-net 678 738 1,282 1,476
Preferred dividends of subsidiary 804 804 1,607 1,607
---------- ---------- ---------- ----------
Total interest and other charges-net 29,290 26,719 58,483 52,563
---------- ---------- ---------- ----------
NET INCOME $ 25,923 $ 15,237 $ 59,129 $ 49,208
========== ========== ========== ==========
See notes to unaudited consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Unaudited Consolidated Balance Sheets
(In Thousands)
June 30, December 31,
2004 2003
------------ ------------
ASSETS
UTILITY PLANT:
Utility plant in service $ 3,366,966 $ 3,205,454
Less accumulated depreciation 1,313,546 1,277,373
------------ ------------
Utility plant in service - net 2,053,420 1,928,081
Construction work in progress 82,378 160,774
Land held for sale - 6,623
Property held for future use 1,085 1,085
------------ ------------
Utility plant - net 2,136,883 2,096,563
------------ ------------
OTHER ASSETS:
Nonutility property - at cost, less
accumulated depreciation 1,505 1,511
Other investments 6,465 7,762
------------ ------------
Other assets - net 7,970 9,273
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents 9,225 13,974
Accounts receivable and unbilled revenue (less allowance
for doubtful accounts of $1,458 and $1,653, respectively) 48,735 44,155
Fuel - at average cost 26,734 29,803
Materials and supplies - at average cost 46,986 47,056
Net income tax refunds receivable 222 11,397
Prepayments and other current assets 5,782 4,574
------------ ------------
Total current assets 137,684 150,959
------------ ------------
DEFERRED DEBITS:
Regulatory assets 100,521 110,061
Miscellaneous 34,855 30,954
------------ ------------
Total deferred debits 135,376 141,015
------------ ------------
TOTAL $ 2,417,913 $ 2,397,810
============ ============
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's deficit:
Premium on 4% cumulative preferred stock $ 649 $ 649
Paid in capital 422 104
Accumulated deficit (63,115) (64,111)
Accumulated other comprehensive loss (54,240) (58,420)
------------ ------------
Total common shareholder's deficit (116,284) (121,778)
Cumulative preferred stock of subsidiary 59,135 59,135
Long-term debt (less current maturities and sinking
fund requirements) 1,502,027 1,482,011
------------ ------------
Total capitalization 1,444,878 1,419,368
------------ -----------
CURRENT LIABILITIES:
Notes payable 300 300
Accounts payable 42,284 49,074
Accrued expenses 18,688 20,221
Dividends payable 803 868
Accrued real estate and personal property taxes 16,938 14,662
Accrued income taxes and other taxes 7,218 3,873
Accrued interest 27,570 25,759
Customer deposits 10,926 10,428
Other current liabilities 649 1,746
------------ ------------
Total current liabilities 125,376 126,931
------------ ------------
DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
Accumulated deferred income taxes - net 318,224 335,008
Regulatory liabilities and other removal costs 371,207 361,221
Unamortized investment tax credit 26,819 28,173
Accrued postretirement benefits 6,499 6,059
Accrued pension benefits 115,573 112,574
Miscellaneous 9,337 8,476
------------ ------------
Total deferred credits and other long-term liabilities 847,659 851,511
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 10)
TOTAL $ 2,417,913 $ 2,397,810
============ ============
See notes to unaudited consolidated financial statements.
