Net decrease in the weighted average price of retail kWh sold, primarily due to lower fuel revenues, including a $10.0 million reduction due to excess earnings under FAC provisions (see Note 2, "Regulatory Matters - FAC and Authorized Annual Jurisdictional Net Operating Income" to the Financial Statements for more information), partially offset by favorable block rate(1) and other retail rate variances (40.7) | | | | (1)Other: | Block rate variances are primarily attributable to our declining block rate structure, which generally provides for residential and commercial customers to be charged a higher per kWh rate at lower consumption levels. Therefore, as volumes decrease, the weighted average price per kWh increases and vice versa.1.2 | |
| | (2)Net decrease in retail revenues | The decreases in environmental and DSM program rate adjustment mechanism revenues are offset by decreases in operating expenses.$ | (105.3) | |
(1)Block rate variances are primarily attributable to our declining block rate structure, which generally provides for residential and commercial customers to be charged a higher per kWh rate at lower consumption levels. Therefore, as volumes decrease, the weighted average price per kWh increases and vice versa.
Wholesale Revenues
The increasedecrease in wholesale revenues of $29.7$22.0 million was primarily due to a $46.2$21.5 million increase in the quantity of kWh sold primarily due to increased generation capacity asvolume decrease and a result of the commencement of commercial operations of the newly constructed CCGT plant at Eagle Valley in April 2018 as well as increased unit availability as a result of outages, partially offset by a $16.5$0.5 million decrease in the weighted average price per kWh sold. We sold 2,718.41,866.0 million kWh in the wholesale market during 20192020 compared to 1,241.42,718.4 million kWh during 2018.2019 primarily due to lower demand and lower unit availability (mostly attributed to the timing of outages). Our ability to be dispatched in the MISO market is primarily driven by the locational marginal price of electricity and variable generation costs. The amount of electricity available for wholesale sales is impacted by our retail load requirements, generation capacity and unit availability. For the comparable period in 2018, 50% of IPL's annual wholesale margins above (or below) an established benchmark of $6.3 million were passed back (or charged) to customer rates through the Off System Sales Margin rider (in accordance with the 2016 Base Rate Order). Effective December 5, 2018, with the implementation of the 2018 Base Rate Order, 100% of annual wholesale margins earned above (or below) a benchmark of $16.3 million are passed back (or charged) to customer rates through the Off System Sales Margin rider.
Operating Costs and Expenses
The following table illustrates our changes in Operating costs and expenses from 20182019 to 20192020 (in thousands): | | | | | | | | | | | | | | | | Years Ended | | | | December 31, | | | | 2020 | 2019 | $ Change | % Change | Operating costs and expenses: | | | | | Fuel | $ | 247,105 | | $ | 340,466 | | $ | (93,361) | | (27.4) | % | Power purchased | 135,767 | | 133,674 | | 2,093 | | 1.6 | % | Operation and maintenance | 416,169 | | 428,201 | | (12,032) | | (2.8) | % | Depreciation and amortization | 246,896 | | 240,314 | | 6,582 | | 2.7 | % | Taxes other than income taxes | 44,516 | | 42,236 | | 2,280 | | 5.4 | % | | | | | | Total operating costs and expenses | $ | 1,090,453 | | $ | 1,184,891 | | $ | (94,438) | | (8.0) | % | | | | | |
| | | | | | | | | | | | | | Years Ended | | | | December 31, | | | | 2019 | 2018 | $ Change | % Change | Operating costs and expenses: | | | | | Fuel | $ | 340,466 |
| $ | 331,701 |
| $ | 8,765 |
| 2.6 | % | Power purchased | 133,674 |
| 164,542 |
| (30,868 | ) | (18.8 | )% | Operation and maintenance | 428,201 |
| 431,620 |
| (3,419 | ) | (0.8 | )% | Depreciation and amortization | 240,314 |
| 232,332 |
| 7,982 |
| 3.4 | % | Taxes other than income taxes | 42,236 |
| 53,952 |
| (11,716 | ) | (21.7 | )% | Total operating costs and expenses | $ | 1,184,891 |
| $ | 1,214,147 |
| $ | (29,256 | ) | (2.4 | )% | | | | | |
Fuel
The increasedecrease in fuel costs of $8.8$93.4 million was primarily due to (i) the following:
•a $34.0 million increase in the quantity of fuel consumed versus the comparable period and (ii) a $15.7 million increase from deferred fuel costs, partially offset by (iii) a $30.5$38.0 million decrease due to the lower price of natural gas consumed versus the comparable periodperiod; •a $34.4 million decrease in the quantity of fuel consumed versus the comparable period; •an $11.6 million decrease from deferred fuel costs; and (iv) a $11.4 •an $8.9 million decrease due to the lower price of coal consumed versus the comparable period.
We are generally permitted to recover underestimated fuel and purchased power costs to serve our retail customers in future rates through quarterly FAC proceedings. These variances are deferred when incurred and amortized into expense in the same period that our rates are adjusted to reflect these variances. For further discussion, please see Note 2, "Regulatory Matters - FAC and Authorized Annual Jurisdictional Net Operating Income” to the Financial Statements of this Form 10-K. Additionally, fuel and purchased power costs incurred for wholesale energy sales are considered in the Off System Sales Margin rider discussed above. As a result of the 100% sharing that began December 5, 2018, fluctuations in such costs will not have an impact on our earnings from operations before income taxes.rider.
Power Purchased
The decreaseincrease in purchased power costs of $30.9$2.1 million was primarily due to (i) the following:
•a 42% decrease$48.6 million increase due to a 45% increase in the volume of power purchased during the period ($55.5 million) and (ii) capacity expense (including deferrals) declining by $3.6 million versus the prior period primarily due to the CCGT plant at Eagle Valley commencing commercial operations in April 2018 (as discussed above),period; partially offset by (iii) •a $28.3$46.7 million increasedecrease in the market price of purchased power.
The volume of power purchased each period is primarily influenced by retail demand, generating unit capacity and outages, and the relative cost of producing power versus purchasing power in the market. The primary driver for the $55.5$48.6 million volume decreaseincrease was due to IPL's generation units running less frequently during 2020 due to lower demand and the commencementmarket prices of commercial operations of the CCGT plant at Eagle Valley in April 2018,purchased power, as well as the timing and duration of outages during these respective periods. The market price of purchased power is influenced primarily by changes in the market price of
delivered fuel (primarily natural gas), the supply of and demand for electricity, and the time of day during which power is purchased.
Operation and Maintenance
The decrease in Operation and maintenance expense of $3.4$12.0 million was primarily due to the following:
lower•decreased maintenance expenses of $13.7 million primarily due to decreased outage costs; and
•a $6.2 million write-off of materials and supplies inventory recorded in December 2019 (for further discussion, see Note 2, “Regulatory Matters - IRP Filing”).
These decreases were partially offset by:
•increase in MISO non-purchased power costs (primarily transmission related expenses) of $4.3 million; and •higher DSM program costs of $15.7$3.2 million (these program costs are recoverable through customer rates and are offset by a decreasean increase in DSM revenues); and. decrease in deferred environmental project expenses of $15.6 million due to differences between the amount of recoverable expenses incurred in the period and the inclusion of such expenses in billing rates through IPL's environmental rider (these project expenses are recoverable through customer rates and are offset by a decrease in environmental revenues).
These were partially offset by:
increased maintenance expenses of $18.2 million primarily due to increased distribution line clearance costs, including vegetation management; and
| | • | a $6.2 million write-off of materials and supplies inventory recorded in December 2019 (for further discussion, see Note 2, “Regulatory Matters - IRP Filing”).
|
Depreciation and Amortization
The increase in Depreciation and amortization expense of $8.0$6.6 million was mostly attributed to the impact of additional assets placed in service (primarily the newly constructed CCGT plant at Eagle Valley) and no longer deferring depreciation expense on the Eagle Valley CCGT (in accordance with the 2018 Base Rate Order).service.
Taxes Other Than Income Taxes
The decreaseincrease in Taxes other than income taxes of $11.7$2.3 million was mostly attributed to lowerhigher property taxes of $10.0$1.9 million primarily as a result of lowerhigher assessed values and a favorable adjustment related to 2018 property taxes recorded in 2019.values.
Other Income / (Expense), Net
The following table illustrates our changes in Other income / (expense), net from 20182019 to 20192020 (in thousands): | | | | | | | | | | | | | | Years Ended | | | | December 31, | | | | 2019 | 2018 | $ Change | % Change | Other income/(expense), net | | | | | Allowance for equity funds used during construction | $ | 3,486 |
| $ | 8,477 |
| $ | (4,991 | ) | (58.9 | )% | Interest expense | (121,771 | ) | (95,509 | ) | (26,262 | ) | 27.5 | % | Other income / (expense), net | (10,546 | ) | (1,852 | ) | (8,694 | ) | 469.4 | % | Total other income/(expense), net | $ | (128,831 | ) | $ | (88,884 | ) | $ | (39,947 | ) | 44.9 | % | | | | | |
Allowance for Equity Funds Used During Construction
The decrease in Allowance for equity funds used during construction of $5.0 million was primarily due to a lower average construction work in progress balance compared to the comparable period (due to the commencement of commercial operations at the Eagle Valley CCGT in April 2018).
| | | | | | | | | | | | | | | | Years Ended | | | | December 31, | | | | 2020 | 2019 | $ Change | % Change | Other income/(expense), net | | | | | Allowance for equity funds used during construction | $ | 4,574 | | $ | 3,486 | | $ | 1,088 | | 31.2 | % | Interest expense | (129,493) | | (121,771) | | (7,722) | | 6.3 | % | Loss on early extinguishment of debt | (2,424) | | — | | (2,424) | | #DIV/0! | Other income / (expense), net | 3,370 | | (10,546) | | 13,916 | | (132.0) | % | Total other income/(expense), net | $ | (123,973) | | $ | (128,831) | | $ | 4,858 | | (3.8) | % | | | | | |
Interest Expense
The increase in Interest expense of $26.3$7.7 million was primarily due to a $23.1(i) amortization of unrealized losses on interest rate hedges of $5.4 million decreasebeginning in the allowance for borrowed funds used during construction, which IPL earned in the prior period on the Eagle Valley CCGT until the 2018 Base Rate Order was approved in December 2018,April 2020 and (ii) higher interest expense on long-term debt of $2.8 million.$3.0 million mostly due to higher rates.
Loss on Early Extinguishment of Debt
The increase in Loss on Early Extinguishment of Debt of $2.4 million was primarily due to a make-whole premium and write-off of deferred financing costs due to the redemption of $405 million of 2020 IPALCO Notes and $65 million IPALCO Term Loan in the second quarter of 2020.
Other Income/(Expense), Net
The decreaseincrease in Other income/(expense), net of $8.7$13.9 million was primarily due to an increasea decrease in defined benefit plan costs of $11.5$16.1 million due to a lowerhigher expected return on plan assets in 2019 compared to 2018.the prior year.
Income Tax Expense
The following table illustrates our changes in income tax expense from 20182019 to 20192020 (in thousands): | | | | | | | | | | | | | | | | Years Ended | | | | December 31, | | | | 2020 | 2019 | $ Change | % Change | Income tax expense | $ | 28,592 | | $ | 35,528 | | $ | (6,936) | | (19.5) | % | | | | | |
| | | | | | | | | | | | | | Years Ended | | | | December 31, | | | | 2019 | 2018 | $ Change | % Change | Income tax expense | $ | 35,528 |
| $ | 13,449 |
| $ | 22,079 |
| 164.2 | % | | | | | |
The increasedecrease in income tax expense of $22.1$6.9 million was primarily due to (i) tax benefits recorded in 2018 associated with the amortization of the impact of the lower income tax rate resulting from the TCJA on our deferred tax balances and (ii) higher pretax income versus the comparable period.
KEY TRENDS AND UNCERTAINTIES
During 20202021 and beyond, we expect that our financial results will be driven primarily by retail demand, weather, and maintenance costs. In addition, our financial results will likely be driven by many other factors including, but not limited to: | | ▪ | regulatory outcomes and impacts; |
| | ▪ | the passage of new legislation, implementation of regulations or other changes in regulation; and |
| | ▪ | timely recovery of capital expenditures. |
▪regulatory outcomes and impacts; ▪the passage of new legislation, implementation of regulations or other changes in regulation; and ▪timely recovery of capital expenditures.
If favorable outcomes related to these factors do not occur, or if the challenges described below and elsewhere in this report impact us more significantly than we currently anticipate, then these adverse factors, or other adverse factors unknown to us, may impact our operating margin, net income and cash flows. We continue to monitor our operations and address challenges as they arise. For a discussion of the risks related to our business, see “Item 1. Business” and “Item 1A. Risk Factors” of this Form 10-K. COVID-19 Pandemic The COVID-19 pandemic has impacted global economic activity, including electricity and energy consumption, and caused significant volatility and negative pressure in financial markets. In response to the COVID-19 pandemic, the Governor of Indiana also issued an Executive Order prohibiting electric utilities, including us, from discontinuing electric utility service to customers through August 14, 2020, which prohibition has lapsed. In addition to the impacts to demand within our service territory, we also have incurred and expect to continue to incur expenses relating to COVID-19, and such expenses may include those that relate to events outside of our control. We experienced impacts from the pandemic in 2020 and into 2021 and expect to continue to experience impacts for the remainder of 2021, and any such impacts during that time or in other future periods could have material and adverse effects on our results of operations, financial condition and cash flows. The following discussion highlights our assessment of the impacts of the COVID-19 pandemic on our current financial and operating status, and our financial and operational outlook based on information known as of this filing. Also see "Item 1A. Risk Factors" of this Form 10-K.
Business Continuity - During the COVID-19 pandemic, we are taking a variety of measures to ensure our ability to generate, transmit, distribute and sell electric energy, to ensure the health and safety of our employees, contractors, customers and communities and to provide essential services to the communities in which we operate. We continue to respond to this global crisis through comprehensive measures to protect our employees and others while fulfilling our vital role in providing our customers with electric energy. While stay-at-home restrictions have been lifted in our service territory, most of our management and administrative personnel are able to work remotely, and we have not experienced significant issues affecting our operations or ability to maintain effective internal controls and produce reliable financial information.
Demand - The economic impact of the COVID-19 pandemic started to materialize in Indiana in the second half of March 2020 and continued for the remainder of 2020 and into 2021. See Note 15, "Risks and Uncertainties - COVID-19 Pandemic" for further discussion of how the COVID-19 pandemic has impacted our sales demand and Note 13, "Revenue" to the Financial Statements for a disaggregation of retail revenues by customer class. The declines for small and large commercial and industrial customers were most severe in April and May, and partially
recovered the remainder of the year as stay-at-home orders were lifted. While we cannot predict the length and magnitude of the COVID-19 pandemic or how it could ultimately impact global or local economic conditions, continuous and/or further declines in future demand would adversely impact our financial results for 2021 and beyond.
Liquidity - We anticipate continuing to have sufficient liquidity to make all required payments, including payments for salaries and wages owed to our employees, during the COVID-19 pandemic. We also continue to not foresee a significant impact to our access to capital or our liquidity position as a result of the COVID-19 pandemic. During the second quarter of 2020, IPALCO accessed the capital markets to issue $475 million in principal amount of 4.25%, ten-year notes, which has been used to repay IPALCO debt due to mature in 2020. In addition, during the fourth quarter of 2020 IPL issued $90 million aggregate principal amount of first mortgage bonds and used the proceeds to refund $90 million of Indiana Finance Authority Environmental Facilities Refunding Revenue Bonds Series 2015A&B. For further discussion of our financial condition, liquidity, and capital requirements, see "Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity" of this Form 10-K.
Credit Exposures - We continue to monitor and manage our credit exposures in a prudent manner. During the year ended December 31, 2020 and into 2021, we experienced credit-related impacts from utility customers due to the prohibition of electric utilities, including us, from discontinuing electric utility service to customers and due to the economic impacts of the COVID-19 pandemic. This has resulted in an increase in past due customer receivable balances, and our allowance for credit losses has increased $2.2 million during the year ended December 31, 2020. See Note 1, "Overview and Summary of Significant Accounting Policies - Accounts Receivable" for further discussion of our allowance for credit losses. If these credit-related impacts from the COVID-19 pandemic continue into 2021 or beyond, further deterioration in our credit exposures and customer collections may result. See Note 2, "Regulatory Matters" for a discussion of regulatory measures which mitigate this impact.
Supply Chain - Our supply chain management has remained robust during this challenging time and we continue to closely manage and monitor developments.
Capital Projects - During the COVID-19 pandemic, our construction projects are proceeding without material delays. For further discussion of our capital requirements, see "Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity" of this Form 10-K.
CARES Act - The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by the U.S. Congress and signed into law on March 27, 2020. While we currently expect a limited impact from this legislation on our business, we have deferred the payment of federal payroll taxes in accordance with the provisions of this act. At December 31, 2020, the total deferral was approximately $2.5 million.
See Note 15, "Risks and Uncertainties" to the Financial Statements and "Item 1A. Risk Factors" of this Form 10-K for more information.
Operational We planAs part of IPL's December 2019 Integrated Resource Plan filing, IPL has plans to retire approximately 630 MW of coal-fired generation at Petersburg Units 1 and 22. IPL issued an all-source request for proposal to competitively procure replacement capacity by June 1, 2023, (forwhich is the first year IPL is expected to have a capacity shortfall. Proposals were received through February 28, 2020 and are currently being evaluated. On February 5, 2021, IPL announced an agreement to acquire a 195 MW solar project, subject to approval from the IURC. For further discussion, see Note 2, "“Regulatory Matters - IRP Filing” Filing"to the Financial Statements of this Form 10-K).10-K.
Regulatory Environment For a discussion of the regulatory environment related to our business, including adjustments to fuel cost recovery that may be required by IPL's FAC if jurisdictional net operating income is higher than authorized, see “Item 1. Business – Regulation” and Note 2, “Regulatory Matters” to the Financial Statements of this Form 10-K.
Macroeconomic and Political
Federal Taxes — In December 2017, the U.S. federal government enacted the TCJA. The legislation significantly revised the U.S. corporate income tax system by, among other things, lowering corporate income tax rates and introducing new limitations on interest expense deductions beginning in 2018. These changes impacted our 2018 and 2019 effective tax rates and will materially impact our effective tax rate in future periods. Our interpretation of
the TCJA may change as the U.S. Treasury and the Internal Revenue Service issue additional guidance. Such changes may be material.
State Taxes —The state of Indiana has largely conformed to the TCJA.
Reference Rate Reform
In July 2017, the UK Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In the U.S., the Alternative Reference Rate Committee at the Federal Reserve identified the Secured Overnight Financing Rate ("SOFR") as its preferred alternative rate for LIBOR; alternative reference rates in other key markets are under development. While IPALCO maintainsOn November 30, 2020, the ICE Benchmark Association ("IBA") announced it had begun consultation on its intention to cease publication of two specific LIBOR rates by December 31, 2021, while extending the timeline for the overnight, one-month, three-month, six-month, and 12-month USD LIBOR rates through June 30, 2023. The IBA expects to make separate announcements in this regard following the outcome of the consultation. We maintain financial instruments referencingthat use LIBOR as an interest rate benchmark, we have not yet executed any technical amendments or other contractual alternatives to address this matter.benchmark. Although the full impact of the reform remains unknown, we have begun to engage with IPALCO and IPLour counterparties to discuss specific action items to be undertaken in order to prepare for amendments when such contractsthey become due.
CAPITAL RESOURCES AND LIQUIDITY
As of December 31, 2019,2020, we had unrestricted cash and cash equivalents of $48.2$20.5 million and available borrowing capacity of $250 millionof $175 million under our unsecured revolving Credit Agreement. All of IPL’s long-term borrowings must first be approved by the IURC and the aggregate amount of IPL’s short-term indebtedness must be approved by the FERC. We have approval from the FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 26, 2020.2022. In December 2018, we received an order from the IURC granting us authority through December 31, 2021 to, among other things, issue up to $350 million in aggregate principal amount of long-term debt, and refinance up to $185 million in existing indebtedness, all of which authority remains available under the order as of December 31, 2019.2020, and refinance up to $185 million in existing indebtedness, of which $95 million of authority remains available under the order as of December 31, 2020. This order also grants us authority to have up to $500 million of long-term credit agreements and liquidity facilities outstanding at any one time, of which $250 million remains available under the order as of December 31, 2019.2020. As an alternative to the sale of all or a portion of $65 million in principal of the long-term debt, we have the authority to issue up to $65 million of new preferred stock, all of which authority remains available under the order as of December 31, 2019.2020. We also have restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under our existing debt obligations. We do not believe such restrictions will be a limiting factor in our ability to issue debt in the ordinary course of prudent business operations.
We believe that existing cash balances, cash generated from operating activities and borrowing capacity on our committed Credit Agreement will be adequate for the foreseeable future to meet anticipated operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures and to pay dividends to AES U.S. Investments and CDPQ. Sources for principal payments on outstanding indebtedness and nonrecurring capital expenditures are expected to be obtained from: (i) existing cash balances; (ii) cash generated from operating activities; (iii) borrowing capacity on our committed Credit Agreement; (iv) additional debt financing; and (v) equity capital contributions. From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions or otherwise when management believes such repurchases are favorable to make. The amounts involved in any such repurchases may be material.
IPL Unsecured NotesFirst Mortgage Bonds
In December 2020, the Indiana Finance Authority issued on behalf of IPL an aggregate principal amount of $90 million of Environmental Facilities Refunding Revenue Bonds, Series 2020A&B due December 2038. For further discussion, please see Note 7, " Debt - IPL First Mortgage Bonds."
IPL has $90$95 million of unsecured notes3.875% IPL first mortgage bonds that are due December 22, 2020.August 1, 2021. For further discussion, please see Note 7, “Debt - IPL Unsecured Notes.First Mortgage Bonds.”
IPALCO’s Senior Secured Notes and Term Loan
In April 2020, IPALCO has $405completed the sale of the $475 million of 3.45% Senior Secured2030 IPALCO Notes due July 15,priced at 4.25%, with the net proceeds from this offering used to retire the Term Loan on April 14, 2020. The remaining net proceeds, together with cash on hand, were used to redeem the 2020 IPALCO Notes on May 14, 2020, and a $65 million Term Loan due July 1, 2020.to pay certain related fees,
expenses and make-whole premiums. For further discussion, please see Note 7, “Debt - IPALCO's Senior Secured Notes and Term Loan.”
Cash Flows
The following table provides a summary of our cash flows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | $ Change | | | | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | | | (in thousands) | | (in thousands) | | Net cash provided by operating activities | | $ | 295,425 | | | $ | 397,815 | | | $ | 381,012 | | | $ | (102,390) | | | Net cash used in investing activities | | (275,769) | | | (237,448) | | | (253,952) | | | (38,321) | | | Net cash used in financing activities | | (41,586) | | | (145,414) | | | (124,142) | | | 103,828 | | | Net change in cash and cash equivalents | | (21,930) | | | 14,953 | | | 2,918 | | | (36,883) | | | Cash, cash equivalents and restricted cash at beginning of period | | 48,552 | | | 33,599 | | | 30,681 | | | 14,953 | | | Cash and cash equivalents at end of period | | $ | 26,622 | | | $ | 48,552 | | | $ | 33,599 | | | $ | (21,930) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Years ended December 31, | | $ Change | | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | | (in thousands) | | (in thousands) | Net cash provided by operating activities | | $ | 397,815 |
| | $ | 381,012 |
| | $ | 285,260 |
| | $ | 16,803 |
| Net cash used in investing activities | | (237,448 | ) | | (253,952 | ) | | (236,432 | ) | | 16,504 |
| Net cash used in financing activities | | (145,414 | ) | | (124,142 | ) | | (53,100 | ) | | (21,272 | ) | Net change in cash and cash equivalents | | 14,953 |
| | 2,918 |
| | (4,272 | ) | | 12,035 |
| Cash, cash equivalents and restricted cash at beginning of period | | 33,599 |
| | 30,681 |
| | 34,953 |
| | 2,918 |
| Cash and cash equivalents at end of period | | $ | 48,552 |
| | $ | 33,599 |
| | $ | 30,681 |
| | $ | 14,953 |
| | | | | | | | | |
2020 versus 2019
2019 versus 2018
Operating Activities
The following table summarizes the key components of our consolidated operating cash flows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years ended December 31, | | $ Change | | | | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | | | (in thousands) | | (in thousands) | | Net income | | $ | 109,967 | | | $ | 132,393 | | | $ | 134,025 | | | $ | (22,426) | | | Depreciation and amortization | | 246,896 | | | 240,314 | | | 232,332 | | | 6,582 | | | | | | | | | | | | | Amortization of debt premium | | 3,942 | | | 4,109 | | | 3,975 | | | (167) | | | Deferred income taxes and investment tax credit adjustments | | 2,854 | | | 15,277 | | | (15,735) | | | (12,423) | | | Loss on early extinguishment of debt | | 2,424 | | | — | | | — | | | 2,424 | | | Allowance for equity funds used during construction | | (4,574) | | | (3,486) | | | (8,477) | | | (1,088) | | | Net income, adjusted for non-cash items | | 361,509 | | | 388,607 | | | 346,120 | | | (27,098) | | | Net change in operating assets and liabilities | | (66,084) | | | 9,208 | | | 34,892 | | | (75,292) | | | Net cash provided by operating activities | | $ | 295,425 | | | $ | 397,815 | | | $ | 381,012 | | | $ | (102,390) | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Years ended December 31, | | $ Change | | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | | (in thousands) | | (in thousands) | Net income | | $ | 132,393 |
| | $ | 134,025 |
| | $ | 108,793 |
| | $ | (1,632 | ) | Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
| | 7,982 |
| Amortization of debt premium | | 4,109 |
| | 3,975 |
| | 4,202 |
| | 134 |
| Deferred income taxes and investment tax credit adjustments | | 15,277 |
| | (15,735 | ) | | (3,506 | ) | | 31,012 |
| Loss on early extinguishment of debt | | — |
| | — |
| | 8,875 |
| | — |
| Allowance for equity funds used during construction | | (3,486 | ) | | (8,477 | ) | | (25,798 | ) | | 4,991 |
| Net income, adjusted for non-cash items | | 388,607 |
| | 346,120 |
| | 301,017 |
| | 42,487 |
| Net change in operating assets and liabilities | | 9,208 |
| | 34,892 |
| | (15,757 | ) | | (25,684 | ) | Net cash provided by operating activities | | $ | 397,815 |
| | $ | 381,012 |
| | $ | 285,260 |
| | $ | 16,803 |
| | | | | | | | | |
The net change in operating assets and liabilities for the year ended December 31, 20192020 compared to the year ended December 31, 20182019 was driven by the following (in thousands): | | | | | | | | | Decrease from inventories is primarily due to higher inventory balances as IPL's generation units ran less frequently during 2020 | | $ | (28,814) | | Decrease from accounts payable due to timing of payments | | (23,369) | | Decrease from short-term and long-term regulatory assets and liabilities is primarily due to a decrease in the ECCRA regulatory liability as we return certain benefits to customers | | (14,311) | | Decrease from accrued and other current liabilities primarily due to a decrease in customer deposits as IPL credited back and did not collect customer deposits during a portion of 2020 per the IURC COVID-19 order | | (12,627) | | Decrease from pension and other postretirement benefit obligations is primarily due to an increase in funded status due to lower net periodic benefit costs | | (12,405) | | Decrease from higher accounts receivable balances primarily due to timing of collections | | (10,572) | | Increase from accrued taxes payable/receivable primarily due to higher current portion income tax expense in the current year and lower tax sharing and property tax payments | | 22,393 | | Other | | 4,413 | | Net change in operating assets and liabilities | | $ | (75,292) | |
| | | | | | Decrease from short-term and long-term regulatory assets and liabilities primarily due to proceeds IPL received in the prior year pursuant to a settlement agreement and a prior year increase to regulatory liabilities to record the impacts of the TCJA on customer rates. IPL has been passing both of these benefits on to customers in 2019. | | $ | (75,726 | ) | Decrease from accrued taxes payable/receivable primarily due to timing of tax sharing payments and lower current income tax expense in 2019. | | (18,878 | ) | Increase from pension and other postretirement benefit obligations primarily due to lower employer contributions | | 36,154 |
| Increase from accounts receivable, primarily due to a decrease in Retail revenues at the end of 2019 as compared to the end of 2018 due to mild weather | | 16,413 |
| Increase from inventories, primarily due to less consumption in 2019 | | 17,226 |
| Increase from accrued and other current liabilities and prepayments and other current assets primarily due to timing of payments | | 8,115 |
| Other | | (8,988 | ) | Net change in operating assets and liabilities | | $ | (25,684 | ) |
Investing Activities
Net cash used in investing activities increased $16.5$38.3 million for the year ended December 31, 20192020 compared to the year ended December 31, 2018,2019, which was primarily driven by (in thousands): | | | | | | | | | Higher cash outflows for capital expenditures due to higher growth related capital expenditures primarily from TDSIC Plan investments, partially offset by lower maintenance related capital expenditures | | $ | (22,081) | | Higher cash outflows on cost of removal and regulatory recoverable ARO payments due to timing of such payments | | (15,948) | | Other | | (292) | | Net change in investing activities | | $ | (38,321) | |
| | | | | | Lower cash outflows for capital expenditures due to decreased growth and environmental related capital expenditures, partially offset by higher maintenance related capital expenditures | | $ | 10,716 |
| Lower cash outflows on cost of removal and regulatory recoverable ARO payments due to timing of such payments | | 7,705 |
| Other | | (1,917 | ) | Net change in investing activities | | $ | 16,504 |
|
Financing Activities
Net cash used in financing activities decreased $21.3$103.8 million for the year ended December 31, 20192020 compared to the year ended December 31, 2018,2019, which was primarily driven by (in thousands): | | | | | | | | | Increase from long-term borrowings, net of discount due primarily to the April 2020 issuance of the $475 million 4.25% 2030 senior secured notes, and the December 2020 issuance of the $90M series 2020A and 2020B bonds | | $ | 564,568 | | Increase from net borrowings under revolving credit facilities due to higher net draws on IPL's line of credit in 2020 | | 75,000 | | Lower distributions to shareholders | | 27,687 | | Decrease from retirement of long-term debt, including early retirement premium primarily due to the April 2020 retirement of a $65.0 million Term Loan, the May 2020 retirement of the $405.0 million 3.45% senior secured notes, and the December 2020 repayment of the $90.0M series 2015A and 2015B notes | | (562,135) | | Other | | (1,292) | | Net change in financing activities | | $ | 103,828 | |
| | | | | | Decrease from long-term borrowings, net of discount due to the October 2018 issuance of a $65.0 million Term Loan and a November 2018 issuance of $105.0 million first mortgage bonds | | $ | (169,936 | ) | Increase from net short-term borrowings due to higher net repayments on IPL's line of credit in 2018 | | 148,000 |
| Higher distributions to shareholders | | (6,247 | ) | Lower payments for financed capital expenditures | | 5,806 |
| Other | | 1,105 |
| Net change in financing activities | | $ | (21,272 | ) |
Capital Requirements
Capital Expenditures
Our capital expenditure program, including development and permitting costs, for the three-year period from 20202021 through 20222023 is currently estimated to cost approximately $1.1$1.5 billion (excluding environmental compliance), and includes estimates as follows (amounts in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | For the three-year period | | | | 2021 | 2022 | 2023 | from 2021 through 2023 | | Transmission and distribution related additions, improvements and extensions | | $ | 287 | | $ | 268 | | $ | 287 | | $ | 842 | | (1) | Power plant related projects | | 55 | | 266 | | 222 | | 543 | | | Other miscellaneous equipment | | 63 | | 53 | | 35 | | 151 | | | Total estimated costs of capital expenditure program | | $ | 405 | | $ | 587 | | $ | 544 | | $ | 1,536 | | | | | | | | | | (1) Additions, improvements and extensions to transmission and distribution lines, substations, power factor and voltage regulating equipment, distribution transformers and street lighting facilities |
The amounts described in the capital expenditure program above include spending under IPL's TDSIC plan approved by the IURC on March 4, 2020 for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027 (which includes estimated spending of $176.5 million in 2021, $190.0 million in 2022 and $212.6 million in 2023, respectively). Total TDSIC costs expended through December 31, 2020 were $145.8 million.
| | | | | | | | | | | | | | | | | | | | | For the three-year period | | | | 2020 | 2021 | 2022 | from 2020 through 2022 | | Transmission and distribution related additions, improvements and extensions | | $ | 208 |
| $ | 277 |
| $ | 307 |
| $ | 792 |
| (1) | Power plant-related projects | | 61 |
| 59 |
| 70 |
| 190 |
| | Other miscellaneous equipment | | 31 |
| 42 |
| 41 |
| 114 |
| | Total estimated costs of capital expenditure program | | $ | 300 |
| $ | 378 |
| $ | 418 |
| $ | 1,096 |
| | | | | | | | | (1) Additions, improvements and extensions to transmission and distribution lines, substations, power factor and voltage regulating equipment, distribution transformers and street lighting facilities |
Additionally, IPL plans to spend $18 millionestimated capital expenditure spending on environmental compliance costs for the three-year period 2020from 2021 through 20222023 includes the following (amounts in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | Total Estimated Costs | | Total Costs Expended | | Remaining Costs | | | | of Project | | Through December 31, 2020 | | of Project | | NAAQS SO2 (1) | | $ | 27 | | | $ | 26 | | | $ | 1 | | | Cooling water intake regulations (2) | | $ | 9 | | | $ | 2 | | | $ | 7 | | | | | | | | | | | (1) Includes spending for projects underway related to environmental compliance for NAAQS SO2. | (2) Includes spending for studies related to cooling water intake requirements in section 316(b) of the CWA. |
| | | | | | | | | | | | | | | | | Total Estimated Costs | | Total Costs Expended | | Remaining Costs | | | | of Project (1) | | Through December 31, 2019 (1) | | of Project | | NAAQS Ozone | | $ | 25 |
| | $ | 15 |
| | $ | 10 |
| | NAAQS SO2 (2) | | $ | 29 |
| | $ | 28 |
| | $ | 1 |
| | Cooling water intake regulations (3) | | $ | 8 |
| | $ | 1 |
| | $ | 7 |
| | | | | | | | | | (1) Reflects total costs from project inception. | (2) IPL plans to spend a total of $29 million through 2020 for projects underway related to environmental compliance for NAAQS SO2. | (3) Includes spending for studies related to cooling water intake requirements in section 316(b) of the CWA. |
Please see “Item 1. Business - Environmental Matters" for additional details on each of these projects.
The amounts described in the capital expenditure program above include spending under IPL's TDSIC plan filed with the IURC on July 24, 2019 for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027.
Capital Resources
As IPALCO is a holding company, substantially all of its cash is generated by the operating activities of its subsidiaries, principally IPL. None of its subsidiaries, including IPL, are obligated under or have guaranteed to make payments with respect to the Term Loan, 20202024 IPALCO Notes or the 20242030 IPALCO Notes; however, all of IPL’s common stock is pledged to secure these debt obligations. Accordingly, IPALCO’s ability to make payments on the Term Loan, 20202024 IPALCO Notes and the 20242030 IPALCO Notes depends on the ability of IPL to generate cash and distribute it to IPALCO.
Liquidity
We expect our existing sources of liquidity to remain sufficient to meet our anticipated operating needs. Our business is capital intensive, requiring significant resources to fund operating expenses, construction expenditures, scheduled debt maturities and carrying costs, potential margin requirements related to energyinterest rate and commodity hedges, taxes and dividend payments. For 20202021 and subsequent years, we expect to satisfy these requirements with a combination of cash from operations, funds from debt financing, and funds from equity capital contributions as our internal liquidity needs and market conditions warrant. We also expect that the borrowing capacity under the Credit Agreement will continue to be available to manage working capital requirements during those periods. The absence of adequate liquidity could adversely affect our ability to operate our business, and our results of operations, financial condition and cash flows.
Indebtedness
Significant Debt Transactions
For further discussion of our significant debt transactions, please see Note 7, “Debt” to the Financial Statements of this Form 10-K.
Line of Credit
IPL entered into an amendment and restatement of its 5-year $250 million revolving credit facility on June 19, 2019 with a syndication of bank lenders, as discussed in Note 7, “Debt - Line of Credit” to the Financial Statements. This Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes.
We had the following amounts available under the revolving Credit Agreement: | | | | | | | | | | | | | | | | | | | | | | | | | | | $ in millions | | Type | | Maturity | | Commitment | | Amounts available at December 31, 2020 | IPL | | Revolving | | June 2024 | | $ | 250.0 | | | $ | 175.0 | |
| | | | | | | | | | | | | | $ in millions | | Type | | Maturity | | Commitment | | Amounts available at December 31, 2019 | IPL | | Revolving | | June 2024 | | $ | 250.0 |
| | $ | 250.0 |
|
Credit Ratings
Our ability to borrow money or to refinance existing indebtedness and the interest rates at which we can borrow money or refinance existing indebtedness are affected by our credit ratings. In addition, the applicable interest rates on IPL’s Credit Agreement and other unsecured notes (as well as the amount of certain other fees in the Credit Agreement) are dependent
upon the credit ratings of IPL. Downgrades in the credit ratings of AES could result in IPL’s and/or IPALCO’s credit ratings being downgraded. Any reduction in our debt or credit ratings may adversely affect the trading price of our outstanding debt securities.
The following table presents the debt ratings and credit ratings (issuer/corporate rating) and outlook for IPALCO and IPL, along with the dates each rating was effective or affirmed. | | | | | | | | | | | | | | | | | | | | | | | | | | | Debt ratings | | IPALCO | | IPL | | Outlook | | Effective or Affirmed | Fitch Ratings | | BBB (a) | | A (b) | | Stable | | November 2020 | Moody's Investors Service | | Baa3 (a) | | A2 (b) | | Stable | | November 2018 | S&P Global Ratings | | BBB- (a) | | A- (b) | | Stable | | November 2019 | | | | | | | | | | Credit ratings | | IPALCO | | IPL | | Outlook | | Effective or Affirmed | Fitch Ratings | | BBB- | | BBB+ | | Stable | | November 2020 | Moody's Investors Service | | — | | Baa1 | | Stable | | November 2018 | S&P Global Ratings | | BBB | | BBB | | Stable | | November 2019 | | | | | | | | | | | | | | | | | | | Debt ratings | | IPALCO | | IPL | | Outlook | | Effective or Affirmed | Fitch Ratings | | BBB (a)
| | A (b)
| | Stable | | November 2019 | Moody's Investors Service | | Baa3 (a)
| | A2 (b)
| | Stable | | November 2018 | S&P Global Ratings | | BBB- (a)
| | A- (b)
| | Stable | | November 2019 | | | | | | | | | | Credit ratings | | IPALCO | | IPL | | Outlook | | Effective or Affirmed | Fitch Ratings | | BBB- | | BBB+ | | Stable | | November 2019 | Moody's Investors Service | | — | | Baa1 | | Stable | | November 2018 | S&P Global Ratings | | BBB | | BBB | | Stable | | November 2019 |
| | (a) | Ratings relate to IPALCO's Senior Secured Notes. |
| | | | | | | (b) | Ratings relate to IPL's Senior Secured Bonds. | | | | | | | | | | | | | | | | |
(a)Ratings relate to IPALCO's Senior Secured Notes. (b)Ratings relate to IPL's Senior Secured Bonds.
We cannot predict whether our current debt and credit ratings or the debt and credit ratings of IPL will remain in effect for any given period of time or that one or more of these ratings will not be lowered or withdrawn entirely by a rating agency. A security rating is not a recommendation to buy, sell or hold securities. Such ratings may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating.
Contractual Cash Obligations
Our non-contingent contractual obligations as of December 31, 20192020 are set forth below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Payment due | | | Total | | Less Than 1 Year | | 1 – 3 Years | | 3 – 5 Years | | More Than 5 Years | | | (In Millions) | Short-term and long-term debt | | $ | 2,758.8 | | | $ | 170.0 | | | $ | — | | | $ | 445.0 | | | $ | 2,143.8 | | Interest obligations | | 1,930.6 | | | 119.5 | | | 232.8 | | | 211.7 | | | 1,366.6 | | Purchase obligations | | | | | | | | | | | Coal, gas, purchased power and | | | | | | | | | | | related transportation | | 1,182.7 | | | 209.1 | | | 237.2 | | | 214.1 | | | 522.3 | | Other | | 188.4 | | | 172.0 | | | 5.4 | | | 2.8 | | | 8.2 | | Total | | $ | 6,060.5 | | | $ | 670.6 | | | $ | 475.4 | | | $ | 873.6 | | | $ | 4,040.9 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | Payment due | | | Total | | Less Than 1 Year | | 1 – 3 Years | | 3 – 5 Years | | More Than 5 Years | | | (In Millions) | Long-term debt | | $ | 2,678.8 |
| | $ | 560.0 |
| | $ | 95.0 |
| | $ | 445.0 |
| | $ | 1,578.8 |
| Interest obligations | | 1,848.3 |
| | 109.4 |
| | 193.0 |
| | 186.0 |
| | 1,359.9 |
| Purchase obligations | | | | | | | | | | | Coal, gas, purchased power and | | | | | | | | | | | related transportation | | 1,435.3 |
| | 249.4 |
| | 343.0 |
| | 212.1 |
| | 630.8 |
| Other | | 81.4 |
| | 52.4 |
| | 11.4 |
| | 7.0 |
| | 10.6 |
| Total | | $ | 6,043.8 |
| | $ | 971.2 |
| | $ | 642.4 |
| | $ | 850.1 |
| | $ | 3,580.1 |
| | | | | | | | | | | |
Long-termShort-term and long-term debt:
Our short-term and long-term debt at December 31, 20192020 consists of outstanding borrowings on the committed line of credit, IPL first mortgage bonds IPL unsecured debt and IPALCO long-term debt. These long-term debt amounts include current maturities but exclude unamortized debt discounts and deferred financing costs. See Note 7, "Debt" to the FinancialFinancial Statements of this Form 10-K.