IPALCO ENTERPRISES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
---------- ---------
2004 2003
--------- ---------
Cash Flows from Operations:
Net income $ 59,129 $ 49,208
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 59,059 59,558
Amortization of regulatory assets 1,460 1,438
Deferred income taxes and investment tax credit
adjustments - net (6,650) (4,131)
Gain on sale of land held for sale (5,922) --
(Gain) loss on sales of assets, net (852) 842
Loss on investments 154 165
Allowance for funds used during construction (2,592) (2,858)
Change in certain assets and liabilities:
Accounts receivable (4,580) 5,152
Fuel, materials and supplies 3,139 (7,699)
Net income taxes receivable or payable 18,802 6,044
Accounts payable and accrued expenses (8,323) (4,058)
Accrued real estate and other taxes (2,007) 3,954
Accrued pension benefits 4,976 (13,547)
Accrued interest 1,811 90
Other - net 1,950 (1,299)
--------- ---------
Net cash provided by operating activities 119,554 92,859
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Construction expenditures - utility (93,261) (62,314)
Proceeds from sales of assets 14,309 --
Other (6,175) (2,549)
--------- ---------
Net cash used in investing activities (85,127) (64,863)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings -- 13,600
Long-term borrowings 98,957 --
Retirement of long-term debt (80,000) --
Dividends on common stock (58,133) (63,262)
--------- ---------
Net cash used in financing activities (39,176) (49,662)
--------- ---------
Net change in cash and cash equivalents (4,749) (21,666)
Cash and cash equivalents at beginning of period 13,974 31,429
--------- ---------
Cash and cash equivalents at end of period $ 9,225 $ 9,763
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amount capitalized) $ 53,787 $ 49,396
========= =========
Income taxes $ 30,667 $ 40,202
========= =========
See notes to unaudited consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
1. ORGANIZATION
IPALCO Enterprises, Inc. ("IPALCO") is a wholly-owned subsidiary of The AES Corporation ("AES"). IPALCO owns all of the outstanding common stock of its subsidiaries. These include its regulated utility subsidiary, Indianapolis Power & Light Company ("IPL") and its unregulated subsidiary, Mid-America Capital Resources, Inc. ("Mid- America"). IPL is an electric utility with its customer base concentrated in Indianapolis, Indiana and is the primary subsidiary of IPALCO. Mid-America conducts IPALCO's unregulated activities.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of IPALCO, IPL and Mid-America. All significant intercompany amounts have been eliminated. The accompanying financial statements are unaudited; however, they have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments necessary for fair presentation, consisting of only normal recurring adjustments, have been included. The electric utility business is affected by seasonal weather patterns throughout the year and, therefore, the operating revenues and associated operating expenses are not generated evenly by month during the year. Certain amounts from prior year financial statements have been reclassified to conform to the current year presentation. These unaudited financial statements have been prepared in accordance with the accounting policies described in IPALCO's audited financial statements for the year ended December 31, 2003, included in its annual report on Form 10-K and should be read in conjunction therewith.
The preparation of financial statements in conformity with GAAP requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may also be affected by the estimates and assumptions management is required to make. Actual results may differ from those estimates.
3. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 addresses consolidation by business enterprises of variable interest entities ("VIE") and significantly changes the consolidation requirements for those entities. FIN 46 is intended to achieve more consistent application of consolidation policies related to VIE's and thus improve comparability between enterprises engaged in similar activities when those activities are conducted through VIE's. In December 2003, the FASB issued a revision to the original Interpretation ("FIN 46-R") to codify both the proposed modifications and other decisions previously issued through certain FASB Staff Positions into one document. FIN 46-R currently applies to VIE's created after January 31, 2003, and to VIE's in which an enterprise obtains an interest after that date. For entities created prior to January 31, 2003, FIN 46 is to be adopted no later than the end of the first interim or annual reporting period ending after March 15, 2004. The application of FIN 46 and FIN 46-R did not have any impact on IPALCO's consolidated financial statements as neither IPALCO nor any of its consolidated subsidiaries obtained any interest in a VIE since January 31, 2003 or is the primary beneficiary in any VIE.
In May 2004, the FASB issued FASB Staff Position ("FSP") 106-2, which provides guidance on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") for employers that sponsor postretirement health care plans that provide prescription drug benefits. The enactment of the Act does not have a significant effect on IPL's retirement plans. IPL's accumulated pension benefit obligation and net periodic postretirement benefit costs currently do not reflect any effect of the Act. The effects of the Act, which are not material, will be incorporated into the next measurement of plan obligations (November 30, 2004) as required by FSP 106-2.
4. SEGMENT INFORMATION
IPALCO's operations are made up almost entirely of its ownership of IPL, its consolidated electric utility, which is a reportable business segment. In addition, IPALCO has outstanding $750 million of Senior Secured Notes (the "IPALCO Notes"); approximately $3.9 million and $2.5 million of nonutility cash and cash equivalents, as of June 30, 2004 and December 31, 2003, respectively; nonutility investments of $5.7 million and $6.1 million at June 30, 2004 and December 31, 2003, respectively; and income taxes related to those items. There was no operating income for any nonutility activities during the periods covered by this report. Nonutility assets represented less than 1% of IPALCO's total assets as of June 30, 2004 and December 31, 2003 and there were no nonutility capital expenditures during the six month periods ended June 30, 2004 and 2003.
5. INDEBTEDNESS
On January 13, 2004, IPL issued $100 million of 6.60% first mortgage bonds due January 1, 2034. The net proceeds of approximately $99 million were used to retire $80 million of 6.05% first mortgage bonds due February 1, 2004 and to reimburse IPL's treasury for expenditures previously incurred in connection with its capital expenditure program.
In May 2004, IPLrenewed its $45 million committed line of credit. The new agreement has substantially the same terms as the previous agreement and matures May 19, 2005.In June 2004, IPL amended another agreement which includes a $30 million committed line of credit and a $40.6 million liquidity facility (related to $40 million of IPL variable rate bonds, which are remarketed weekly) to extend the maturity to May 31, 2005.
On July 22, 2004, Standard & Poor's raised its ratings on the utility first mortgage bonds of 20 utility companies, based on an updated analysis of ultimate recovery prospects. As a result, all of IPL's first mortgage bonds were upgraded from BB+ to BBB-. The upgrade did not affect the interest rates on any of IPL's existing debt.
On July 23, 2004, the Federal Energy Regulatory Commission ("FERC") issued an order renewing IPL's authority to issue up to $500 million of short-term indebtedness outstanding at any time through July 2006.
6. PENSION BENEFITS
Employees' Retirement Plan: Most of IPL's employees are covered by the Employees' Retirement Plan of Indianapolis Power & Light Company (the "Defined Benefit Pension Plan.") The Defined Benefit Pension Plan is noncontributory and is funded through a trust. Benefits are based on each individual employee's pension band and years of service as opposed to their compensation. Pension bands are based primarily on job duties and responsibilities.
IPL's funding policy for the Defined Benefit Pension Plan is to contribute annually not less than the minimum required by applicable law, nor more than the maximum amount that can be deducted for federal income tax purposes.
Supplemental Retirement Plan:Additionally, a select group of former management employees of IPALCO and IPL who have terminated vested benefits are covered under a funded supplemental retirement plan.
The following table presents information relating to the Defined Benefit Pension Plan and supplemental retirement plan:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2004 2003 2004 2003
-------------------- --------------------
Pension Benefits (IN THOUSANDS)
Components of net periodic benefit cost
Service cost $913 $925 $1,827 $1,851
Interest cost 6,426 6,744 12,852 13,487
Expected return on plan assets (6,788) (5,674) (13,505) (11,348)
Amortization of prior service cost 34 34 67 67
Recognized actuarial gain 953 669 1,906 1,339
-------------------- --------------------
Net periodic benefit cost $1,538 $2,698 $3,147 $5,396
==================== ====================
In April 2004, pension legislation was passed which decreased the present value of IPALCO's current pension fund liabilities and lowered IPALCO's pension funding requirements in the short- term. As a result, IPALCO can achieve the desired level of funding in 2004 (90%) with approximately $5.7 million of contributions. Management is evaluating whether it is economically attractive to discretionally fund in excess of this amount. IPALCO did not make any pension funding contributions during the six months ended June 30, 2004.
7. OTHER POSTRETIREMENT BENEFITS
The Group Benefits Plan: IPL sponsors a group benefits plan which provides certain health care and life insurance benefits to active employees. Prior to October 20, 2000, the plan also provided certain health care and life insurance benefits to employees who retired from active service on or after attaining age 55 and had rendered at least 10 years of service. The postretirement benefit costs of this plan were funded through an independent voluntary employee beneficiary association ("VEBA") trust (the "VEBA Trust"). On April 30, 2001, all assets of the VEBA Trust and its obligations were formally spun-off to an independent trustee into a newly formed plan, the VEBA Plan (the "VEBA Plan") that provides postretirement medical and life benefits to retirees who retired from IPL or IPALCO before October 20, 2000. In addition, people who were employed by IPL or IPALCO on October 20, 2000, who subsequently retire from IPL or IPALCO and who meet the retirement requirements of age 55 or older and 10 or more years service are eligible for postretirement health care benefits under the VEBA Trust. The VEBA Plan is sponsored and administered by an independent VEBA committee.