Interest obligations:
Interest payment obligations are associated with the short-term and long-term debt described above. The interest payments relating to variable-rate debt are projected using the interest rates in effect at December 31, 2019.2020.
Purchase obligations:
Purchase commitments for coal, gas, purchased power and related transportation: Electricity purchase commitments
:
IPL enters into long-term contracts for the purchase of electricity.coal, gas, purchased power and related transportation. In general, these contracts are subject to variable quantities or prices and are terminable only in limited circumstances.
Purchase orders and other contractual obligations:
At December 31, 2019,2020, we had various other contractual obligations including contracts to purchase goods and services with various terms and expiration dates. Due to uncertainty regarding the timing and payment of future obligations to the Service Company, and our ability to terminate such obligations upon 90 days' notice, we have excluded such amounts in the contractual obligations table above. This table also does not include (i) regulatory liabilities (see Note 2, "Regulatory Matters"), (ii) derivatives and incentive compensation (see Note 5, "Derivative Instruments and Hedging Activities"), (iii) taxes (see Note 8, "Income Taxes"), (iv) pension and other postretirement employee benefit liabilities (see Note 9, "Benefit Plans") and (v) contingencies (see Note 10, "Commitments and Contingencies"). See the indicated notes to the Financial Statements of this Form 10-K for additional information on the items excluded.
Reserve for uncertain tax positions:
Due to the uncertainty regarding the timing of future cash outflows associated with our unrecognized tax benefits of $7.1$7.4 million at December 31, 2019,2020, we are unable to make a reliable estimate of the periods of cash settlement with the respective tax authorities and have not included such amounts in the contractual obligations table above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with GAAP. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period presented. Therefore, the possibility exists for materially different reported amounts under different conditions or assumptions. Significant accounting policies used in the preparation of the consolidated financial statements are described in Note 1, “Overview and Summary of Significant Accounting Policies” to the Financial Statements. This section addresses only those accounting policies involving amounts material to our financial statements that require the most estimation, judgment or assumptions and should be read in conjunction with Note 1, “Overview and Summary of Significant Accounting Policies” to the Financial Statements.
Revenue Recognition
Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making our estimates of unbilled revenue, we use complex models that consider various factors including daily generation volumes; known amounts of energy usage by nearly all residential, small commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. The effect on 20192020 revenues and ending unbilled revenues of a one percentage point change in estimated line losses for the month of December 20192020 is immaterial. An allowance for potential credit losses is maintained and amounts are written off when normal collection efforts have been exhausted.
Income Taxes
We are subject to federal and state income taxes. Our income tax provision requires significant judgment and is based on calculations and assumptions that are subject to examination by the U.S. Internal Revenue Service and other tax authorities. We regularly assess the potential outcome of tax examinations when determining the adequacy of our income tax provisions by considering the technical merits of the filing position, case law, and
results of previous tax examinations. Accounting guidance for uncertainty in income taxes prescribes a more-likely-than-not recognition threshold and measurement requirements for financial statement reporting of our income tax positions. Tax reserves have been established, which we believe to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted only when there is more information available or when an event occurs necessitating a change to the reserves. While we believe that the amount of the tax reserves is reasonable, it is possible that the ultimate outcome of current or future examinations may be materially different than the reserve amounts.
Regulation
As a regulated utility, we apply the provisions of ASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of the IURC and the FERC. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory liabilities generally represent obligations to make refunds or future rate reductions to customers for previous overcollections or the deferral of revenues collected for costs that IPL expects to incur in the future. Specific regulatory assets and liabilities are disclosed in Note 2, “Regulatory Matters - Regulatory Assets and Liabilities” to the Financial Statements.
The deferral of costs (as regulatory assets) is appropriate only when the future recovery of such costs is probable. In assessing probability, we consider such factors as specific orders from the IURC, regulatory precedent and the current regulatory environment. To the extent recovery of costs is no longer deemed probable, related regulatory assets would be required to be expensed in current period earnings. Our regulatory assets and liabilities have been created pursuant to specific orders of the IURC or established regulatory practices, such as other utilities under the jurisdiction of the IURC being granted recovery of similar costs. It is probable, but not certain, that these regulatory assets will be recoverable, subject to IURC approval.
AROs
In accordance with the provisions of GAAP relating to the accounting for AROs, legal obligations associated with the retirement of long-lived assets are required to be recognized at their fair value at the time those obligations are incurred. Upon initial recognition of a legal liability, costs are capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. These GAAP provisions also require that components of previously recorded depreciation related to the cost of removal of assets upon future retirement, whether legal AROs or not, must be removed from a company’s accumulated depreciation reserve and be reclassified as a regulatory liability. We make assumptions, estimates and judgments that affect the reported amounts of assets, liabilities and expenses as they relate to AROs. These assumptions and estimates are based on historical experience and assumptions that we believe to be reasonable at the time. See Note 3, "Property, Plant and Equipment - ARO" to the Financial Statements for more information.
Pension Costs
We account for and disclose pension and postemployment benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postemployment plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Contingencies We accrue for loss contingencies when the amount of the loss is probable and estimable. We are subject to various environmental regulations and are involved in certain legal proceedings. If our actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our results of operations, financial condition and cash flows; although that has not been the case during the periods covered by this report. Please see Note 10, “Commitments and Contingencies” to the Financial Statements for information about significant contingencies involving us.
NEW ACCOUNTING STANDARDS
Please see Note 1, “Overview and Summary of Significant Accounting Policies” to the Financial Statements for a discussion of new accounting pronouncements and the potential impact to our results of operations, financial condition and cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Overview
The primary market risks to which we are exposed are those associated with environmental regulation, debt and equity investments, fluctuations in interest rates and the prices of SO2 allowances and certain raw materials. We sometimes use financial instruments and other contracts to hedge against such fluctuations, including, on a limited basis, financial and commodity derivatives. We generally do not enter into derivative instruments for trading or speculative purposes. Our U.S. Risk Management Committee (U.S. RMC), comprised of members of senior management, is responsible for establishing risk management policies and the monitoring and reporting of risk exposures related to our operations. The U.S. RMC meets on a regular basis with the objective of identifying, assessing and quantifying material risk issues and developing strategies to manage these risks.
The disclosures presented in this section are based upon a number of assumptions; actual effects may differ. The safe harbor provided in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 shall apply to the disclosures contained in this section. For further information regarding market risk, see "Item 1A.—Risk Factors." Our businesses may incur substantial costs and liabilities and be exposed to price volatility as a result of risks associated with the electricity markets, which could have a material adverse effect on our financial performance; and we may not be adequately hedged against our exposure to changes in interest rates.
Wholesale Sales
We engage in wholesale power marketing activities that primarily involve the offering of utility-owned or contracted generation into the MISO day-ahead and real-time markets. Our ability to compete effectively in the wholesale market is dependent on a variety of factors, including our generating availability, the supply of wholesale power, the demand by load-serving entities, and the formation of IPL’s offers into the market. Our wholesale revenues are generated primarily from sales directly to the MISO energy market. The average price per MWh we sold in the wholesale market was $24.91, $25.19 and $31.26 in 2020, 2019 and $31.99 in 2019, 2018, and 2017, respectively. For the periods presented in the Financial Statements of this Form 10-K, a decline in wholesale prices could have had a negative impact on earnings, because most of our non-fuel costs are fixed in the short term and lower wholesale prices can result in lower wholesale volumes sold. However, after the implementation of the 2018 Base Rate Order in December 2018, the impact is limited as the order provides that annual wholesale margins earned above (or below) a benchmark of $16.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. Our wholesale revenues represented 2.2%2.6% of our total electric revenues over the past five years. As a result, we anticipate that a 10% change in the market price for wholesale electricity would not havehave a material impact onon our results of operations.
Fuel
We have limited exposure to commodity price risk for the purchase of coal and natural gas, the primary fuels used by us for the production of electricity. We manage this risk for coal by providing for alla significant portion of our current projected burn through 20202021 and approximately 57%28% of our current projected burn for the three-year period ending December 31, 2022,2023, under long-term contracts. Our current hedge percentage is lower than normal because we have delayed term purchases until the Spring of 2021 to manage our existing higher coal inventory levels. In addition, IPL has established physical natural gas hedges for firm gas supply of approximately 50%100% of the expected consumption at Eagle Valley during the 20202021 winter period.period, which price off the daily natural gas index for the respective physical hubs. Pricing provisions in some of our long-term contracts allow for price changes under certain circumstances. FuelExisting coal purchases made in 2020 have been and2021 are expected to continue to be made at prices that are slightly lowerhigher than our weighted average price in 2019.2020. New coal purchases transacted for 2021 are expected to be lower than the weighted average price of 2020. Our exposure to fluctuations in the price of fuel is limited because pursuant to Indiana law, we may apply to the IURC for a change in our fuel charge every three months to recover our estimated fuel costs, which may be above or below the levels included in our basic rates. We must present evidence in each FAC proceeding that we have made every reasonable effort to acquire fuel and generate or
purchase power or both so as to provide electricity to our retail customers at the lowest fuel cost reasonably possible.
Power Purchased
We depend on purchased power, in part, to meet our retail load obligations. As a result, we also have limited exposure to commodity price risk for the purchase of electric energy for our retail customers. Purchased power costs can be highly volatile. We are generally allowed to recover, through our FAC, the energy portion of purchased power costs incurred to meet jurisdictional retail load. In certain circumstances, we may not be allowed to recover a portion of purchased power costs incurred to meet our jurisdictional retail load. See Note 2, “Regulatory Matters - FAC and Authorized Annual Jurisdictional Net Operating Income” to the Financial Statements.
Equity MarketPrice Risk
Our Pension Plans are impacted significantly by the economy as a result of the Pension Plans being invested in common equity securities. The performance of the Pension Plans’ investments in such common equity securities and other instruments impacts our earnings as well as our funding liability. A hypothetical 10% decrease in prices
quoted by stock exchanges would result in a $21.4$32.3 million reduction in fair value as of December 31, 20192020 and approximately a $7.4$8.2 million increase to the 20202021 pension expense. Please see Note 9, “Benefit Plans” to the Financial Statements for additional Pension Plan information.
Interest Rate Risk
We use long-term debt as a significant source of capital in our business, which exposes us to interest rate risk. We do not enter into market risk sensitive instruments for trading purposes. We manage our exposure to interest rate risk through the use of fixed-rate debt and by refinancing existing long-term debt at times when it is deemed economic and prudent. In addition, IPL’s Credit Agreement and IPALCO's Term Loan bearbears interest at a variable ratesrate based either on the Prime interest rate or on the LIBOR. IPL’s Series 2015A and Series 2015B notes bear interest at variable rates based on the LIBOR. Fair values relating to financial instruments are dependent upon prevalent market rates of interest, primarily the LIBOR. At December 31, 2019,2020, we had approximately $2,523.8$2,683.8 million principal amount of fixed rate debt and $155.0$75.0 million principal amount of variable rate debt outstanding. In regard to our fixed rate debt, the interest rate risk with respect to long-term debt primarily relates to the potential impact a decrease in interest rates has on the fair value of our fixed-rate debt and not on our financial condition or results of operations.
Variable rate debt at December 31, 20192020 was comprised of $90.0$75.0 million under IPL's Series 2015A and Series 2015B notes and $65.0 million under IPALCO's Term Loan.Credit Agreement. Based on amounts outstanding as of December 31, 2019,2020, the effect of a 25 basis point change in the applicable rates on our variable-rate debt would change our annual interest expense and cash paid for interest by $0.4$0.2 million and $(0.40.2 million), respectively.
The following table shows our consolidated indebtedness (in millions) by maturity as of December 31, 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total | | Fair Value | Fixed-rate | | $ | 95.0 | | | $ | — | | | $ | — | | | $ | 445.0 | | | $ | — | | | $ | 2,143.8 | | | $ | 2,683.8 | | | $ | 3,295.6 | | Variable-rate | | 75.0 | | | — | | | — | | | — | | | — | | | — | | | 75.0 | | | 75.0 | | Total Indebtedness | | $ | 170.0 | | | $ | — | | | $ | — | | | $ | 445.0 | | | $ | — | | | $ | 2,143.8 | | | $ | 2,758.8 | | | $ | 3,370.6 | | Weighted Average Interest Rates by Maturity | | 2.732% | | N/A | | N/A | | 3.648% | | N/A | | 4.673% | | 4.388% | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total | | Fair Value | Fixed-rate | | $ | 405.0 |
| | $ | 95.0 |
| | $ | — |
| | $ | — |
| | $ | 445.0 |
| | $ | 1,578.8 |
| | $ | 2,523.8 |
| | $ | 2,876.1 |
| Variable-rate | | 155.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 155.0 |
| | 155.0 |
| Total Indebtedness | | $ | 560.0 |
| | $ | 95.0 |
| | $ | — |
| | $ | — |
| | $ | 445.0 |
| | $ | 1,578.8 |
| | $ | 2,678.8 |
| | $ | 3,031.1 |
| Weighted Average Interest Rates by Maturity | | 3.144% | | 3.875% | | N/A | | N/A | | 3.648% | | 5.016% | | 4.357% | | | | | | | | | | | | | | | | | | | |
For further discussion of our fair value of our indebtedness and book value of our indebtedness please see Note 4, “Fair Value” and Note 7, “Debt” to the Financial Statements.
Retail Energy Market
The legislatures of several states have enacted laws that allow various forms of competition or that experiment with allowing some form of customer choice of electricity suppliers for retail sales of electric energy. Indiana has not done so. In Indiana, competition among electric energy providers for sales has focused primarily on the sale of bulk power to other public and municipal utilities. Indiana law provides for electricity suppliers to have exclusive retail
service areas. In order to increase sales, we work to attract new customers into our service territory. Although the retail sales of electric energy are regulated, we face competition from other energy sources. For example, customers have a choice of installing electric or natural gas home and hot water heating systems or installing qualified generation facilities on their premises.
Counterparty Credit Risk
At times, we may utilize forward purchase contracts to manage the risk associated with power purchases and could be exposed to counterparty credit risk in these contracts. We manage this exposure to counterparty credit risk by entering into contracts with companies that are expected to fully perform under the terms of the contract. Individual credit limits are generally implemented for each counterparty to further mitigate credit risk. We may also require a counterparty to provide collateral in the event certain financial benchmarks are not maintained, or certain credit ratings are not maintained.
We are also exposed to counterparty credit risk related to our ability to collect electricity sales from our customers, which may be impacted by volatility in the financial markets and the economy. Historically, our write-offs of customer accounts have been immaterial, which is common for the electric utility industry.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS | | | | | | | Page No. | IPALCO Enterprises, Inc. and Subsidiaries – Consolidated Financial Statements | Report of Independent Registered Public Accounting Firm – 2020, 2019 2018 and 20172018 | | Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Balance Sheets as of December 31, 20192020 and 20182019 | | Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Statements of Common Shareholders’ Equity and Noncontrolling Interest | | for the Years ended December 31, 2020, 2019 2018 and 20172018 | | Notes to Consolidated Financial Statements | | | | Indianapolis Power & Light Company and Subsidiary – Consolidated Financial Statements | Report of Independent Registered Public Accounting Firm – 2020, 2019 2018 and 20172018 | | Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Balance Sheets as of December 31, 20192020 and 20182019 | | Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Statements of Common Shareholder’s Equity for the Years Ended | | December 31, 2020, 2019 2018 and 20172018 | | Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of IPALCO Enterprises, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of IPALCO Enterprises, Inc. and subsidiaries (the Company) as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, comprehensive income / loss, common shareholders’ equity and noncontrolling interest, and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes and financial statement schedules listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | Regulatory Accounting | |
Regulatory Accounting | Description of the Matter | As described in Note 2 to the consolidated financial statements, the Company applies the provisions of FASC 980 “Regulated Operations”, which gives recognition to the ratemaking and accounting practices of the IURC and the FERC. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory liabilities generally represent obligations to provide refunds or future rate reductions to customers for previous over collections or the deferral of revenues collected for costs that the Company expects to incur in the future. Accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; operating revenues; and depreciation expense, and related disclosures in the Company’s consolidated financial statements. | | Auditing the Company’s regulatory accounting was complex due to significant judgments made by management to support its assertions about the impact of future regulatory orders on the consolidated financial statements. In particular, there is subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred as of December 31, 2020, judgment required to evaluate the relevance and reliability of audit evidence to support impacted account balances and disclosures, and judgments involved in assessing the probability of recovery in future rates of incurred costs or refunds to customers. These assumptions have a significant effect on the regulatory assets and liabilities and related disclosures. | How We Addressed the Matter in Our Audit | To test the Company’s accounting for regulatory assets and liabilities, our audit procedures included, among others, reviewing relevant regulatory orders, statutes and interpretations; filings made by intervening parties; and other publicly available information, to assess the likelihood of recovery of regulatory assets in future rates or of a refund or future reduction in rates for regulatory liabilities based on precedents for the treatment of similar costs under similar circumstances. We evaluated the Company’s assertions regarding the probability of recovery of regulatory assets or refund or future reduction in rates for regulatory liabilities, to assess the Company’s assertion that amounts are probable of recovery or of a refund or future reduction in rates. | | |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Indianapolis, Indiana February 27, 202024, 2021
| | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | Consolidated Statements of Operations | Consolidated Statements of Operations | Consolidated Statements of Operations | For the Years Ended December 31, 2019, 2018 and 2017 | | For the Years Ended December 31, 2020, 2019 and 2018 | | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | (In Thousands) | (In Thousands) | | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | REVENUES | | $ | 1,481,643 |
| | $ | 1,450,505 |
| | $ | 1,349,588 |
| REVENUES | | $ | 1,352,985 | | | $ | 1,481,643 | | | $ | 1,450,505 | | | | | | | | | | OPERATING COSTS AND EXPENSES: | | | | | | | OPERATING COSTS AND EXPENSES: | | | | | | | Fuel | | 340,466 |
| | 331,701 |
| | 281,542 |
| Fuel | | 247,105 | | | 340,466 | | | 331,701 | | Power purchased | | 133,674 |
| | 164,542 |
| | 189,847 |
| Power purchased | | 135,767 | | | 133,674 | | | 164,542 | | Operation and maintenance | | 428,201 |
| | 431,620 |
| | 385,906 |
| Operation and maintenance | | 416,169 | | | 428,201 | | | 431,620 | | Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
| Depreciation and amortization | | 246,896 | | | 240,314 | | | 232,332 | | Taxes other than income taxes | | 42,236 |
| | 53,952 |
| | 44,644 |
| Taxes other than income taxes | | 44,516 | | | 42,236 | | | 53,952 | | | Total operating expenses | | 1,184,891 |
| | 1,214,147 |
| | 1,110,390 |
| Total operating expenses | | 1,090,453 | | | 1,184,891 | | | 1,214,147 | | | | | | | | | | | OPERATING INCOME | | 296,752 |
| | 236,358 |
| | 239,198 |
| OPERATING INCOME | | 262,532 | | | 296,752 | | | 236,358 | | | | | | | | | | | OTHER INCOME / (EXPENSE), NET: | | | | | | | OTHER INCOME / (EXPENSE), NET: | | | | | | | Allowance for equity funds used during construction | | 3,486 |
| | 8,477 |
| | 25,798 |
| Allowance for equity funds used during construction | | 4,574 | | | 3,486 | | | 8,477 | | Interest expense | | (121,771 | ) | | (95,509 | ) | | (101,130 | ) | Interest expense | | (129,493) | | | (121,771) | | | (95,509) | | Loss on early extinguishment of debt | | — |
| | — |
| | (8,875 | ) | Loss on early extinguishment of debt | | (2,424) | | | 0 | | | 0 | | Other income / (expense), net | | (10,546 | ) | | (1,852 | ) | | 2,753 |
| Other income / (expense), net | | 3,370 | | | (10,546) | | | (1,852) | | Total other income / (expense), net | | (128,831 | ) | | (88,884 | ) | | (81,454 | ) | Total other income / (expense), net | | (123,973) | | | (128,831) | | | (88,884) | | | | | | | | | | | EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 167,921 |
| | 147,474 |
| | 157,744 |
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 138,559 | | | 167,921 | | | 147,474 | | | | | | | | | | Less: income tax expense | | 35,528 |
| | 13,449 |
| | 48,951 |
| Less: income tax expense | | 28,592 | | | 35,528 | | | 13,449 | | NET INCOME | | 132,393 |
| | 134,025 |
| | 108,793 |
| NET INCOME | | 109,967 | | | 132,393 | | | 134,025 | | | | | | | | | | Less: dividends on preferred stock | | 3,213 |
| | 3,213 |
| | 3,213 |
| Less: dividends on preferred stock | | 3,213 | | | 3,213 | | | 3,213 | | NET INCOME APPLICABLE TO COMMON STOCK | | $ | 129,180 |
| | $ | 130,812 |
| | $ | 105,580 |
| NET INCOME APPLICABLE TO COMMON STOCK | | $ | 106,754 | | | $ | 129,180 | | | $ | 130,812 | | | | | | | | | | |
See notes to consolidated financial statements.
| | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | Consolidated Statements of Comprehensive Income/(Loss) | Consolidated Statements of Comprehensive Income/(Loss) | Consolidated Statements of Comprehensive Income/(Loss) | For the Years Ended December 31, 2019, 2018 and 2017 | | For the Years Ended December 31, 2020, 2019 and 2018 | | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | (In Thousands) | (In Thousands) | | 2019 | 2018 | 2017 | | | 2020 | 2019 | 2018 | | | | | | Net income applicable to common stock | $ | 129,180 |
| $ | 130,812 |
| $ | 105,580 |
| Net income applicable to common stock | | $ | 106,754 | | $ | 129,180 | | $ | 130,812 | | | | | | | Derivative activity: | | Derivative activity: | | | Change in derivative fair value, net of income tax benefit of $6,810, $0 and $0, for each respective period | (19,750 | ) | — |
| — |
| | Change in derivative fair value, net of income tax benefit of $8,876, $6,810 and $0, for each respective period | | Change in derivative fair value, net of income tax benefit of $8,876, $6,810 and $0, for each respective period | | (27,779) | | (19,750) | | 0 | | Reclassification to earnings, net of income tax benefit of $1,313, $0 and $0, for each respective period | | Reclassification to earnings, net of income tax benefit of $1,313, $0 and $0, for each respective period | | 4,109 | | 0 | | 0 | | Net change in fair value of derivatives | (19,750 | ) | — |
| — |
| Net change in fair value of derivatives | | (23,670) | | (19,750) | | 0 | | | | | | | Other comprehensive loss | (19,750 | ) | — |
| — |
| Other comprehensive loss | | (23,670) | | (19,750) | | 0 | | | | | | | Net comprehensive income | $ | 109,430 |
| $ | 130,812 |
| $ | 105,580 |
| Net comprehensive income | | $ | 83,084 | | $ | 109,430 | | $ | 130,812 | | | | | | |
See notes to consolidated financial statements.
| | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | Consolidated Balance Sheets | Consolidated Balance Sheets | Consolidated Balance Sheets | (In Thousands) | (In Thousands) | (In Thousands) | | | December 31, 2019 | | December 31, 2018 | | | December 31, 2020 | | December 31, 2019 | ASSETS | | | | | ASSETS | | | | | CURRENT ASSETS: | | | | | CURRENT ASSETS: | | Cash and cash equivalents | | $ | 48,152 |
| | $ | 33,199 |
| Cash and cash equivalents | | $ | 20,502 | | | $ | 48,152 | | Restricted cash | | 400 |
| | 400 |
| Restricted cash | | 6,120 | | | 400 | | Accounts receivable, net | | 161,090 |
| | 167,559 |
| | Accounts receivable, net of allowance for credit losses of $3,155 and $921, respectively | | Accounts receivable, net of allowance for credit losses of $3,155 and $921, respectively | | 165,193 | | | 161,090 | | Inventories | | 83,569 |
| | 99,668 |
| Inventories | | 95,506 | | | 83,569 | | Regulatory assets, current | | 37,398 |
| | 28,399 |
| Regulatory assets, current | | 45,430 | | | 37,398 | | Taxes receivable | | 23,670 |
| | 13,773 |
| Taxes receivable | | 24,384 | | | 23,670 | | Prepayments and other current assets | | 17,264 |
| | 15,573 |
| Prepayments and other current assets | | 17,842 | | | 17,264 | | Total current assets | | 371,543 |
| | 358,571 |
| Total current assets | | 374,977 | | | 371,543 | | NON-CURRENT ASSETS: | | | | | NON-CURRENT ASSETS: | | | | | Property, plant and equipment | | 6,398,612 |
| | 6,201,078 |
| Property, plant and equipment | | 6,530,395 | | | 6,398,612 | | Less: Accumulated depreciation | | 2,414,652 |
| | 2,256,215 |
| Less: Accumulated depreciation | | 2,643,695 | | | 2,414,652 | |
| | 3,983,960 |
| | 3,944,863 |
| | | 3,886,700 | | | 3,983,960 | | Construction work in progress | | 130,609 |
| | 111,723 |
| Construction work in progress | | 209,584 | | | 130,609 | | Total net property, plant and equipment | | 4,114,569 |
| | 4,056,586 |
| Total net property, plant and equipment | | 4,096,284 | | | 4,114,569 | | OTHER NON-CURRENT ASSETS: | | |
| | |
| OTHER NON-CURRENT ASSETS: | | | | | Intangible assets - net | | 64,861 |
| | 40,848 |
| Intangible assets - net | | 59,141 | | | 64,861 | | Regulatory assets, non-current | | 355,614 |
| | 395,077 |
| Regulatory assets, non-current | | 392,801 | | | 355,614 | | Other non-current assets | | 22,082 |
| | 10,971 |
| Other non-current assets | | 46,716 | | | 22,082 | | Total other non-current assets | | 442,557 |
| | 446,896 |
| Total other non-current assets | | 498,658 | | | 442,557 | | TOTAL ASSETS | | $ | 4,928,669 |
| | $ | 4,862,053 |
| TOTAL ASSETS | | $ | 4,969,919 | | | $ | 4,928,669 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | CURRENT LIABILITIES: | | | | | CURRENT LIABILITIES: | | | | | Short-term and current portion of long-term debt (Note 7) | | $ | 559,199 |
| | $ | — |
| | Short-term debt and current portion of long-term debt (Note 7) | | Short-term debt and current portion of long-term debt (Note 7) | | $ | 169,907 | | | $ | 559,199 | | Accounts payable | | 128,521 |
| | 134,931 |
| Accounts payable | | 127,089 | | | 128,521 | | Accrued taxes | | 22,012 |
| | 21,325 |
| Accrued taxes | | 26,620 | | | 22,012 | | Accrued interest | | 35,334 |
| | 34,790 |
| Accrued interest | | 31,733 | | | 35,334 | | Customer deposits | | 34,635 |
| | 32,700 |
| Customer deposits | | 27,929 | | | 34,635 | | Regulatory liabilities, current | | 52,654 |
| | 51,024 |
| Regulatory liabilities, current | | 30,036 | | | 52,654 | | Derivative liabilities, current | | Derivative liabilities, current | | 0 | | | 26,560 | | Accrued and other current liabilities | | 49,860 |
| | 27,787 |
| Accrued and other current liabilities | | 19,453 | | | 23,300 | | Total current liabilities | | 882,215 |
| | 302,557 |
| Total current liabilities | | 432,767 | | | 882,215 | | NON-CURRENT LIABILITIES: | | | | | NON-CURRENT LIABILITIES: | | | | | Long-term debt (Note 7) | | 2,092,430 |
| | 2,649,064 |
| Long-term debt (Note 7) | | 2,556,278 | | | 2,092,430 | | Deferred income tax liabilities | | 272,861 |
| | 253,085 |
| Deferred income tax liabilities | | 275,714 | | | 272,861 | | Taxes payable | | 4,658 |
| | 4,658 |
| Taxes payable | | 7,458 | | | 4,658 | | Regulatory liabilities, non-current | | 846,430 |
| | 870,255 |
| Regulatory liabilities, non-current | | 839,360 | | | 846,430 | | Accrued pension and other postretirement benefits | | 19,344 |
| | 19,329 |
| Accrued pension and other postretirement benefits | | 5,334 | | | 19,344 | | Asset retirement obligations | | 204,219 |
| | 129,451 |
| Asset retirement obligations | | 195,236 | | | 204,219 | | Derivative liabilities, non-current | | Derivative liabilities, non-current | | 63,215 | | | 0 | | Other non-current liabilities | | 252 |
| | 604 |
| Other non-current liabilities | | 13,785 | | | 252 | | Total non-current liabilities | | 3,440,194 |
| | 3,926,446 |
| Total non-current liabilities | | 3,956,380 | | | 3,440,194 | | Total liabilities | | 4,322,409 |
| | 4,229,003 |
| Total liabilities | | 4,389,147 | | | 4,322,409 | | COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | | COMMITMENTS AND CONTINGENCIES (Note 10) | | COMMITMENTS AND CONTINGENCIES (Note 10) | | | SHAREHOLDERS' EQUITY: | | | | | SHAREHOLDERS' EQUITY: | | | | | Paid in capital | | 590,784 |
| | 597,824 |
| Paid in capital | | 588,966 | | | 590,784 | | Accumulated other comprehensive loss | | (19,750 | ) | | — |
| Accumulated other comprehensive loss | | (43,420) | | | (19,750) | | Accumulated deficit | | (24,558 | ) | | (24,558 | ) | Accumulated deficit | | (24,558) | | | (24,558) | | Total common shareholders' equity | | 546,476 |
| | 573,266 |
| Total common shareholders' equity | | 520,988 | | | 546,476 | | Preferred stock of subsidiary | | 59,784 |
| | 59,784 |
| Preferred stock of subsidiary | | 59,784 | | | 59,784 | | Total shareholders' equity | | 606,260 |
| | 633,050 |
| Total shareholders' equity | | 580,772 | | | 606,260 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 4,928,669 |
| | $ | 4,862,053 |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 4,969,919 | | | $ | 4,928,669 | | | | | | | | |
See notes to consolidated financial statements.
| | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows | For the Years Ended December 31, 2019, 2018 and 2017 | | For the Years Ended December 31, 2020, 2019 and 2018 | | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | (In Thousands) | (In Thousands) | | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net income | | $ | 132,393 |
| | $ | 134,025 |
| | $ | 108,793 |
| Net income | | $ | 109,967 | | | $ | 132,393 | | | $ | 134,025 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
| Depreciation and amortization | | 246,896 | | | 240,314 | | | 232,332 | | Amortization of deferred financing costs and debt premium | | 4,109 |
| | 3,975 |
| | 4,202 |
| | Amortization of deferred financing costs and debt discounts | | Amortization of deferred financing costs and debt discounts | | 3,942 | | | 4,109 | | | 3,975 | | Deferred income taxes and investment tax credit adjustments - net | | 15,277 |
| | (15,735 | ) | | (3,506 | ) | Deferred income taxes and investment tax credit adjustments - net | | 2,854 | | | 15,277 | | | (15,735) | | Loss on early extinguishment of debt | | — |
| | — |
| | 8,875 |
| Loss on early extinguishment of debt | | 2,424 | | | 0 | | | 0 | | Allowance for equity funds used during construction | | (3,486 | ) | | (8,477 | ) | | (25,798 | ) | Allowance for equity funds used during construction | | (4,574) | | | (3,486) | | | (8,477) | | Change in certain assets and liabilities: | | |
| | |
| | |
| Change in certain assets and liabilities: | | | | | | | Accounts receivable | | 6,469 |
| | (9,944 | ) | | (3,028 | ) | Accounts receivable | | (4,103) | | | 6,469 | | | (9,944) | | Inventories | | 13,574 |
| | (3,652 | ) | | (5,342 | ) | Inventories | | (15,240) | | | 13,574 | | | (3,652) | | Accounts payable | | 3,047 |
| | 3,675 |
| | (12,917 | ) | Accounts payable | | (20,322) | | | 3,047 | | | 3,675 | | Accrued and other current liabilities | | 4,413 |
| | (10,532 | ) | | 97 |
| Accrued and other current liabilities | | (8,214) | | | 4,413 | | | (10,532) | | Accrued taxes payable/receivable | | (15,698 | ) | | 3,180 |
| | (785 | ) | Accrued taxes payable/receivable | | 6,695 | | | (15,698) | | | 3,180 | | Accrued interest | | 544 |
| | 458 |
| | 1,791 |
| Accrued interest | | (3,601) | | | 544 | | | 458 | | Pension and other postretirement benefit expenses | | 5,414 |
| | (30,740 | ) | | (14,069 | ) | Pension and other postretirement benefit expenses | | (6,991) | | | 5,414 | | | (30,740) | | Short-term and long-term regulatory assets and liabilities | | 921 |
| | 76,647 |
| | 17,011 |
| Short-term and long-term regulatory assets and liabilities | | (13,390) | | | 921 | | | 76,647 | | Prepayments and other current assets | | (2,119 | ) | | 4,711 |
| | (553 | ) | Prepayments and other current assets | | (578) | | | (2,119) | | | 4,711 | | Other - net | | (7,357 | ) | | 1,089 |
| | 2,038 |
| Other - net | | (340) | | | (7,357) | | | 1,089 | | Net cash provided by operating activities | | 397,815 |
| | 381,012 |
| | 285,260 |
| Net cash provided by operating activities | | 295,425 | | | 397,815 | | | 381,012 | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | Capital expenditures | | (213,619 | ) | | (224,335 | ) | | (218,224 | ) | Capital expenditures | | (235,700) | | | (213,619) | | | (224,335) | | Project development costs | | (2,269 | ) | | (1,127 | ) | | (1,729 | ) | Project development costs | | (2,401) | | | (2,269) | | | (1,127) | | Cost of removal and regulatory recoverable ARO payments | | (21,838 | ) | | (29,543 | ) | | (16,802 | ) | Cost of removal and regulatory recoverable ARO payments | | (37,786) | | | (21,838) | | | (29,543) | | Other | | 278 |
| | 1,053 |
| | 323 |
| Other | | 118 | | | 278 | | | 1,053 | | Net cash used in investing activities | | (237,448 | ) | | (253,952 | ) | | (236,432 | ) | Net cash used in investing activities | | (275,769) | | | (237,448) | | | (253,952) | | CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
| | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | Short-term debt borrowings | | 10,000 |
| | 100,000 |
| | 202,500 |
| | Short-term debt repayments | | (10,000 | ) | | (248,000 | ) | | (129,150 | ) | | Borrowings under revolving credit facilities | | Borrowings under revolving credit facilities | | 115,000 | | | 10,000 | | | 100,000 | | Repayments under revolving credit facilities | | Repayments under revolving credit facilities | | (40,000) | | | (10,000) | | | (248,000) | | Long-term borrowings, net of discount | | — |
| | 169,936 |
| | 404,633 |
| Long-term borrowings, net of discount | | 564,568 | | | 0 | | | 169,936 | | Retirement of long-term debt, including early payment premium | | — |
| | — |
| | (408,152 | ) | Retirement of long-term debt, including early payment premium | | (562,135) | | | 0 | | | 0 | | Distributions to shareholders | | (136,426 | ) | | (130,179 | ) | | (105,144 | ) | Distributions to shareholders | | (108,739) | | | (136,426) | | | (130,179) | | | Preferred dividends of subsidiary | | (3,213 | ) | | (3,213 | ) | | (3,213 | ) | Preferred dividends of subsidiary | | (3,213) | | | (3,213) | | | (3,213) | | Deferred financing costs paid | | — |
| | (1,067 | ) | | (3,709 | ) | Deferred financing costs paid | | (6,914) | | | 0 | | | (1,067) | | Payments for financed capital expenditures | | (5,623 | ) | | (11,429 | ) | | (10,637 | ) | Payments for financed capital expenditures | | (36) | | | (5,623) | | | (11,429) | | Other | | (152 | ) | | (190 | ) | | (228 | ) | Other | | (117) | | | (152) | | | (190) | | Net cash used in financing activities | | (145,414 | ) | | (124,142 | ) | | (53,100 | ) | Net cash used in financing activities | | (41,586) | | | (145,414) | | | (124,142) | | Net change in cash, cash equivalents and restricted cash | | 14,953 |
| | 2,918 |
| | (4,272 | ) | Net change in cash, cash equivalents and restricted cash | | (21,930) | | | 14,953 | | | 2,918 | | Cash, cash equivalents and restricted cash at beginning of period | | 33,599 |
| | 30,681 |
| | 34,953 |
| Cash, cash equivalents and restricted cash at beginning of period | | 48,552 | | | 33,599 | | | 30,681 | | Cash, cash equivalents and restricted cash at end of period | | $ | 48,552 |
| | $ | 33,599 |
| | $ | 30,681 |
| Cash, cash equivalents and restricted cash at end of period | | $ | 26,622 | | | $ | 48,552 | | | $ | 33,599 | | | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Cash paid during the period for: | | | | | | | Interest (net of amount capitalized) | | $ | 117,457 |
| | $ | 90,975 |
| | $ | 94,781 |
| Interest (net of amount capitalized) | | $ | 122,938 | | | $ | 117,457 | | | $ | 90,975 | | Income taxes | | 29,600 |
| | 28,275 |
| | 65,050 |
| Income taxes | | 27,000 | | | 29,600 | | | 28,275 | | Non-cash investing activities: | | | | | | |
| Non-cash investing activities: | | | | | | | Accruals for capital expenditures | | $ | 35,471 |
| | $ | 47,553 |
| | $ | 45,322 |
| Accruals for capital expenditures | | $ | 54,360 | | | $ | 35,471 | | | $ | 47,553 | | | | | | | | | |
See notes to consolidated financial statements.
| | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | Consolidated Statements of Common Shareholders' Equity | Consolidated Statements of Common Shareholders' Equity | Consolidated Statements of Common Shareholders' Equity | and Noncontrolling Interest | and Noncontrolling Interest | and Noncontrolling Interest | For the Years Ended December 31, 2019, 2018 and 2017 | | For the Years Ended December 31, 2020, 2019 and 2018 | | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | (In Thousands) | (In Thousands) | | | Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Common Shareholders' Equity | | Cumulative Preferred Stock of Subsidiary | | | Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Common Shareholders' Equity | | Cumulative Preferred Stock of Subsidiary | Balance at January 1, 2017 | | $ | 596,810 |
| | $ | — |
| | $ | (25,627 | ) | | $ | 571,183 |
| | $ | 59,784 |
| | Net income | | — |
| | — |
| | 105,580 |
| | 105,580 |
| | 3,213 |
| | Preferred stock dividends | | — |
| | — |
| | — |
| | — |
| | (3,213 | ) | | Distributions to shareholders | | — |
| | — |
| | (105,144 | ) | | (105,144 | ) | | — |
| | Other | | 657 |
| | — |
| | — |
| | 657 |
| | — |
| | Balance at December 31, 2017 | | 597,467 |
| | — |
| | (25,191 | ) | | 572,276 |
| | 59,784 |
| | Balance at January 1, 2018 | | Balance at January 1, 2018 | | $ | 597,467 | | | $ | — | | | $ | (25,191) | | | $ | 572,276 | | | $ | 59,784 | | Net income | | — |
| | — |
| | 130,812 |
| | 130,812 |
| | 3,213 |
| Net income | | — | | | — | | | 130,812 | | | 130,812 | | | 3,213 | | Preferred stock dividends | | — |
| | — |
| | — |
| | — |
| | (3,213 | ) | Preferred stock dividends | | — | | | — | | | — | | | — | | | (3,213) | | Distributions to shareholders | | — |
| | — |
| | (130,179 | ) | | (130,179 | ) | | — |
| Distributions to shareholders | | — | | | — | | | (130,179) | | | (130,179) | | | — | | Other | | 357 |
| | — |
| | — |
| | 357 |
| | — |
| Other | | 357 | | | — | | | — | | | 357 | | | — | | Balance at December 31, 2018 | | 597,824 |
| | — |
| | (24,558 | ) | | 573,266 |
| | 59,784 |
| Balance at December 31, 2018 | | 597,824 | | | — | | | (24,558) | | | 573,266 | | | 59,784 | | Net comprehensive income | | — |
| | (19,750 | ) | | 129,180 |
| | 109,430 |
| | 3,213 |
| Net comprehensive income | | — | | | (19,750) | | | 129,180 | | | 109,430 | | | 3,213 | | Preferred stock dividends | | — |
| | — |
| | — |
| | — |
| | (3,213 | ) | Preferred stock dividends | | — | | | — | | | — | | | — | | | (3,213) | | Distributions to shareholders(1) | | (7,246 | ) | | — |
| | (129,180 | ) | | (136,426 | ) | | — |
| Distributions to shareholders(1) | | (7,246) | | | — | | | (129,180) | | | (136,426) | | | — | | Other | | 206 |
| | — |
| | — |
| | 206 |
| | — |
| Other | | 206 | | | — | | | — | | | 206 | | | — | | Balance at December 31, 2019 | | $ | 590,784 |
| | $ | (19,750 | ) | | $ | (24,558 | ) | | $ | 546,476 |
| | $ | 59,784 |
| Balance at December 31, 2019 | | 590,784 | | | (19,750) | | | (24,558) | | | 546,476 | | | 59,784 | | Net comprehensive income | | Net comprehensive income | | — | | | (23,670) | | | 106,754 | | | 83,084 | | | 3,213 | | Preferred stock dividends | | Preferred stock dividends | | — | | | — | | | — | | | — | | | (3,213) | | Distributions to shareholders(1) | | Distributions to shareholders(1) | | (1,985) | | | — | | | (106,754) | | | (108,739) | | | — | | Other | | Other | | 167 | | | — | | | — | | | 167 | | | — | | Balance at December 31, 2020 | | Balance at December 31, 2020 | | $ | 588,966 | | | $ | (43,420) | | | $ | (24,558) | | | $ | 520,988 | | | $ | 59,784 | | | | | | | | | | | | | | | | | | 1) IPALCO made return of capital payments of $7.2 million in 2019 for the portion of current year distributions to shareholders in excess of current year net income.
| | 1) IPALCO made return of capital payments of $2.0 million, $7.2 million and $0.0 million in 2020, 2019 and 2018, respectively, for the portion of current year distributions to shareholders in excess of current year net income.
| | 1) IPALCO made return of capital payments of $2.0 million, $7.2 million and $0.0 million in 2020, 2019 and 2018, respectively, for the portion of current year distributions to shareholders in excess of current year net income.
| | | |
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES Notes to Consolidated Financial Statements For the Years Ended December 31, 2020, 2019 2018 and 20172018
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IPALCO is a holding company incorporated under the laws of the state of Indiana. IPALCO, acquired by AES in March 2001, is owned by AES U.S. Investments (82.35%) and CDPQ (17.65%). AES U.S. Investments is owned by AES U.S. Holdings, LLC (85%) and CDPQ (15%). IPALCO owns all of the outstanding common stock of IPL. Substantially all of IPALCO’s business consists of generating, transmitting, distributing and selling of electric energy conducted through its principal subsidiary, IPL. IPL was incorporated under the laws of the state of Indiana in 1926. IPL has more than 500,000approximately 512,000 retail customers in the city of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, with the most distant point being approximately 40 miles from Indianapolis. IPL has an exclusive right to provide electric service to those customers. IPL owns and operates 4 generating stations all within the state of Indiana. Our largest generating station, Petersburg, is coal-fired.coal-fired, and IPL has plans to retire approximately 630 MW of coal-fired generation at Petersburg Units 1 and 2 in 2021 and 2023, respectively (for further discussion, see Note 2, "Regulatory Matters - IRP Filing"). The second largest station, Harding Street, uses natural gas and fuel oil to power combustion turbines. In addition, IPL operates a 20 MW battery energy storage unit at this location, which provides frequency response. The third station, Eagle Valley, is a CCGT natural gas plant. IPL took operational control and commenced commercial operations of this CCGT plant in April 2018. The fourth station, Georgetown, is a small peaking station that uses natural gas to power combustion turbines. As of December 31, 2019,2020, IPL’s net electric generation capacity for winter is 3,705 MW and net summer capacity is 3,560 MW.