In November 2002, IPL and one bargaining unit of the International Brotherhood of Electrical Workers union reached an agreement whereby IPL will provide postretirement health care benefits through the end of their current contract to unit members who were hired by IPL after October 20, 2000. The plan was amended accordingly.
The following table presents the components of period benefit costs for other postretirement benefits:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2004 2003 2004 2003
-------------------- --------------------
Other Postretirement Benefits (IN THOUSANDS)
Components of net periodic benefit cost
Service cost $198 $47 $395 $94
Interest cost 206 196 413 392
Amortization of prior service cost 236 213 471 427
-------------------- --------------------
Total periodic benefit cost $640 $456 $1,279 $913
==================== ====================
8. LAND SALES
In December 2003, IPL reached agreements to sell approximately 4,000 acres of undeveloped property near Martinsville, Indiana divided between two purchasers for an aggregate price of $13.2 million. This land is presented on IPALCO's consolidated balance sheet as land held for sale at $6.6 million as of December 31, 2003. The sale to one of the purchasers was completed in February 2004 for $7.4 million net proceeds with a gain of $4.1 million and the other sale was completed in April 2004 with net proceeds of $4.3 million and a gain of $1.8 million. In accordance with regulatory accounting, these gains are included as a reduction of other operating expenses on IPALCO's consolidated statements of income.
9. LONG TERM COMPENSATION PLAN
During 2004, all non-union employees of IPL became eligible to participate in the AES Long Term Compensation Plan, a deferred compensation program. Participants receive deferred compensation in the form of cash, restricted shares of AES common stock and options to purchase shares of AES common stock. All three of such components vest in thirds over a three-year period. Total deferred compensation expense recorded during the three-month and six-month periods ended June 30, 2004 was $0.3 million and $0.6 million, respectively, and was included in Other Operating Expenses on IPALCO's consolidated statement of income.
10. COMMITMENTS AND CONTINGENCIES
Legal
IPALCO and certain former officers and directors of IPALCO are named as defendants in class action lawsuits under the Employment Retirement Income Security Act ("ERISA") and the Federal securities laws (see below), respectively, each filed in the U.S. District Court for the Southern District of Indiana, and each making allegations regarding matters arising from the acquisition of IPALCO by AES. The ERISA suit alleges breach of fiduciary duties with respect to shares held in IPL's 401(k) thrift plan. While we cannot predict the outcomes, we do not believe that the suits will have a material adverse effect on IPALCO's consolidated financial statements.
Since May 2003, IPALCO, IPL, AES and certain former directors and officers of IPALCO and/or IPL received subpoenas from the Securities Division of the Indiana Secretary of State seeking information focused largely on circumstances surrounding the acquisition of IPALCO by AES. The Secretary of State's inquiry is ongoing, as indicated in the Secretary of State's January 27, 2004 press release. IPALCO, IPL, AES and the individuals have produced various materials in response to the subpoenas. While we can not predict the outcome, we do not expect these matters will have a material adverse effect on IPALCO's consolidated financial statements.
In November 2002, IPL was sued in a Fair Labor Standards Act ("FLSA") collective action lawsuit filed in the U.S. District Court for the Southern District of Indiana. The complaint alleges that certain of IPL's current and former employees were not paid overtime pay at the rate required by the FLSA. We believe that IPL did not violate the FLSA. While we cannot predict the outcome, we do not believe the suit will have a material adverse effect on IPALCO's consolidated financial statements.
In September 2002, IPALCO and certain of its former officers and directors were sued in the U.S. District Court for the Southern District of Indiana in connection with IPALCO's acquisition by AES. That suit has now been consolidated with other actions in that court with the result that the only remaining IPALCO defendants are three former officers who are insured under IPALCO's liability insurance policies. The lawsuit purports to be filed on behalf of all persons who exchanged their shares of IPALCO common stock for shares of AES common stock. The complaint alleges violations of Section 11 of the Securities Act; Sections 10(b), 14(a) and 20(a) of the Exchange Act and Rules 10b-5 and 14a-9. We believe that the IPALCO defendants have meritorious defenses to the suit. While we cannot predict the outcome, we do not believe that the suit will have a material adverse effect on IPALCO's consolidated financial statements.
As of June 30, 2004, IPL is a defendant in approximately 88 pending lawsuits alleging personal injury or wrongful death stemming from exposure to asbestos and asbestos containing products formerly located in IPL power plants. IPL has been named as a "premises defendant" in that IPL did not mine, manufacture, distribute or install asbestos or asbestos containing products. These suits have been brought on behalf of persons who worked for contractors or subcontractors hired by IPL. IPL has insurance coverage for many of these claims; currently, these cases are being defended by counsel retained by various insurers who wrote policies applicable to the period of time during which much of the exposure has been alleged. Although we do not believe that any of the pending asbestos suits in which IPL is a named defendant will have a material adverse effect on IPALCO's business or operations, we are unable to predict the number or effect any additional suits may have. Accordingly, we cannot assure that the pending or any additional suits will not have a material effect on IPALCO's consolidated financial statements.
In addition, IPALCO and IPL are involved in litigation arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management, based upon advice of counsel, believes that the final outcome will not have a material adverse effect on IPALCO's consolidated financial statements.
Environmental
We are subject to various federal, state and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of hazardous materials; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We believe that we operate in material compliance with environmental laws, regulations and permits and health and safety laws. We cannot assure, however, that we have been or will be at all times in full compliance with such laws, regulations and permits.
National Ambient Air Quality Standards.On July 16, 1997, the U.S. Environmental Protection Agency ("EPA") promulgated final rules tightening the National Ambient Air Quality Standards for ozone and creating a new fine particulate matter standard. On April 30, 2004, the EPA designated Marion and Morgan counties as parts of the Greater Indianapolis nonattainment area for ozone, effective June 15, 2004. Indiana is now required to devise implementation plan revisions to attain and maintain the new ozone standards. Such revisions may require IPL to reduce emissions of ozone precursors, chiefly oxides of nitrogen, from its Harding Street and Eagle Valley generating stations.
On June 29, 2004, the EPA wrote to the Governor of Indiana stating its intention to designate Marion, Morgan, and Pike Counties nonattainment for the fine particulate matter ambient air quality standard. The EPA stated that it intends to promulgate these designations in November 2004. The non attainment designation for both ozone and particulate matter will legally require the State of Indiana to modify its State Implementation Plan ("SIP") by 2008. The SIP will detail how the state will regain its compliance status. It is unclear at this time the potential impact of these new EPA designations on our generating stations.
NOx SIP Call. On October 27, 1998, the EPA issued a final rule, referred to as the NOx SIP call, which imposes more stringent limits on NOx emissions from fossil fuel-fired steam electric generators. IPL's current estimates are the NOx SIP call will necessitate capital expenditures of approximately $109 million during 2004 and 2005 to achieve substantially all of the required NOx emission reductions.
On November 14, 2002, the IURC issued a Certificate of Public Convenience and Necessity for the construction and use of clean coal technology ("CCT") to allow IPL to meet the NOx emission limits imposed pursuant to the EPA's NOx SIP call. The CCT constitutes qualified pollution control property as defined in Ind. Code section 8-1-2-6.6 and the IURC has approved ratemaking treatment applicable to such property through an Environmental Compliance Cost Recovery Adjustment ("ECCRA"). The ratemaking treatment provided for in the IURC order includes a return on the investment in IPL's planned CCT projects under construction. After the projects have been placed in service, the approved ratemaking treatment provides for a return on the investment and recovery of the depreciation expenses and operation and maintenance expenses associated with these projects. Such costs are deferred as regulatory assets on IPALCO's balance sheets. The ratemaking treatment also provides for recovery of expenditures related to the purchase of NOx emission allowances, should such expenditures be made to supplement IPL's CCT construction projects. IPL may add the approved return on its CCT projects to its authorized annual net operating income in subsequent fuel adjustment charge proceedings. The increase in the amount of rate revenues and authorized net operating income resulting from IPL's CCT plan will be determined in periodic filings to the IURC to be made at intervals of no more often than every 6 months and will depend on the amount of cumulative investment, depreciation expenses, operation and maintenance expenses and actual NOx emission allowance purchases at the time of each of the filings. Our first ECCRAs were approved on August 20, 2003 and February 18, 2004.
Guarantees
As of June 30, 2004 and December 31, 2003, Mid-America had a commitment to invest additional capital of $3.8 million in EnerTech Capital Partners II L.P. ("EnerTech"), a venture capital fund. IPALCO has guaranteed the prompt payment of this commitment when it may become due pursuant to the terms of the partnership agreement between Mid-America and EnerTech. As required by GAAP, there is no liability on the accompanying balance sheets for this guarantee.