IPALCO’s other direct subsidiary is Mid-America. Mid-America is the holding company for IPALCO’s unregulated activities, which have not been material to the financial statements in the periods covered by this report. IPALCO’s regulated business is conducted through IPL. IPALCO has 2 business segments: utility and nonutility. The utility segment consists of the operations of IPL and everything else is included in the nonutility segment.
Principles of Consolidation
IPALCO’s consolidated financial statements are prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The consolidated financial statements include the accounts of IPALCO, its regulated utility subsidiary, IPL, and its unregulated subsidiary, Mid-America. All intercompany items have been eliminated in consolidation. Certain costs for shared resources amongst IPL and IPALCO, such as labor and benefits, are allocated to each entity based on allocation methodologies that management believes to be reasonable. We have evaluated subsequent events through the date this report is issued.
Financial Statement Presentation
During 2018, we adopted a change in presentation on our Consolidated Balance Sheets and Consolidated Statements of Operations from a utility format to a traditional format. These changes combined or revised the order of certain balance sheet and income statement line items and resulted in the movement of certain immaterial balances within the Consolidated Statements of Operations and Consolidated Balance Sheets, but did not result in any material changes to the classification of any such amounts or have any impact on net assets or net income.
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
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.
Regulatory Accounting
The retail utility operations of IPL are subject to the jurisdiction of the IURC. IPL’s wholesale power transactions are subject to the jurisdiction of the FERC. These agencies regulate IPL’s utility business operations, tariffs, accounting, depreciation allowances, services, issuances of securities and the sale and acquisition of utility properties. The
financial statements of IPL are based on GAAP, including the provisions of FASB ASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of these agencies. See also Note 2, “Regulatory Matters - Regulatory Assets and Liabilities” for a discussion of specific regulatory assets and liabilities.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents. Restricted cash includes cash
which is restricted as to withdrawal or usage. The nature of the restrictions includes restrictions imposed by agreements related to deposits held as collateral. The following table provides a summary of cash, cash equivalents and restricted cash amounts as shown on the Consolidated Statements of Cash Flows: | | | | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Cash, cash equivalents and restricted cash | | | | | Cash and cash equivalents | | $ | 20,502 | | | $ | 48,152 | | Restricted cash | | 6,120 | | | 400 | | Total cash, cash equivalents and restricted cash | | $ | 26,622 | | | $ | 48,552 | | | | | | |
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Cash, cash equivalents and restricted cash | | | | | Cash and cash equivalents | | $ | 48,152 |
| | $ | 33,199 |
| Restricted cash | | 400 |
| | 400 |
| Total cash, cash equivalents and restricted cash | | $ | 48,552 |
| | $ | 33,599 |
| | | | | |
Revenues and Accounts Receivable
Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to certain customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making its estimates of unbilled revenue, IPL uses complex models that consider various factors including daily generation volumes; known amounts of energy usage by nearly all residential, small commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. An allowance for potential credit losses is maintained and amounts are written off when normal collection efforts have been exhausted. Our provision for doubtful accountsexpected credit losses included in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations was $5.5$4.8 million $6.0, $4.3 million and $5.9 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
IPL’s basic rates include a provision for fuel costs as established in IPL’s most recent rate proceeding, which last adjusted IPL’s rates in December 2018. IPL is permitted to recover actual costs of purchased power and fuel consumed, subject to certain restrictions. This is accomplished through quarterly FAC proceedings, in which IPL estimates the amount of fuel and purchased power costs in future periods. Through these proceedings, IPL is also permitted to recover, in future rates, underestimated fuel and purchased power costs from prior periods, subject to certain restrictions, and therefore the over or underestimated costs are deferred or accrued and amortized into fuel expense in the same period that IPL’s rates are adjusted. See also Note 2, “Regulatory Matters” for a discussion of other costs that IPL is permitted to recover through periodic rate adjustment proceedings and the status of current rate adjustment proceedings.
In addition, we are one of many transmission system owner members of MISO, a regional transmission organization which maintains functional control over the combined transmission systems of its members and manages one of the largest energy markets in the U.S. See Note 13, "Revenue" for additional information of MISO sales and other revenue streams.
The following table summarizes our accounts receivable balances at December 31: | | | | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Accounts receivable, net | | | | | Customer receivables | | $ | 91,335 | | | $ | 90,747 | | Unbilled revenue | | 72,334 | | | 65,822 | | Amounts due from related parties | | 490 | | | 2,717 | | Other | | 4,189 | | | 2,725 | | Provision for uncollectible accounts | | (3,155) | | | (921) | | Total accounts receivable, net | | $ | 165,193 | | | $ | 161,090 | | | | | | |
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Accounts receivable, net | | | | | Customer receivables | | $ | 90,747 |
| | $ | 91,426 |
| Unbilled revenue | | 65,822 |
| | 68,893 |
| Amounts due from related parties | | 2,717 |
| | 5,720 |
| Other | | 3,857 |
| | 4,341 |
| Provision for uncollectible accounts | | (2,053 | ) | | (2,821 | ) | Total accounts receivable, net | | $ | 161,090 |
| | $ | 167,559 |
| | | | | |
The following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the year ended December 31, 2020 (in Thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning Allowance Balance at January 1, 2020 | | Current Period Provision | | Write-offs Charged Against Allowances | | Recoveries Collected | | Ending Allowance Balance at December 31, 2020 | Allowance for credit losses | | $ | 921 | | | $ | 5,861 | | | $ | (5,473) | | | $ | 1,846 | | | $ | 3,155 | | | | | | | | | | | | |
The allowance for credit losses primarily relates to utility customer receivables, including unbilled amounts. Expected credit loss estimates are developed by disaggregating customers into those with similar credit risk characteristics and using historical credit loss experience. In addition, we also consider how current and future economic conditions are expected to impact collectability, as applicable, including the economic impacts of the COVID-19 pandemic on our receivable balance as of December 31, 2020. Amounts are written off when reasonable collections efforts have been exhausted. An Executive Order issued by the Governor of Indiana on March 19, 2020 and extended by the IURC prohibited electric utilities, including us, from discontinuing electric utility service to customers through August 14, 2020 due to the economic impacts of COVID-19. This order along with the economic impacts of COVID-19 has resulted in an increase in past due customer receivable balances, and thus the current period provision and the allowance for credit losses has increased during 2020. Please see additional discussion in Note 2, "Regulatory Matters - IURC COVID-19 Order” and Note 15, "Risks and Uncertainties - COVID-19 Pandemic."
Inventories
We maintain coal, fuel oil, materials and supplies inventories for use in the production of electricity. These inventories are accounted for at the lower of cost or net realizable value, using the average cost. The following table summarizes our inventories balances at December 31: | | | | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Inventories | | | | | Fuel | | $ | 36,953 | | | $ | 26,907 | | Materials and supplies, net | | 58,553 | | | 56,662 | | Total inventories | | $ | 95,506 | | | $ | 83,569 | | | | | | |
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Inventories | | | | | Fuel | | $ | 26,907 |
| | $ | 32,457 |
| Materials and supplies | | 56,662 |
| | 67,211 |
| Total inventories | | $ | 83,569 |
| | $ | 99,668 |
| | | | | |
Property, Plant and Equipment
Property, plant and equipment is stated at original cost as defined for regulatory purposes. The cost of additions to property, plant and equipment and replacements of retirement units of property 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, 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 3.7%, 4.2%3.7%, and 4.1%4.2% during 2020, 2019 2018
and 2017,2018, respectively. Depreciation expense was $232.8 million, $228.2 million, $235.2 million, and $209.8$235.2 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. "Depreciation and amortization" expense on the accompanying Consolidated Statements of Operations is presented net of regulatory deferrals of depreciation expense and also includes amortization of intangible assets and amortization of previously deferred regulatory costs. Allowance For Funds Used During Construction
In accordance with the Uniform System of Accounts prescribed by FERC, IPL capitalizes an allowance for the net cost of funds (interest on borrowed funds and a reasonable rate of return 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 6.9%, 6.9% and 6.4% during 2020, 2019 and 6.6% during 2019, 2018, and 2017, respectively.
Impairment of Long-lived Assets GAAP requires that we test long-lived assets for impairment when indicators of impairment exist. If an asset is deemed to be impaired, we are required to write down the asset to its fair value with a charge to current earnings. The net book value of our property, plant, and equipment was $4.1 billion as of December 31, 20192020 and 2018. 2019. In December 2020, IPL reclassified net property, plant and equipment of $74.5 million associated with the probable Petersburg Unit 1 retirement to long-term regulatory assets (for further discussion, see Note 2, “Regulatory Matters - IRP Filing” and Note 3, "Property, Plant and Equipment"). We do not believe any of these assets are currently impaired. In making this assessment, we consider such factors as: the overall condition and generating and distribution capacity of the assets; the expected ability to recover additional
expenditures in the assets; the anticipated demand and relative pricing of retail electricity in our service territory and wholesale electricity in the region; and the cost of fuel.
Intangible Assets
Intangible assets primarily include capitalized software of $139.6$144.5 million and $129.7$139.6 million and its corresponding accumulated amortization of $74.7$85.3 million and $88.8$74.7 million, as of December 31, 20192020 and 2018,2019, respectively. Amortization expense was $10.6 million, $7.5 million $5.5 million and $4.3$5.5 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. The estimated amortization expense of this capitalized software is approximately $50.0$59.0 million over the next 5 years ($10.0 million in 2020, $10.011.8 million in 2021, $10.0$11.8 million in 2022, $10.0$11.8 million in 2023, and $10.0$11.8 million in 2024)2024 and $11.8 million in 2025).
Implementation Costs Related to Software as a Service
IPALCO has recorded prepayments for implementation costs related to software as a service in support of utility customer services of $8.8 million as of December 31, 2020, which are recorded within "Other non-current assets" on the accompanying Consolidated Balance Sheets.
Contingencies
IPALCO accrues for loss contingencies when the amount of the loss is probable and estimable. We are subject to various environmental regulations and are involved in certain legal proceedings. If IPL’s actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our results of operations, financial condition and cash flows; although that has not been the case during the periods covered by this report. As of December 31, 20192020 and 2018,2019, total loss contingencies accrued were $4.5$15.4 million and $4.6$4.5 million, respectively, which were included in “Accrued and Other Current Liabilities” and "Other Non-Current Liabilities", respectively, on the accompanying Consolidated Balance Sheets.
Concentrations of Risk
Substantially all of IPL’s customers are located within the Indianapolis area. Approximately 69% of IPL’s employees are covered by collective bargaining agreements in two bargaining units: a physical unit and a clerical-technical unit. IPL’s contract with the physical unit expires on December 6, 2021,, and the contract with the clerical-technical unit expires February 13, 2023.2023. Additionally, IPL has long-term coal contracts with 42 suppliers, with about 33% of our existing coal under contract for the three-year period ending December 31, 2022 coming from one supplier. Substantiallyand substantially all of the coal is currently mined in the state of Indiana.
Financial Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Changes in the fair value are recorded in earnings unless the derivative is designated as a cash flow hedge of a forecasted transaction or it qualifies for the normal purchases and sales exception.
IPL has contracts involving the physical delivery of energy and fuel. Because these contracts qualify for the normal purchases and normal sales scope exception in ASC 815, IPL has elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
Additionally, we use interest rate hedges to manage the interest rate risk of our variable rate debt. We use cash flow hedge accounting when the hedge or a portion of the hedge is deemed to be highly effective, which results in changes in the fair value being recorded within accumulated other comprehensive income, a component of shareholders' equity. We have elected not to offset net derivative positions in the Financial Statements. Accordingly, we do not offset such derivative positions against the fair value of amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral under master netting agreements. See Note 5, “Derivative Instruments and Hedging Activities” for additional information.
Accumulated Other Comprehensive Income / (Loss)
The amounts reclassified out of Accumulated Other Comprehensive Loss by component during the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands): | | | | | | | | | | | | | | | | | | Details about Accumulated Other Comprehensive Loss components | Affected line item in the Condensed Consolidated Statements of Operations | | For the Years Ended December 31, | | 2020 | 2019 | 2018 | Gains and losses on cash flow hedges (Note 5): | Interest expense | | $ | (5,422) | | $ | 0 | | $ | 0 | | | Income tax expense | | 1,313 | | 0 | | 0 | | Total reclassifications for the period, net of income taxes | | | $ | (4,109) | | $ | 0 | $ | 0 | | | | | | |
The changes in the components of Accumulated Other Comprehensive Income/(Loss) during the yearyears ended December 31, 2020, 2019, and 2018 are as follows:follows (in thousands): | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2020 | 2019 | 2018 | Gains and losses on cash flow hedges (Note 5): | | | | | Balance at January 1 | | $ | (19,750) | | $ | 0 | | $ | 0 | | Other comprehensive loss before reclassifications | | (27,779) | | (19,750) | | 0 | | Amounts reclassified from AOCI to earnings | | 4,109 | | 0 | | 0 | | Balance at December 31 | | $ | (43,420) | | $ | (19,750) | | $ | 0 | | | | | | |
| | | | | | | | Gains and losses on cash flow hedges | | | (In Thousands) | Balance at January 1, 2019 | | $ | — |
| Other comprehensive loss | | (19,750 | ) | Balance at December 31, 2019 | | $ | (19,750 | ) | | | |
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. The Company establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company’s tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting. Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. The Company’s policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations. Income tax assets or liabilities, which are included in allowable costs for ratemaking purposes in future years, are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income
over the useful lives of the properties in accordance with regulatory treatment. See Note 2, "Regulatory Matters" for additional information.
IPALCO and its subsidiaries file U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 8, "Income Taxes" for additional information.
Pension and Postretirement Benefits
We recognize in our Consolidated Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes in the funded status, that would otherwise be recognized in AOCI, recorded as a regulatory asset as this can be recovered through future rates. All plan assets are recorded at fair value. We follow the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
We account for and disclose pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of ASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans. See Note 9, "Benefit Plans" for more information. Repair and Maintenance Costs
Repair and maintenance costs are expensed as incurred.
Per Share Data
IPALCO is owned by AES U.S. Investments and CDPQ. IPALCO does not report earnings on a per-share basis.
New Accounting Pronouncements Adopted in 20192020
The following table provides a brief description of recent accounting pronouncements that had an impact on the Company’s Financial Statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on the Company’s Financial Statements. | | | | | | | | | | | | New Accounting Standards Adopted | ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption | 2017-12, Derivatives and Hedging2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, 2020-03, Financial Instruments - Credit Losses (Topic 815)326): Targeted Improvements to Accounting for Hedging ActivitiesMeasurement of Credit Losses on Financial Instruments | The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity, and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that the entire change in the fair value of a hedging instrument will be recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item.
Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date. Prospective for presentation and disclosures.
| January 1, 2019 | The adoption of this standard did not have a material impact on the Financial Statements. | 2016-02, 2018-01, 2018-10, 2018-11, 2018-20, 2019-01, Leases (Topic 842) | See discussion of the ASUsASU below.
| January 1, 20192020 | See impact upon adoption of the standard below.
|
ASC 326 - Financial Instruments - Credit Losses
On January 1, 2019,2020, the Company adopted ASC 842326 LeasesFinancial Instruments - Credit Losses and its subsequent corresponding updates (“("ASC 842”326"). Under thisThe new standard lesseesupdates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to recognize assets and liabilitiesuse a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for most leasescredit losses. For available-for-sale debt securities with unrealized losses, entities measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the balance sheet and recognize expenses inwith a manner similarcorresponding adjustment to the current accounting method. For lessors, the guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. The guidance eliminates previous real estate-specific provisions.
Under ASC 842, fewer of our contracts contain a lease. However, due to the elimination of the real estate-specific guidance and changes to certain lessor classification criteria, more leases qualify as sales-type leases and direct financing leases. Under these two models, a lessor derecognizes the asset and recognizes a lease receivable. According to ASC 842, the net investmentearnings in the lease includes the fair value of residual interest in the asset after the contract period as well as the present value of the fixed lease payments, but does not include any variable payments under the lease. Therefore, the net investment in the lease could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized net investment in the lease and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.
During the course of adopting ASC 842, the Company applied various practical expedients including:
The package of practical expedients (applied to all leases) that allowed lessees and lessors not to reassess:
a. whether any expired or existing contracts are or contain leases,
b. lease classification for any expired or existing leases, and
c. whether initial direct costs for any expired or existing leases qualify for capitalization under ASC 842.
The transition practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements, and
The transition practical expedient for lessees that allowed businesses to not separate lease and non-lease components. The Company applied the practical expedient to all classes of underlying assets when valuing
right-of-use assets and lease liabilities. Contracts where the Company is the lessor were separated between the lease and non-lease components.
income statement.
The Company applied the modified retrospective method of adoption and elected to continue to apply the guidance infor ASC 840 Leases to the comparative periods presented in the year of adoption.326. Under this transition method, the Company applied the transition provisions starting at the date of adoption. The CECL model primarily impacts the calculation of the Company's expected credit losses in gross customer trade accounts receivable. The adoption of ASC 842326 and the application of CECL on our trade accounts receivable did not have a material impact on our Financial Statements.
New Accounting Pronouncements Issued But Not Yet Effective
The following table provides a brief description of recent accounting pronouncements that could have a material impact on the Company’s Financial Statements once adopted. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on the Company’s Financial Statements. | | | | | | | | | | | | New Accounting Standards Issued But Not Yet Effective | ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption | 2019-12, Income Taxes2020-04 and 2021-01, Reference Rate Form (Topic 740)848): SimplifyingFacilitation of the Accounting For Income TaxesEffects of Reference Rate Reform on Financial Reporting | The standard removes certainamendments in these updates provide optional expedients and exceptions for recognizing deferred taxesapplying GAAP to contracts, hedging relationships and other transactions that reference to LIBOR or another reference rate expected to be discontinued by reference rate reform, and clarify that certain optional expedients and exceptions in Topic 848 for investments, performing intra-period allocationcontract modifications and calculating income taxes in interim periods. It also adds guidancehedge accounting apply to reduce complexity in certain areas, including recognizing deferred taxesderivatives that are affected by the discounting transition. These amendments are effective for tax goodwill and allocating taxes to membersa limited period of a consolidated group. time (March 12, 2020 - December 21, 2022).
Transition Method: various
| January 1, 2021. Early adoption is permitted.March 12, 2020 - December 31, 2022
| The Company is currently evaluating the impact of adopting the standard on the Financial Statements. | 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | See discussion of the ASU below.
| January 1, 2020. Early adoption is permitted only as of January 1, 2019. | The Company will adopt the standard on January 1, 2020; see below for the evaluation of the impact of the adoption on the standard on the Financial Statements. |
ASU 2016-13 and its subsequent corresponding updates will update the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, there will be no change to the measurement of credit losses, except that unrealized losses due to credit-related factors will be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement. There are various transition methods available upon adoption.
The Company is currently evaluating the impact of adopting the standard on its Financial Statements; however, it is expected that the new current expected credit loss model will primarily impact the calculation of the Company's expected credit losses on $163.1 million in gross trade accounts receivable. The Company does not expect a material impact to result from the application of CECL on our trade accounts receivable.
2. REGULATORY MATTERS
General
IPL is subject to regulation by the IURC as to its services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, retail rates and charges, the issuance of securities (other than evidences of indebtedness payable less than twelve months after the date of issue), the acquisition and sale of some public utility properties or securities and certain other matters.
In addition, IPL is subject to the jurisdiction of the FERC with respect to, among other things, short-term borrowings not regulated by the IURC, the sale of electricity at wholesale, the transmission of electric energy in interstate commerce, the classification of accounts, reliability standards, and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act. 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 unregulated entities.
IPL is also affected by the regulatory jurisdiction of the EPA at the federal level, and the IDEM at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the NERC, the U.S. Department of Labor and the IOSHA.
Basic Rates and Charges
Our basic rates and charges represent the largest component of our annual revenues. Our basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. These basic rates and charges are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the IURC, the Indiana Office of Utility Consumer Counselor, and other interested stakeholders. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all Indiana utilities at least once every four years, but the IURC has the authority to review the rates of any Indiana utility at any time. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property.
Our declining block rate structure generally provides for residential and commercial customers to be charged a lower per kWh rate at higher consumption levels. Therefore, as volumes increase, the weighted average price per
kWh decreases. Numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual operating and maintenance expenditures, fuel costs, generating unit availability, and capital expenditures including those required by environmental regulations can affect the return realized.
Base Rate Orders
On October 31, 2018, the IURC issued an order approving an uncontested settlement agreement previously filed with the IURC by IPL for a $43.9 million, or 3.2%, increase to annual revenues (the "2018 Base Rate Order"). The 2018 Base Rate Order includes recovery through rates of the CCGT at Eagle Valley completed in the first half of 2018, as well as other construction projects and changes to operating income since the 2016 Base Rate Order (See below).Order. New basic rates and charges became effective on December 5, 2018. The 2018 Base Rate Order also provides customers approximately $50 million in benefits, which are flowing to customers over the two-year period that began March 2019, via the ECCRA rate adjustment mechanism. This liability, less amounts returned to IPL's customers during 2020 and 2019, is recorded primarily in "Regulatory liabilities, current" with approximately $4.7($4.7 million inand $25.1 million as of December 31, 2020 and 2019, respectively) and "Regulatory liabilities, non-current" ($0.0 million and $4.7 million as of December 31, 2020 and 2019, respectively) on the accompanying Consolidated Balance Sheets. In addition, the 2018 Base Rate Order provides that annual wholesale margins earned above (or below) the benchmark of $16.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. Prior to the 2018 Base Rate Order, wholesale sales margins were shared with customers 50% above and below an established benchmark of $6.3 million. Similarly, the 2018 Base Rate Order provides that all capacity sales above (or below) a benchmark of $11.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. The 2018 Base Rate Order also approved changes to IPL's depreciation and amortization rates (including no longer deferring depreciation on the CCGT at Eagle Valley) which altogether represent a net expense increase of approximately $28.7 million annually.
In March 2016, the IURC issued the 2016 Base Rate Order authorizing IPL to increase its basic rates and charges by $30.8 million annually. IPL also received approval to implement three new rate riders for current recovery from customers ofongoing MISO costs and capacity costs, and for sharing with customers 50% of wholesale sales margins above and below the established benchmark of $6.3 million.
CCR
On April 26, 2017, the IURC approved IPL’s CCR compliance request to install a bottom ash dewatering system at its Petersburg generating station and to recover 80% of qualifying costs through a rate adjustment mechanism with the remainder recorded as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the CCR compliance plan was approximately $47 million. IPL’s bottom ash dewatering system at its Petersburg generating station went into service in September 2017.
NAAQS
On April 26, 2017, the IURC approved IPL’s request for NAAQS SO2 compliance at its Petersburg generation station with 80% of qualifying costs recovered through a rate adjustment mechanism and the remainder recorded
as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the NAAQS SO2 compliance plan was approximately $29 million. These projects went into service between August 2018 and August 2019.
Other
The DOE issued a Notice of Proposed Rule Making on September 29, 2017, which directed the FERC to exercise its authority to set just and reasonable rates that recognize the “resiliency” value provided by generation plants with certain characteristics, including having 90-days or more of on-site fuel and operating in markets where they do not receive rate base treatment through state ratemaking. Nuclear and coal-fired generation plants would have been most likely to be able to meet the requirements. As proposed, the DOE would value resiliency through rates that recover “compensable costs” that were defined to include the recovery of operating and fuel expenses, debt service and a fair return on equity. On January 8, 2018, the FERC issued an order terminating this docket stating that it failed to satisfy the legal requirements of Section 206 of the Federal Power Act of 1935. The FERC initiated a new docket to take additional steps to explore resilience issues in RTOs/ISOs. The goal of this new proceeding is to: (1) develop a common understanding among the FERC, State Commissions, RTOs/ISOs, transmission owners, and others as to what resilience of the bulk power system means and requires; (2) understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) use this information to evaluate whether additional action regarding resilience is appropriate at this time. It is not possible to predict the impact of this proceeding on our business, financial condition and results of operations.
FAC and Authorized Annual Jurisdictional Net Operating Income
IPL may apply to the IURC for a change in IPL’s fuel charge every three months to recover IPL’s estimated fuel costs, including the energy portion of purchased power costs, which may be above or below the levels included in IPL’s basic rates and charges. IPL must present evidence in each FAC proceeding that it has made every reasonable effort to acquire fuel and generate or purchase power or both so as to provide electricity to its retail customers at the lowest fuel cost reasonably possible.
Independent of the IURC’s ability to review basic rates and charges, Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in the FAC. A utility may be unable to recover all of its fuel costs if its rolling twelve-month operating income, determined at quarterly measurement dates, exceeds its authorized annual jurisdictional net operating income and there are not sufficient applicable cumulative net operating income deficiencies (“Cumulative Deficiencies”) to offset it. The Cumulative Deficiencies calculation provides that only five years’ worth of historical earnings deficiencies or surpluses are included, unless it has been greater than five years since the most recent rate case.
In each of the last three calendar years, IPL has reported earnings in excess of the authorized level for each of the four quarterly reporting periods in those years.years, however IPL was not required to reduce its fuel cost recovery because of its Cumulative Deficiencies. The historical periods whenDuring 2020, IPL's Cumulative Deficiencies dropped to zero and thus IPL earned less than the authorized level, which put IPL recorded a reduction to revenue of $10.0 million in a Cumulative Deficiency position, all relate2020. IPL's regulatory liability attributed to earnings prior to IPL’s 2018 Base Rate Order and therefore each quarter one of those under-earning periods drops out of the Cumulative Deficiency calculation. Consequently, itDeficiencies calculation was $7.7 million as of December 31, 2020, which is likely that IPL’s Cumulative Deficiencies will drop to zero in 2020 and IPL may then be required to decrease its fuel factor if it continues to earn aboverecorded within "Regulatory liabilities, current" on the authorized level.accompanying Consolidated Balance Sheets.
ECCRA
IPL may apply to the IURC for approval of a rate adjustment known as the ECCRA periodically to recover costs (including a return) to comply with certain environmental regulations applicable to IPL’s generating stations. The total amount of IPL’s equipment approved for ECCRA recovery as of December 31, 20192020 was $17.4$22.5 million. The jurisdictional revenue requirement approved by the IURC to be included in IPL’s rates for the twelve-month period ending February 20202021 was a net credit to customers of $28.4$31.2 million. This amount is significantly lower than prior ECCRA periods prior to 2019 as a result of (i) having the vast majority of the ECCRA projects rolled into IPL’s basic rates and charges effective December 5, 2018 as a result of the 2018 Base Rate Order and (ii) the approximately $50 million of customer benefits being flowed through the ECCRA as a result of the 2018 Base Rate Order, as described above. The only equipment still remaining in the ECCRA as of December 31, 20192020 are certain projects associated with NAAQS compliance.
DSM
Through various rate orders from the IURC, IPL has been able to recover its costs of implementing various DSM programs throughout the periods covered by this report. In 2020, 2019 and 2018, IPL also had the ability to receive performance incentives, dependent upon the level of success of the programs. Performance incentives included in revenues for the years ended December 31, 2020, 2019 and 2018 and 2017 were $6.0 million, $7.5 million $3.8and$3.8 million, and $0.0 million, respectively.
On February 7, 2018, the IURC approved a settlement agreement establishingapproving a new three year DSM plan for IPL through 2020. The approval included cost recovery of programs as well as performance incentives, depending on the level of success of the programs. The order also approved recovery of lost revenues, consistent with the provisions of the settlement agreement.
On December 29, 2020, the IURC approved a settlement agreement establishing a new three year DSM plan for IPL through 2023. The approval included cost recovery of programs as well as performance incentives, depending on the level of success of the programs. The order also approved recovery of lost revenues, consistent with the provisions of the settlement agreement.
Wind and Solar Power Purchase Agreements
We are committed under a power purchase agreement to purchase all wind-generated electricity through 2029 from a wind project in Indiana. We are also committed under another agreement to purchase all wind-generated electricity through 2031 from a project in Minnesota. The Indiana project has a maximum output capacity of approximately 100 MW and the Minnesota project has a maximum output capacity of approximately 200 MW. In addition, we have 96.4 MW of solar-generated electricity in our service territory under long-term contracts (these long-term contracts have expiration dates ranging from 2021 to 2033), of which 95.9 MW was in operation as of December 31, 2019.2020. We have authority from the IURC to recover the costs for all of these agreements through an adjustment mechanism administered within the FAC. If and when IPL sells the renewable energy attributes (in the form of renewable energy credits) generated from these facilities, the proceeds would pass back to benefit IPL’s retail customers through the FAC.
Taxes
On January 3, 2018, the IURC opened a generic investigation to review and consider the impacts from the TCJA and how any resulting benefits should be realized by customers. The IURC’s order opening this investigation directed Indiana utilities to apply regulatory accounting treatment, such as the use of regulatory assets and regulatory liabilities, for all estimated impacts resulting from the TCJA. On February 16, 2018, the IURC issued an order establishing two phases of the investigation. The first phase (“Phase I”) directed respondent utilities (including IPL) to make a filing to remove from respondents’ rates and charges for service, the impact of a lower federal
income tax rate. The second phase (“Phase II”) was established to address remaining issues from the TCJA, including treatment of deferred taxes and how these benefits will be realized by customers. On August 29, 2018, the IURC approved a settlement agreement filed by IPL and various other parties to resolve the Phase I issues of the TCJA tax expense via a credit through the ECCRA rate adjustment mechanism of $9.5 million. The 2018 Base Rate Order described above resolved the Phase II and all other issues regarding the TCJA impact on IPL's rates and includes an additional credit of $14.3 million to be paid by IPL to its customers through the ECCRA rate adjustment mechanism over two years beginning in March 2019.
TDSIC
In 2013, Senate Enrolled Act 560, the Transmission, Distribution, and Storage System Improvement Charge ("TDSIC") statute, was signed into law. The TDSIC statute was revised in 2019. Among other provisions, this legislation provides for cost recovery outside of a base rate proceeding for new or replacement electric and gas transmission, distribution, and storage projects that a public utility undertakes for the purposes of safety, reliability, system modernization, or economic development. Provisions of the TDSIC statute require that, among other things, requests for recovery include a plan of at least five years and not more than seven for eligible investments. The first 80 percent of eligible costs can be recovered using a periodic rate adjustment mechanism. The cost recovery mechanism is referred to as a TDSIC mechanism. Recoverable costs include a return on, and of, the investment, including AFUDC, post-in-service carrying charges, operation and maintenance expenses, depreciation and property taxes. The remaining 20 percent of recoverable costs are to be deferred for future recovery in the public utility’s next base rate case. The periodic rate adjustment mechanism is capped at an annual increase of no more than 2 percent of total retail revenues.
On March 4, 2020, the IURC issued an order approving the projects in a seven-year TDSIC Plan for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027. On June 18, 2020, IPL filed its first annual TDSIC rate adjustment (TDSIC 1) for a return on and of investments through March 31, 2020. On October 14, 2020, the IURC issued an order approving this TDSIC rate adjustment, which was reflected in rates effective November 2020. On December 23, 2020, IPL filed its first annual TDSIC plan update filing (TDSIC 2), which was staggered by six months from TDSIC 1 as ordered by the IURC.
IRP Filing
In December 2019, IPL filed its IRP, which describes IPL's Preferred Resource Portfolio for meeting generation capacity needs for serving IPL's retail customers over the next several years. IPL's Preferred Resource Portfolio is its reasonable least cost option and provides a cleaner and more diverse generation mix for customers. IPL's Preferred Resource Portfolio includes the retirement of approximately 630 MW of coal-fired generation at Petersburg Units 1 and 2 in 2021 and 2023, respectively. Based on extensive modeling, IPL has determined that the cost of operating Petersburg Units 1 and 2 exceeds the value customers receive compared to alternative resources. Retirement of these units allows the company to cost-effectively diversify the portfolio and transition to lower cost and cleaner resources while maintaining a reliable system.
IPL issued an all-source Request for Proposal on December 20, 2019, in order to competitively procure replacement capacity by June 1, 2023, which is the first year IPL is expected to have a capacity shortfall. Our modeling indicated that a combination of wind, solar, storage, and energy efficiency would be the lowest reasonable cost option for the replacement capacity, but IPL continues to assess the type, size, and location of resources in the bids we received. As a result of the plans to retire Petersburg Units 1 and 2, IPL recorded a $6.2 million obsolescence loss in December 2019 for materials and supplies inventory IPL does not believe will be utilized by the planned retirement dates, which is recorded in "Operating expenses - Operation and maintenance" on the accompanying Consolidated Statements of Operations. In December 2020, IPL reclassified net property, plant and equipment of $74.5 million, associated with the probable Petersburg Unit 1 retirement, to long-term regulatory assets. On February 5, 2021, IPL announced an agreement to acquire a 195 MW solar project. Expected to be completed in 2023, the solar project will be located in Clinton County, Indiana and Invenergy will develop the project and manage construction. The acquisition agreement is subject to approval from the IURC. On February 12, 2021, IPL filed a petition and case-in-chief with the IURC seeking a CPCN for this solar project.
IURC COVID-19 Orders
In its June 29, 2020 order, the IURC extended the disconnection moratorium for IURC-jurisdictional utilities through August 14, 2020, which has lapsed. Additionally, the IURC authorized Indiana utilities to use regulatory accounting for any impacts associated with prohibiting utility disconnections, waiver or exclusion of certain utility fees (i.e., late fees, convenience fees, deposits, and reconnection fees), and also required utilities to use expanded payment arrangements to aid customers. The IURC also authorized regulatory accounting treatment for COVID-19 related uncollectible and incremental bad debt expense.
On August 12, 2020, the IURC required all jurisdictional utilities to continue offering extended payment arrangements for a minimum of six months to all customers for an additional 60 days, until October 12, 2020, which the IURC again extended through December 31, 2020 for residential customers on October 27, 2020. The IURC also continued to suspend the collection of certain utility fees (late fees, deposits, and disconnection/reconnection fees) from residential customers for an additional 60 days, until October 12, 2020, after which utilities were allowed to resume charging convenience fees as set forth in the rate and charges established in their Commission-approved tariffs.
As a result of these orders, IPL has recorded a $6.4 million regulatory asset as of December 31, 2020. Additionally, IPL implemented and extended flexible payment assistance plans to customers during 2020.
Phase Two of the IURC investigation is expected to focus on longer-term issues related to COVID-19. Among other things, the issues may include consideration of appropriate methodology to review the reasonableness, necessity, and prudency of any COVID-19-related cost recovery requests in future rate cases. For further discussion on the COVID-19 pandemic, see Note 15, "Risks and Uncertainties - COVID-19 Pandemic".
Regulatory Assets and Liabilities
Regulatory assets represent deferred costs or credits that have been included as allowable costs or credits for ratemaking purposes. IPL has recorded regulatory assets or liabilities relating to certain costs or credits as authorized by the IURC or established regulatory practices in accordance with ASC 980. IPL is amortizing non tax-related regulatory assets to expense over periods ranging from 1 to 45 years. Tax-related regulatory assets represent the net income tax costs to be considered in future regulatory proceedings generally as the tax-related amounts are paid.
The amounts of regulatory assets and regulatory liabilities at December 31 are as follows: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | Recovery Period | | | (In Thousands) | | | Regulatory Assets | | | | | | | Current: | | | | | | | Undercollections of rate riders | | $ | 31,569 | | | $ | 22,216 | | | Approximately 1 year(1) | Costs being recovered through basic rates and charges | | 13,861 | | | 15,182 | | | Approximately 1 year(1) | Total current regulatory assets | | 45,430 | | | 37,398 | | | | Long-term: | | | | | | | Unrecognized pension and other | | | | | | | postretirement benefit plan costs | | 149,374 | | | 176,646 | | | Various (2) | | | | | | | | Deferred MISO costs | | 61,267 | | | 74,660 | | | Through 2026(1) | Unamortized Petersburg Unit 4 carrying | | | | | | | charges and certain other costs | | 5,975 | | | 7,030 | | | Through 2026(1)(3) | Unamortized reacquisition premium on debt | | 17,018 | | | 18,330 | | | Over remaining life of debt | Environmental projects | | 74,637 | | | 78,021 | | | Through 2046(1)(3) | COVID-19 | | 6,391 | | | 0 | | | To be determined | TDSIC projects | | 2,747 | | | 0 | | | 36.3 years(1)(3) | Petersburg Unit 1 retirement | | 74,545 | | | 0 | | | Through 2035(3)(5) | Other miscellaneous | | 847 | | | 927 | | | Various (4) | Total long-term regulatory assets | | 392,801 | | | 355,614 | | | | Total regulatory assets | | $ | 438,231 | | | $ | 393,012 | | | | Regulatory Liabilities | | | | | | | Current: | | | | | | | Overcollections and other credits being passed | | | | | | | to customers through rate riders | | $ | 29,493 | | | $ | 51,790 | | | Approximately 1 year(1) | FTRs | | 543 | | | 864 | | | Approximately 1 year(1) | Total current regulatory liabilities | | 30,036 | | | 52,654 | | | | Long-term: | | | | | | | ARO and accrued asset removal costs | | 723,897 | | | 719,680 | | | Not applicable | Deferred income taxes payable to customers through rates | | 112,957 | | | 122,156 | | | Various | Long-term portion of credits being passed to customers | | | | | | | through rate riders | | 0 | | | 3,337 | | | Through 2020 | Other miscellaneous | | 2,506 | | | 1,257 | | | To be determined | Total long-term regulatory liabilities | | 839,360 | | | 846,430 | | | | Total regulatory liabilities | | $ | 869,396 | | | $ | 899,084 | | | | |
(1)Recovered (credited) per specific rate orders (2)IPL receives a return on its discretionary funding (3)Recovered with a current return (4) The majority of these costs are being recovered in basic rates and charges through 2026. For the remainder, recovery is probable, but the timing is not yet determined. (5) Recovered per regulatory precedent.