In connection with the sale of the Cleveland Energy Resources assets, Cleveland Thermal Energy Corporation and Cleveland District Cooling Corporation, both of which are subsidiaries of Mid-America, have agreed to indemnify the buyer on an after-tax basis from and against all losses arising out of: any liabilities excluded from the sale; and certain litigation and environmental matters existing at the closing date, November 2, 2000. IPALCO has guaranteed this indemnification up to $14.6 million. Claims regarding a breach of an environmental representation or regarding an excluded liability must be brought on or before November 2, 2004. The indemnification provided for under this agreement will in no event exceed the total aggregate purchase price, or $14.6 million.
Lease Commitments
IPL has capital leases expiring at various dates through 2010. Plant-in-service includes fixed assets under capital lease, net of accumulated depreciation, totaling $3.9 million at June 30, 2004. The interest component of capital leases as of June 30, 2004 is $0.1 million and the net present value of future minimum lease payments is $3.5 million. The current portion of this liability is recorded inother current liabilities and the noncurrent portion is recorded inmiscellaneous on IPL's balance sheets. IPL also has operating leases expiring at various dates through 2009. Rental expense for the six-month periods ended June 30, 2004 and 2003 was $0.5 million and $0.2 million, respectively. The following table shows fixed future minimum lease payments as of June 30, 2004 for all capital leases and for operating leases with remaining noncancelable lease terms in excess of one year (in thousands):
2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | |
Operating Leases | $501 | $921 | $786 | $658 | $646 | $128 | $3,640 |
Capital Leases | $439 | $906 | $657 | $651 | $581 | $673 | $3,907 |
11. RELATED PARTY TRANSACTION
On June 11, 2004, IPL entered into an agreement with Health and Welfare Benefit Plans LLC ("HWBP"), an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits, in which AES and other AES subsidiaries also participate. HWBP will administer the financial aspects of the group insurance program, receive all premium payments from the participating affiliates, and make all vendor payments. We believe that cost savings can be realized through participation in this group benefits program. Coverage for IPL employees through the group benefits program began on August 1, 2004.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer ("CEO") and chief financial officer ("CFO"), of the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15-d-15 (e) as required by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15) as of June 30, 2004. The Company's management, including the CEO and CFO, is engaged in a comprehensive effort to review, evaluate and improve our controls; however, management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. In addition, we have interests in certain unconsolidated entities. As we do not control or manage these entities, our disclosure controls and procedures with respect to such entities is generally more limited than those we maintain with respect to our consolidated subsidiaries.
Based upon the controls evaluation performed, the CEO and CFO have concluded that as of June 30, 2004, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to us and our consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.
Changes in Internal Controls. In the course of our evaluation of disclosure controls and procedures, management considered certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, the CEO and CFO concluded that there were no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the second quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Compliance with Section 404 of the Sarbanes Oxley Act of 2002. Beginning with the year ending December 31, 2005, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our annual report on Form 10-K. The internal control report must contain (1) a statement of management's responsibility for establishing and maintaining adequate internal controls over financial reporting for our Company, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal controls over financial reporting, (3) management's assessment of the effectiveness of our internal controls over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not our internal controls over financial reporting are effective, and (4) a statement that our independent auditors have issued an attestation report on management's assessment of our internal controls over financial reporting.
Management developed a comprehensive plan in order to achieve compliance with Section 404 within the prescribed period and to review, evaluate and improve the design and effectiveness of our controls and procedures on an on-going basis. The comprehensive compliance plan includes (1) documentation and assessment of the adequacy of our internal controls over financial reporting, (2) remediation of control weaknesses, (3) validation through testing that controls are functioning as documented and (4) implementation of a continuous reporting and improvement process for internal controls over financial reporting. As a result of this initiative, we have made and will continue to make changes from time to time in our internal controls over financial reporting.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IPALCO ENTERPRISES, INC. |
| (Registrant) |
Date: August 16, 2004
| By: | /s/ Hamsa Shadaksharappa |
| Hamsa Shadaksharappa | |
| Senior Vice President-Financial Services, Chief Financial Officer and Secretary | |
| (Principal Financial and Accounting Officer and Duly Authorized Officer) |