Current Regulatory Assets and Liabilities
Current regulatory assets and liabilities primarily represent costs that are being recovered per specific rate order; recovery for the remaining costs is probable, but not certain. As current assets, this includes undercollection of adjustment mechanisms for: (i) DSM, (ii) Off System Sales Margin Sharing, (iii) Capacity Cost Recovery and (iv) TDSIC. It also includes the current portion of deferred MISO costs and environmental costs which are described in greater detail below. As current liabilities, this includes overcollection of green power costs, MISO rider costs, fuel costs (including the NOI liability) and ECCRA costs.
Deferred Fuel
Deferred fuel costs are a component of current regulatory assets or liabilities (which is a result of IPL charging either more or less for fuel than our actual costs to our jurisdictional customers) and are expected to be recovered through future FAC proceedings. IPL records deferred fuel in accordance with standards prescribed by the FERC. The deferred fuel adjustment is the result of variances between estimated fuel and purchased power costs in IPL’s FAC and actual fuel and purchased power costs. IPL is generally permitted to recover underestimated fuel and purchased power costs in future rates through the FAC proceedings and therefore the costs are deferred when incurred and amortized into fuel expense in the same period that IPL’s rates are adjusted to reflect these costs.
Unrecognized Pension and Postretirement Benefit Plan Costs
In accordance with ASC 715 “Compensation – Retirement Benefits” and ASC 980, we recognize a regulatory asset equal to the unrecognized actuarial gains and losses and prior service costs. Pension expenses are recorded based on the benefit plan’s actuarially determined pension liability and associated level of annual expenses to be recognized. The other postretirement benefit plan’s deferred benefit cost is the excess of the other postretirement benefit liability over the amount previously recognized.
Deferred MISO Costs
These consist of administrative costs for transmission services, transmission expansion cost sharing, and certain other operational and administrative costs from the MISO market. These costs are being recovered per specific rate order.
Unamortized Petersburg Unit 4 Carrying Charges and Certain Other Costs
These consist of deferred debt carrying costs, depreciation, and post-in-service Allowance for Funds Used During Construction ("AFUDC") on Petersburg Unit 4. These costs are being recovered per specific rate order.
Unamortized Reaquisition Premium on Debt
This regulatory asset represents losses on long-term debt reacquired or redeemed in prior periods that have been deferred. These deferred losses are being amortized over the lives of the original issues in accordance with the rules of the FERC and the IURC.
Environmental Costs
These consist of various costs incurred to comply with environmental regulations. These costs were approved for recovery either through IPL's ECCRA proceedings or in the 2018 Base Rate Order. Amortization periods vary, ranging from 3 to 45 years.
COVID-19 Costs
These consist of deferred fees (foregone late fees, reconnection fees and disconnection fees), as well as deferred convenience payments and incremental bad debt expense as the result of COVID-19. See "IURC COVID-19 Orders" above for additional discussion.
TDSIC Costs
These consist of various costs incurred for IPL's approved TDSIC Plan. These costs were approved for recovery through IPL's TDSIC proceedings and amortization periods range from 3 to 31 years. See "TDSIC" above for additional discussion.
Petersburg Unit 1 Retirement Costs
These consist of the estimated remaining net book value of Petersburg Unit 1 at its anticipated date of retirement. It was determined that the Petersburg Unit 1 retirement became probable, in accordance with ASC 980, in the fourth quarter of 2020. As it is expected that the entire carrying value of the asset will be recoverable through future rates, no loss on abandonment was recorded and the asset was reclassified from net property, plant and equipment to a long-term regulatory asset. See "IRP Filing" above for additional discussion.
FTRs
In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. See Note 4, "Fair Value - Fair Value Hierarchy and Valuation Techniques - Financial Assets - FTRs" for additional information.
ARO and Accrued Asset Removal Costs
In accordance with ASC 410 and ASC 980, IPL recognizes the amount collected in customer rates for costs of removal that do not have an associated legal retirement obligation as a deferred regulatory liability. This amount is net of the portion of legal ARO costs that is also currently being recovered in rates.
Deferred Income Taxes Recoverable/Payable Through Rates
A deferred income tax asset or liability is created from a difference in timing of income recognition between tax laws and accounting methods. As a regulated utility, IPL includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets.
On December 22, 2017, the U.S. federal government enacted the TCJA, which, among other things, reduced the federal corporate income tax rate from 35% to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, IPL and IPALCO remeasured their deferred income tax assets and liabilities using the new tax rate. The impact of the reduction of the income tax rate on deferred income taxes was utilized in the 2018 Base Rate Order to reduce jurisdictional retail rates. Accordingly, we have a net regulatory deferred income tax liability of $113.0 million and $122.2 million as of December 31, 2020 and 2019, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
The original cost of property, plant and equipment segregated by functional classifications follows: | | | | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Production | | $ | 4,191,223 | | | $ | 4,154,919 | | Transmission | | 408,380 | | | 398,903 | | Distribution | | 1,671,861 | | | 1,594,208 | | General plant | | 258,931 | | | 250,582 | | Total property, plant and equipment | | $ | 6,530,395 | | | $ | 6,398,612 | | | | | | |
In December 2020, IPL reclassified net property, plant and equipment of $74.5 million associated with the Petersburg Unit 1 retirement to long-term regulatory assets by crediting accumulated depreciation (for further discussion, see Note 2, “Regulatory Matters - IRP Filing”).
Substantially all of IPL’s property is subject to a $1,803.8 million direct first mortgage lien, as of December 31, 2020, securing IPL’s first mortgage bonds. Total non-contractually or legally required accrued removal costs of utility plant in service at December 31, 2020 and 2019 were $818.0 million and $788.3 million, respectively; and total contractually or legally required removal costs of property, plant and equipment at December 31, 2020 and 2019 were $195.2 million and $204.2 million, respectively. Please see “ARO” below for further information.
ARO
ASC 410 “Asset Retirement and Environmental Obligations” addresses financial accounting and reporting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation. A legal obligation for purposes of ASC 410 is an obligation that a party is required to settle as a result of an existing law, statute, ordinance, written or oral contract or the doctrine of promissory estoppel.
IPL’s ARO relates primarily to environmental issues involving asbestos-containing materials, ash ponds, landfills and miscellaneous contaminants associated with its generating plants, transmission system and distribution system. The following is a roll forward of the ARO legal liability year end balances: | | | | | | | | | | | | | | | | | 2020 | | 2019 | | | (In Thousands) | Balance as of January 1 | | $ | 204,219 | | | $ | 129,451 | | Liabilities settled | | (18,302) | | | (9,891) | | Revisions to cash flow and timing estimates | | 1,120 | | | 78,153 | | Accretion expense | | 8,199 | | | 6,506 | | Balance as of December 31 | | $ | 195,236 | | | $ | 204,219 | | | | | | |
IPL recorded adjustments to its ARO liabilities of $1.1 million and $78.2 million in 2020 and 2019, respectively, primarily to reflect increases to estimated ash pond closure costs, including groundwater remediation. As of December 31, 2020 and 2019, IPL did not have any assets that are legally restricted for settling its ARO liability.
4. FAIR VALUE
The fair value of financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of the Company’s assets and liabilities have been determined using available market information. As these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
ASC 820 defined and established a framework for measuring fair value and expands disclosures about fair value measurements for financial assets and liabilities that are adjusted to fair value on a recurring basis and/or financial assets and liabilities that are measured at fair value on a nonrecurring basis, which have been adjusted to fair value during the period. In accordance with ASC 820, we have categorized our financial assets and liabilities that are adjusted to fair value, based on the priority of the inputs to the valuation technique, following the three-level fair value hierarchy prescribed by ASC 820 as follows:
Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets; and
Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Whenever possible, quoted prices in active markets are used to determine the fair value of our financial instruments. Our financial instruments are not held for trading or other speculative purposes. The estimated fair
value of financial instruments has been determined by 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 we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Financial Assets
VEBA Assets
IPALCO has VEBA investments that are to be used to fund certain employee postretirement health care benefit plans. These assets are primarily comprised of open-ended mutual funds, which are valued using the net assets value per unit. These investments are recorded at fair value within "Other non-current assets" on the accompanying Consolidated Balance Sheets and classified as equity securities. All changes to fair value on the VEBA investments are included in income in the period that the changes occur. These changes to fair value were not material for the years ended December 31, 2020, 2019, or 2018. Any unrealized gains or losses are recorded in "Other income / (expense), net" on the accompanying Consolidated Statements of Operations.
FTRs
In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. FTRs are used in the MISO market to hedge IPL’s exposure to congestion charges, which result from constraints on the transmission system. IPL’s FTRs are valued at the cleared auction prices for FTRs in MISO’s annual auction. Because of the infrequent nature of this valuation, the fair value assigned to the FTRs is considered a Level 3 input under the fair value hierarchy required by ASC 820. An offsetting regulatory liability has been recorded as these revenues or costs will be flowed through to customers through the FAC. As such, there is no impact on our Consolidated Statements of Operations.
Financial Liabilities
Interest Rate Hedges
In March 2019, we entered into forward interest rate hedges, which were amended in April 2020. The interest rate hedges have a combined notional amount of $400.0 million. All changes in the market value of the interest rate hedges are recorded in AOCL. See also Note 5, "Derivative Instruments and Hedging Activities - Cash Flow Hedges" for further information.
Summary
The fair value of assets and liabilities at December 31, 2020 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCO was determined as follows: | | | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2020 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 16 | | $ | 16 | | $ | 0 | | $ | 0 | | Mutual funds | 3,209 | | 0 | | 3,209 | | 0 | | Total VEBA investments | 3,225 | | 16 | | 3,209 | | 0 | | Financial transmission rights | 543 | | 0 | | 0 | | 543 | | Total financial assets measured at fair value | $ | 3,768 | | $ | 16 | | $ | 3,209 | | $ | 543 | | Financial liabilities: | | | | | Interest rate hedges | $ | 63,215 | | $ | 0 | | $ | 63,215 | | $ | 0 | | Total financial liabilities measured at fair value | $ | 63,215 | | $ | 0 | | $ | 63,215 | | $ | 0 | |
The fair value of assets and liabilities at December 31, 2019 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCO was determined as follows: | | | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2019 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 25 | | $ | 25 | | $ | 0 | | $ | 0 | | Mutual funds | 2,854 | | 0 | | 2,854 | | 0 | | Total VEBA investments | 2,879 | | 25 | | 2,854 | | 0 | | Financial transmission rights | 864 | | 0 | | 0 | | 864 | | Total financial assets measured at fair value | $ | 3,743 | | $ | 25 | | $ | 2,854 | | $ | 864 | | Financial liabilities: | | | | | Interest rate hedges | $ | 26,560 | | $ | 0 | | $ | 26,560 | | $ | 0 | | Total financial liabilities measured at fair value | $ | 26,560 | | $ | 0 | | $ | 26,560 | | $ | 0 | |
The following table sets forth a roll forward of financial instruments, measured at fair value on a recurring basis, classified as Level 3 in the fair value hierarchy (note, amounts in this table indicate carrying values, which approximate fair values): | | | | | | | Reconciliation of Financial Instruments Classified as Level 3 | | (In Thousands) | Balance at January 1, 2019 | $ | 3,046 | | Unrealized gain recognized in earnings | 53 | | Issuances | 2,846 | | Settlements | (5,081) | | Balance at December 31, 2019 | $ | 864 | | | | Issuances | 1,889 | | Settlements | (2,210) | | Balance at December 31, 2020 | $ | 543 | | | |
Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Debt
The fair value of our outstanding fixed-rate debt has been determined on the basis of the quoted market prices of the specific securities issued and outstanding. In certain circumstances, the market for such securities was inactive and therefore the valuation was adjusted to consider changes in market spreads for similar securities. Accordingly, the purpose of this disclosure is not to approximate the value on the basis of how the debt might be refinanced.
The following table shows the face value and the fair value of fixed-rate and variable-rate indebtedness (Level 2) for the periods ending: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | Face Value | | Fair Value | | Face Value | | Fair Value | | | (In Thousands) | Fixed-rate | | $ | 2,683,800 | | | $ | 3,295,588 | | | $ | 2,523,800 | | | $ | 2,876,140 | | Variable-rate | | 75,000 | | | 75,000 | | | 155,000 | | | 155,000 | | Total indebtedness | | $ | 2,758,800 | | | $ | 3,370,588 | | | $ | 2,678,800 | | | $ | 3,031,140 | | | | | | | | | | |
The difference between the face value and the carrying value of this indebtedness represents the following:
•unamortized deferred financing costs of $26.0 million and $20.7 million at December 31, 2020 and 2019, respectively; and •unamortized discounts of $6.6 million and $6.5 million at December 31, 2020 and 2019, respectively.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.
At December 31, 2020, IPL's outstanding derivative instruments were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) | Interest rate hedges | | Designated | | USD | | $ | 400,000 | | | $ | 0 | | | $ | 400,000 | | FTRs | | Not Designated | | MWh | | 3,168 | | | 0 | | | 3,168 | |
(a) Refers to whether the derivative instruments have been designated as a cash flow hedge.
Cash Flow Hedges
As part of our risk management processes, we identify the relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The fair values of cash flow hedges determined by current public market prices will continue to fluctuate with changes in market prices up to contract expiration. With the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities effective January 1, 2019, we are no longer required to calculate effectiveness and thus the entire change in the fair value of a hedging instrument is now recorded in other comprehensive income and amounts deferred are reclassified to earnings in the same income statement line as the hedged item in the period in which it settles.
In March 2019, we entered into 3 forward interest rate swaps to hedge the interest risk associated with refinancing the IPALCO 2020 maturities. The 3 interest rate swaps had a combined notional amount of $400.0 million. In April 2020, we de-designated the swaps as cash flow hedges and froze the AOCL of $72.3 million at the date of de-designation. The interest rate swaps were then amended and re-designated as cash flow hedges to hedge the interest rate risk associated with refinancing the 2024 IPALCO Notes. The amended interest rate swaps have a combined notional amount of $400.0 million and will be settled when the 2024 IPALCO Notes are refinanced. The $72.3 million of AOCL associated with the interest rate swaps through the date of the amendment will be amortized out of AOCL into interest expense over the remaining life of the 2030 IPALCO Notes, while any changes in fair value associated with the amended interest rate swaps will be recognized in AOCL going forward.
The following tables provide information on gains or losses recognized in AOCL for the cash flow hedges for the periods indicated: | | | | | | | | | | | | | | | | | Interest Rate Hedges for the Year Ended December 31, | $ in thousands (net of tax) | | 2020 | 2019 | 2018 | Beginning accumulated derivative gain / (loss) in AOCL | | $ | (19,750) | | $ | 0 | | $ | 0 | | | | | | | Net losses associated with current period hedging transactions | | (27,779) | | (19,750) | | 0 | | Net losses reclassified to interest expense, net of tax | | 4,109 | | 0 | | 0 | | Ending accumulated derivative loss in AOCL | | $ | (43,420) | | $ | (19,750) | | $ | 0 | | | | | | | Loss expected to be reclassified to earnings in the next twelve months | | $ | (5,375) | | | | Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months) | | 45 | | |
Derivatives Not Designated as Hedge
FTRs do not qualify for hedge accounting or the normal purchases and sales exceptions under ASC 815. Accordingly, such contracts are recorded at fair value when acquired and subsequently amortized over the annual period as they are used. FTRs are initially recorded at fair value using the income approach.
Certain qualifying derivative instruments have been designated as normal purchases or normal sales contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to hedge or mark to market accounting and are recognized in the consolidated statements of operations on an accrual basis.
When applicable, IPALCO has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral
received (a liability) under derivative agreements. As of December 31, 2020, IPALCO had $6.1 million of collateral in a broker margin account which offsets our loss positions on the interest rate hedges.
The following table summarizes the fair value, balance sheet classification and hedging designation of IPALCO's derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | Commodity | Hedging Designation | | Balance sheet classification | | 2020 | | 2019 | Financial transmission rights | Not a Cash Flow Hedge | | Prepayments and other current assets | | $ | 543 | | | $ | 864 | | Interest rate hedges | Cash Flow Hedge | | Derivative liabilities, current | | $ | 0 | | | $ | 26,560 | | Interest rate hedges | Cash Flow Hedge | | Derivative liabilities, non-current | | $ | 63,215 | | | $ | 0 | |
6. EQUITY
Dividend Restrictions
IPL’s mortgage and deed of trust and its amended articles of incorporation contain restrictions on IPL’s ability to issue certain securities or pay cash dividends. So long as any of the several series of bonds of IPL issued under its mortgage remains outstanding, and subject to certain exceptions, 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 the mortgage, after December 31, 1939. In addition, pursuant to IPL’s articles, 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. As of December 31, 2020, and as of the filing of this report, IPL was in compliance with these restrictions.
IPL is also restricted in its ability to pay dividends if it is in default under the terms of its Credit Agreement, which could happen if IPL fails to comply with certain covenants. These covenants, among other things, require IPL to maintain a ratio of total debt to total capitalization not in excess of 0.67 to 1. As of December 31, 2020. and as of the filing of this report, IPL was in compliance with all covenants and no event of default existed.
IPALCO’s Third Amended and Restated Articles of Incorporation contain provisions which state that IPALCO may not make a distribution to its shareholders or make a loan to any of its affiliates (other than its subsidiaries), unless: (a) there exists no event of default (as defined in the articles) and no such event of default would result from the making of the distribution or loan; and either (b)(i) at the time of, and/or as a result of, the distribution or loan, IPALCO’sleverage ratio does not exceed 0.67 to 1 and IPALCO’s interest coverage ratio is not less than 2.50 to 1 or, (b)(ii) if such ratios are not within the parameters, IPALCO’s senior long-term debt rating from one of the three major credit rating agencies is at least investment grade. As of December 31, 2020, and as of the filing of this report, IPALCO was in compliance with all covenants and no event of default existed.
During the years ended December 31, 2020, 2019 and 2018, IPALCO declared and paid distributions to its shareholders totaling $108.7 million, $136.4 million and $130.2 million, respectively.
Cumulative Preferred Stock
IPL has 5 separate series of cumulative preferred stock. Holders of preferred stock are entitled to receive dividends at rates per annum ranging from 4.0% to 5.65%. During each year ended December 31, 2020, 2019 and 2018, total preferred stock dividends declared were $3.2 million. Holders of preferred stock are entitled to 2 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 of IPL’s Board of Directors. Based on the preferred stockholders’ ability to elect a majority of IPL’s Board of Directors in this circumstance, the redemption of the preferred shares is considered to be not solely within the control of the issuer and the preferred stock was considered temporary equity and presented in the mezzanine level of the audited consolidated balance sheets in accordance with the relevant accounting guidance for non-controlling interests and redeemable securities. IPL has issued and outstanding 500,000 shares of 5.65% preferred stock, which are now redeemable at par value, subject to certain restrictions, in whole or in part. Additionally, IPL has 91,353 shares of
preferred stock which are redeemable solely at the option of IPL and can be redeemed in whole or in part at any time at specific call prices.
At December 31, 2020, 2019 and 2018, preferred stock consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, | | | Shares Outstanding | | Call Price | | 2020 | | 2019 | | 2018 | | | | | Par Value, plus premium, if applicable | | | | | (In Thousands) | Cumulative $100 par value, | | | | | | | | | | | authorized 2,000,000 shares | | | | | | | | | | | 4% Series | | 47,611 | | | $ | 118.00 | | | $ | 5,410 | | | $ | 5,410 | | | $ | 5,410 | | 4.2% Series | | 19,331 | | | $ | 103.00 | | | 1,933 | | | 1,933 | | | 1,933 | | 4.6% Series | | 2,481 | | | $ | 103.00 | | | 248 | | | 248 | | | 248 | | 4.8% Series | | 21,930 | | | $ | 101.00 | | | 2,193 | | | 2,193 | | | 2,193 | | 5.65% Series | | 500,000 | | | $ | 100.00 | | | 50,000 | | | 50,000 | | | 50,000 | | Total cumulative preferred stock | | 591,353 | | | | | $ | 59,784 | | | $ | 59,784 | | | $ | 59,784 | | | | | | | | | | | | |
7. DEBT
Long-Term Debt
The following table presents our long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | Series | | Due | | 2020 | | 2019 | | | | | (In Thousands) | IPL first mortgage bonds: | | | | | 3.875% (1) | | August 2021 | | $ | 55,000 | | | $ | 55,000 | | 3.875% (1) | | August 2021 | | 40,000 | | | 40,000 | | 3.125% (1) | | December 2024 | | 40,000 | | | 40,000 | | 6.60% | | January 2034 | | 100,000 | | | 100,000 | | 6.05% | | October 2036 | | 158,800 | | | 158,800 | | 6.60% | | June 2037 | | 165,000 | | | 165,000 | | 4.875% | | November 2041 | | 140,000 | | | 140,000 | | 4.65% | | June 2043 | | 170,000 | | | 170,000 | | 4.50% | | June 2044 | | 130,000 | | | 130,000 | | 4.70% | | September 2045 | | 260,000 | | | 260,000 | | 4.05% | | May 2046 | | 350,000 | | | 350,000 | | 4.875% | | November 2048 | | 105,000 | | | 105,000 | | 0.75% (2) | | April 2026 | | 30,000 | | | 0 | | 0.95% (2) | | April 2026 | | 60,000 | | | 0 | | Unamortized discount – net | | | | (6,006) | | | (6,156) | | Deferred financing costs | | | | (17,384) | | | (16,629) | | Total IPL first mortgage bonds | | 1,780,410 | | | 1,691,015 | | IPL unsecured debt: | | | | | Variable (3) | | December 2020 | | 0 | | | 30,000 | | Variable (3) | | December 2020 | | 0 | | | 60,000 | | Deferred financing costs | | | | 0 | | | (114) | | Total IPL unsecured debt | | 0 | | | 89,886 | | Total long-term debt – IPL | | 1,780,410 | | | 1,780,901 | | Long-term debt – IPALCO: | | | | | Term Loan | | July 2020 | | 0 | | | 65,000 | | 3.45% Senior Secured Notes | | July 2020 | | 0 | | | 405,000 | | 3.70% Senior Secured Notes | | September 2024 | | 405,000 | | | 405,000 | | 4.25% Senior Secured Notes | | May 2030 | | 475,000 | | | 0 | | Unamortized discount – net | | | | (625) | | | (313) | | Deferred financing costs | | | | (8,600) | | | (3,959) | | Total long-term debt – IPALCO | | 870,775 | | | 870,728 | | Total consolidated IPALCO long-term debt | | 2,651,185 | | | 2,651,629 | | Less: current portion of long-term debt | | 94,907 | | | 559,199 | | Net consolidated IPALCO long-term debt | | $ | 2,556,278 | | | $ | 2,092,430 | | |
(1)First mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority. (2)Unsecured notes issued to the Indiana Finance Authority by IPL to facilitate the loan of proceeds from various tax-exempt notes issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but were subject to a mandatory put in December 2020. (3)First mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but are subject to a mandatory put in April 2026.
Debt Maturities
Maturities on long-term indebtedness subsequent to December 31, 2020, are as follows: | | | | | | Year | Amount | | (In Thousands) | 2021 | $ | 95,000 | | 2022 | 0 | | 2023 | 0 | | 2024 | 445,000 | | 2025 | 0 | | Thereafter | 2,143,800 | | Total | $ | 2,683,800 | | | |
Significant Transactions
IPL First Mortgage Bonds and Recent Indiana Finance Authority Bond Issuances
The mortgage and deed of trust of IPL, together with the supplemental indentures thereto, secure the first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage, substantially all property owned by IPL is subject to a first mortgage lien securing indebtedness of $1,803.8 million as of December 31, 2020. The IPL first mortgage bonds require net earnings as calculated thereunder be at least two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. IPL was in compliance with such requirements as of December 31, 2020.
In December 2020, the Indiana Finance Authority issued on behalf of IPL an aggregate principal amount of $90 million of Environmental Facilities Refunding Revenue Bonds, Series 2020A&B due December 2038. IPL issued $90 million aggregate principal amount of first mortgage bonds to the Indiana Finance Authority in two series: $30 million Series 2020A notes at 0.75% and $60 million Series 2020B notes at 0.95% to secure the loan of proceeds from these bonds issued by the Indiana Finance Authority. These bonds are subject to a mandatory put date of April 1, 2026. Proceeds of the bonds were used to refund $90 million of Indiana Finance Authority Environmental Facilities Refunding Revenue Bonds Series 2015A&B.
IPL has $95 million of 3.875% IPL first mortgage bonds that are due August 1, 2021. Management plans to refinance these first mortgage bonds with new debt. In the event that we are unable to refinance these first mortgage bonds on acceptable terms, IPL has available borrowing capacity on its revolving credit facility that could be used to satisfy the obligation.
IPALCO’s Senior Secured Notes and Term Loan
In April 2020, IPALCO completed the sale of the $475 million aggregate principal amount of 4.25% 2030 IPALCO Notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. We used the net proceeds from this offering to retire the $65 million Term Loan on April 14, 2020. The remaining net proceeds, together with cash on hand, were used to redeem the 2020 IPALCO Notes on May 14, 2020, and to pay certain related fees, expenses and make-whole premiums. A loss on early extinguishment of debt of $2.4 million for the 2020 IPALCO Notes is included as a separate line item within "Other Income/(Expense), Net" in the accompanying Consolidated Statements of Operations.
The 2030 IPALCO Notes are secured by IPALCO’s pledge of all of the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s existing senior secured notes. IPALCO has also agreed to register the 2030 IPALCO Notes under the Securities Act by filing an exchange offer registration statement or, under specified circumstances, a shelf registration statement with the SEC pursuant to a Registration Rights Agreement dated April 14, 2020.
Line of Credit
IPL entered into an amendment and restatement of its 5-year $250 million revolving credit facility on June 19, 2019 with a syndication of bank lenders. This Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on June 19, 2024, and bears interest at variable rates as described in the Credit Agreement. It includes an uncommitted $150 million accordion feature to provide IPL with an option to request an increase in the size of the facility at any time prior to June 19, 2023, subject to approval by the lenders. The Credit Agreement also includes two one-year extension options, allowing IPL to extend the maturity date subject to approval by the lenders. Prior to execution, IPL and IPALCO had existing general banking relationships with the parties to the Credit Agreement. As of December 31, 2020 and 2019, IPL had $75.0 million and $0.0 million in outstanding borrowings on the committed line of credit, respectively.
Restrictions on Issuance ofDebt
All of IPL’s long-term borrowings must first be approved by the IURC and the aggregate amount of IPL’s short-term indebtedness must be approved by the FERC. IPL has approval from FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 26, 2022. In December 2018, IPL received an order from the IURC granting IPL authority through December 31, 2021 to, among other things, issue up to $350 million in aggregate principal amount of long-term debt, all of which authority remains available as of December 31, 2020, and refinance up to $185 million in existing indebtedness, of which $95 million of authority remains available under the order as of December 31, 2020. This order also grants IPL authority to have up to $500 million of long-term credit agreements and liquidity facilities outstanding at any one time, of which $250.0 million remains available under the order as of December 31, 2020. As an alternative to the sale of all or a portion of $65 million in principal of the long-term debt mentioned above, we have the authority to issue up to $65 million of new preferred stock, all of which authority remains available under the order as of December 31, 2020. IPL also has restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under our existing debt obligations. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its Credit Agreement, refinance existing debt and issue new debt approved by the IURC and issue certain other indebtedness.
Credit Ratings Our ability to borrow money or to refinance existing indebtedness and the interest rates at which we can borrow money or refinance existing indebtedness are affected by our credit ratings. In addition, the applicable interest rates on IPL’s Credit Agreement are dependent upon the credit ratings of IPL. Downgrades in the credit ratings of AES could result in IPL’s and/or IPALCO’s credit ratings being downgraded.
8. INCOME TAXES
IPALCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPALCO and its subsidiaries each filed separate income tax returns. IPALCO is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods. IPALCO made tax sharing payments to AES of $27.0 million, $29.6 million and $28.3 million in 2020, 2019 and 2018, respectively.
On March 25, 2014, the state of Indiana amended Indiana Code 6-3-2-1 through Senate Bill 001, which phases in an additional 1.6% reduction to the state corporate income tax rate that was initially being reduced by 2%. While the statutory state income tax rate decreased to 5.375% for the calendar year 2020, the deferred tax balances were adjusted according to the anticipated reversal of temporary differences. The change in required deferred taxes on plant and plant-related temporary differences resulted in a reduction to the associated regulatory asset of $1.3 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.1 million. The statutory state corporate income tax rate will be 5.075% for 2021.
Income Tax Provision
Federal and state income taxes charged to income are as follows: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | | (In Thousands) | Components of income tax expense: | | | | | | | Current income taxes: | | | | | | | Federal | | $ | 19,489 | | | $ | 17,229 | | | $ | 20,341 | | State | | 6,249 | | | 3,022 | | | 8,843 | | Total current income taxes | | 25,738 | | | 20,251 | | | 29,184 | | Deferred income taxes: | | | | | | | Federal | | 323 | | | 7,547 | | | (15,150) | | State | | 2,531 | | | 7,745 | | | 326 | | Total deferred income taxes | | 2,854 | | | 15,292 | | | (14,824) | | Net amortization of investment credit | | 0 | | | (15) | | | (911) | | Total income tax expense | | $ | 28,592 | | | $ | 35,528 | | | $ | 13,449 | | | | | | | | |
Effective and Statutory Rate Reconciliation
The provision for income taxes (including net investment tax credit adjustments) is different 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: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | Federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % | State income tax, net of federal tax benefit | | 4.2 | % | | 4.4 | % | | 5.6 | % | | | | | | | | Research and development credit | | 0 | % | | 0 | % | | (1.9) | % | | | | | | | | Depreciation flow through and amortization | | (6.8) | % | | (5.7) | % | | (15.6) | % | Additional funds used during construction - equity | | 1.0 | % | | 0.2 | % | | 0.3 | % | | | | | | | | Other – net | | 1.2 | % | | 1.3 | % | | (0.3) | % | Effective tax rate | | 20.6 | % | | 21.2 | % | | 9.1 | % | | | | | | | |
Deferred Income Taxes
The significant items comprising IPALCO’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2020 and 2019, are as follows: | | | | | | | | | | | | | | | | | 2020 | | 2019 | | | (In Thousands) | Deferred tax liabilities: | | | | | Relating to utility property, net | | $ | 408,291 | | | $ | 411,182 | | Regulatory assets recoverable through future rates | | 82,783 | | | 69,156 | | Other | | 5,485 | | | 6,192 | | Total deferred tax liabilities | | 496,559 | | | 486,530 | | Deferred tax assets: | | | | | Investment tax credit | | 6 | | | 7 | | Regulatory liabilities including ARO | | 197,657 | | | 191,676 | | Employee benefit plans | | 3,866 | | | 8,545 | | | | | | | Other | | 19,316 | | | 13,441 | | Total deferred tax assets | | 220,845 | | | 213,669 | | Deferred income tax liability – net | | $ | 275,714 | | | $ | 272,861 | | | | | | |
Uncertain Tax Positions
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | | (In Thousands) | Unrecognized tax benefits at January 1 | | $ | 7,056 | | | $ | 7,056 | | | $ | 7,049 | | Gross increases – current period tax positions | | 312 | | | 0 | | | 0 | | Gross decreases – prior period tax positions | | 0 | | | 0 | | | 7 | | Unrecognized tax benefits at December 31 | | $ | 7,368 | | | $ | 7,056 | | | $ | 7,056 | | | | | | | | |
The unrecognized tax benefits at December 31, 2020 represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.
Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. There are no interest or penalties applicable to the periods contained in this report. 9. BENEFIT PLANS
Defined Contribution Plans
All of IPL’s employees are covered by one of two defined contribution plans, the Thrift Plan or the RSP: The Thrift Plan Approximately 80% of IPL’s active employees are covered by the Thrift Plan, a qualified defined contribution plan. All union new hires are covered under the Thrift Plan. Participants elect to make contributions to the Thrift Plan based on a percentage of their base compensation. Each participant’s contribution is matched up to certain thresholds of base compensation. The IBEW clerical-technical union new hires receive an annual lump sum
company contribution into the Thrift Plan in addition to the company match. Employer contributions to the Thrift Plan were $3.4 million, $3.3 million and $3.3 million for 2020, 2019 and 2018, respectively. The RSP Approximately 20% of IPL’s active employees are covered by the RSP, a qualified defined contribution plan containing a match and nondiscretionary component. All non-union new hires are covered under the RSP. Participants elect to make contributions to the RSP based on a percentage of their eligible compensation. Each participant’s contribution is matched in amounts up to, but not exceeding, 5% of the participant’s eligible compensation. Starting in 2018, the RSP also includes a 4% nondiscretionary contribution based as a percentage of each participant's eligible compensation. Employer contributions (by IPL) relating to the RSP were $1.8 million, $1.6 million and $1.7 million for 2020, 2019 and 2018, respectively.
Defined Benefit Plans
Approximately 72% of IPL’s active employees are covered by the qualified Defined Benefit Pension Plan; while approximately 8% of active employees are IBEW clerical-technical unit employees who are only eligible for the Thrift Plan. The remaining 20% of active employees are covered by the RSP. All non-union new hires are covered under the RSP, while IBEW physical unit union new hires are covered under the Defined Benefit Pension Plan and Thrift Plan. The IBEW clerical-technical unit new hires are no longer covered under the Defined Benefit Pension Plan but do receive an annual lump sum company contribution into the Thrift Plan, in addition to the company match. The Defined Benefit Pension Plan is noncontributory and is funded by IPL through a trust. Benefits for non-union participants in the Defined Benefit Pension Plan are based on salary, years of service and accrued benefits at April 1, 2015. Benefits for eligible union participants 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.
Additionally, a small group of former officers and their surviving spouses are covered under a funded non-qualified Supplemental Retirement Plan. The total number of participants in the plan as of December 31, 2020 was 22. The plan is closed to new participants.
IPL also provides postretirement health care benefits to certain active or retired employees and the spouses of certain active or retired employees. Approximately 142 active employees and 16 retirees (including spouses) were receiving such benefits or entitled to future benefits as of January 1, 2020. The plan is unfunded. These postretirement health care benefits and the related unfunded obligation of $4.3 million and $6.4 million at December 31, 2020 and 2019, respectively, were not material to the consolidated financial statements in the periods covered by this report.
The following table presents information relating to the Pension Plans: | | | | | | | | | | | | | | | | | Pension benefits as of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Change in benefit obligation: | | | | | Projected benefit obligation at January 1 | | $ | 782,795 | | | $ | 697,228 | | Service cost | | 8,272 | | | 7,412 | | Interest cost | | 22,151 | | | 27,343 | | Actuarial loss/(gain) | | 66,827 | | | 88,311 | | Amendments (primarily increases in pension bands) | | 967 | | | 0 | | | | | | | | | | | | Benefits paid | | (38,487) | | | (37,499) | | Projected benefit obligation at December 31 | | 842,525 | | | 782,795 | | Change in plan assets: | | | | | Fair value of plan assets at January 1 | | 769,704 | | | 684,485 | | Actual return on plan assets | | 118,716 | | | 122,690 | | Employer contributions | | 87 | | | 28 | | | | | | | Benefits paid | | (38,487) | | | (37,499) | | Fair value of plan assets at December 31 | | 850,020 | | | 769,704 | | Funded (unfunded) status | | $ | 7,495 | | | $ | (13,091) | | Amounts recognized in the statement of financial position: | | | | | Non-current assets | | $ | 8,669 | | | $ | 0 | | Non-current liabilities | | (1,174) | | | (13,091) | | Net amount recognized at end of year | | $ | 7,495 | | | $ | (13,091) | | Sources of change in regulatory assets(1): | | | | | Prior service cost arising during period | | $ | 967 | | | $ | 0 | | Net (gain)/loss arising during period | | (14,110) | | | (4,472) | | Amortization of prior service cost | | (3,677) | | | (3,823) | | Amortization of loss | | (8,115) | | | (11,084) | | Total recognized in regulatory assets | | $ | (24,935) | | | $ | (19,379) | | Amounts included in regulatory assets: | | | | | Net loss | | $ | 145,526 | | | $ | 167,750 | | Prior service cost | | 11,613 | | | 14,323 | | Total amounts included in regulatory assets | | $ | 157,139 | | | $ | 182,073 | | | | | | |
(1)Amounts that would otherwise be charged/credited to Accumulated Other Comprehensive Income or Loss upon application of ASC 715, “Compensation – Retirement Benefits,” are recorded as a regulatory asset or liability because IPL has historically recovered and currently recovers pension and other postretirement benefit expenses in rates. These are unrecognized amounts not yet recognized as components of net periodic benefit costs.
Information for Pension Plans with aprojectedbenefit obligation in excess of plan assets | | | | | | | | | | | | | | | | | Pension benefits as of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Benefit obligation | | $ | 842,525 | | | $ | 782,795 | | Plan assets | | 850,020 | | | 769,704 | | Benefit obligation in excess of plan assets | | $ | (7,495) | | | $ | 13,091 | | | | | | |
IPL’s total plan assets in excess of projected benefit obligation was $7.5 million as of December 31, 2020 ($8.7 million Defined Benefit Pension Plan plan assets in excess of projected benefit obligation, partially offset by $1.2 million Supplemental Retirement Plan projected benefit obligation in excess of plan assets).
Information for Pension Plans with an accumulated benefit obligation in excess of plan assets | | | | | | | | | | | | | | | | | Pension benefits as of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Accumulated benefit obligation | | $ | 830,458 | | | $ | 771,592 | | Plan assets | | 850,020 | | | 769,704 | | Accumulated benefit obligation in excess of plan assets | | $ | (19,562) | | | $ | 1,888 | | | | | | |
IPL’s total plan assets in excess of accumulated benefit obligation was $19.6 million as of December 31, 2020 ($20.7 million Defined Benefit Pension Plan plan assets in excess of accumulated benefit obligation, partially offset by $1.1 million Supplemental Retirement Plan accumulated benefit obligation in excess of plan assets).
Significant Gains and Losses Related to Changes in the Benefit Obligation for the Period
As shown in the table above, an actuarial loss of $66.8 million increased the benefit obligation for the year ended December 31, 2020 and an actuarial loss of $88.3 million increased the benefit obligation for the year ended December 31, 2019. The actuarial losses in 2020 and 2019 were primarily due to decreases in the discount rate.
Pension Benefits and Expense
Reported expenses relevant to the Defined Benefit Pension Plan are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience, including the performance of plan assets and actual benefits paid out in future years. Pension costs associated with the Defined Benefit Pension Plan are impacted by the level of contributions made to the plan, earnings on plan assets, the adoption of new mortality tables, and employee demographics, including age, job responsibilities, salary and employment periods. Changes made to the provisions of the Defined Benefit Pension Plan may impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the corporate bond discount rates, as well as, the adoption of a new mortality table used in determining the projected benefit obligation and pension costs.
The 2020 net actuarial gain of $14.1 million recognized in regulatory assets is comprised of two parts: (1) an $80.9 million pension asset actuarial gain primarily due to higher than expected return on assets; partially offset by (2) a $66.8 million pension liability actuarial loss primarily due to a decrease in the discount rate used to value pension liabilities. The unrecognized net loss of $145.5 million in the Pension Plans has accumulated over time primarily due to the long-term declining trend in corporate bond rates and the adoption of new mortality tables which increased the expected benefit obligation due to the longer expected lives of plan participants. During 2020, the accumulated net gain increased due to lower discount rates used to value pension liabilities, which was partially offset by a combination of higher than expected return on pension assets, as well as the year 2020 amortization of accumulated loss. The unrecognized net loss, to the extent that it exceeds 10% of the greater of the benefit obligation or the assets, will be amortized and included as a component of net periodic benefit cost in future years. The amortization period is approximately 10.84 years based on estimated demographic data as of December 31, 2020. The projected benefit obligation of $842.5 million less the fair value of assets of $850.0 million results in an overfunded status of $7.5 million at December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | Pension benefits for years ended December 31, | | | 2020 | | 2019 | | 2018 | | | (In Thousands) | Components of net periodic benefit cost: | | | | | | | Service cost | | $ | 8,272 | | | $ | 7,412 | | | $ | 8,450 | | Interest cost | | 22,151 | | | 27,343 | | | 25,220 | | Expected return on plan assets | | (37,779) | | | (29,907) | | | (40,801) | | Amortization of prior service cost | | 3,677 | | | 3,823 | | | 3,837 | | Recognized actuarial loss | | 8,115 | | | 11,084 | | | 11,403 | | Recognized settlement loss | | 0 | | | 0 | | | 1,230 | | Total pension cost | | 4,436 | | | 19,755 | | | 9,339 | | Less: amounts capitalized | | 372 | | | 1,237 | | | 1,223 | | Amount charged to expense | | $ | 4,064 | | | $ | 18,518 | | | $ | 8,116 | | Rates relevant to each year’s expense calculations: | | | | | | | Discount rate – defined benefit pension plan | | 3.33 | % | | 4.36 | % | | 3.67 | % | Discount rate – supplemental retirement plan | | 3.05 | % | | 4.24 | % | | 3.60 | % | Expected return on defined benefit pension plan assets | | 5.05 | % | | 4.50 | % | | 5.45 | % | Expected return on supplemental retirement plan assets | | 4.45 | % | | 4.50 | % | | 5.45 | % | | | | | | | |
Pension expense for the following year is determined as of the December 31 measurement date based on the fair value of the Pension Plans’ assets, the expected long-term rate of return on plan assets, a mortality table assumption that reflects the life expectancy of plan participants, and a discount rate used to determine the projected benefit obligation. For 2020, pension expense was determined using an assumed long-term rate of return on plan assets of 5.05% for the Defined Benefit Pension Plan and 4.45% for the Supplemental Retirement Plan. As of the December 31, 2020 measurement date, IPL decreased the discount rate from 3.33% to 2.46% for the Defined Benefit Pension Plan and from 3.05% to 2.31% for the Supplemental Retirement Plan. The discount rate assumptions affect the pension expense determined for 2021. In addition, IPL maintained the expected long-term rate of return on plan assets at 5.05% for the Defined Benefit Pension Plan and decreased the expected long-term rate of return for the Supplemental Retirement Plan from 4.45% to 3.60% for 2021. The expected long-term rate of return assumption affects the pension expense determined for 2021. The effect on 2021 total pension expense of a 25 basis point increase and decrease in the assumed discount rate is $(1.4) million and $1.3 million, respectively.
In determining the discount rate to use for valuing liabilities we use the market yield curve on high-quality fixed income investments as of December 31, 2020. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Pension Plan Assets and Fair Value Measurements
Pension plan assets consist of investments in cash and cash equivalents, government debt securities, and mutual funds (equity and debt). Differences between actual portfolio returns and expected returns may result in increased or reduced pension costs in future periods. Pension costs are determined as of the plans' measurement date of December 31, 2020. Pension costs are determined for the following year based on the market value of pension plan assets, expected employer contributions, a discount rate used to determine the projected benefit obligation and the expected long-term rate of return on plan assets.
Fair value is defined under ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned. Dividends are recorded on the ex-dividend date. Net appreciation includes the Pension Plans’ gains and losses on investments bought and sold, as well as held, during the year.
A description of the valuation methodologies used for each major class of assets and liabilities measured at fair value follows:
•The non-qualified Supplemental Retirement Plan investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy.
•The qualified Defined Benefit Pension Plan investments in common collective trusts are valued based on the daily net asset value and are categorized as Level 2 in the fair value hierarchy except for cash and cash equivalents which are categorized as level 1.
The primary objective of the Pension Plans’ is to provide a source of retirement income for its participants and beneficiaries, while the primary financial objective is to improve the unfunded status of the Pension Plans. A secondary financial objective is, where possible, to minimize pension expense volatility. The objective is based on a long-term investment horizon, so that interim fluctuations should be viewed with appropriate perspective. There can be no assurance that these objectives will be met.
In establishing our expected long-term rate of return assumption, we utilize a methodology developed by the plan’s investment consultant who maintains a capital market assumption model that takes into consideration risk, return and correlation assumptions across asset classes. A combination of quantitative analysis of historical data and qualitative judgment is used to capture trends, structural changes and potential scenarios not reflected in historical data.
The result of the analyses is a series of inputs that produce a picture of how the plan consultant believes portfolios are likely to behave through time. Capital market assumptions are intended to reflect the behavior of asset classes observed over several market cycles. Stress assumptions are also examined, since the characteristics of asset classes are constantly changing. A dynamic model is employed to manage the numerous assumptions required to estimate portfolio characteristics under different base currencies, time horizons and inflation expectations. The Pension Plans’ consultant develops forward-looking, long-term capital market assumptions for risk, return and correlations for a variety of global asset classes, interest rates and inflation. These assumptions are created using a combination of historical analysis, current market environment assessment and by applying the consultant’s own judgment. The consultant then determines an equilibrium long-term rate of return. We then take into consideration the investment manager/consultant expenses, as well as any other expenses expected to be paid out of the Pension Plans’ trust. Finally, we have the Pension Plans’ actuary perform a tolerance test of the consultant’s equilibrium expected long-term rate of return. We use an expected long-term rate of return compatible with the actuary’s tolerance level.
The following table summarizes the Company’s target pension plan allocation for 2020: | | | | | | Asset Category: | Target Allocations | Equity Securities | 36% | Debt Securities | 64% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2020 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Cash and cash equivalents | | $ | 2,221 | | | $ | 2,221 | | | $ | — | | | 0 | % | Government debt securities | | 118,255 | | | 131 | | | 118,124 | | | 14 | % | Mutual fund - equities | | 323,253 | | | 2,839 | | | 320,414 | | | 38 | % | Mutual fund - debt | | 406,291 | | | 1,578 | | | 404,713 | | | 48 | % | Total | | $ | 850,020 | | | $ | 6,769 | | | $ | 843,251 | | | 100 | % | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2019 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Cash and cash equivalents | | $ | 2,599 | | | $ | 2,599 | | | $ | — | | | 0 | % | Government debt securities | | 154,798 | | | 39 | | | 154,759 | | | 20 | % | Mutual fund - equities | | 214,369 | | | 2,744 | | | 211,625 | | | 28 | % | Mutual fund - debt | | 397,938 | | | 1,664 | | | 396,274 | | | 52 | % | Total(1) | | $ | 769,704 | | | $ | 7,046 | | | $ | 762,658 | | | 100 | % | | | | | | | | | |
(1) In 2019, the qualified Defined Benefit Pension Plan moved all investments except for cash and cash equivalents into collective trusts; therefore, the 2019 balances under the Government debt securities, Mutual fund - equities, and Mutual fund - debt categories shown above as level 2 represent investments through collective trusts. The Defined Benefit Pension Plan has chosen collective trusts for which the underlying investments are mutual funds, mutual funds categories for which debt securities are the primary underlying investment, or real estate in alignment with the target asset allocation.
Pension Funding
We contributed $0.1 million, $0.0 million, and $30.1 million to the Pension Plans in 2020, 2019 and 2018, respectively. Funding for the qualified Defined Benefit Pension Plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds. From an ERISA funding perspective, IPL’s funded target liability percentage was estimated to be 100%. In general, IPL must contribute the normal service cost earned by active participants during the plan year; however, this amount can be offset by any surplus or credit balance carried by the Pension Plan. The normal cost is expected to be approximately $6.1 million in 2021 (including $0.4 million for plan expenses), which is expected to be fully offset by the surplus amount. Each year thereafter, if the Pension Plans’ underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over a seven-year period. IPL does not expect to make an employer contribution for the calendar year 2021. IPL’s funding policy for the Pension Plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments made from the Pension Plans for the years ended December 31, 2020, 2019 and 2018 were $38.5 million, $37.5 million and $62.1 million, respectively. Expected benefit payments are expected to be paid out of the Pension Plans as follows: | | | | | | Year | Pension Benefits | | (In Thousands) | 2021 | $ | 41,552 | | 2022 | 42,715 | | 2023 | 43,371 | | 2024 | 43,827 | | 2025 | 44,467 | | 2026 through 2030 | 224,933 | | | |
10. COMMITMENTS AND CONTINGENCIES
Legal Loss Contingencies
IPALCO and IPL are involved in litigation arising in the normal course of business. We accrue for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of December 31, 2020 and 2019, total legal loss contingencies accrued were $13.4 million and $2.6 million, respectively, which were included in “Accrued and Other Current Liabilities” and "Other Non-Current Liabilities," respectively, on the accompanying Consolidated Balance Sheets. A significant portion of these accrued liabilities relate to a personal injury legal claim involving injuries to a contractor. We maintain an amount of insurance protection for such litigation that we believe is adequate. While the ultimate outcome of such litigation cannot be predicted with certainty, management believes that final outcomes will not have a material adverse effect on IPALCO’s results of operations, financial condition and cash flows.
Environmental Loss Contingencies
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; 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 cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
New Source Review and other CAA NOVs
In October 2009, IPL received a NOV and Finding of Violation from the EPA pursuant to the CAA Section 113(a). The NOV alleged violations of the CAA at IPL’s 3 primarily coal-fired electric generating facilities at the time, dating back to 1986. The alleged violations primarily pertain to the PSD and non-attainment New Source Review (NSR) requirements under the CAA. In addition, on October 1, 2015, IPL received a NOV from the EPA pursuant to CAA Section 113(a) alleging violations of the CAA, the Indiana SIP, and the Title V operating permit related to alleged particulate matter and opacity violations at IPL Petersburg Unit 3. Also, on February 5, 2016, the EPA issued a NOV pursuant to CAA Section 113(a) alleging violations of PSD, non-attainment NSR and other CAA regulations, the Indiana SIP, and the Title V operating permit at Petersburg Generating Station. On August 31, 2020, IPL reached a settlement with the EPA, the DOJ and IDEM resolving the purported violations of the CAA with respect to IPL's four coal-fired generation units currently operating at IPL's Petersburg location. The settlement agreement, in the form of a proposed judicial consent decree, includes, among other items, the following requirements: annual caps on NOx and SO2 emissions and more stringent emissions limits than IPL's current Title V air permit; payment of civil penalties totaling $1.525 million; a $5 million environmental mitigation project consisting of the construction and operation of a new, non-emitting source of generation at the site; expenditure of $0.325 million on a state-only environmentally beneficial project to preserve local, ecologically-significant lands; and retirement of Units 1 and 2 prior to July 1, 2023. If IPL does not meet this retirement obligation, it must install a Selective Non-Catalytic
Reduction System (SNCR) on Unit 4. The proposed Consent Decree is subject to final review and approval by the U.S. District Court for the Southern District of Indiana. On January 14, 2021, the U.S. and Indiana, on behalf of EPA and IDEM, respectively, filed a motion asking the court to enter the proposed Consent Decree, along with the U.S.' response to the adverse public comments on the proposed settlements. IPL has a contingent liability recorded related to these New Source Review and other CAA NOV matters. 11. RELATED PARTY TRANSACTIONS
IPL participates in a property insurance program in which IPL buys insurance from AES Global Insurance Company, a wholly-owned subsidiary of AES. IPL is not self-insured on property insurance, but does take a $5 million per occurrence deductible. Except for IPL’s large substations, IPL does not carry insurance on transmission and distribution assets, which are considered to be outside the scope of property insurance. AES and other AES subsidiaries, including IPALCO, also participate in the AES global insurance program. IPL pays premiums for a policy that is written and administered by a third-party insurance company. The premiums paid to this third-party administrator by the participants are paid to AES Global Insurance Company and all claims are paid from a trust fund funded by and owned by AES Global Insurance Company, but controlled by the third-party administrator. IPL also has third-party insurance in which the premiums are paid directly to the third-party insurers. The cost to IPL of coverage under the property insurance program with AES Global Insurance Company was approximately $5.6 million, $4.3 million, and $3.1 million in 2020, 2019 and 2018, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. As of December 31, 2020 and 2019, we had prepaid approximately $2.3 million and $2.0 million, respectively, for coverage under these plans, which is recorded in "Prepayments and other current assets" on the accompanying Consolidated Balance Sheets. IPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments. The cost of coverage under this program was approximately $21.0 million, $20.2 million, and $21.5 million in 2020, 2019 and 2018, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. We had no prepaids for coverage under this plan as of December 31, 2020 and 2019, respectively.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. IPALCO had a receivable balance under this agreement of $24.4 million and $23.7 million as of December 31, 2020 and 2019, respectively, which is recorded in “Taxes receivable” on the accompanying Consolidated Balance Sheets. See Note 8, "Income Taxes" for more information.
Long-term Compensation Plan
During 2020, 2019 and 2018, many of IPL’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2020, 2019 and 2018 was $0.3 million, $0.3 million and $0.5 million, respectively, and was included in “Operating expenses - Operation and maintenance” on IPALCO’s Consolidated Statements of Operations. The value of these benefits is being recognized over the 36 month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder recorded as “Paid in capital” on IPALCO’s Consolidated Balance Sheets in accordance with ASC 718 “Compensation – Stock Compensation.”
See also Note 9, “Benefit Plans” to the Financial Statements for a description of benefits awarded to IPL employees by AES under the RSP.
ServiceCompany
Total costs incurred by the Service Company on behalf of IPALCO were $55.7 million, $42.0 million and $44.5 million during 2020, 2019 and 2018, respectively. Total costs incurred by IPALCO on behalf of the Service Company
during 2020, 2019 and 2018 were $10.6 million, $9.7 million and $10.1 million, respectively, which are included as a reduction to charges from the Service Company. These costs were included in “Operating expenses - Operation and maintenance” on IPALCO’s Consolidated Statements of Operations. IPALCO had a payable balance with the Service Company of $4.5 million and $8.4 million as of December 31, 2020 and December 31, 2019, respectively, which is recorded in “Accounts payable” on the accompanying Consolidated Balance Sheets.
Other
A member of the AES Board of Directors is also a member of the Supervisory Board of a third party vendor that IPL engaged in 2014 for certain construction projects. As the transactions with this vendor related to capital projects, there was no direct impact on the Consolidated Statements of Operations for the periods presented. Over the life of the project, IPL had total net charges from this vendor of $474.9 million. This vendor completed its service in 2018.
Additionally, transactions with various other related parties were $6.5 million, $3.0 million and $5.7 million during 2020, 2019 and 2018, respectively. These expenses were primarily recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations.
12. BUSINESS SEGMENT INFORMATION
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, for which separate financial information is available, and is evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate resources. Substantially all of our business consists of the generation, transmission, distribution and sale of electric energy conducted through IPL which is a vertically integrated electric utility. IPALCO’s reportable business segment is its utility segment, with all other non-utility business activities aggregated separately. The "All Other" non-utility category primarily includes the 2024 IPALCO Notes and 2030 IPALCO Notes and related interest expense, balances associated with IPALCO's interest rate hedges, cash and other immaterial balances. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies.
The following table provides information about IPALCO’s business segments (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | | Utility | | All Other | | Total | | Utility | | All Other | | Total | | Utility | | All Other | | Total | Revenues | | $ | 1,352,985 | | | $ | — | | | $ | 1,352,985 | | | $ | 1,481,643 | | | $ | — | | | $ | 1,481,643 | | | $ | 1,450,505 | | | $ | — | | | $ | 1,450,505 | | Depreciation and amortization | | $ | 246,896 | | | $ | 0 | | | $ | 246,896 | | | $ | 240,314 | | | $ | 0 | | | $ | 240,314 | | | $ | 232,332 | | | $ | 0 | | | $ | 232,332 | | Interest expense | | $ | 87,281 | | | $ | 42,212 | | | $ | 129,493 | | | $ | 89,014 | | | $ | 32,757 | | | $ | 121,771 | | | $ | 64,472 | | | $ | 31,037 | | | $ | 95,509 | | Earnings/(loss) from operations before income tax | | $ | 184,174 | | | $ | (45,615) | | | $ | 138,559 | | | $ | 200,707 | | | $ | (32,786) | | | $ | 167,921 | | | $ | 178,953 | | | $ | (31,479) | | | $ | 147,474 | | Capital expenditures(1) | | $ | 235,736 | | | $ | 0 | | | $ | 235,736 | | | $ | 219,242 | | | $ | 0 | | | $ | 219,242 | | | $ | 235,764 | | | $ | 0 | | | $ | 235,764 | | (1) Capital expenditures includes $0.0 million, $5.6 million and $11.4 million of payments for financed capital expenditures in 2020, 2019 and 2018, respectively.
| | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | As of December 31, 2019 | | As of December 31, 2018 | Total assets | | $ | 4,952,408 | | | $ | 17,511 | | | $ | 4,969,919 | | | $ | 4,918,408 | | | $ | 10,261 | | | $ | 4,928,669 | | | $ | 4,851,712 | | | $ | 10,341 | | | $ | 4,862,053 | | | | | | | | | | | | | | | | | | | | |
13. REVENUE
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenues - IPL energy sales to utility customers are based on the reading of meters at the customer’s location that occurs on a systematic basis throughout the month. IPL sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Retail revenues have a single performance obligation, as the promise to transfer energy and other distribution and/or transmission services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. Additionally, as the performance obligation is satisfied over
time as energy is delivered, and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series.
In exchange for the exclusive right to sell or distribute electricity in our service area, IPL is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that IPLis allowed to charge customers for electric services. Since tariffs are approved by the regulator, the price that IPL has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff. Customer payments are typically due on a monthly basis, though see Note 2, "Regulatory Matters - IURC COVID-19 Orders" for a discussion of the orders requiring expanded payment arrangements for customers.
Wholesale revenues - Power produced at the generation stations in excess of our retail load is sold into the MISO market. Such sales are made at either the day-ahead or real-time hourly market price, and these sales are classified as wholesale revenues. We sell to and purchase power from MISO, and such sales and purchases are settled and accounted for on a net hourly basis.
In the MISO market, wholesale revenue is recorded at the spot price based on the quantities of MWh delivered in each hour during each month. As a member of MISO, we are obligated to declare the availability of our energy production into the wholesale energy market, but we are not obligated to commit our previously declared availability. As such, contract terms end as the energy for each day is delivered to the market in the case of the day-ahead market and for each hour in the case of the real-time market.
Miscellaneous revenues - Miscellaneous revenues are mainly comprised of MISO transmission revenues. MISO transmission revenues are earned when IPL’s power lines are used in transmission of energy by power producers other than IPL. As IPL owns and operates transmission lines in central and southern Indiana, demand charges collected from network customers by MISO are allocated to the appropriate transmission owners (including IPL) and recognized as transmission revenues. Capacity revenues are also included in miscellaneous revenues, but these were not material for the period presented.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that the transmission operator has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period as the price paid is the transmission operator's allocation of the tariff rate (as approved by the regulator) charged to network participants.
IPL’s revenue from contracts with customers was $1,326.6 million, $1,455.3 million and $1,440.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. The following table presents our revenue from contracts with customers and other revenue (in thousands): | | | | | | | | | | | | | For the Years Ended December 31, | | 2020 | 2019 | 2018 | Retail Revenues | | | | Retail revenue from contracts with customers: | | | | Residential | $ | 566,668 | | $ | 589,719 | | $ | 588,031 | | Small commercial and industrial | 194,904 | | 215,878 | | 217,896 | | Large commercial and industrial | 484,230 | | 548,551 | | 565,720 | | Public lighting | 9,115 | | 7,249 | | 9,797 | | Other (1) | 14,402 | | 14,136 | | 10,427 | | Total retail revenue from contracts with customers | 1,269,319 | | 1,375,533 | | 1,391,871 | | Alternative revenue programs | 24,781 | | 23,841 | | 4,594 | | Wholesale Revenues | | | | Wholesale revenues from contracts with customers | 46,482 | | 68,474 | | 38,789 | | Miscellaneous Revenues | | | | Transmission and other revenue from contracts with customers | 10,794 | | 11,335 | | 10,057 | | Other miscellaneous revenues (2) | 1,609 | | 2,460 | | 5,194 | | Total Revenues | $ | 1,352,985 | | $ | 1,481,643 | | $ | 1,450,505 | |
(1) Other retail revenue from contracts with customers includes miscellaneous charges to customers (2) Other miscellaneous revenue includes lease and other miscellaneous revenues not accounted for under ASC 606
The balances of receivables from contracts with customers are $163.8 million and $155.0 million as of December 31, 2020 and December 31, 2019, respectively. Payment terms for all receivables from contracts with customers typically do not extend beyond 30 days, though see Note 2, "Regulatory Matters - IURC COVID-19 Order" for a discussion of orders requiring expanded payment arrangements for customers.
The Company has elected to apply the optional disclosure exemptions under ASC 606. Therefore, the Company has not included disclosure pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and contracts with variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled.
Contract Balances — The timing of revenue recognition, billings, and cash collections results in accounts receivable and contract liabilities. The contract liabilities from contracts with customers were $0.5 million as of December 31, 2020. During the year ended December 31, 2020, we recognized revenue of $1.3 million related to this contract liability balance, respectively.
14. LEASES
LESSOR
The Company is the lessor under operating leases for land, office space and operating equipment. Minimum lease payments from such contracts are recognized as operating lease revenue on a straight-line basis over the lease term whereas contingent rentals are recognized when earned. Lease revenue included in the Consolidated Statements of Operations was $0.9 million and $1.0 million for the years ended December 31, 2020 and 2019, respectively. Underlying gross assets and accumulated depreciation of operating leases included in Total net property, plant and equipment on the Consolidated Balance Sheet were $4.3 million and $0.8 million, respectively, as of December 31, 2020 and $4.3 million and $0.7 million, respectively, as of December 31, 2019.
The option to extend or terminate a lease is based on customary early termination provisions in the contract. The Company has not recognized any early terminations as of December 31, 2020.
The following table shows the future minimum lease receipts through 2025 and thereafter (in thousands): | | | | | | | Operating Leases | 2021 | $ | 886 | | 2022 | 906 | | 2023 | 906 | | 2024 | 786 | | 2025 | 544 | | Thereafter | 2,074 | | Total | $ | 6,102 | |
15. RISKS AND UNCERTAINTIES
COVID-19 Pandemic
The COVID-19 pandemic has severely impacted global economic activity, including electricity and energy consumption, and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the U.S., have reacted by instituting quarantines, mandating business and school closures and social distancing measures as well as restricting travel. The State of Indiana implemented, among other things, stay-at-home and other social distancing measures to slow the spread of the virus, which has impacted energy demand within our service territory, though the stay-at-home restrictions have now been lifted in our service territory. Also, the Executive Order previously issued by the Governor of Indiana prohibiting electric utilities, including us, from discontinuing electric utility service to customers through August 14, 2020 has lapsed. We are taking a variety of measures in response to the spread of COVID-19 to ensure our ability to generate, transmit, distribute and sell electric energy, ensure the health and safety of our employees, contractors, customers and communities and provide essential services to the communities in which we operate. In addition to the impacts to demand within our service territory, we also have incurred and expect to continue to incur expenses relating to COVID-19, including those that relate to events outside of our control.
As the economic impact of the COVID-19 pandemic started to materialize in Indiana in the second half of March 2020 and continued for the duration of 2020, the COVID-19 pandemic primarily impacted our retail sales demand as shown by the changes in weather-normalized volumes of kWh sold compared to the weather-normalized volumes for the same periods in 2019:
| | | | | | | | | | | | | | | | | | | Customer class | | For the three months ended | For the year ended | | March 31, 2020 | June 30, 2020 | September 30, 2020 | December 31, 2020 | December 31, 2020 | Residential | | 1.6 | % | 6.6 | % | 3.9 | % | 2.4 | % | 3.4 | % | Small commercial and industrial | | (1.8) | % | (10.3) | % | (4.2) | % | (5.3) | % | (5.2) | % | Large commercial and industrial | | (2.8) | % | (11.0) | % | (7.9) | % | (5.7) | % | (6.9) | % | | | | | | | |
As noted above, we also have incurred and expect to continue to incur expenses relating to COVID-19, however see Note 2, "Regulatory Matters - IURC COVID-19 Orders" for a discussion of regulatory measures which partially mitigate the impact of these expenses. We continued to experience COVID-19 impacts into 2021. The magnitude and duration of the COVID-19 pandemic is unknown at this time and may have material and adverse effects on our results of operations, financial condition and cash flows in future periods.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Indianapolis Power & Light Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Indianapolis Power & Light Company and subsidiary (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| | | | | | | Regulatory Accounting | |
Regulatory Accounting | Description of the Matter | As described in Note 2 to the consolidated financial statements, the Company applies the provisions of FASC 980 “Regulated Operations”, which gives recognition to the ratemaking and accounting practices of the IURC and the FERC. Regulatory assets generally represent incurred costs that have been deferred because such costs are probable of future recovery in customer rates. Regulatory assets can also represent performance incentives permitted by the regulator. Regulatory liabilities generally represent obligations to provide refunds or future rate reductions to customers for previous over collections or the deferral of revenues collected for costs that the Company expects to incur in the future. Accounting for the economics of rate regulation affects multiple financial statement line items, including property, plant, and equipment; regulatory assets and liabilities; operating revenues; and depreciation expense, and related disclosures in the Company’s consolidated financial statements. | | Auditing the Company’s regulatory accounting was complex due to significant judgments made by management to support its assertions about the impact of future regulatory orders on the consolidated financial statements. In particular, there is subjectivity involved in assessing the impact of current and future regulatory orders on events that have occurred as of December 31, 2020, judgment required to evaluate the relevance and reliability of audit evidence to support impacted account balances and disclosures, and judgments involved in assessing the probability of recovery in future rates of incurred costs or refunds to customers. These assumptions have a significant effect on the regulatory assets and liabilities and related disclosures. | How We Addressed the Matter in Our Audit | To test the Company’s accounting for regulatory assets and liabilities, our audit procedures included, among others, reviewing relevant regulatory orders, statutes and interpretations; filings made by intervening parties; and other publicly available information, to assess the likelihood of recovery of regulatory assets in future rates or of a refund or future reduction in rates for regulatory liabilities based on precedents for the treatment of similar costs under similar circumstances. We evaluated the Company’s assertions regarding the probability of recovery of regulatory assets or refund or future reduction in rates for regulatory liabilities, to assess the Company’s assertion that amounts are probable of recovery or of a refund or future reduction in rates. | | |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Indianapolis, Indiana February 24, 2021
| | | | | | | | | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Statements of Operations | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | | | 2020 | | 2019 | | 2018 | REVENUES | | $ | 1,352,985 | | | $ | 1,481,643 | | | $ | 1,450,505 | | | | | | | | | OPERATING COSTS AND EXPENSES: | | | | | | | Fuel | | 247,105 | | | 340,466 | | | 331,701 | | Power purchased | | 135,767 | | | 133,674 | | | 164,542 | | Operations and maintenance | | 415,824 | | | 427,803 | | | 431,125 | | Depreciation and amortization | | 246,896 | | | 240,314 | | | 232,332 | | Taxes other than income taxes | | 44,516 | | | 42,229 | | | 53,941 | | | | | | | | | Total operating expenses | | 1,090,108 | | | 1,184,486 | | | 1,213,641 | | | | | | | | | OPERATING INCOME | | 262,877 | | | 297,157 | | | 236,864 | | | | | | | | | OTHER INCOME / (EXPENSE), NET: | | | | | | | Allowance for equity funds used during construction | | 4,574 | | | 3,486 | | | 8,477 | | Interest expense | | (87,478) | | | (89,014) | | | (64,472) | | Other income / (expense), net | | 4,201 | | | (10,922) | | | (1,916) | | Total other income / (expense), net | | (78,703) | | | (96,450) | | | (57,911) | | | | | | | | | EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 184,174 | | | 200,707 | | | 178,953 | | | | | | | | | Less: income tax expense | | 40,134 | | | 43,430 | | | 21,590 | | NET INCOME | | 144,040 | | | 157,277 | | | 157,363 | | | | | | | | | Less: dividends on preferred stock | | 3,213 | | | 3,213 | | | 3,213 | | NET INCOME APPLICABLE TO COMMON STOCK | | $ | 140,827 | | | $ | 154,064 | | | $ | 154,150 | | | | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Balance Sheets | (In Thousands) | | | December 31, 2020 | | December 31, 2019 | ASSETS | | | | | CURRENT ASSETS: | | | | | Cash and cash equivalents | | $ | 17,946 | | | $ | 42,189 | | Restricted cash | | 5 | | | 400 | | Accounts receivable, net of allowance for credit losses of $3,155 and $921, respectively | | 165,435 | | | 161,365 | | Inventories | | 95,506 | | | 83,569 | | Regulatory assets, current | | 45,430 | | | 37,398 | | Taxes receivable | | 12,531 | | | 23,134 | | Prepayments and other current assets | | 23,944 | | | 17,264 | | Total current assets | | 360,797 | | | 365,319 | | NON-CURRENT ASSETS: | | | | | Property, plant and equipment | | 6,530,395 | | | 6,398,612 | | Less: Accumulated depreciation | | 2,643,695 | | | 2,414,652 | | | | 3,886,700 | | | 3,983,960 | | Construction work in progress | | 209,584 | | | 130,609 | | Total net property, plant and equipment | | 4,096,284 | | | 4,114,569 | | OTHER NON-CURRENT ASSETS: | | | | | Intangible assets - net | | 59,141 | | | 64,861 | | Regulatory assets, non-current | | 392,801 | | | 355,614 | | Other non-current assets | | 43,386 | | | 18,045 | | Total other non-current assets | | 495,328 | | | 438,520 | | TOTAL ASSETS | | $ | 4,952,409 | | | $ | 4,918,408 | | LIABILITIES AND SHAREHOLDER'S EQUITY | | | | | CURRENT LIABILITIES: | | | | | Short-term debt and current portion of long-term debt (Note 7) | | $ | 169,907 | | | $ | 89,886 | | Accounts payable | | 126,772 | | | 128,504 | | Accrued taxes | | 26,620 | | | 22,012 | | Accrued interest | | 23,340 | | | 23,857 | | Customer deposits | | 27,929 | | | 34,635 | | Regulatory liabilities, current | | 30,036 | | | 52,654 | | Accrued and other current liabilities | | 26,653 | | | 37,500 | | Total current liabilities | | 431,257 | | | 389,048 | | NON-CURRENT LIABILITIES: | | | | | Long-term debt (Note 7) | | 1,685,503 | | | 1,691,015 | | Deferred income tax liabilities | | 289,799 | | | 279,159 | | Taxes payable | | 7,458 | | | 4,658 | | Regulatory liabilities, non-current | | 839,360 | | | 846,430 | | Accrued pension and other postretirement benefits | | 5,334 | | | 19,344 | | Asset retirement obligations | | 195,236 | | | 204,219 | | Other non-current liabilities | | 13,785 | | | 252 | | Total non-current liabilities | | 3,036,475 | | | 3,045,077 | | Total liabilities | | 3,467,732 | | | 3,434,125 | | COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | SHAREHOLDER'S EQUITY: | | | | | Common stock | | 324,537 | | | 324,537 | | Paid in capital | | 664,886 | | | 664,719 | | Retained earnings | | 435,470 | | | 435,243 | | Total shareholder's equity | | 1,424,893 | | | 1,424,499 | | Cumulative preferred stock | | 59,784 | | | 59,784 | | Total shareholder's equity | | 1,484,677 | | | 1,484,283 | | TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY | | $ | 4,952,409 | | | $ | 4,918,408 | | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Statements of Cash Flows | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | | | 2020 | | 2019 | | 2018 | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net income | | $ | 144,040 | | | $ | 157,277 | | | $ | 157,363 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Depreciation and amortization | | 246,896 | | | 240,314 | | | 232,332 | | Amortization of deferred financing costs and debt discounts | | 2,335 | | | 2,262 | | | 2,011 | | Deferred income taxes and investment tax credit adjustments - net | | 3,078 | | | 15,120 | | | (15,646) | | Allowance for equity funds used during construction | | (4,574) | | | (3,486) | | | (8,477) | | Change in certain assets and liabilities: | | | | | | | Accounts receivable | | (4,071) | | | 6,504 | | | (10,167) | | Inventories | | (15,240) | | | 13,574 | | | (3,652) | | Accounts payable | | (20,621) | | | 2,816 | | | 4,080 | | Accrued and other current liabilities | | (8,214) | | | 4,416 | | | (9,655) | | Accrued taxes payable/receivable | | 18,012 | | | (15,437) | | | 3,180 | | Accrued interest | | (518) | | | 546 | | | 826 | | Pension and other postretirement benefit expenses | | (6,991) | | | 5,414 | | | (30,740) | | Short-term and long-term regulatory assets and liabilities | | (13,390) | | | 921 | | | 76,647 | | Prepayments and other current assets | | (569) | | | (2,119) | | | 7,279 | | Other - net | | (6,174) | | | (7,053) | | | 582 | | Net cash provided by operating activities | | 333,999 | | | 421,069 | | | 405,963 | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | Capital expenditures | | (235,700) | | | (213,619) | | | (224,335) | | Project development costs | | (2,401) | | | (2,269) | | | (1,127) | | Cost of removal and regulatory recoverable ARO payments | | (37,786) | | | (21,838) | | | (29,543) | | Loans to parent | | (26,110) | | | 0 | | | 0 | | Loan repayments from parent | | 20,000 | | | 0 | | | 0 | | Other | | 118 | | | 0 | | | 0 | | Net cash used in investing activities | | (281,879) | | | (237,726) | | | (255,005) | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | Borrowings under revolving credit facilities | | 115,000 | | | 10,000 | | | 100,000 | | Repayments under revolving credit facilities | | (40,000) | | | (10,000) | | | (248,000) | | Long-term borrowings, net of discount | | 90,000 | | | 0 | | | 104,936 | | Retirement of long-term debt | | (90,000) | | | 0 | | | 0 | | Dividends on common stock | | (147,600) | | | (159,000) | | | (142,250) | | Dividends on preferred stock | | (3,213) | | | (3,213) | | | (3,213) | | Deferred financing costs paid | | (792) | | | 0 | | | 0 | | Equity contributions from IPALCO | | 0 | | | 0 | | | 65,000 | | Payments for financed capital expenditures | | (36) | | | (5,623) | | | (11,429) | | Other | | (117) | | | (152) | | | (1,110) | | Net cash used in financing activities | | (76,758) | | | (167,988) | | | (136,066) | | Net change in cash, cash equivalents and restricted cash | | (24,638) | | | 15,355 | | | 14,892 | | Cash, cash equivalents and restricted cash at beginning of period | | 42,589 | | | 27,234 | | | 12,342 | | Cash, cash equivalents and restricted cash at end of period | | $ | 17,951 | | | $ | 42,589 | | | $ | 27,234 | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Interest (net of amount capitalized) | | $ | 84,869 | | | $ | 88,546 | | | $ | 61,310 | | Income taxes | | 27,000 | | | 37,400 | | | 33,750 | | Non-cash investing activities: | | | | | | | Accruals for capital expenditures | | $ | 54,360 | | | $ | 35,471 | | | $ | 47,553 | | | | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Statements of Common Shareholder's Equity | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | | | Common Stock | | Paid in Capital | | Retained Earnings | | Total | Balance at January 1, 2018 | | $ | 324,537 | | | $ | 599,157 | | | $ | 442,779 | | | $ | 1,366,473 | | Net income | | — | | | — | | | 157,363 | | | 157,363 | | Preferred stock dividends | | — | | | — | | | (3,213) | | | (3,213) | | Cash dividends declared on common stock | | — | | | — | | | (156,750) | | | (156,750) | | Contributions from IPALCO | | — | | | 65,000 | | | — | | | 65,000 | | Other | | — | | | 356 | | | — | | | 356 | | Balance at December 31, 2018 | | 324,537 | | | 664,513 | | | 440,179 | | | 1,429,229 | | Net income | | — | | | — | | | 157,277 | | | 157,277 | | Preferred stock dividends | | — | | | — | | | (3,213) | | | (3,213) | | Cash dividends declared on common stock | | — | | | — | | | (159,000) | | | (159,000) | | | | | | | | | | | Other | | — | | | 206 | | | — | | | 206 | | Balance at December 31, 2019 | | 324,537 | | | 664,719 | | | 435,243 | | | 1,424,499 | | Net income | | — | | | — | | | 144,040 | | | 144,040 | | Preferred stock dividends | | — | | | — | | | (3,213) | | | (3,213) | | Cash dividends declared on common stock | | — | | | — | | | (140,600) | | | (140,600) | | | | | | | | | | | Other | | — | | | 167 | | | — | | | 167 | | Balance at December 31, 2020 | | $ | 324,537 | | | $ | 664,886 | | | $ | 435,470 | | | $ | 1,424,893 | | | | | | | | | | |
See notes to consolidated financial statements.
INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY Notes to Consolidated Financial Statements For the Years Ended December 31, 2020, 2019 and 2018
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IPL was incorporated under the laws of the state of Indiana in 1926. All of the outstanding common stock of IPL is owned by IPALCO. IPALCO, acquired by AES in March 2001, is owned by AES U.S. Investments and CDPQ. AES U.S. Investments is owned by AES (85%) and CDPQ (15%). IPL is engaged primarily in generating, transmitting, distributing and selling of electric energy to approximately 512,000 retail customers in the city of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, with the most distant point being approximately 40 miles from Indianapolis. IPL has an exclusive right to provide electric service to those customers. IPL owns and operates 4 generating stations all within the state of Indiana. Our largest generating station, Petersburg, is coal-fired, and IPL has plans to retire approximately 630 MW of coal-fired generation at Petersburg Units 1 and 2 in 2021 and 2023, respectively (for further discussion, see Note 2, "Regulatory Matters - IRP Filing"). The second largest station, Harding Street, uses natural gas and fuel oil to power combustion turbines. In addition, IPL operates a 20 MW battery energy storage unit at this location, which provides frequency response. The third station, Eagle Valley, is a CCGT natural gas plant. IPL took operational control and commenced commercial operations of this CCGT plant in April 2018. The fourth station, Georgetown, is a small peaking station that uses natural gas to power combustion turbines. As of December 31, 2020, IPL’s net electric generation capacity for winter is 3,705 MW and net summer capacity is 3,560 MW.
Principles of Consolidation
IPL’s consolidated financial statements are prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The consolidated financial statements include the accounts of IPL and its unregulated subsidiary, IPL Funding Corporation, which was dissolved in 2018 and was immaterial to the consolidated financial statements in the periods covered by this report. All intercompany items have been eliminated in consolidation. Certain costs for shared resources amongst IPL and IPALCO, such as labor and benefits, are allocated to each entity based on allocation methodologies that management believes to be reasonable. We have evaluated subsequent events through the date this report is issued.
Use of Management Estimates
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.
Regulatory Accounting
The retail utility operations of IPL are subject to the jurisdiction of the IURC. IPL’s wholesale power transactions are subject to the jurisdiction of the FERC. These agencies regulate IPL’s utility business operations, tariffs, accounting, depreciation allowances, services, issuances of securities and the sale and acquisition of utility properties. The financial statements of IPL are based on GAAP, including the provisions of FASB ASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of these agencies. See also Note 2, “Regulatory Matters - Regulatory Assets and Liabilities” for a discussion of specific regulatory assets and liabilities.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents. Restricted cash includes cash which is restricted as to withdrawal or usage. The nature of the restrictions includes restrictions imposed by agreements related to deposits held as collateral. The following table provides a summary of cash, cash equivalents and restricted cash amounts as shown on the Consolidated Statements of Cash Flows: | | | | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Cash, cash equivalents and restricted cash | | | | | Cash and cash equivalents | | $ | 17,946 | | | $ | 42,189 | | Restricted cash | | 5 | | | 400 | | Total cash, cash equivalents and restricted cash | | $ | 17,951 | | | $ | 42,589 | | | | | | |
Revenues and Accounts Receivable
Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to certain customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making its estimates of unbilled revenue, IPL uses complex models that consider various factors including daily generation volumes; known amounts of energy usage by nearly all residential, commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. An allowance for potential credit losses is maintained and amounts are written off when normal collection efforts have been exhausted. IPL’s provision for expected credit losses included in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations was $4.8 million, $4.3 million and $5.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. IPL’s basic rates include a provision for fuel costs as established in IPL’s most recent rate proceeding, which last adjusted IPL’s rates in December 2018. IPL is permitted to recover actual costs of purchased power and fuel consumed, subject to certain restrictions. This is accomplished through quarterly FAC proceedings, in which IPL estimates the amount of fuel and purchased power costs in future periods. Through these proceedings, IPL is also permitted to recover, in future rates, underestimated fuel and purchased power costs from prior periods, subject to certain restrictions, and therefore the over or underestimated costs are deferred or accrued and amortized into fuel expense in the same period that IPL’s rates are adjusted. See also Note 2, “RegulatoryMatters” for a discussion of other costs that IPL is permitted to recover through periodic rate adjustment proceedings and the status of current rate adjustment proceedings. In addition, IPL is one of many transmission system owner members of MISO, a regional transmission organization which maintains functional control over the combined transmission systems of its members and manages one of the largest energy markets in the U.S. See Note 13, "Revenue" for additional information of MISO sales and other revenue streams.
The following table summarizes our accounts receivable balances at December 31: | | | | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Accounts receivable, net | | | | | Customer receivables | | $ | 91,335 | | | $ | 90,747 | | Unbilled revenue | | 72,334 | | | 65,822 | | Amounts due from related parties | | 734 | | | 2,992 | | Other | | 4,187 | | | 2,725 | | Provision for uncollectible accounts | | (3,155) | | | (921) | | Total accounts receivable, net | | $ | 165,435 | | | $ | 161,365 | | | | | | |
The following table is a rollforward of our allowance for credit losses related to the accounts receivable balances for the year ended December 31, 2020 (in Thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Beginning Allowance Balance at January 1, 2020 | | Current Period Provision | | Write-offs Charged Against Allowances | | Recoveries Collected | | Ending Allowance Balance at December 31, 2020 | Allowance for credit losses | | $ | 921 | | | $ | 5,861 | | | $ | (5,473) | | | $ | 1,846 | | | $ | 3,155 | | | | | | | | | | | | |
The allowance for credit losses primarily relates to utility customer receivables, including unbilled amounts. Expected credit loss estimates are developed by disaggregating customers into those with similar credit risk characteristics and using historical credit loss experience. In addition, we also consider how current and future economic conditions are expected to impact collectability, as applicable, including the economic impacts of the COVID-19 pandemic on our receivable balance as of December 31, 2020. Amounts are written off when reasonable collections efforts have been exhausted. An Executive Order issued by the Governor of Indiana on March 19, 2020 and extended by the IURC prohibited electric utilities, including us, from discontinuing electric utility service to customers through August 14, 2020 due to the economic impacts of COVID-19. This order along with the economic impacts of COVID-19 has resulted in an increase in past due customer receivable balances, and thus the current period provision and the allowance for credit losses has increased during 2020. Please see additional discussion in Note 2, "Regulatory Matters - IURC COVID-19 Order” and Note 15, "Risks and Uncertainties - COVID-19 Pandemic."
Inventories
IPL maintains coal, fuel oil, materials and supplies inventories for use in the production of electricity. These inventories are accounted for at the lower of cost or net realizable value, using the average cost. The following table summarizes our inventories balances at December 31: | | | | | | | | | | | | | | | | | As of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Inventories | | | | | Fuel | | $ | 36,953 | | | $ | 26,907 | | Materials and supplies, net | | 58,553 | | | 56,662 | | Total inventories | | $ | 95,506 | | | $ | 83,569 | | | | | | |
Property, Plant and Equipment Property, plant and equipment is stated at original cost as defined for regulatory purposes. The cost of additions to property, plant and equipment and replacements of retirement units of property 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, 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 3.7%, 3.7%, and 4.2% during 2020, 2019 and 2018, respectively. Depreciation expense was $232.8 million, $228.2 million, and $235.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. "Depreciation and amortization" expense on the accompanying Consolidated Statements of Operations is presented net of regulatory deferrals of depreciation expense and also includes amortization of intangible assets and amortization of previously deferred regulatory costs.
Allowance For Funds Used During Construction
In accordance with the Uniform System of Accounts prescribed by FERC, IPL capitalizes an allowance for the net cost of funds (interest on borrowed funds and a reasonable rate of return 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 6.9%, 6.9% and 6.4% during 2020, 2019 and 2018, respectively. Impairment of Long-lived Assets
GAAP requires that IPL test long-lived assets for impairment when indicators of impairment exist. If an asset is deemed to be impaired, IPL is required to write down the asset to its fair value with a charge to current earnings. The net book value of IPL’s property, plant, and equipment was $4.1 billion as of December 31, 2020 and 2019. In December 2020, IPL reclassified net property, plant and equipment of $74.5 million associated with the probable Petersburg Unit 1 retirement to long-term regulatory assets (for further discussion, see Note 2, “Regulatory Matters - IRP Filing” andNote 3, "Property, Plant and Equipment"). IPL does not believe any of these assets are currently impaired. In making this assessment, IPL considers such factors as: the overall condition and generating and distribution capacity of the assets; the expected ability to recover additional expenditures in the assets; the anticipated demand and relative pricing of retail electricity in its service territory and wholesale electricity in the region; and the cost of fuel.
Intangible Assets
Intangible assets primarily include capitalized software of $144.5 million and $139.6 million and its corresponding accumulated amortization of $85.3 million and $74.7 million, as of December 31, 2020 and 2019, respectively. Amortization expense was $10.6 million, $7.5 million and $5.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The estimated amortization expense of this capitalized software is approximately $59.0 million over the next 5 years ($11.8 million in 2021, $11.8 million in 2022, $11.8 million in 2023, $11.8 million in 2024 and $11.8 million in 2025).
Implementation Costs Related to Software as a Service
IPL has recorded prepayments for implementation costs related to software as a service in support of utility customer services of $8.8 million as of December 31, 2020, which are recorded within "Other non-current assets" on the accompanying Consolidated Balance Sheets.
Contingencies
IPL accrues for loss contingencies when the amount of the loss is probable and estimable. IPL is subject to various environmental regulations and is involved in certain legal proceedings. If IPL’s actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our results of operations, financial condition and cash flows; although that has not been the case during the periods covered by this report. As of December 31, 2020 and 2019, total loss contingencies accrued were $15.4 million and $4.5 million, respectively, which were included in “Accrued and Other Current Liabilities” and "Other Non-Current Liabilities", respectively, on the accompanying Consolidated Balance Sheets.
Concentrations of Risk Substantially all of IPL’s customers are located within the Indianapolis area. Approximately 69% of IPL’s employees are covered by collective bargaining agreements in two bargaining units: a physical unit and a clerical-technical unit. IPL’s contract with the physical unit expires on December 6, 2021, and the contract with the clerical-technical unit expires February 13, 2023. Additionally, IPL has long-term coal contracts with 2 suppliers, and substantially all of the coal is currently mined in the state of Indiana.
Financial Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Changes in the fair value are recorded in earnings unless the derivative is designated as a cash flow hedge of a forecasted transaction or it qualifies for the normal purchases and sales exception.
IPL has contracts involving the physical delivery of energy and fuel. Because these contracts qualify for the normal purchases and normal sales scope exception in ASC 815, IPL has elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. IPL establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. IPL’s tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting. Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. IPL’s policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations. Income tax assets or liabilities which are included in allowable costs for ratemaking purposes in future years are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 2, "Regulatory Matters" for additional information.
IPL and its subsidiary file U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 8, "Income Taxes" for additional information.
Pension and Postretirement Benefits
IPL recognizes in its Consolidated Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes in the funded status, that would otherwise be recognized in AOCI, recorded as a regulatory asset as this can be recovered through future rates. All plan assets are recorded at fair value. IPL follows the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
IPL accounts for and discloses pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of ASC 715, IPL applies a disaggregated discount rate approach for determining service cost and interest cost for its defined benefit pension plans and postretirement plans. See Note 9, "Benefit Plans" for more information. Repair and Maintenance Costs
Repair and maintenance costs are expensed as incurred.
Per Share Data
IPALCO owns all of the outstanding common stock of IPL. IPL does not report earnings on a per-share basis.
New Accounting Pronouncements Adopted in 2020
The following table provides a brief description of recent accounting pronouncements that had an impact on the Company’s Financial Statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on the Company’s Financial Statements. | | | | | | | | | | | | New Accounting Standards Adopted | ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption | 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, 2020-02, 2020-03, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | See discussion of the ASU below.
| January 1, 2020 | See impact upon adoption of the standard below. |
ASC 326 - Financial Instruments - Credit Losses
On January 1, 2020, the Company adopted ASC 326 Financial Instruments - Credit Losses and its subsequent corresponding updates ("ASC 326"). The new standard updates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to use a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for credit losses. For available-for-sale debt securities with unrealized losses, entities measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement.
The Company applied the modified retrospective method of adoption for ASC 326. Under this transition method, the Company applied the transition provisions starting at the date of adoption. The CECL model primarily impacts the calculation of the Company's expected credit losses in gross customer trade accounts receivable. The adoption of ASC 326 and the application of CECL on our trade accounts receivable did not have a material impact on IPL's Financial Statements.
New Accounting Pronouncements Issued But Not Yet Effective
The following table provides a brief description of recent accounting pronouncements that could have a material impact on the Company’s Financial Statements once adopted. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on the Company’s Financial Statements. | | | | | | | | | | | | New Accounting Standards Issued But Not Yet Effective | ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption | 2020-04 and 2021-01, Reference Rate Form (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting | The amendments in these updates provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference to LIBOR or another reference rate expected to be discontinued by reference rate reform, and clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. These amendments are effective for a limited period of time (March 12, 2020 - December 21, 2022). | March 12, 2020 - December 31, 2022
| The Company is currently evaluating the impact of adopting the standard on the Financial Statements.
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2. REGULATORY MATTERS
General
IPL is subject to regulation by the IURC as to its services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, retail rates and charges, the issuance of securities (other than evidences of indebtedness payable less than twelve months
after the date of issue), the acquisition and sale of some public utility properties or securities and certain other matters.
In addition, IPL is subject to the jurisdiction of the FERC with respect to, among other things, short-term borrowings not regulated by the IURC, the sale of electricity at wholesale, the transmission of electric energy in interstate commerce, the classification of accounts, reliability standards, and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act. 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 unregulated entities.
IPL is also affected by the regulatory jurisdiction of the EPA at the federal level, and the IDEM at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the NERC, the U.S. Department of Labor and the IOSHA.
Basic Rates and Charges IPL’s basic rates and charges represent the largest component of its annual revenues. IPL’s basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. These basic rates and charges are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the IURC, the Indiana Office of Utility Consumer Counselor, and other interested stakeholders. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all Indiana utilities at least once every four years, but the IURC has the authority to review the rates of any Indiana utility at any time. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property.
IPL’s declining block rate structure generally provides for residential and commercial customers to be charged a lower per kWh rate at higher consumption levels. Therefore, as volumes increase, the weighted average price per kWh decreases. Numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual operating and maintenance expenditures, fuel costs, generating unit availability, and capital expenditures including those required by environmental regulations can affect the return realized.
Base Rate Orders
On October 31, 2018, the IURC issued an order approving an uncontested settlement agreement previously filed with the IURC by IPL for a $43.9 million, or 3.2%, increase to annual revenues (the "2018 Base Rate Order"). The 2018 Base Rate Order includes recovery through rates of the CCGT at Eagle Valley completed in the first half of 2018, as well as other construction projects and changes to operating income since the 2016 Base Rate Order. New basic rates and charges became effective on December 5, 2018. The 2018 Base Rate Order also provides customers approximately $50 million in benefits, which are flowing to customers over the two-year period that began March 2019, via the ECCRA rate adjustment mechanism. This liability, less amounts returned to IPL's customers during 2020 and 2019, is recorded primarily in "Regulatory liabilities, current" ($4.7 million and $25.1 million as of December 31, 2020 and 2019, respectively) and"Regulatory liabilities, non-current" ($0.0 million and $4.7 million as ofDecember 31, 2020 and 2019, respectively) on the accompanying Consolidated Balance Sheets. In addition, the 2018 Base Rate Order provides that annual wholesale margins earned above (or below) the benchmark of $16.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. Prior to the 2018 Base Rate Order, wholesale sales margins were shared with customers 50% above and below an established benchmark of $6.3 million. Similarly, the 2018 Base Rate Order provides that all capacity sales above (or below) a benchmark of $11.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. The 2018 Base Rate Order also approved changes to IPL's depreciation and amortization rates (including no longer deferring depreciation on the CCGT at Eagle Valley) which altogether represent a net expense increase of approximately $28.7 million annually.
Other
The DOE issued a Notice of Proposed Rule Making on September 29, 2017, which directed the FERC to exercise its authority to set just and reasonable rates that recognize the “resiliency” value provided by generation plants with certain characteristics, including having 90-days or more of on-site fuel and operating in markets where they do not receive rate base treatment through state ratemaking. Nuclear and coal-fired generation plants would have been
most likely to be able to meet the requirements. As proposed, the DOE would value resiliency through rates that recover “compensable costs” that were defined to include the recovery of operating and fuel expenses, debt service and a fair return on equity. On January 8, 2018, the FERC issued an order terminating this docket stating that it failed to satisfy the legal requirements of Section 206 of the Federal Power Act of 1935. The FERC initiated a new docket to take additional steps to explore resilience issues in RTOs/ISOs. The goal of this new proceeding is to: (1) develop a common understanding among the FERC, State Commissions, RTOs/ISOs, transmission owners, and others as to what resilience of the bulk power system means and requires; (2) understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) use this information to evaluate whether additional action regarding resilience is appropriate at this time. It is not possible to predict the impact of this proceeding on our business, financial condition and results of operations.
FACand Authorized Annual Jurisdictional Net Operating Income
IPL may apply to the IURC for a change in IPL’s fuel charge every three months to recover IPL’s estimated fuel costs, including the energy portion of purchased power costs, which may be above or below the levels included in IPL’s basic rates and charges. IPL must present evidence in each FAC proceeding that it has made every reasonable effort to acquire fuel and generate or purchase power or both so as to provide electricity to its retail customers at the lowest fuel cost reasonably possible.
Independent of the IURC’s ability to review basic rates and charges, Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in the FAC. A utility may be unable to recover all of its fuel costs if its rolling twelve-month operating income, determined at quarterly measurement dates, exceeds its authorized annual jurisdictional net operating income and there are not sufficient applicable cumulative net operating income deficiencies (“Cumulative Deficiencies”) to offset it. The Cumulative Deficiencies calculation provides that only five years’ worth of historical earnings deficiencies or surpluses are included, unless it has been greater than five years since the most recent rate case.
In each of the last three calendar years, IPL has reported earnings in excess of the authorized level for each of the four quarterly reporting periods in those years, however IPL was not required to reduce its fuel cost recovery because of its Cumulative Deficiencies. During 2020, IPL's Cumulative Deficiencies dropped to zero and thus IPL recorded a reduction to revenue of $10.0 million in 2020. IPL's regulatory liability attributed to the Cumulative Deficiencies calculation was $7.7 million as of December 31, 2020, which is recorded within "Regulatory liabilities, current" on the accompanying Consolidated Balance Sheets.
ECCRA
IPL may apply to the IURC for approval of a rate adjustment known as the ECCRA periodically to recover costs (including a return) to comply with certain environmental regulations applicable to IPL’s generating stations. The total amount of IPL’s equipment approved for ECCRA recovery as of December 31, 2020 was $22.5 million. The jurisdictional revenue requirement approved by the IURC to be included in IPL’s rates for the twelve-month period ending February 2021 was a net credit to customers of $31.2 million. This amount is significantly lower than ECCRA periods prior to 2019 as a result of (i) having the vast majority of the ECCRA projects rolled into IPL’s basic rates and charges effective December 5, 2018 as a result of the 2018 Base Rate Order and (ii) the approximately $50 million of customer benefits being flowed through the ECCRA as a result of the 2018 Base Rate Order, as described above. The only equipment still remaining in the ECCRA as of December 31, 2020 are certain projects associated with NAAQS compliance.
DSM
Through various rate orders from the IURC, IPL has been able to recover its costs of implementing various DSM programs throughout the periods covered by this report. In 2020, 2019 and 2018, IPL also had the ability to receive performance incentives, dependent upon the level of success of the programs. Performance incentives included in revenues for the years ended December 31, 2020, 2019 and 2018 were $6.0 million, $7.5 millionand$3.8 million, respectively.
On February 7, 2018, the IURC approved a settlement agreement approving a three year DSM plan for IPL through 2020. The approval included cost recovery of programs as well as performance incentives, depending on the level
of success of the programs. The order also approved recovery of lost revenues, consistent with the provisions of the settlement agreement.
On December 29, 2020, the IURC approved a settlement agreement establishing a new three year DSM plan for IPL through 2023. The approval included cost recovery of programs as well as performance incentives, depending on the level of success of the programs. The order also approved recovery of lost revenues, consistent with the provisions of the settlement agreement.
Wind and Solar Power Purchase Agreements
IPL is committed under a power purchase agreement to purchase all wind-generated electricity through 2029 from a wind project in Indiana. IPL is also committed under another agreement to purchase all wind-generated electricity through 2031 from a project in Minnesota. The Indiana project has a maximum output capacity of approximately 100 MW and the Minnesota project has a maximum output capacity of approximately 200 MW. In addition, IPL has 96.4 MW of solar-generated electricity in its service territory under long-term contracts (these long-term contracts have expiration dates ranging from 2021 to 2033), of which 95.9 MW was in operation as of December 31, 2020. IPL has authority from the IURC to recover the costs for all of these agreements through an adjustment mechanism administered within the FAC. If and when IPL sells the renewable energy attributes (in the form of renewable energy credits) generated from these facilities, the proceeds would pass back to benefit IPL’s retail customers through the FAC.
Taxes
On January 3, 2018, the IURC opened a generic investigation to review and consider the impacts from the TCJA and how any resulting benefits should be realized by customers. The IURC’s order opening this investigation directed Indiana utilities to apply regulatory accounting treatment, such as the use of regulatory assets and regulatory liabilities, for all estimated impacts resulting from the TCJA. On February 16, 2018, the IURC issued an order establishing two phases of the investigation. The first phase (“Phase I”) directed respondent utilities (including IPL) to make a filing to remove from respondents’ rates and charges for service, the impact of a lower federal income tax rate. The second phase (“Phase II”) was established to address remaining issues from the TCJA, including treatment of deferred taxes and how these benefits will be realized by customers. On August 29, 2018, the IURC approved a settlement agreement filed by IPL and various other parties to resolve the Phase I issues of the TCJA tax expense via a credit through the ECCRA rate adjustment mechanism of $9.5 million. The 2018 Base Rate Order described above resolved the Phase II and all other issues regarding the TCJA impact on IPL's rates and includes an additional credit of $14.3 million to be paid by IPL to its customers through the ECCRA rate adjustment mechanism over two years beginning in March 2019. See also Note 8, “Income Taxes - U.S. Tax Reform” for further information.
TDSIC
TDSIC Filing
In 2013, Senate Enrolled Act 560, the Transmission, Distribution, and Storage System Improvement Charge ("TDSIC") statute, was signed into law. The TDSIC statute was revised in 2019. Among other provisions, this legislation provides for cost recovery outside of a base rate proceeding for new or replacement electric and gas transmission, distribution, and storage projects that a public utility undertakes for the purposes of safety, reliability, system modernization, or economic development. Provisions of the TDSIC statute require that, among other things, requests for recovery include a plan of at least five years and not more than seven for eligible investments. Once the plan is approved by the IURC,The first 80 percent of eligible costs can be recovered using a periodic rate adjustment mechanism. The cost recovery mechanism is referred to as a TDSIC mechanism. Recoverable costs include a return on, and of, the investment, including AFUDC, post-in-service carrying charges, operation and maintenance expenses, depreciation and property taxes. The remaining 20 percent of recoverable costs are to be deferred for future recovery in the public utility’s next base rate case. The periodic rate adjustment mechanism is capped at an annual increase of no more than 2 percent of total retail revenues.
On July 24, 2019, IPL filed a petition withMarch 4, 2020, the IURC seeking approval ofissued an order approving the projects in a seven-year TDSIC Plan for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027. AnOn June 18, 2020, IPL filed its first annual TDSIC rate adjustment (TDSIC 1) for a return on and of investments through March 31, 2020. On October 14, 2020, the IURC issued an order is expectedapproving this TDSIC rate adjustment, which was reflected in rates effective November 2020. On December 23, 2020, IPL filed its first annual TDSIC plan update filing (TDSIC 2), which was staggered by six months from TDSIC 1 as ordered by the first quarter of 2020. There will be no revenues and/or cost recovery until approval of the TDSIC rider, which is not expected to occur until later in 2020.IURC.
IRP Filing
In December 2019, IPL filed its IRP, which describes IPL's Preferred Resource Portfolio for meeting generation capacity needs for serving IPL's retail customers over the next several years. IPL's Preferred Resource Portfolio is IPL'sits reasonable least cost option and provides a cleaner and more diverse generation mix for customers. IPL's Preferred Resource Portfolio includes the retirement of approximately 630 MW of coal-fired generation by 2023.at Petersburg Units 1 and 2 in 2021 and 2023, respectively. Based on extensive modeling, IPL has determined that the cost of operating Petersburg Units 1 and 2 exceeds the value customers receive compared to alternative resources. Retirement of these units allows the company to cost-effectively diversify the portfolio and transition to lower cost and cleaner resources while maintaining a reliable system.
IPL issued an all-source Request for Proposal on December 20, 2019, in order to competitively procure replacement capacity by June 1, 2023, which is the first year IPL is expected to have a capacity shortfall. CurrentOur modeling indicatesindicated that a combination of wind, solar, storage, and energy efficiency would be the lowest reasonable cost option for the replacement capacity, but IPL willcontinues to assess the type, size, and location of resources afterin the bids arewe received. As a result of the decisionplans to retire Petersburg Units 1 and 2, IPL recorded a $6.2 million obsolescence loss in December 2019 for materials and supplies inventory IPL does not believe will be utilized by the planned retirement dates, which is recorded in "Operating expenses - Operation and maintenance" on the accompanying Consolidated Statements of Operations. In December 2020, IPL reclassified net property, plant and equipment of $74.5 million, associated with the probable Petersburg Unit 1 retirement, to long-term regulatory assets. On February 5, 2021, IPL announced an agreement to acquire a 195 MW solar project. Expected to be completed in 2023, the solar project will be located in Clinton County, Indiana and Invenergy will develop the project and manage construction. The acquisition agreement is subject to approval from the IURC. On February 12, 2021, IPL filed a petition and case-in-chief with the IURC seeking a CPCN for this solar project.
IURC COVID-19 Orders
In its June 29, 2020 order, the IURC extended the disconnection moratorium for IURC-jurisdictional utilities through August 14, 2020, which has lapsed. Additionally, the IURC authorized Indiana utilities to use regulatory accounting for any impacts associated with prohibiting utility disconnections, waiver or exclusion of certain utility fees (i.e., late fees, convenience fees, deposits, and reconnection fees), and also required utilities to use expanded payment arrangements to aid customers. The IURC also authorized regulatory accounting treatment for COVID-19 related uncollectible and incremental bad debt expense.
On August 12, 2020, the IURC required all jurisdictional utilities to continue offering extended payment arrangements for a minimum of six months to all customers for an additional 60 days, until October 12, 2020, which the IURC again extended through December 31, 2020 for residential customers on October 27, 2020. The IURC also continued to suspend the collection of certain utility fees (late fees, deposits, and disconnection/reconnection fees) from residential customers for an additional 60 days, until October 12, 2020, after which utilities were allowed to resume charging convenience fees as set forth in the rate and charges established in their Commission-approved tariffs.
As a result of these orders, IPL has recorded a $6.4 million regulatory asset as of December 31, 2020. Additionally, IPL implemented and extended flexible payment assistance plans to customers during 2020.
Phase Two of the IURC investigation is expected to focus on longer-term issues related to COVID-19. Among other things, the issues may include consideration of appropriate methodology to review the reasonableness, necessity, and prudency of any COVID-19-related cost recovery requests in future rate cases. For further discussion on the COVID-19 pandemic, see Note 15, "Risks and Uncertainties - COVID-19 Pandemic".
Regulatory Assets and Liabilities
Regulatory assets represent deferred costs or credits that have been included as allowable costs or credits for ratemaking purposes. IPL has recorded regulatory assets or liabilities relating to certain costs or credits as authorized by the IURC or established regulatory practices in accordance with ASC 980. IPL is amortizing non tax-related regulatory assets to expense over periods ranging from 1 to 45 years. Tax-related regulatory assets represent the net income tax costs to be considered in future regulatory proceedings generally as the tax-related amounts are paid.
The amounts of regulatory assets and regulatory liabilities at December 31 are as follows: | | | | 2019 | | 2018 | | Recovery Period | | | 2020 | | 2019 | | Recovery Period | | | (In Thousands) | | | | | (In Thousands) | | | Regulatory Assets | | | | | | | Regulatory Assets | | | | | | | Current: | | | | | | | Current: | | | | | | | Undercollections of rate riders | | $ | 22,216 |
| | $ | 13,217 |
| | Approximately 1 year(1) | Undercollections of rate riders | | $ | 31,569 | | | $ | 22,216 | | | Approximately 1 year(1) | Costs being recovered through basic rates and charges | | 15,182 |
| | 15,182 |
| | Approximately 1 year(1) | Costs being recovered through basic rates and charges | | 13,861 | | | 15,182 | | | Approximately 1 year(1) | Total current regulatory assets | | 37,398 |
| | 28,399 |
| | | Total current regulatory assets | | 45,430 | | | 37,398 | | | | Long-term: | | | | | | | Long-term: | | | | | | | Unrecognized pension and other | | | | | | | Unrecognized pension and other | | | | | | | postretirement benefit plan costs | | 176,646 |
| | 195,559 |
| | Various (2) | postretirement benefit plan costs | | 149,374 | | | 176,646 | | | Various(2) | | Deferred MISO costs | | 74,660 |
| | 88,052 |
| | Through 2026(1) | Deferred MISO costs | | 61,267 | | | 74,660 | | | Through 2026(1) | Unamortized Petersburg Unit 4 carrying | | | | | | | Unamortized Petersburg Unit 4 carrying | | | | | | | charges and certain other costs | | 7,030 |
| | 8,084 |
| | Through 2026(1)(3) | charges and certain other costs | | 5,975 | | | 7,030 | | | Through 2026(1)(3) | Unamortized reacquisition premium on debt | | 18,330 |
| | 19,714 |
| | Over remaining life of debt | Unamortized reacquisition premium on debt | | 17,018 | | | 18,330 | | | Over remaining life of debt | Environmental projects | | 78,021 |
| | 81,204 |
| | Through 2046(1)(3) | Environmental projects | | 74,637 | | | 78,021 | | | Through 2046(1)(3) | COVID-19 | | COVID-19 | | 6,391 | | | 0 | | | To be determined | TDSIC projects | | TDSIC projects | | 2,747 | | | 0 | | | 36.3 years(1)(3) | Petersburg Unit 1 retirement | | Petersburg Unit 1 retirement | | 74,545 | | | 0 | | | Through 2035(3)(5) | Other miscellaneous | | 927 |
| | 2,464 |
| | Various (4) | Other miscellaneous | | 847 | | | 927 | | | Various(4) | Total long-term regulatory assets | | 355,614 |
| | 395,077 |
| | | Total long-term regulatory assets | | 392,801 | | | 355,614 | | | | Total regulatory assets | | $ | 393,012 |
| | $ | 423,476 |
| | | Total regulatory assets | | $ | 438,231 | | | $ | 393,012 | | | | Regulatory Liabilities | | | | | | | Regulatory Liabilities | | | | | | | Current: | | | | | | | Current: | | | | | | | Overcollections and other credits being passed | | | | | | Overcollections and other credits being passed | | | to customers through rate riders | | $ | 51,790 |
| | $ | 47,925 |
| | Approximately 1 year(1) | to customers through rate riders | | $ | 29,493 | | | $ | 51,790 | | | Approximately 1 year(1) | FTRs | | 864 |
| | 3,099 |
| | Approximately 1 year(1) | FTRs | | 543 | | | 864 | | | Approximately 1 year(1) | Total current regulatory liabilities | | 52,654 |
| | 51,024 |
| | Total current regulatory liabilities | | 30,036 | | | 52,654 | | | | Long-term: | | | | | | | Long-term: | | | | | | | ARO and accrued asset removal costs | | 719,680 |
| | 707,662 |
| | Not applicable | ARO and accrued asset removal costs | | 723,897 | | | 719,680 | | | Not applicable | Income taxes payable to customers through rates | | 122,156 |
| | 141,058 |
| | Various | | Deferred income taxes payable to customers through rates | | Deferred income taxes payable to customers through rates | | 112,957 | | | 122,156 | | | Various | Long-term portion of credits being passed to customers | | | | | | Long-term portion of credits being passed to customers | | through rate riders | | 3,337 |
| | 21,341 |
| | Through 2021 | through rate riders | | 0 | | | 3,337 | | | Through 2020 | Other miscellaneous | | 1,257 |
| | 194 |
| | To be determined | Other miscellaneous | | 2,506 | | | 1,257 | | | To be determined | Total long-term regulatory liabilities | | 846,430 |
| | 870,255 |
| | | Total long-term regulatory liabilities | | 839,360 | | | 846,430 | | | | Total regulatory liabilities | | $ | 899,084 |
| | $ | 921,279 |
| | | Total regulatory liabilities | | $ | 869,396 | | | $ | 899,084 | | | | | | |
| | (1) | Recovered (credited) per specific rate orders |
| | (2) | IPL receives a return on its discretionary funding |
| | (3) | Recovered with a current return |
(1)Recovered (credited) per specific rate orders (2)IPL receives a return on its discretionary funding (3)Recovered with a current return (4) The majority of these costs are being recovered in basic rates and charges through 2026. For the remainder, recovery is probable, but the timing is not yet determined. (5) Recovered per regulatory precedent.
Current Regulatory Assets and Liabilities
Current regulatory assets and liabilities primarily represent costs that are being recovered per specific rate order; recovery for the remaining costs is probable, but not certain. As current assets, this includes undercollection of adjustment mechanisms for: (i) DSM, (ii) Off System Sales Margin Sharing, (iii) Capacity Cost Recovery and (iv) TDSIC. It also includes the current portion of deferred MISO costs and environmental costs which are described in greater detail below. As current liabilities, this includes overcollection of green power costs, MISO rider costs, fuel costs (including the NOI liability) and ECCRA costs.
Deferred Fuel
Deferred fuel costs are a component of current regulatory assets or liabilities (which is a result of IPL charging either more or less for fuel than our actual costs to our jurisdictional customers) and are expected to be recovered through future FAC proceedings. IPL records deferred fuel in accordance with standards prescribed by the FERC. The deferred fuel adjustment is the result of variances between estimated fuel and purchased power costs in IPL’s FAC and actual fuel and purchased power costs. IPL is generally permitted to recover underestimated fuel and purchased power costs in future rates through the FAC proceedings and therefore the costs are deferred when incurred and amortized into fuel expense in the same period that IPL’s rates are adjusted to reflect these costs.
Unrecognized Pension and Postretirement Benefit Plan Costs
In accordance with ASC 715 “Compensation – Retirement Benefits” and ASC 980, we recognizeIPL recognizes a regulatory asset equal to the unrecognized actuarial gains and losses and prior service costs. Pension expenses are recorded based on the benefit plan’s actuarially determined pension liability and associated level of annual expenses to be recognized. The other postretirement benefit plan’s deferred benefit cost is the excess of the other postretirement benefit liability over the amount previously recognized.
Deferred Income Taxes Recoverable/Payable Through Rates
A deferred income tax asset or liability is created from a difference in timing of income recognition between tax laws and accounting methods. As a regulated utility, IPL includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets.
On December 22, 2017, the U.S. federal government enacted the TCJA, which, among other things, reduced the federal corporate income tax rate from 35% to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, IPL and IPALCO remeasured their deferred income tax assets and liabilities using the new tax rate. The impact of the reduction of the income tax rate on deferred income taxes was utilized in the 2018 Base Rate Order to reduce jurisdictional retail rates. Accordingly, we have a net regulatory deferred income tax liability of $122.2 million and $141.1 million as of December 31, 2019 and 2018, respectively.
Deferred MISO Costs
These consist of administrative costs for transmission services, transmission expansion cost sharing, and certain other operational and administrative costs from the MISO market. These costs are being recovered per specific rate order.
Unamortized Petersburg Unit 4 Carrying Charges and Certain Other Costs
These consist of deferred debt carrying costs, depreciation, and post-in-service Allowance for Funds Used During Construction ("AFUDC") on Petersburg Unit 4. These costs are being recovered per specific rate order.
Unamortized Reaquisition Premium on Debt
This regulatory asset represents losses on long-term debt reacquired or redeemed in prior periods that have been deferred. These deferred losses are being amortized over the lives of the original issues in accordance with the rules of the FERC and the IURC.
Environmental Costs
These consist of various costs incurred to comply with environmental regulations. These costs were approved for recovery either through IPL's ECCRA proceedings or in the 2018 Base Rate Order. Amortization periods vary, but allranging from 3 to 45 years.
COVID-19 Costs
These consist of deferred fees (foregone late fees, reconnection fees and disconnection fees), as well as deferred convenience payments and incremental bad debt expense as the result of COVID-19. See "IURC COVID-19 Orders" above for additional discussion.
TDSIC Costs
These consist of various costs shouldincurred for IPL's approved TDSIC Plan. These costs were approved for recovery through IPL's TDSIC proceedings and amortization periods range from 3 to 31 years. See "TDSIC" above for additional discussion.
Petersburg Unit 1 Retirement Costs
These consist of the estimated remaining net book value of Petersburg Unit 1 at its anticipated date of retirement. It was determined that the Petersburg Unit 1 retirement became probable, in accordance with ASC 980, in the fourth quarter of 2020. As it is expected that the entire carrying value of the asset will be recovered by 2064.recoverable through future rates, no loss on abandonment was recorded and the asset was reclassified from net property, plant and equipment to a long-term regulatory asset. See "IRP Filing" above for additional discussion.
FTRs
In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. See Note 4, "Fair Value - Fair Value Hierarchy and Valuation Techniques - Financial Assets - FTRs" for additional information.
ARO and Accrued Asset Removal Costs
In accordance with ASC 410 and ASC 980, IPL recognizes the amount collected in customer rates for costs of removal that do not have an associated legal retirement obligation as a deferred regulatory liability. This amount is net of the portion of legal ARO costs that is also currently being recovered in rates.
Deferred Income Taxes Recoverable/Payable Through Rates
A deferred income tax asset or liability is created from a difference in timing of income recognition between tax laws and accounting methods. As a regulated utility, IPL includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets.
On December 22, 2017, the U.S. federal government enacted the TCJA, which, among other things, reduced the federal corporate income tax rate from 35% to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, IPL remeasured their deferred income tax assets and liabilities using the new tax rate. The impact of the reduction of the income tax rate on deferred income taxes was utilized in the 2018 Base Rate Order to reduce jurisdictional retail rates. Accordingly, IPL has a net regulatory deferred income tax liability of $113.0 million and $122.2 million as of December 31, 2020 and 2019, respectively.
3. PROPERTY, PLANT AND EQUIPMENT
The original cost of property, plant and equipment segregated by functional classifications follows: | | | | As of December 31, | | | As of December 31, | | | 2019 | | 2018 | | | 2020 | | 2019 | | | (In Thousands) | | | (In Thousands) | Production | | $ | 4,154,919 |
| | $ | 3,927,847 |
| Production | | $ | 4,191,223 | | | $ | 4,154,919 | | Transmission | | 398,903 |
| | 394,621 |
| Transmission | | 408,380 | | | 398,903 | | Distribution | | 1,594,208 |
| | 1,533,828 |
| Distribution | | 1,671,861 | | | 1,594,208 | | General plant | | 250,582 |
| | 344,782 |
| General plant | | 258,931 | | | 250,582 | | Total property, plant and equipment | | $ | 6,398,612 |
| | $ | 6,201,078 |
| Total property, plant and equipment | | $ | 6,530,395 | | | $ | 6,398,612 | | | | | | | | |
In December 2020, IPL reclassified net property, plant and equipment of $74.5 million associated with the Petersburg Unit 1 retirement to long-term regulatory assets by crediting accumulated depreciation (for further discussion, see Note 2, “Regulatory Matters - IRP Filing”).
Substantially all of IPL’s property is subject to a $1,713.8$1,803.8 million direct first mortgage lien, as of December 31, 2019,2020, securing IPL’s first mortgage bonds. Total non-contractually or legally required accrued removal costs of utility plant in service at December 31, 2020 and 2019 and 2018 were $788.3$818.0 million and $761.1$788.3 million, respectively; and total contractually or legally required removal costs of property, plant and equipment at December 31, 2020 and 2019 and 2018 were $204.2$195.2 million and $129.5$204.2 million, respectively. Please see “ARO” below for further information.
ARO
ASC 410 “Asset Retirement and Environmental Obligations” addresses financial accounting and reporting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation. A legal obligation for purposes of ASC 410 is an obligation that a party is required to settle as a result of an existing law, statute, ordinance, written or oral contract or the doctrine of promissory estoppel.
IPL’s ARO relates primarily to environmental issues involving asbestos-containing materials, ash ponds, landfills and miscellaneous contaminants associated with its generating plants, transmission system and distribution system. The following is a roll forward of the ARO legal liability year end balances: | | | | | | | | | | | | | | | | | 2020 | | 2019 | | | (In Thousands) | Balance as of January 1 | | $ | 204,219 | | | $ | 129,451 | | Liabilities settled | | (18,302) | | | (9,891) | | Revisions to cash flow and timing estimates | | 1,120 | | | 78,153 | | Accretion expense | | 8,199 | | | 6,506 | | Balance as of December 31 | | $ | 195,236 | | | $ | 204,219 | | | | | | |
| | | | | | | | | | | | 2019 | | 2018 | | | (In Thousands) | Balance as of January 1 | | $ | 129,451 |
| | $ | 79,535 |
| Liabilities settled | | (9,891 | ) | | (8,932 | ) | Revisions to cash flow and timing estimates | | 78,153 |
| | 54,811 |
| Accretion expense | | 6,506 |
| | 4,037 |
| Balance as of December 31 | | $ | 204,219 |
| | $ | 129,451 |
| | | | | |
In 2019, IPL recorded adjustments to its ARO liabilities of $1.1 million and $78.2 million in 2020 and 2019, respectively, primarily to reflect an increaseincreases to estimated ash pond closure costs, including groundwater remediation. In 2018, IPL recorded additional ARO liabilities of $54.8 million to reflect revisions to cash flow and timing estimates due to accelerated ash pond closure dates, revised estimated closure costs after review of updates to the CCR rule and revised estimated costs associated with our coal storage areas, landfills, and asbestos remediation. As of December 31, 20192020 and 2018,2019, IPL did not have any assets that are legally restricted for settling its ARO liability.
4. FAIR VALUE
The fair value of financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of the Company’sIPL’s assets and liabilities have been determined using available market information. As these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
ASC 820 defined and established a framework for measuring fair value and expands disclosures about fair value measurements for financial assets and liabilities that are adjusted to fair value on a recurring basis and/or financial assets and liabilities that are measured at fair value on a nonrecurring basis, which have been adjusted to fair value during the period. In accordance with ASC 820, we haveIPL has categorized ourits financial assets and liabilities that are adjusted to fair value, based on the priority of the inputs to the valuation technique, following the three-level fair value hierarchy prescribed by ASC 820 as follows:
Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets; and
Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Whenever possible, quoted prices in active markets are used to determine the fair value of ourIPL’s financial instruments. OurIPL’s financial instruments are not held for trading or other speculative purposes. The estimated fair value of financial instruments has been determined by 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 weIPL could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Financial Assets
VEBA Assets
IPL has VEBA investments that are to be used to fund certain employee postretirement health care benefit plans. These assets are primarily comprised of open-ended mutual funds, which are valued using the net assets value per unit. These investments are recorded at fair value within "Other non-current assets" on the accompanying Consolidated Balance Sheets and classified as equity securities. ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” was effective as of January 1, 2018. This ASU requires the change in the fair value of equity instruments to be recorded in income. Equity Instruments were defined to include all mutual funds, regardless of the underlying investments. Therefore, all changes to fair value on the VEBA investments will be included in income in the period that the changes occur. These changes to fair value were not material for the years ended December 31, 2019, 2018, or 2017. Any unrealized gains or losses are recorded in "Other income / (expense), net" on the accompanying Consolidated Statements of Operations.
FTRs
In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. FTRs are used in the MISO market to hedge IPL’s exposure to congestion charges, which result from constraints on the transmission system. IPL’s FTRs are valued at the cleared auction prices for FTRs in MISO’s annual auction. Because of the infrequent nature of this valuation, the fair value assigned to the FTRs is considered a Level 3 input under the fair value hierarchy required by ASC 820. An offsetting regulatory liability has been recorded as these revenues or costs will be flowed through to customers through the FAC. As such, there is no impact on ourIPL’s Consolidated Statements of Operations.
Financial Liabilities
Interest Rate Hedges
Summary
In March 2019, we entered into forward interest rate hedges related to the 2020 IPALCO Notes and Term Loan that have maturities in July 2020.
The interest rate hedges have a combined notional amount of $400.0 million, which will settle when we refinance the debt. All changes in the marketfair value of the interest rate hedges will be recorded in AOCI. See also Note 5, "Derivative Instrumentsassets and Hedging Activities - Cash Flow Hedges" for further information.
Other Financial Liabilities
As ofliabilities at December 31, 2018, IPALCO's other financial liabilities2020 measured at fair value on a recurring basis were considered Level 3, based onand the respective category within the fair value hierarchy.hierarchy for IPL was determined as follows:
| | | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2020 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | Financial transmission rights | $ | 543 | | $ | 0 | | $ | 0 | | $ | 543 | | Total financial assets measured at fair value | $ | 543 | | $ | 0 | | $ | 0 | | $ | 543 | | | | | | | | | | | | | | | | |
Summary
The fair value of assets and liabilities at December 31, 2019 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCOIPL was determined as follows: | | | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2019 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | Financial transmission rights | $ | 864 | | $ | 0 | | $ | 0 | | $ | 864 | | Total financial assets measured at fair value | $ | 864 | | $ | 0 | | $ | 0 | | $ | 864 | |
| | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2019 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 25 |
| $ | 25 |
| $ | — |
| $ | — |
| Mutual funds | 2,854 |
| — |
| 2,854 |
| — |
| Total VEBA investments | 2,879 |
| 25 |
| 2,854 |
| — |
| Financial transmission rights | 864 |
| — |
| — |
| 864 |
| Total financial assets measured at fair value | $ | 3,743 |
| $ | 25 |
| $ | 2,854 |
| $ | 864 |
| Financial liabilities: | | | | | Interest rate hedges | $ | 26,560 |
| $ | — |
| $ | 26,560 |
| $ | — |
| Total financial liabilities measured at fair value | $ | 26,560 |
| $ | — |
| $ | 26,560 |
| $ | — |
|
The fair value of assets and liabilities at December 31, 2018 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCO was determined as follows:
| | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2018 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 21 |
| $ | 21 |
| $ | — |
| $ | — |
| Mutual funds | 2,565 |
| — |
| 2,565 |
| — |
| Total VEBA investments | 2,586 |
| 21 |
| 2,565 |
| — |
| Financial transmission rights | 3,099 |
| — |
| — |
| 3,099 |
| Total financial assets measured at fair value | $ | 5,685 |
| $ | 21 |
| $ | 2,565 |
| $ | 3,099 |
| Financial liabilities: | | | | | Other derivative liabilities | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
| Total financial liabilities measured at fair value | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
|
121
The following table sets forth a roll forward of financial instruments, measured at fair value on a recurring basis, classified as Level 3 in the fair value hierarchy (note, amounts in this table indicate carrying values, which approximate fair values): | | | | | | | Reconciliation of Financial Instruments Classified as Level 3 | | (In Thousands) | Balance at January 1, 2019 | $ | 3,046 | | Unrealized gain recognized in earnings | 53 | | Issuances | 2,846 | | Settlements | (5,081) | | Balance at December 31, 2019 | $ | 864 | | | | Issuances | 1,889 | | Settlements | (2,210) | | Balance at December 31, 2020 | $ | 543 | | | |
| | | | | | Reconciliation of Financial Instruments Classified as Level 3 | | (In Thousands) | Balance at January 1, 2018 | $ | 2,454 |
| Unrealized gain recognized in earnings | 24 |
| Issuances | 9,295 |
| Settlements | (8,727 | ) | Balance at December 31, 2018 | $ | 3,046 |
| Unrealized gain recognized in earnings | 53 |
| Issuances | 2,846 |
| Settlements | (5,081 | ) | Balance at December 31, 2019 | $ | 864 |
| | |
Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Debt
The fair value of ourIPL’s outstanding fixed-rate debt has been determined on the basis of the quoted market prices of the specific securities issued and outstanding. In certain circumstances, the market for such securities was inactive and therefore the valuation was adjusted to consider changes in market spreads for similar securities. Accordingly, the purpose of this disclosure is not to approximate the value on the basis of how the debt might be refinanced.
The following table shows the face value and the fair value of fixed-rate and variable-rate indebtedness (Level 2) for the periods ending: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | Face Value | | Fair Value | | Face Value | | Fair Value | | | (In Thousands) | Fixed-rate | | $ | 1,803,800 | | | $ | 2,302,973 | | | $ | 1,713,800 | | | $ | 2,049,758 | | Variable-rate | | 75,000 | | | 75,000 | | | 90,000 | | | 90,000 | | Total indebtedness | | $ | 1,878,800 | | | $ | 2,377,973 | | | $ | 1,803,800 | | | $ | 2,139,758 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | | Face Value | | Fair Value | | Face Value | | Fair Value | | | (In Thousands) | Fixed-rate | | $ | 2,523,800 |
| | $ | 2,876,140 |
| | $ | 2,523,800 |
| | $ | 2,649,265 |
| Variable-rate | | 155,000 |
| | 155,000 |
| | 155,000 |
| | 155,000 |
| Total indebtedness | | $ | 2,678,800 |
| | $ | 3,031,140 |
| | $ | 2,678,800 |
| | $ | 2,804,265 |
| | | | | | | | | |
The difference between the face value and the carrying value of this indebtedness represents the following:
•unamortized deferred financing costs of $20.7$17.4 million and $23.0$16.7 million at December 31, 20192020 and 2018,2019, respectively; and •unamortized discounts of $6.5$6.0 million and $6.7$6.2 million at December 31, 2020 and 2019, and 2018, respectively.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.
At December 31, 20192020, IPL's outstanding derivative instruments were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) | FTRs | | Not Designated | | MWh | | 3,168 | | | 0 | | | 3,168 | |
| | | | | | | | | | | | | | | | | | Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) | Interest rate hedges | | Designated | | USD | | $ | 400,000 |
| | $ | — |
| | $ | 400,000 |
| FTRs | | Not Designated | | MWh | | 5,707 |
| | — |
| | 5,707 |
|
| | (a) | (a) Refers to whether the derivative instruments have been designated as a cash flow hedge. |
Cash Flow Hedges
As part of our risk management processes, we identify the relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The fair values of cash flow hedges determined by current public market prices will continue to fluctuate with changes in market prices up to contract expiration. With the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities effective January 1, 2019, we are no longer required to calculate effectiveness and thus the entire change in the fair value of a hedging instrument is now recorded in other comprehensive income and amounts deferred are reclassified to earnings in the same income statement line as the hedged item in the period in which it settles.hedge.
In March 2019, we entered into 3 forward interest rate swaps to hedge the interest risk associated with refinancing future debt. The 3 interest rate swaps have a combined notional amount of $400.0 million and will be settled when the associated debt is refinanced. The AOCI associated with the interest rate swaps will be amortized out of AOCI into interest expense over the remaining life of the underlying debt.
We use the income approach to value the swaps, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward rates with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. We will reclassify gains and losses on the swaps out of AOCI and into earnings in those periods in which hedged interest payments occur.
The following tables provide information on gains or losses recognized in AOCI for the cash flow hedges for the period indicated:
| | | | | | | | Interest Rate Hedges for the Year Ended December 31, 2019 | $ in thousands (net of tax) | | Beginning accumulated derivative gain / (loss) in AOCI | | $ | — |
| | | | Net losses associated with current period hedging transactions | | (19,750 | ) | Ending accumulated derivative loss in AOCI | | $ | (19,750 | ) | | | | Portion expected to be reclassified to earnings in the next twelve months | | $ | — |
| Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months) | | 7 |
|
Derivatives Not Designated as Hedge
FTRs do not qualify for hedge accounting or the normal purchases and sales exceptions under ASC 815. Accordingly, such contracts are recorded at fair value when acquired and subsequently amortized over the annual period as they are used. FTRs are initially recorded at fair value using the income approach.
Certain qualifying derivative instruments have been designated as normal purchases or normal sales contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to hedge or mark to market accounting and are recognized in the consolidated statements of operations on an accrual basis.
When applicable, IPALCOIPL has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. As of December 31, 2019, IPALCO2020, IPL did not have any offsetting positions.
The following table summarizes the fair value, balance sheet classification and hedging designation of IPALCO'sIPL's derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | Commodity | Hedging Designation | | Balance sheet classification | | 2020 | | 2019 | Financial transmission rights | Not a Cash Flow Hedge | | Prepayments and other current assets | | $ | 543 | | | $ | 864 | |
| | | | | | | | | | | | | | | | | | December 31, | Commodity | Hedging Designation | | Balance sheet classification | | 2019 | | 2018 | Financial transmission rights | Not a Cash Flow Hedge | | Prepayments and other current assets | | $ | 864 |
| | $ | 3,099 |
| Interest rate hedges | Cash Flow Hedge | | Accrued and other current liabilities | | $ | 26,560 |
| | $ | — |
|
6. EQUITY
Paid In Capital and Capital Stock
IPL had capital contributions from IPALCO of $0.0 million, $0.0 million and $65.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
All of the outstanding common stock of IPL is owned by IPALCO. IPL’s common stock is pledged under the 2024 IPALCO Notes and 2030 IPALCO Notes. There have been no changes in the capital stock of IPL during the three years ended December 31, 2020.
Dividend Restrictions
IPL’s mortgage and deed of trust and its amended articles of incorporation contain restrictions on IPL’s ability to issue certain securities or pay cash dividends. So long as any of the several series of bonds of IPL issued under its mortgage remains outstanding, and subject to certain exceptions, 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 the mortgage, after December 31, 1939. In addition, pursuant to IPL’s articles, 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. As of December 31, 2019,2020, and as of the filing of this report, IPL was in compliance with these restrictions.
IPL is also restricted in its ability to pay dividends if it is in default under the terms of its Credit Agreement, and its unsecured notes, which could happen if IPL fails to comply with certain covenants. These covenants, among other things, require IPL to maintain a ratio of total debt to total capitalization not in excess of 0.650.67 to 1. As of December 31, 2019.2020, and as of the filing of this report, IPL was in compliance with all covenants and no event of default existed.
IPALCO’s Third Amended and Restated Articles of Incorporation contain provisions which state that IPALCO may not make a distribution to its shareholders or make a loan to any of its affiliates (other than its subsidiaries), unless: (a) there exists no event of default (as defined in the articles) and no such event of default would result from the making of the distribution or loan; and either (b)(i) at the time of, and/or as a result of, the distribution or loan, IPALCO’s
leverage ratio does not exceed 0.67 to 1 and IPALCO’s interest coverage ratio is not less than 2.50 to 1 or, (b)(ii) if such ratios are not within the parameters, IPALCO’s senior long-term debt rating from one of the three major credit rating agencies is at least investment grade. As of December 31, 2019, and as of the filing of this report, IPALCO was in compliance with all covenants and no event of default existed.
IPALCO is also restricted in its ability to pay dividends if it is in default under the terms of its Term Loan, which could happen if IPALCO fails to comply with certain covenants. These covenants, among other things, require IPALCO to maintain a ratio of total debt to total capitalization not in excess of 0.67 to 1. As of December 31, 2019, and as of the filing of this report, IPALCO was in compliance with all covenants and no event of default existed.
During the years ended December 31, 2020, 2019 and 2018, and 2017, IPALCO paid distributionsIPL declared dividends to its shareholdersshareholder totaling $136.4$140.6 million, $130.2$159.0 million, and $105.1$156.8 million, respectively.
Cumulative Preferred Stock
IPL has 5 separate series of cumulative preferred stock. Holders of preferred stock are entitled to receive dividends at rates per annum ranging from 4.0% to 5.65%. During each year ended December 31, 2019, 2018 and 2017, total preferred stock dividends declared were $3.2 million. Holders of preferred stock are entitled to 2 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 of IPL’s Board of
Directors. Based on the preferred stockholders’ ability to elect a majority of IPL’s Board of Directors in this circumstance, the redemption of the preferred shares is considered to be not solely within the control of the issuer and the preferred stock was considered temporary equity and presented in the mezzanine level of the audited consolidated balance sheets in accordance with the relevant accounting guidance for non-controlling interests and redeemable securities. IPL has issued and outstanding 500,000 shares of 5.65% preferred stock, which are now redeemable at par value, subject to certain restrictions, in whole or in part. Additionally, IPL has 91,353 shares of preferred stock which are redeemable solely at the option of IPL and can be redeemed in whole or in part at any time at specific call prices.
At December 31, 2019, 2018 and 2017, preferred stock consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, | | | Shares Outstanding | | Call Price | | 2019 | | 2018 | | 2017 | | | | | Par Value, plus premium, if applicable | | | | | (In Thousands) | Cumulative $100 par value, | | | | | | | | | | | authorized 2,000,000 shares | | | | | | | | | | | 4% Series | | 47,611 |
| | $ | 118.00 |
| | $ | 5,410 |
| | $ | 5,410 |
| | $ | 5,410 |
| 4.2% Series | | 19,331 |
| | $ | 103.00 |
| | 1,933 |
| | 1,933 |
| | 1,933 |
| 4.6% Series | | 2,481 |
| | $ | 103.00 |
| | 248 |
| | 248 |
| | 248 |
| 4.8% Series | | 21,930 |
| | $ | 101.00 |
| | 2,193 |
| | 2,193 |
| | 2,193 |
| 5.65% Series | | 500,000 |
| | $ | 100.00 |
| | 50,000 |
| | 50,000 |
| | 50,000 |
| Total cumulative preferred stock | | 591,353 |
| | |
| | $ | 59,784 |
| | $ | 59,784 |
| | $ | 59,784 |
| | | | | | | | | | | |
7. DEBT
Long-Term Debt
The following table presents our long-term debt:
| | | | | | | | | | | | | | | | December 31, | Series | | Due | | 2019 | | 2018 | | | | | (In Thousands) | IPL first mortgage bonds: | | | | | 3.875% (1) | | August 2021 | | $ | 55,000 |
| | $ | 55,000 |
| 3.875% (1) | | August 2021 | | 40,000 |
| | 40,000 |
| 3.125% (1) | | December 2024 | | 40,000 |
| | 40,000 |
| 6.60% | | January 2034 | | 100,000 |
| | 100,000 |
| 6.05% | | October 2036 | | 158,800 |
| | 158,800 |
| 6.60% | | June 2037 | | 165,000 |
| | 165,000 |
| 4.875% | | November 2041 | | 140,000 |
| | 140,000 |
| 4.65% | | June 2043 | | 170,000 |
| | 170,000 |
| 4.50% | | June 2044 | | 130,000 |
| | 130,000 |
| 4.70% | | September 2045 | | 260,000 |
| | 260,000 |
| 4.05% | | May 2046 | | 350,000 |
| | 350,000 |
| 4.875% | | November 2048 | | 105,000 |
| | 105,000 |
| Unamortized discount – net | | | | (6,156 | ) | | (6,272 | ) | Deferred financing costs | | | | (16,629 | ) | | (17,115 | ) | Total IPL first mortgage bonds | | 1,691,015 |
| | 1,690,413 |
| IPL unsecured debt: | | | | | Variable (2) | | December 2020 | | 30,000 |
| | 30,000 |
| Variable (2) | | December 2020 | | 60,000 |
| | 60,000 |
| Deferred financing costs | | | | (114 | ) | | (229 | ) | Total IPL unsecured debt | | 89,886 |
| | 89,771 |
| Total long-term debt – IPL | | 1,780,901 |
| | 1,780,184 |
| Long-term debt – IPALCO: | | |
| | |
| Term Loan | | July 2020 | | 65,000 |
| | 65,000 |
| 3.45% Senior Secured Notes | | July 2020 | | 405,000 |
| | 405,000 |
| 3.70% Senior Secured Notes | | September 2024 | | 405,000 |
| | 405,000 |
| Unamortized discount – net | | | | (313 | ) | | (424 | ) | Deferred financing costs | | | | (3,959 | ) | | (5,696 | ) | Total long-term debt – IPALCO | | 870,728 |
| | 868,880 |
| Total consolidated IPALCO long-term debt | | 2,651,629 |
| | 2,649,064 |
| Less: current portion of long-term debt | | 559,199 |
| | — |
| Net consolidated IPALCO long-term debt | | $ | 2,092,430 |
| | $ | 2,649,064 |
| |
| | (1) | First mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority. |
| | (2) | Unsecured notes issued to the Indiana Finance Authority by IPL to facilitate the loan of proceeds from various tax-exempt notes issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but are subject to a mandatory put in December 2020. |
Debt Maturities
Maturities on long-term indebtedness subsequent to December 31, 2019, are as follows:
| | | | | Year | Amount | | (In Thousands) | 2020 | $ | 560,000 |
| 2021 | 95,000 |
| 2022 | — |
| 2023 | — |
| 2024 | 445,000 |
| Thereafter | 1,578,800 |
| Total | $ | 2,678,800 |
| | |
Significant Transactions
IPL First Mortgage Bonds and Recent Indiana Finance Authority Bond Issuances
The mortgage and deed of trust of IPL, together with the supplemental indentures thereto, secure the first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage, substantially all property owned by IPL is subject to a first mortgage lien securing indebtedness of $1,713.8 million as of December 31, 2019. The IPL first mortgage bonds require net earnings as calculated thereunder be at least two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. IPL was in compliance with such requirements as of December 31, 2019.
In November 2018, IPL issued $105 million aggregate principal amount of first mortgage bonds, 4.875% Series, due November 2048, pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from this offering were approximately $103.5 million, after deducting the initial purchasers’ discounts and fees and expenses for the offering. The net proceeds from this offering were used to repay amounts due under IPL's Credit Agreement and for general corporate purposes.
In August 2017, IPL repaid $24.7 million in outstanding borrowings of 5.40% IPL first mortgage bonds that were due in August 2017.
IPL Unsecured Notes
In December 2015, the Indiana Finance Authority issued on behalf of IPL an aggregate principal amount of $90 million of Environmental Facilities Refunding Revenue Notes due December 2038 (Indianapolis Power & Light Company Project). These unsecured notes were issued in two series: $30 million Series 2015A notes and $60 million 2015B notes. These notes were initially purchased by a syndication of banks who will hold the notes until the mandatory put date of December 22, 2020.
IPL has classified its outstanding $90 million aggregate principal amount of these unsecured notes as short-term indebtedness as they are due December 2020. Management plans to refinance these unsecured notes with new debt. In the event that we are unable to refinance these unsecured notes on acceptable terms, IPL has available borrowing capacity on its revolving credit facility that could be used to satisfy the obligation.
IPALCO’s Senior Secured Notes and Term Loan
IPALCO has $405 million of 3.45% Senior Secured Notes due July 15, 2020, ("2020 IPALCO Notes") and a $65 million Term Loan due July 1, 2020. Although current liquid funds are not sufficient to pay the collective amounts due under the 2020 IPALCO Notes and Term Loan at their maturities, we believe that we will be able to refinance the 2020 IPALCO Notes and Term Loan based on our conversations with investment bankers, which currently indicate more than adequate demand for new IPALCO debt at our current credit ratings, and our previous successful issuance of our $405 million IPALCO senior secured notes in 2017, which served to refinance notes existing at the time. Should the capital markets not be accessible to us at the time of the maturity of the 2020
IPALCO Notes and Term Loan, management believes that other financing options are at its disposal to meet the needs of the maturities.
IPALCO Term Loan
On October 31, 2018, IPALCO closed on a new Term Loan consisting of a $65 million credit facility maturing July 1, 2020. The Term Loan is variable rate and is secured by IPALCO’s pledge of all the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’ existing senior secured notes. The Term Loan proceeds were used to repay amounts under IPL's Credit Agreement and for general corporate purposes.
IPALCO’s Senior Secured Notes
In August 2017, IPALCO completed the sale of the $405 million 2024 IPALCO Notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 2024 IPALCO Notes were issued pursuant to an Indenture dated August 22, 2017, by and between IPALCO and U.S. Bank, National Association, as trustee. The 2024 IPALCO Notes were priced to the public at 99.901% of the principal amount. Net proceeds to IPALCO were approximately $399.3 million after deducting underwriting costs and estimated offering expenses. These costs are being amortized to the maturity date using the effective interest method. We used the net proceeds from this offering, together with cash on hand, to redeem the $400 million 2018 IPALCO Notes on September 21, 2017, and to pay certain related fees, expenses and make-whole premiums. A loss on early extinguishment of debt of $8.9 million for the 2018 IPALCO Notes is included as a separate line item within “Other Income/(Expense), Net” in the accompanying Consolidated Statements of Operations.
The 2020 IPALCO Notes and 2024 IPALCO Notes are secured by IPALCO’s pledge of all of the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s Term Loan. IPALCO filed its registration statement on Form S-4 with respect to the 2024 IPALCO Notes with the SEC on November 13, 2017, and this registration statement was declared effective on December 5, 2017. The exchange offer was completed on January 12, 2018.
Line of Credit
IPL entered into an amendment and restatement of its 5-year $250 million revolving credit facility on June 19, 2019 with a syndication of bank lenders. This Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on June 19, 2024, and bears interest at variable rates as described in the Credit Agreement. It includes an uncommitted $150 million accordion feature to provide IPL with an option to request an increase in the size of the facility at any time prior to June 19, 2023, subject to approval by the lenders. The Credit Agreement also includes two one-year extension options, allowing IPL to extend the maturity date subject to approval by the lenders. Prior to execution, IPL and IPALCO had existing general banking relationships with the parties to the Credit Agreement. IPL had no outstanding borrowings on the committed line of credit as of December 31, 2019 and 2018, respectively.
Restrictions on Issuance ofDebt
All of IPL’s long-term borrowings must first be approved by the IURC and the aggregate amount of IPL’s short-term indebtedness must be approved by the FERC. IPL has approval from FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 26, 2020. In December 2018, IPL received an order from the IURC granting IPL authority through December 31, 2021 to, among other things, issue up to $350 million in aggregate principal amount of long-term debt and refinance up to $185.0 million in existing indebtedness, all of which authority remains available under the order as of December 31, 2019. This order also grants IPL authority to have up to $500 million of long-term credit agreements and liquidity facilities outstanding at any one time, of which $250.0 million remains available under the order as of December 31, 2019. As an alternative to the sale of all or a portion of $65 million in principal of the long-term debt mentioned above, we have the authority to issue up to $65 million of new preferred stock, all of which authority remains available under the order as of December 31, 2019. IPL also has restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under our existing debt obligations. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its Credit Agreement, refinance existing debt and issue new debt approved by the IURC and issue certain other indebtedness.
Credit Ratings
Our ability to borrow money or to refinance existing indebtedness and the interest rates at which we can borrow money or refinance existing indebtedness are affected by our credit ratings. In addition, the applicable interest rates on IPL’s Credit Agreement and other unsecured notes are dependent upon the credit ratings of IPL. Downgrades in the credit ratings of AES could result in IPL’s and/or IPALCO’s credit ratings being downgraded.
8. INCOME TAXES
IPALCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPALCO and its subsidiaries each filed separate income tax returns. IPALCO is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods. IPALCO made tax sharing payments to AES of $29.6 million, $28.3 million and $65.1 million in 2019, 2018 and 2017 respectively.
On March 25, 2014, the state of Indiana amended Indiana Code 6-3-2-1 through Senate Bill 001, which phases in an additional 1.6% reduction to the state corporate income tax rate that was initially being reduced by 2%. While the statutory state income tax rate decreased to 5.625% for the calendar year 2019, the deferred tax balances were adjusted according to the anticipated reversal of temporary differences. The change in required deferred taxes on plant and plant-related temporary differences resulted in a reduction to the associated regulatory asset of $1.3 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.1 million. The statutory state corporate income tax rate will be 5.375% for 2020.
In tax years prior to 2018, Internal Revenue Code Section 199 permitted taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL’s electric production activities qualify for this deduction. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for the tax year 2017 was $3.9 million. Due to the enactment of TCJA (as described below), the 2017 tax year was the final year for this deduction.
U.S. Tax Reform
On December 22, 2017, the U.S. federal government enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law. Notable items impacting the effective tax rate for the 2018 tax year related to the TCJA include a rate reduction in the corporate tax rate to 21% from 35% and an increase in the estimated flow-through depreciation partially offset by the repeal of the manufacturer’s production deduction.
In 2017, the Company recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, the Company’s financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined.
The Company completed its calculation of the impact of the TCJA in its income tax provision during the year ended December 31, 2018in accordance with its understanding of the TCJA and guidance available as of that date, and as a result recognized $0.0 million and $0.2 million of discrete tax expense in the fourth quarters of 2018 and 2017, respectively. This total results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $7.7 million and $215.5 million in 2018 and 2017, respectively, was recorded as a regulatory liability, which was a non-cash adjustment.
Income Tax Provision
Federal and state income taxes charged to income are as follows:
| | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | (In Thousands) | Components of income tax expense: | | | | | | | Current income taxes: | | | | | | | Federal | | $ | 17,229 |
| | $ | 20,341 |
| | $ | 42,542 |
| State | | 3,022 |
| | 8,843 |
| | 9,916 |
| Total current income taxes | | 20,251 |
| | 29,184 |
| | 52,458 |
| Deferred income taxes: | | |
| | |
| | |
| Federal | | 7,547 |
| | (15,150 | ) | | (1,720 | ) | State | | 7,745 |
| | 326 |
| | (332 | ) | Total deferred income taxes | | 15,292 |
| | (14,824 | ) | | (2,052 | ) | Net amortization of investment credit | | (15 | ) | | (911 | ) | | (1,455 | ) | Total income tax expense | | $ | 35,528 |
| | $ | 13,449 |
| | $ | 48,951 |
| | | | | | | |
Effective and Statutory Rate Reconciliation
The provision for income taxes (including net investment tax credit adjustments) is different 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:
| | | | | | | | | | | | | 2019 | | 2018 | | 2017 | Federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % | State income tax, net of federal tax benefit | | 4.4 | % | | 5.6 | % | | 4.1 | % | Research and development credit | | — | % | | (1.9 | )% | | — | % | Depreciation flow through and amortization | | (5.7 | )% | | (15.6 | )% | | (0.1 | )% | Additional funds used during construction - equity | | 0.2 | % | | 0.3 | % | | (4.1 | )% | Manufacturers’ Production Deduction (Sec. 199) | | — | % | | — | % | | (2.5 | )% | Other – net | | 1.3 | % | | (0.3 | )% | | (1.4 | )% | Effective tax rate | | 21.2 | % | | 9.1 | % | | 31.0 | % | | | | | | | |
Deferred Income Taxes
The significant items comprising IPALCO’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2019 and 2018, are as follows:
| | | | | | | | | | | | 2019 | | 2018 | | | (In Thousands) | Deferred tax liabilities: | | | | | Relating to utility property, net | | $ | 406,605 |
| | $ | 378,460 |
| Regulatory assets recoverable through future rates | | 61,984 |
| | 67,721 |
| Other | | 17,996 |
| | 12,161 |
| Total deferred tax liabilities | | 486,585 |
| | 458,342 |
| Deferred tax assets: | | |
| | |
| Investment tax credit | | 7 |
| | 11 |
| Regulatory liabilities including ARO | | 191,676 |
| | 184,413 |
| Employee benefit plans | | 8,556 |
| | 8,335 |
| Other | | 13,485 |
| | 12,498 |
| Total deferred tax assets | | 213,724 |
| | 205,257 |
| Deferred income tax liability – net | | $ | 272,861 |
| | $ | 253,085 |
| | | | | |
Uncertain Tax Positions
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:
| | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | (In Thousands) | Unrecognized tax benefits at January 1 | | $ | 7,056 |
| | $ | 7,049 |
| | $ | 6,634 |
| Gross increases – current period tax positions | | — |
| | — |
| | 470 |
| Gross decreases – prior period tax positions | | — |
| | 7 |
| | (55 | ) | Unrecognized tax benefits at December 31 | | $ | 7,056 |
| | $ | 7,056 |
| | $ | 7,049 |
| | | | | | | |
The unrecognized tax benefits at December 31, 2019 represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.
Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. There are no interest or penalties applicable to the periods contained in this report.
9. BENEFIT PLANS
Defined Contribution Plans
All of IPL’s employees are covered by one of two defined contribution plans, the Thrift Plan or the RSP:
The Thrift Plan
Approximately 82% of IPL’s active employees are covered by the Thrift Plan, a qualified defined contribution plan. All union new hires are covered under the Thrift Plan. Participants elect to make contributions to the Thrift Plan based on a percentage of their base compensation. Each participant’s contribution is matched up to certain thresholds of base compensation. The IBEW clerical-technical union new hires receive an annual lump sum company contribution into the Thrift Plan in addition to the company match. Employer contributions to the Thrift Plan were $3.3 million, $3.3 million and $3.4 million for 2019, 2018 and 2017, respectively.
The RSP
Approximately 18% of IPL’s active employees are covered by the RSP, a qualified defined contribution plan containing a match, nondiscretionary and profit sharing component. All non-union new hires are covered under the RSP. Participants elect to make contributions to the RSP based on a percentage of their eligible compensation. Each participant’s contribution is matched in amounts up to, but not exceeding, 5% of the participant’s eligible compensation. Starting in 2018, the RSP also includes a 4% nondiscretionary contribution based as a percentage of each participant's eligible compensation. Finally, the RSP included a profit sharing component through 2017 whereby IPL contributed a percentage of each employee’s annual salary into the plan on a pre-tax basis. The profit sharing percentage was determined by the AES Board of Directors on an annual basis. Employer contributions (by IPL) relating to the RSP were $1.6 million, $1.7 million and $1.8 million for 2019, 2018 and 2017, respectively.
Defined Benefit Plans
Approximately 76% of IPL’s active employees are covered by the qualified Defined Benefit Pension Plan; while approximately 6% of active employees are IBEW clerical-technical unit employees who are only eligible for the Thrift Plan. The remaining 18% of active employees are covered by the RSP. All non-union new hires are covered under the RSP, while IBEW physical unit union new hires are covered under the Defined Benefit Pension Plan and Thrift Plan. The IBEW clerical-technical unit new hires are no longer covered under the Defined Benefit Pension Plan but do receive an annual lump sum company contribution into the Thrift Plan, in addition to the company match. The Defined Benefit Pension Plan is noncontributory and is funded by IPL through a trust. Benefits for non-union participants in the Defined Benefit Pension Plan are based on salary, years of service and accrued benefits at April 1, 2015. Benefits for eligible union participants 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.
Additionally, a small group of former officers and their surviving spouses are covered under a funded non-qualified Supplemental Retirement Plan. The total number of participants in the plan as of December 31, 2019 was 22. The plan is closed to new participants.
IPL also provides postretirement health care benefits to certain active or retired employees and the spouses of certain active or retired employees. Approximately 147 active employees and 17 retirees (including spouses) were receiving such benefits or entitled to future benefits as of January 1, 2019. The plan is unfunded. These postretirement health care benefits and the related unfunded obligation of $6.4 million and $6.7 million at December 31, 2019 and 2018, respectively, were not material to the consolidated financial statements in the periods covered by this report.
The following table presents information relating to the Pension Plans:
| | | | | | | | | | | | Pension benefits as of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Change in benefit obligation: | | | | | Projected benefit obligation at January 1 | | $ | 697,228 |
| | $ | 782,108 |
| Service cost | | 7,412 |
| | 8,450 |
| Interest cost | | 27,343 |
| | 25,220 |
| Actuarial loss/(gain) | | 88,311 |
| | (62,303 | ) | Amendments (primarily increases in pension bands) | | — |
| | 5,446 |
| Curtailments(1) | | — |
| | 450 |
| Benefits paid | | (37,499 | ) | | (62,143 | ) | Projected benefit obligation at December 31 | | 782,795 |
| | 697,228 |
| Change in plan assets: | | |
| | |
| Fair value of plan assets at January 1 | | 684,485 |
| | 738,947 |
| Actual return on plan assets | | 122,690 |
| | (22,404 | ) | Employer contributions | | 28 |
| | 30,085 |
| Benefits paid | | (37,499 | ) | | (62,143 | ) | Fair value of plan assets at December 31 | | 769,704 |
| | 684,485 |
| Unfunded status | | $ | (13,091 | ) | | $ | (12,743 | ) | Amounts recognized in the statement of financial position: | | |
| | |
| Noncurrent liabilities | | $ | (13,091 | ) | | $ | (12,743 | ) | Net amount recognized at end of year | | $ | (13,091 | ) | | $ | (12,743 | ) | Sources of change in regulatory assets(2): | | |
| | |
| Prior service cost arising during period | | $ | — |
| | $ | 5,446 |
| Net (gain)/loss arising during period | | (4,472 | ) | | 902 |
| Amortization of prior service cost | | (3,823 | ) | | (4,618 | ) | Amortization of loss | | (11,084 | ) | | (11,403 | ) | Total recognized in regulatory assets | | $ | (19,379 | ) | | $ | (9,673 | ) | Amounts included in regulatory assets: | | |
| | |
| Net loss | | $ | 167,750 |
| | $ | 183,306 |
| Prior service cost | | 14,323 |
| | 18,146 |
| Total amounts included in regulatory assets | | $ | 182,073 |
| | $ | 201,452 |
| | | | | |
| | (1) | As a result of the announced AES restructuring in the first quarter of 2018, we recognized a plan curtailment of $1.2 million in the first quarter of 2018. |
| | (2) | Amounts that would otherwise be charged/credited to Accumulated Other Comprehensive Income or Loss upon application of ASC 715, “Compensation – Retirement Benefits,” are recorded as a regulatory asset or liability because IPL has historically recovered and currently recovers pension and other postretirement benefit expenses in rates. These are unrecognized amounts not yet recognized as components of net periodic benefit costs. |
Information for Pension Plans with aprojectedbenefit obligation in excess of plan assets
| | | | | | | | | | | | Pension benefits as of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Benefit obligation | | $ | 782,795 |
| | $ | 697,228 |
| Plan assets | | 769,704 |
| | 684,485 |
| Benefit obligation in excess of plan assets | | $ | 13,091 |
| | $ | 12,743 |
| | | | | |
IPL’s total benefit obligation in excess of plan assets was $13.1 million as of December 31, 2019 ($12.0 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan).
Information for Pension Plans with an accumulated benefit obligation in excess of plan assets
| | | | | | | | | | | | Pension benefits as of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Accumulated benefit obligation | | $ | 771,592 |
| | $ | 687,136 |
| Plan assets | | 769,704 |
| | 684,485 |
| Accumulated benefit obligation in excess of plan assets | | $ | 1,888 |
| | $ | 2,651 |
| | | | | |
IPL’s total accumulated benefit obligation in excess of plan assets was $1.9 million as of December 31, 2019 ($0.8 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan).
Significant Gains and Losses Related to Changes in the Benefit Obligation for the Period
As shown in the table above, an actuarial loss of $88.3 million increased the benefit obligation for the year ended December 31, 2019 and an actuarial gain of $62.3 million reduced the benefit obligation for the year ended December 31, 2018. The actuarial loss in 2019 was primarily due to a decrease in the discount rate, while the actuarial gain in 2018 was primarily due to an increase in the discount rate.
Pension Benefits and Expense
Reported expenses relevant to the Defined Benefit Pension Plan are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience, including the performance of plan assets and actual benefits paid out in future years. Pension costs associated with the Defined Benefit Pension Plan are impacted by the level of contributions made to the plan, earnings on plan assets, the adoption of new mortality tables, and employee demographics, including age, job responsibilities, salary and employment periods. Changes made to the provisions of the Defined Benefit Pension Plan may impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the corporate bond discount rates, as well as, the adoption of a new mortality table used in determining the projected benefit obligation and pension costs.
The 2019 net actuarial gain of $4.5 million recognized in regulatory assets is comprised of two parts: (1) a $92.8 million pension asset actuarial gain primarily due to higher than expected return on assets; partially offset by (2) an $88.3 million pension liability actuarial loss primarily due to a decrease in the discount rate used to value pension liabilities. The unrecognized net loss of $167.8 million in the Pension Plans has accumulated over time primarily due to the long-term declining trend in corporate bond rates and the adoption of new mortality tables which increased the expected benefit obligation due to the longer expected lives of plan participants. During 2019, the accumulated net gain increased due to lower discount rates used to value pension liabilities; which was partially offset by a combination of higher than expected return on pension assets, as well as the year 2019 amortization of accumulated loss. The unrecognized net loss, to the extent that it exceeds 10% of the greater of the benefit obligation or the assets, will be amortized and included as a component of net periodic benefit cost in future years. The amortization period is approximately 10.96 years based on estimated demographic data as of December 31, 2019. The projected benefit obligation of $782.8 million less the fair value of assets of $769.7 million results in an unfunded status of $13.1 million at December 31, 2019.
| | | | | | | | | | | | | | | | Pension benefits for years ended December 31, | | | 2019 | | 2018 | | 2017 | | | (In Thousands) | Components of net periodic benefit cost: | | | | | | | Service cost | | $ | 7,412 |
| | $ | 8,450 |
| | $ | 7,344 |
| Interest cost | | 27,343 |
| | 25,220 |
| | 25,305 |
| Expected return on plan assets | | (29,907 | ) | | (40,801 | ) | | (44,672 | ) | Amortization of prior service cost | | 3,823 |
| | 3,837 |
| | 4,240 |
| Recognized actuarial loss | | 11,084 |
| | 11,403 |
| | 13,195 |
| Recognized settlement loss | | — |
| | 1,230 |
|
| 146 |
| Total pension cost | | 19,755 |
| | 9,339 |
| | 5,558 |
| Less: amounts capitalized | | 1,237 |
| | 1,223 |
| | 845 |
| Amount charged to expense | | $ | 18,518 |
| | $ | 8,116 |
| | $ | 4,713 |
| Rates relevant to each year’s expense calculations: | | | | | | | Discount rate – defined benefit pension plan | | 4.36 | % | | 3.67 | % | | 4.29 | % | Discount rate – supplemental retirement plan | | 4.24 | % | | 3.60 | % | | 4.00 | % | Expected return on defined benefit pension plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % | Expected return on supplemental retirement plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % | | | | | | | |
Pension expense for the following year is determined as of the December 31 measurement date based on the fair value of the Pension Plans’ assets, the expected long-term rate of return on plan assets, a mortality table assumption that reflects the life expectancy of plan participants, and a discount rate used to determine the projected benefit obligation. For 2019, pension expense was determined using an assumed long-term rate of return on plan assets of 4.50%. As of the December 31, 2019 measurement date, IPL decreased the discount rate from 4.36% to 3.33% for the Defined Benefit Pension Plan and decreased the discount rate from 4.24% to 3.05% for the Supplemental Retirement Plan. The discount rate assumptions affect the pension expense determined for 2020. In addition, IPL increased the expected long-term rate of return on plan assets from 4.50% to 5.05% effective January 1, 2020. The expected long-term rate of return assumption affects the pension expense determined for 2020. The effect on 2020 total pension expense of a 25 basis point increase and decrease in the assumed discount rate is $(1.2) million and $1.1 million, respectively.
In determining the discount rate to use for valuing liabilities we use the market yield curve on high-quality fixed income investments as of December 31, 2019. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Pension Plan Assets and Fair Value Measurements
Pension plan assets consist of investments in cash and cash equivalents, government debt securities, and mutual funds (equity and debt). Differences between actual portfolio returns and expected returns may result in increased or reduced pension costs in future periods. Pension costs are determined as of the plans' measurement date of December 31, 2019. Pension costs are determined for the following year based on the market value of pension plan assets, expected employer contributions, a discount rate used to determine the projected benefit obligation and the expected long-term rate of return on plan assets.
Fair value is defined under ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned. Dividends are recorded on the ex-dividend date. Net appreciation includes the Pension Plans’ gains and losses on investments bought and sold, as well as held, during the year.
A description of the valuation methodologies used for each major class of assets and liabilities measured at fair value follows:
For 2019, the non-qualified Supplemental Retirement Plan investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy.
For 2019, the qualified Defined Benefit Pension Plan investments in common collective trusts are valued based on the daily net asset value and are categorized as Level 2 in the fair value hierarchy except for cash and cash equivalents which are categorized as level 1.
For 2018, all the Pension Plans’ investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy. The investments in U.S. government agency fixed income securities are valued from third-party pricing sources, but they generally do not represent transaction prices for the identical security in an active market nor does it represent data obtained from an exchange.
The primary objective of the Pension Plans’ is to provide a source of retirement income for its participants and beneficiaries, while the primary financial objective is to improve the unfunded status of the Pension Plans. A secondary financial objective is, where possible, to minimize pension expense volatility. The objective is based on a long-term investment horizon, so that interim fluctuations should be viewed with appropriate perspective. There can be no assurance that these objectives will be met.
In establishing our expected long-term rate of return assumption, we utilize a methodology developed by the plan’s investment consultant who maintains a capital market assumption model that takes into consideration risk, return and correlation assumptions across asset classes. A combination of quantitative analysis of historical data and qualitative judgment is used to capture trends, structural changes and potential scenarios not reflected in historical data.
The result of the analyses is a series of inputs that produce a picture of how the plan consultant believes portfolios are likely to behave through time. Capital market assumptions are intended to reflect the behavior of asset classes observed over several market cycles. Stress assumptions are also examined, since the characteristics of asset classes are constantly changing. A dynamic model is employed to manage the numerous assumptions required to estimate portfolio characteristics under different base currencies, time horizons and inflation expectations.
The Pension Plans’ consultant develops forward-looking, long-term capital market assumptions for risk, return and correlations for a variety of global asset classes, interest rates and inflation. These assumptions are created using a combination of historical analysis, current market environment assessment and by applying the consultant’s own judgment. The consultant then determines an equilibrium long-term rate of return. We then take into consideration the investment manager/consultant expenses, as well as any other expenses expected to be paid out of the Pension Plans’ trust. Finally, we have the Pension Plans’ actuary perform a tolerance test of the consultant’s equilibrium expected long-term rate of return. We use an expected long-term rate of return compatible with the actuary’s tolerance level.
The following table summarizes the Company’s target pension plan allocation for 2019:
| | | Asset Category: | Target Allocations | Equity Securities | 27% | Debt Securities | 73% |
| | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2019 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Cash and cash equivalents | | $ | 2,599 |
| | $ | 2,599 |
| | $ | — |
| | — | % | Government debt securities | | 154,798 |
| | 39 |
| | 154,759 |
| | 20 | % | Mutual fund - equities | | 214,369 |
| | 2,744 |
| | 211,625 |
| | 28 | % | Mutual fund - debt | | 397,938 |
| | 1,664 |
| | 396,274 |
| | 52 | % | Total(1) | | $ | 769,704 |
| | $ | 7,046 |
| | $ | 762,658 |
| | 100 | % | | | | | | | | | |
| | (1) | In 2019, the qualified Defined Benefit Pension Plan moved all investments except for cash and cash equivalents into collective trusts; therefore, the 2019 balances under the Government debt securities, Mutual fund - equities, and Mutual fund - debt categories shown above as level 2 represent investments through collective trusts. The Defined Benefit Pension Plan has chosen collective trusts for which the underlying investments are mutual funds, mutual funds categories for which debt securities are the primary underlying investment, or real estate in alignment with the target asset allocation. |
| | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2018 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Short-term investments | | $ | 3,597 |
| | $ | 3,597 |
| | $ | — |
| | 1 | % | Mutual funds: | | | | | | | | |
| U.S. equities | | 1,906 |
| | 1,906 |
| | — |
| | — | % | International equities | | 52,354 |
| | 52,354 |
| | — |
| | 8 | % | Fixed income | | 497,323 |
| | 497,323 |
| | — |
| | 72 | % | Fixed income securities: | | | | | | | | |
| U.S. Treasury securities | | 129,305 |
| | 129,305 |
| | — |
| | 19 | % | Total | | $ | 684,485 |
| | $ | 684,485 |
| | $ | — |
| | 100 | % | | | | | | | | | |
Pension Funding
We contributed $0.0 million, $30.1 million, and $7.2 million to the Pension Plans in 2019, 2018 and 2017, respectively. Funding for the qualified Defined Benefit Pension Plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, IPL’s funded target liability percentage was estimated to be 101%. In general, IPL must contribute the normal service cost earned by active participants during the plan year; however, this amount can be offset by any surplus or credit balance carried by the Pension Plan. The normal cost is expected to be approximately $7.6 million in 2020 (including $2.3 million for plan expenses), which is expected to be fully offset by the surplus amount. Each year thereafter, if the Pension Plans’ underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over a seven-year period. IPL does not expect to make an employer contribution for the calendar year 2020. IPL’s funding policy for the Pension Plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments made from the Pension Plans for the years ended December 31, 2019, 2018 and 2017 were $37.5 million, $62.1 million and $35.5 million, respectively. Expected benefit payments are expected to be paid out of the Pension Plans as follows:
| | | | | Year | Pension Benefits | | (In Thousands) | 2020 | $ | 42,215 |
| 2021 | 43,552 |
| 2022 | 44,606 |
| 2023 | 45,095 |
| 2024 | 45,362 |
| 2024 through 2028 | 231,475 |
| | |
10. COMMITMENTS AND CONTINGENCIES
Legal Loss Contingencies
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 believes that the final outcome will not have a material adverse effect on IPALCO’s results of operations, financial condition and cash flows. Amounts accrued or expensed for legal or environmental contingencies collectively during the periods covered by this report have not been material to the Financial Statements.
Environmental Loss Contingencies
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; 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 cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
New Source Review and other CAA NOVs
In October 2009, IPL received a NOV and Finding of Violation from the EPA pursuant to the CAA Section 113(a). The NOV alleges violations of the CAA at IPL’s 3 primarily coal-fired electric generating facilities at the time, dating back to 1986. The alleged violations primarily pertain to the PSD and nonattainment New Source Review requirements under the CAA. In addition, on October 1, 2015, IPL received a NOV from the EPA pursuant to CAA Section 113(a) alleging violations of the CAA, the Indiana SIP, and the Title V operating permit related to alleged particulate matter and opacity violations at IPL Petersburg Unit 3. Also, on February 5, 2016, the EPA issued a NOV pursuant to CAA Section 113(a) alleging violations of New Source Review and other CAA regulations, the Indiana SIP, and the Title V operating permit at Petersburg Generating Station. Since receiving the letters, IPL management has been working with the EPA staff regarding possible resolutions of the NOVs. Settlements and litigated outcomes of similar New Source Review cases have required companies to pay civil penalties, install additional pollution control technology on coal-fired electric generating units, retire existing generating units, and invest in additional environmental projects. A similar outcome in these cases could have a material impact on our business. At this time, we cannot determine whether these NOVs could have a material impact on our business, financial condition and results of operations. We would seek recovery of any operating or capital expenditures, but not fines or penalties, related to air pollution control technology to reduce regulated air emissions; however, there can be no assurances that we would be successful in recovering any operating or capital expenditures. IPL has recorded a contingent liability related to these New Source Review cases and other CAA NOV matters.
11. RELATED PARTY TRANSACTIONS
IPL participates in a property insurance program in which IPL buys insurance from AES Global Insurance Company, a wholly-owned subsidiary of AES. IPL is not self-insured on property insurance, but does take a $5 million per occurrence deductible. Except for IPL’s large substations, IPL does not carry insurance on transmission and distribution assets, which are considered to be outside the scope of property insurance. AES and other AES subsidiaries, including IPALCO, also participate in the AES global insurance program. IPL pays premiums for a policy that is written and administered by a third-party insurance company. The premiums paid to this third-party administrator by the participants are paid to AES Global Insurance Company and all claims are paid from a trust fund funded by and owned by AES Global Insurance Company, but controlled by the third-party administrator. IPL also has third-party insurance in which the premiums are paid directly to the third-party insurers. The cost to IPL of coverage under this program with AES Global Insurance Company was approximately $4.3 million, $3.1 million, and $3.1 million in 2019, 2018 and 2017, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. As of December 31, 2019 and 2018, we had prepaid approximately $2.0 million and $1.6 million, respectively, which is recorded in “Prepayments and other current assets” on the accompanying Consolidated Balance Sheets.
IPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments. The cost of coverage under this program was approximately $20.2 million, $21.5 million, and $24.9 million in 2019, 2018 and 2017, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. We had no prepaids for coverage under this plan as of December 31, 2019 and 2018, respectively.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. IPALCO had a receivable balance under this agreement of $23.7 million and $13.8 million as of December 31, 2019 and 2018, respectively, which is recorded in “Prepayments and other current assets” on the accompanying Consolidated Balance Sheets.
Long-term Compensation Plan
During 2019, 2018 and 2017, many of IPL’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2019, 2018 and 2017 was $0.3 million, $0.5 million and $0.8 million, respectively, and was included in “Operating expenses - Operation and maintenance” on IPALCO’s Consolidated Statements of Operations. The value of these benefits is being recognized over the 36 month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder recorded as “Paid in capital” on IPALCO’s Consolidated Balance Sheets in accordance with ASC 718 “Compensation – Stock Compensation.”
See also Note 9, “Benefit Plans” to the Financial Statements for a description of benefits awarded to IPL employees by AES under the RSP.
ServiceCompany
Total costs incurred by the Service Company on behalf of IPALCO were $42.0 million, $44.5 million and $34.4 million during 2019, 2018 and 2017, respectively. Total costs incurred by IPALCO on behalf of the Service Company during 2019, 2018 and 2017 were $9.7 million, $10.1 million and $10.7 million, respectively, which are included as a reduction to charges from the Service Company. These costs were included in “Operating expenses - Operation and maintenance” on IPALCO’s Consolidated Statements of Operations. IPALCO had a payable balance with the Service Company of $8.4 million and $3.8 million as of December 31, 2019 and December 31, 2018, respectively, which is recorded in “Accounts payable” on the accompanying Consolidated Balance Sheets.
Other
A member of the AES Board of Directors is also a member of the Supervisory Board of a third party vendor that IPL engaged in 2014 for certain construction projects. As the transactions with this vendor related to capital projects, there was no direct impact on the Consolidated Statements of Operations for the periods presented. Over the life of the project, IPL had total net charges from this vendor of $474.9 million. This vendor completed its service in 2018.
Additionally, transactions with various other related parties were $3.0 million, $5.7 million and $2.4 million during 2019, 2018 and 2017, respectively. These expenses were primarily recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations.
12. BUSINESS SEGMENT INFORMATION
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, for which separate financial information is available, and is evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate resources. Substantially all of our business consists of the generation, transmission, distribution and sale of electric energy conducted through IPL which is a vertically integrated electric utility. IPALCO’s reportable business segment is its utility segment, with all other non-utility business activities aggregated separately. The "All Other" non-utility category primarily includes the Term Loan, 2020 IPALCO Notes and 2024 IPALCO Notes; approximately $6.0 million and $6.4 million of cash and cash equivalents, as of December 31, 2019 and 2018, respectively; long-term investments of $2.8 million and $4.0 million as of December 31, 2019 and 2018, respectively; long-term liabilities for interest rate hedges of $26.6 million and $0 million as of December 31, 2019 and December 31, 2018, respectively; and income taxes and interest related to those items. All other assets represented less than 1% of IPALCO’s total assets as of December 31, 2019 and 2018. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies.
The following table provides information about IPALCO’s business segments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | Utility | | All Other | | Total | | Utility | | All Other | | Total | | Utility | | All Other | | Total | Revenues | | $ | 1,481,643 |
| | $ | — |
| | $ | 1,481,643 |
| | $ | 1,450,505 |
| | $ | — |
| | $ | 1,450,505 |
| | $ | 1,349,588 |
| | $ | — |
| | $ | 1,349,588 |
| Depreciation and amortization | | $ | 240,314 |
| | $ | — |
| | $ | 240,314 |
| | $ | 232,332 |
| | $ | — |
| | $ | 232,332 |
| | $ | 208,451 |
| | $ | — |
| | $ | 208,451 |
| Interest expense | | $ | 89,014 |
| | $ | 32,757 |
| | $ | 121,771 |
| | $ | 64,472 |
| | $ | 31,037 |
| | $ | 95,509 |
| | $ | 65,340 |
| | $ | 35,790 |
| | $ | 101,130 |
| Earnings/(loss) from operations before income tax | | $ | 200,707 |
| | $ | (32,786 | ) | | $ | 167,921 |
| | $ | 178,953 |
| | $ | (31,479 | ) | | $ | 147,474 |
| | $ | 202,106 |
| | $ | (44,362 | ) | | $ | 157,744 |
| Capital expenditures(1) | | $ | 219,242 |
| | $ | — |
| | $ | 219,242 |
| | $ | 235,764 |
| | $ | — |
| | $ | 235,764 |
| | $ | 228,861 |
| | $ | — |
| | $ | 228,861 |
| (1) Capital expenditures includes $5.6 million, $11.4 million and $10.6 million of payments for financed capital expenditures in 2019, 2018 and 2017, respectively.
| | | | | | | | | | | | | | | | | | | | | | As of December 31, 2019 | | As of December 31, 2018 | | As of December 31, 2017 | Total assets | | $ | 4,918,408 |
| | $ | 10,261 |
| | $ | 4,928,669 |
| | $ | 4,851,712 |
| | $ | 10,341 |
| | $ | 4,862,053 |
| | $ | 4,719,547 |
| | $ | 21,014 |
| | $ | 4,740,561 |
| | | | | | | | | | | | | | | | | | | |
13. REVENUE
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenues - IPL energy sales to utility customers are based on the reading of meters at the customer’s location that occurs on a systematic basis throughout the month. IPL sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Retail revenues have a single performance obligation, as the promise to transfer energy and other distribution and/or transmission services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. Additionally, as the performance obligation is satisfied over time as energy is delivered, and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series.
In exchange for the exclusive right to sell or distribute electricity in our service area, IPL is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that IPLis allowed to charge customers for electric services. Since tariffs are approved by the regulator, the price that IPL has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff. Customer payments are typically due on a monthly basis.
Wholesale revenues - Power produced at the generation stations in excess of our retail load is sold into the MISO market. Such sales are made at either the day-ahead or real-time hourly market price, and these sales are classified as wholesale revenues. We sell to and purchase power from MISO, and such sales and purchases are settled and accounted for on a net hourly basis.
In the MISO market, wholesale revenue is recorded at the spot price based on the quantities of MWh delivered in each hour during each month. As a member of MISO, we are obligated to declare the availability of our energy production into the wholesale energy market, but we are not obligated to commit our previously declared availability. As such, contract terms end as the energy for each day is delivered to the market in the case of the day-ahead market and for each hour in the case of the real-time market.
Miscellaneous revenues - Miscellaneous revenues are mainly comprised of MISO transmission revenues. MISO transmission revenues are earned when IPL’s power lines are used in transmission of energy by power producers other than IPL. As IPL owns and operates transmission lines in central and southern Indiana, demand charges collected from network customers by MISO are allocated to the appropriate transmission owners (including IPL) and recognized as transmission revenues. Capacity revenues are also included in miscellaneous revenues, but these were not material for the period presented.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that the transmission operator has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period as the price paid is the transmission operator's allocation of the tariff rate (as approved by the regulator) charged to network participants.
IPL’s revenue from contracts with customers was $1,455.3 million and $1,428.9 million for the years ended December 31, 2019 and 2018, respectively. The following table presents our revenue from contracts with customers and other revenue (in thousands):
| | | | | | | | | For the Year Ended, | For the Year Ended, | | December 31, 2019 | December 31, 2018 | Retail Revenues | | | Retail revenue from contracts with customers | $ | 1,375,533 |
| $ | 1,380,042 |
| Other retail revenues (1) | 23,841 |
| 16,423 |
| Wholesale Revenues | 68,474 |
| 38,789 |
| Miscellaneous Revenues | | | Transmission and other revenue from contracts with customers | 11,335 |
| 10,057 |
| Other miscellaneous revenues (2) | 2,460 |
| 5,194 |
| Total Revenues | $ | 1,481,643 |
| $ | 1,450,505 |
|
(1) Other retail revenue represents alternative revenue programs not accounted for under ASC 606
(2) Other miscellaneous revenue includes lease and other miscellaneous revenues not accounted for under ASC 606
The balances of receivables from contracts with customers are $155.0 million and $160.8 million as of December 31, 2019 and December 31, 2018, respectively. Payment terms for all receivables from contracts with customers typically do not extend beyond 30 days.
The Company has elected to apply the optional disclosure exemptions under ASC 606. Therefore, the Company has not included disclosure pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we
recognize revenue based on the amount we have the right to invoice for services performed, and contracts with variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled.
14. LEASES
LESSEE
The Company enters into long-term non-cancelable lease arrangements which are classified as either operating or finance leases; however, lease balances were not material to the Financial Statements in the periods covered by this report.
LESSOR
The Company is the lessor under operating leases for land, office space and operating equipment. Minimum lease payments from such contracts are recognized as operating lease revenue on a straight-line basis over the lease term whereas contingent rentals are recognized when earned. Lease revenue included in the Consolidated Statements of Operations was $1.0 million for the year ended December 31, 2019. Underlying gross assets and accumulated depreciation of operating leases included in Total net property, plant and equipment on the Consolidated Balance Sheet were $4.3 million and $0.7 million, respectively, as of December 31, 2019.
The option to extend or terminate a lease is based on customary early termination provisions in the contract. The Company has not recognized any early terminations as of December 31, 2019.
The following table shows the future minimum lease receipts through 2024 and thereafter (in thousands):
| | | | | | Operating Leases | 2020 | $ | 941 |
| 2021 | 994 |
| 2022 | 906 |
| 2023 | 906 |
| 2024 | 786 |
| Thereafter | 2,628 |
| Total | $ | 7,161 |
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Indianapolis Power & Light Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Indianapolis Power & Light Company and subsidiary (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Indianapolis, Indiana
February 27, 2020
| | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Statements of Operations | For the Years Ended December 31, 2019, 2018 and 2017 | (In Thousands) | | | 2019 | | 2018 | | 2017 | REVENUES | | $ | 1,481,643 |
| | $ | 1,450,505 |
| | $ | 1,349,588 |
| | | | | | | | OPERATING COSTS AND EXPENSES: | | | | | | | Fuel | | 340,466 |
| | 331,701 |
| | 281,542 |
| Power purchased | | 133,674 |
| | 164,542 |
| | 189,847 |
| Operations and maintenance | | 427,803 |
| | 431,125 |
| | 385,338 |
| Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
| Taxes other than income taxes | | 42,229 |
| | 53,941 |
| | 44,628 |
| Total operating expenses | | 1,184,486 |
| | 1,213,641 |
| | 1,109,806 |
| | | | | | | | OPERATING INCOME | | 297,157 |
| | 236,864 |
| | 239,782 |
| | | | | | | | OTHER INCOME/(EXPENSE), NET: | | | | | | | Allowance for equity funds used during construction | | 3,486 |
| | 8,477 |
| | 25,798 |
| Interest expense | | (89,014 | ) | | (64,472 | ) | | (65,340 | ) | Other income/(expense), net | | (10,922 | ) | | (1,916 | ) | | 1,866 |
| Total other income/(expense), net | | (96,450 | ) | | (57,911 | ) | | (37,676 | ) | | | | | | | | EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 200,707 |
| | 178,953 |
| | 202,106 |
| | | | | | | | Less: income tax expense | | 43,430 |
| | 21,590 |
| | 65,591 |
| NET INCOME | | 157,277 |
| | 157,363 |
| | 136,515 |
| | | | | | | | LESS: PREFERRED DIVIDEND REQUIREMENTS | | 3,213 |
| | 3,213 |
| | 3,213 |
| NET INCOME APPLICABLE TO COMMON STOCK | | $ | 154,064 |
| | $ | 154,150 |
| | $ | 133,302 |
| | | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Balance Sheets | (In Thousands) | | | December 31, 2019 | | December 31, 2018 | ASSETS | | | | | CURRENT ASSETS: | | |
| | |
| Cash and cash equivalents | | $ | 42,189 |
| | $ | 26,834 |
| Restricted cash | | 400 |
| | 400 |
| Accounts receivable, net | | 161,365 |
| | 167,869 |
| Inventories | | 83,569 |
| | 99,669 |
| Regulatory assets, current | | 37,398 |
| | 28,399 |
| Taxes receivable | | 23,134 |
| | 13,498 |
| Prepayments and other current assets | | 17,264 |
| | 15,573 |
| Total current assets | | 365,319 |
| | 352,242 |
| NON-CURRENT ASSETS: | | | | | Property, plant and equipment | | 6,398,612 |
| | 6,201,078 |
| Less: Accumulated depreciation | | 2,414,652 |
| | 2,256,215 |
|
| | 3,983,960 |
| | 3,944,863 |
| Construction work in progress | | 130,609 |
| | 111,723 |
| Total net property, plant and equipment | | 4,114,569 |
| | 4,056,586 |
| OTHER NON-CURRENT ASSETS: | | |
| | |
| Intangible assets - net | | 64,861 |
| | 40,848 |
| Regulatory assets, non-current | | 355,614 |
| | 395,077 |
| Other non-current assets | | 18,045 |
| | 6,959 |
| Total other non-current assets | | 438,520 |
| | 442,884 |
| TOTAL ASSETS | | $ | 4,918,408 |
| | $ | 4,851,712 |
| LIABILITIES AND SHAREHOLDER'S EQUITY | | | | | CURRENT LIABILITIES: | | | | | Short-term and current portion of long-term debt (Note 7) | | $ | 89,886 |
| | $ | — |
| Accounts payable | | 128,504 |
| | 135,144 |
| Accrued taxes | | 22,012 |
| | 21,325 |
| Accrued interest | | 23,857 |
| | 23,312 |
| Customer deposits | | 34,635 |
| | 32,700 |
| Regulatory liabilities, current | | 52,654 |
| | 51,024 |
| Accrued and other current liabilities | | 37,500 |
| | 41,984 |
| Total current liabilities | | 389,048 |
| | 305,489 |
| NON-CURRENT LIABILITIES: | | | | | Long-term debt (Note 7) | | 1,691,015 |
| | 1,780,184 |
| Deferred income tax liabilities | | 279,159 |
| | 252,729 |
| Taxes payable | | 4,658 |
| | 4,658 |
| Regulatory liabilities, non-current | | 846,430 |
| | 870,255 |
| Accrued pension and other postretirement benefits | | 19,344 |
| | 19,329 |
| Asset retirement obligations | | 204,219 |
| | 129,451 |
| Other non-current liabilities | | 252 |
| | 604 |
| Total non-current liabilities | | 3,045,077 |
| | 3,057,210 |
| Total liabilities | | 3,434,125 |
| | 3,362,699 |
| COMMITMENTS AND CONTINGENCIES (Note 10) | | | | | SHAREHOLDER'S EQUITY: | | | | | Common stock | | 324,537 |
| | 324,537 |
| Paid in capital | | 664,719 |
| | 664,513 |
| Retained earnings | | 435,243 |
| | 440,179 |
| Total shareholder's equity | | 1,424,499 |
| | 1,429,229 |
| Cumulative preferred stock | | 59,784 |
| | 59,784 |
| Total shareholder's equity | | 1,484,283 |
| | 1,489,013 |
| TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY | | $ | 4,918,408 |
| | $ | 4,851,712 |
| | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Statements of Cash Flows | For the Years Ended December 31, 2019, 2018 and 2017 | (In Thousands) | | | 2019 | | 2018 | | 2017 | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | Net income | | $ | 157,277 |
| | $ | 157,363 |
| | $ | 136,515 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
| Amortization of deferred financing costs and debt premium | | 2,262 |
| | 2,011 |
| | 2,199 |
| Deferred income taxes and investment tax credit adjustments - net | | 15,120 |
| | (15,646 | ) | | (3,441 | ) | Allowance for equity funds used during construction | | (3,486 | ) | | (8,477 | ) | | (25,798 | ) | Change in certain assets and liabilities: | | |
| | |
| | |
| Accounts receivable | | 6,504 |
| | (10,167 | ) | | (3,031 | ) | Inventories | | 13,574 |
| | (3,652 | ) | | (5,342 | ) | Accounts payable | | 2,816 |
| | 4,080 |
| | (5,048 | ) | Accrued and other current liabilities | | 4,416 |
| | (9,655 | ) | | (7,771 | ) | Accrued taxes payable/receivable | | (15,437 | ) | | 3,180 |
| | (785 | ) | Accrued interest | | 546 |
| | 826 |
| | (245 | ) | Pension and other postretirement benefit expenses | | 5,414 |
| | (30,740 | ) | | (14,069 | ) | Short-term and long-term regulatory assets and liabilities | | 921 |
| | 76,647 |
| | 17,011 |
| Prepayments and other current assets | | (2,119 | ) | | 7,279 |
| | (4,938 | ) | Other - net | | (7,053 | ) | | 582 |
| | 2,257 |
| Net cash provided by operating activities | | 421,069 |
| | 405,963 |
| | 295,965 |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | Capital expenditures | | (213,619 | ) | | (224,335 | ) | | (218,224 | ) | Project development costs | | (2,269 | ) | | (1,127 | ) | | (1,729 | ) | Cost of removal and regulatory recoverable ARO payments | | (21,838 | ) | | (29,543 | ) | | (16,802 | ) | Other | | — |
| | — |
| | (123 | ) | Net cash used in investing activities | | (237,726 | ) | | (255,005 | ) | | (236,878 | ) | CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
| | |
| Short-term debt borrowings | | 10,000 |
| | 100,000 |
| | 202,500 |
| Short-term debt repayments | | (10,000 | ) | | (248,000 | ) | | (129,150 | ) | Long-term borrowings, net of discount | | — |
| | 104,936 |
| | — |
| Dividends on common stock | | (159,000 | ) | | (142,250 | ) | | (132,516 | ) | Dividends on preferred stock | | (3,213 | ) | | (3,213 | ) | | (3,213 | ) | Equity contributions from IPALCO | | — |
| | 65,000 |
| | — |
| Payments for financed capital expenditures | | (5,623 | ) | | (11,429 | ) | | (10,637 | ) | Other | | (152 | ) | | (1,110 | ) | | (336 | ) | Net cash used in financing activities | | (167,988 | ) | | (136,066 | ) | | (73,352 | ) | Net change in cash, cash equivalents and restricted cash | | 15,355 |
| | 14,892 |
| | (14,265 | ) | Cash, cash equivalents and restricted cash at beginning of period | | 27,234 |
| | 12,342 |
| | 26,607 |
| Cash, cash equivalents and restricted cash at end of period | | $ | 42,589 |
| | $ | 27,234 |
| | $ | 12,342 |
| | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Interest (net of amount capitalized) | | $ | 88,546 |
| | $ | 61,310 |
| | $ | 63,031 |
| Income taxes | | 37,400 |
| | 33,750 |
| | 87,000 |
| Non-cash investing activities: | | | | | | |
| Accruals for capital expenditures | | $ | 35,471 |
| | $ | 47,553 |
| | $ | 45,322 |
| | | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Consolidated Statements of Common Shareholder's Equity | For the Years Ended December 31, 2019, 2018 and 2017 | (In Thousands) | | | Common Stock | | Paid in Capital | | Retained Earnings | | Total | Balance at January 1, 2017 | | $ | 324,537 |
| | $ | 598,500 |
| | $ | 434,993 |
| | $ | 1,358,030 |
| Net income | | — |
| | — |
| | 136,515 |
| | 136,515 |
| Preferred stock dividends | | — |
| | — |
| | (3,213 | ) | | (3,213 | ) | Cash dividends declared on common stock | | — |
| | — |
| | (125,516 | ) | | (125,516 | ) | Other | | | | 657 |
| | | | 657 |
| Balance at December 31, 2017 | | 324,537 |
| | 599,157 |
| | 442,779 |
| | 1,366,473 |
| Net income | | — |
| | — |
| | 157,363 |
| | 157,363 |
| Preferred stock dividends | | — |
| | — |
| | (3,213 | ) | | (3,213 | ) | Cash dividends declared on common stock | | — |
| | — |
| | (156,750 | ) | | (156,750 | ) | Contributions from IPALCO | | — |
| | 65,000 |
| | — |
| | 65,000 |
| Other | | |
| | 356 |
| | |
| | 356 |
| Balance at December 31, 2018 | | 324,537 |
| | 664,513 |
| | 440,179 |
| | 1,429,229 |
| Net income | | — |
| | — |
| | 157,277 |
| | 157,277 |
| Preferred stock dividends | | — |
| | — |
| | (3,213 | ) | | (3,213 | ) | Cash dividends declared on common stock | | — |
| | — |
| | (159,000 | ) | | (159,000 | ) | Other | | — |
| | 206 |
| | — |
| | 206 |
| Balance at December 31, 2019 | | $ | 324,537 |
| | $ | 664,719 |
| | $ | 435,243 |
| | $ | 1,424,499 |
| | | | | | | | | |
See notes to consolidated financial statements.
INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019, 2018 and 2017
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IPL was incorporated under the laws of the state of Indiana in 1926. All of the outstanding common stock of IPL is owned by IPALCO. IPALCO, acquired by AES in March 2001, is owned by AES U.S. Investments and CDPQ. AES U.S. Investments is owned by AES (85%) and CDPQ (15%). IPL is engaged primarily in generating, transmitting, distributing and selling of electric energy to more than 500,000 retail customers in the city of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, with the most distant point being approximately 40 miles from Indianapolis. IPL has an exclusive right to provide electric service to those customers. IPL owns and operates 4 generating stations all within the state of Indiana. Our largest generating station, Petersburg, is coal-fired. The second largest station, Harding Street, uses natural gas and fuel oil to power combustion turbines. In addition, IPL operates a 20 MW battery energy storage unit at this location, which provides frequency response. The third station, Eagle Valley, is a CCGT natural gas plant. IPL took operational control and commenced commercial operations of this CCGT plant in April 2018. The fourth station, Georgetown, is a small peaking station that uses natural gas to power combustion turbines. As of December 31, 2019, IPL’s net electric generation capacity for winter is 3,705 MW and net summer capacity is 3,560 MW.
Principles of Consolidation
IPL’s consolidated financial statements are prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The consolidated financial statements include the accounts of IPL and its unregulated subsidiary, IPL Funding Corporation, which was dissolved in 2018 and was immaterial to the consolidated financial statements in the periods covered by this report. All intercompany items have been eliminated in consolidation. Certain costs for shared resources amongst IPL and IPALCO, such as labor and benefits, are allocated to each entity based on allocation methodologies that management believes to be reasonable. We have evaluated subsequent events through the date this report is issued.
Financial Statement Presentation
During 2018, IPL adopted a change in presentation on its Consolidated Balance Sheets and Consolidated Statements of Operations from a utility format to a traditional format. These changes revised the order of certain balance sheet line items and resulted in the movement of certain balances within the Consolidated Statements of Operations and Consolidated Balance Sheets, but did not result in any material changes to the classification of any such amounts between line items or have any impact on net assets or net income.
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
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.
Regulatory Accounting
The retail utility operations of IPL are subject to the jurisdiction of the IURC. IPL’s wholesale power transactions are subject to the jurisdiction of the FERC. These agencies regulate IPL’s utility business operations, tariffs, accounting, depreciation allowances, services, issuances of securities and the sale and acquisition of utility properties. The financial statements of IPL are based on GAAP, including the provisions of FASB ASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of these agencies. See also Note 2, “Regulatory Matters - Regulatory Assets and Liabilities” for a discussion of specific regulatory assets and liabilities.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents. Restricted cash includes cash which is restricted as to withdrawal or usage. The nature of the restrictions includes restrictions imposed by agreements related to deposits held as collateral. The following table provides a summary of cash, cash equivalents and restricted cash amounts as shown on the Consolidated Statements of Cash Flows:
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Cash, cash equivalents and restricted cash | | | | | Cash and cash equivalents | | $ | 42,189 |
| | $ | 26,834 |
| Restricted cash | | 400 |
| | 400 |
| Total cash, cash equivalents and restricted cash | | $ | 42,589 |
| | $ | 27,234 |
| | | | | |
Revenues and Accounts Receivable
Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to certain customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making its estimates of unbilled revenue, IPL uses complex models that consider various factors including daily generation volumes; known amounts of energy usage by nearly all residential, small commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. An allowance for potential credit losses is maintained and amounts are written off when normal collection efforts have been exhausted. IPL’s provision for doubtful accounts included in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations was $5.5 million, $6.0 million and $5.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
IPL’s basic rates include a provision for fuel costs as established in IPL’s most recent rate proceeding, which last adjusted IPL’s rates in December 2018. IPL is permitted to recover actual costs of purchased power and fuel consumed, subject to certain restrictions. This is accomplished through quarterly FAC proceedings, in which IPL estimates the amount of fuel and purchased power costs in future periods. Through these proceedings, IPL is also permitted to recover, in future rates, underestimated fuel and purchased power costs from prior periods, subject to certain restrictions, and therefore the over or underestimated costs are deferred or accrued and amortized into fuel expense in the same period that IPL’s rates are adjusted. See also Note 2, “RegulatoryMatters” for a discussion of other costs that IPL is permitted to recover through periodic rate adjustment proceedings and the status of current rate adjustment proceedings.
In addition, IPL is one of many transmission system owner members of MISO, a regional transmission organization which maintains functional control over the combined transmission systems of its members and manages one of the largest energy markets in the U.S. See Note 13, "Revenue" for additional information of MISO sales and other revenue streams.
The following table summarizes our accounts receivable balances at December 31:
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Accounts receivable, net | | | | | Customer receivables | | $ | 90,747 |
| | $ | 91,426 |
| Unbilled revenue | | 65,822 |
| | 68,893 |
| Amounts due from related parties | | 2,992 |
| | 6,030 |
| Other | | 3,857 |
| | 4,341 |
| Provision for uncollectible accounts | | (2,053 | ) | | (2,821 | ) | Total accounts receivable, net | | $ | 161,365 |
| | $ | 167,869 |
| | | | | |
Inventories
IPL maintains coal, fuel oil, materials and supplies inventories for use in the production of electricity. These inventories are accounted for at the lower of cost or net realizable value, using the average cost. The following table summarizes our inventories balances at December 31:
| | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Inventories | | | | | Fuel | | $ | 26,907 |
| | $ | 32,457 |
| Materials and supplies | | 56,662 |
| | 67,212 |
| Total inventories | | $ | 83,569 |
| | $ | 99,669 |
| | | | | |
Property, Plant and Equipment
Property, plant and equipment is stated at original cost as defined for regulatory purposes. The cost of additions to property, plant and equipment and replacements of retirement units of property 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, 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 3.7%, 4.2%, and 4.1% during 2019, 2018 and 2017, respectively. Depreciation expense was $228.2 million, $235.2 million, and $209.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. "Depreciation and amortization" expense on the accompanying Consolidated Statements of Operations is presented net of regulatory deferrals of depreciation expense and also includes amortization of intangible assets and amortization of previously deferred regulatory costs.
Allowance For Funds Used During Construction
In accordance with the Uniform System of Accounts prescribed by FERC, IPL capitalizes an allowance for the net cost of funds (interest on borrowed funds and a reasonable rate of return 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 6.9%, 6.4% and 6.6% during 2019, 2018 and 2017, respectively.
Impairment of Long-lived Assets
GAAP requires that IPL test long-lived assets for impairment when indicators of impairment exist. If an asset is deemed to be impaired, IPL is required to write down the asset to its fair value with a charge to current earnings. The net book value of IPL’s property, plant, and equipment was $4.1 billion as of December 31, 2019 and 2018. IPL does not believe any of these assets are currently impaired. In making this assessment, IPL considers such factors as: the overall condition and generating and distribution capacity of the assets; the expected ability to recover
additional expenditures in the assets; the anticipated demand and relative pricing of retail electricity in its service territory and wholesale electricity in the region; and the cost of fuel.
Intangible Assets
Intangible assets primarily include capitalized software of $139.6 million and $129.7 million and its corresponding accumulated amortization of $74.7 million and $88.8 million, as of December 31, 2019 and 2018, respectively. Amortization expense was $7.5 million, $5.5 million and $4.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. The estimated amortization expense of this capitalized software is approximately $50.0 million over the next 5 years ($10.0 million in 2020, $10.0 million in 2021, $10.0 million in 2022, $10.0 million in 2023 and $10.0 million in 2024).
Contingencies
IPL accrues for loss contingencies when the amount of the loss is probable and estimable. IPL is subject to various environmental regulations and is involved in certain legal proceedings. If IPL’s actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our results of operations, financial condition and cash flows; although that has not been the case during the periods covered by this report. As of December 31, 2019 and 2018, total loss contingencies accrued were $4.5 million and $4.6 million, respectively, which were included in “Accrued and Other Current Liabilities” on the accompanying Consolidated Balance Sheets.
Concentrations of Risk
Substantially all of IPL’s customers are located within the Indianapolis area. Approximately 69% of IPL’s employees are covered by collective bargaining agreements in two bargaining units: a physical unit and a clerical-technical unit. IPL’s contract with the physical unit expires on December 6, 2021, and the contract with the clerical-technical unit expires February 13, 2023. Additionally, IPL has long-term coal contracts with 4 suppliers, with about 33% of our existing coal under contract for the three-year period ending December 31, 2022 coming from one supplier. Substantially all of the coal is currently mined in the state of Indiana.
Financial Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Changes in the fair value are recorded in earnings unless the derivative is designated as a cash flow hedge of a forecasted transaction or it qualifies for the normal purchases and sales exception.
IPL has contracts involving the physical delivery of energy and fuel. Because these contracts qualify for the normal purchases and normal sales scope exception in ASC 815, IPL has elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. IPL establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. IPL’s tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting.
Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. IPL’s policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations.
Income tax assets or liabilities which are included in allowable costs for ratemaking purposes in future years are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 2, "Regulatory Matters" for additional information.
IPL and its subsidiary file U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 8, "Income Taxes" for additional information.
Pension and Postretirement Benefits
IPL recognizes in its Consolidated Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes in the funded status, that would otherwise be recognized in AOCI, recorded as a regulatory asset as this can be recovered through future rates. All plan assets are recorded at fair value. IPL follows the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
IPL accounts for and discloses pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of ASC 715, IPL applies a disaggregated discount rate approach for determining service cost and interest cost for its defined benefit pension plans and postretirement plans.
See Note 9, "Benefit Plans" for more information.
Repair and Maintenance Costs
Repair and maintenance costs are expensed as incurred.
Per Share Data
IPALCO owns all of the outstanding common stock of IPL. IPL does not report earnings on a per-share basis.
New Accounting Pronouncements Adopted in 2019
The following table provides a brief description of recent accounting pronouncements that had an impact on IPL's consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on IPL's consolidated financial statements.
| | | | | New Accounting Standards Adopted | ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption | 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities | The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity, and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that the entire change in the fair value of a hedging instrument will be recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item.
Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date. Prospective for presentation and disclosures.
| January 1, 2019 | The adoption of this standard did not have a material impact on IPL's consolidated financial statements. | 2016-02, 2018-01, 2018-10, 2018-11, 2018-20, 2019-01, Leases (Topic 842) | See discussion of the ASUs below.
| January 1, 2019 | See impact upon adoption of the standard below.
|
On January 1, 2019, IPL adopted ASC 842 Leases and its subsequent corresponding updates (“ASC 842”). Under this standard, lessees are required to recognize assets and liabilities for most leases on the balance sheet, and recognize expenses in a manner similar to the current accounting method. For lessors, the guidance modifies the
lease classification criteria and the accounting for sales-type and direct financing leases. The guidance eliminates previous real estate-specific provisions.
Under ASC 842, fewer of IPL's contracts contain a lease. However, due to the elimination of the real estate-specific guidance and changes to certain lessor classification criteria, more leases qualify as sales-type leases and direct financing leases. Under these two models, a lessor derecognizes the asset and recognizes a lease receivable. According to ASC 842, the net investment in the lease includes the fair value of residual interest in the asset after the contract period as well as the present value of the fixed lease payments, but does not include any variable payments under the lease. Therefore, the net investment in the lease could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized net investment in the lease and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.
During the course of adopting ASC 842, IPL applied various practical expedients including:
The package of practical expedients (applied to all leases) that allowed lessees and lessors not to reassess:
a. whether any expired or existing contracts are or contain leases,
b. lease classification for any expired or existing leases, and
c. whether initial direct costs for any expired or existing leases qualify for capitalization under ASC 842.
The transition practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements, and
The transition practical expedient for lessees that allowed businesses to not separate lease and non-lease components. IPL applied the practical expedient to all classes of underlying assets when valuing right-of-use assets and lease liabilities. Contracts where IPL is the lessor were separated between the lease and non-lease components.
IPL applied the modified retrospective method of adoption and elected to continue to apply the guidance in ASC 840 Leases to the comparative periods presented in the year of adoption. Under this transition method, IPL applied the transition provisions starting at the date of adoption. The adoption of ASC 842 did not have a material impact on IPL's consolidated financial statements.
New Accounting Pronouncements Issued But Not Yet Effective
The following table provides a brief description of recent accounting pronouncements that could have a material impact on IPL's consolidated financial statements once adopted. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on IPL's consolidated financial statements.
| | | | | New Accounting Standards Issued But Not Yet Effective | ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption | 2019-12, Income Taxes (Topic 740): Simplifying the Accounting For Income Taxes | The standard removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.
Transition Method: various
| January 1, 2021. Early adoption is permitted. | IPL is currently evaluating the impact of adopting the standard on IPL's consolidated financial statements. | 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
| See discussion of the ASU below.
| January 1, 2020. Early adoption is permitted only as of January 1, 2019. | IPL will adopt the standard on January 1, 2020; see below for the evaluation of the impact of the adoption on the standard on IPL's consolidated financial statements. |
ASU 2016-13 and its subsequent corresponding updates will update the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new
forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, there will be no change to the measurement of credit losses, except that unrealized losses due to credit-related factors will be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement. There are various transition methods available upon adoption.
IPL is currently evaluating the impact of adopting the standard on its financial statements; however, it is expected that the new current expected credit loss model will primarily impact the calculation of IPL's expected credit losses on $163.4 million in gross trade accounts receivable. IPL does not expect a material impact to result from the application of CECL on our trade accounts receivable.
2. REGULATORY MATTERS
General
IPL is subject to regulation by the IURC as to its services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, retail rates and charges, the issuance of securities (other than evidences of indebtedness payable less than twelve months after the date of issue), the acquisition and sale of some public utility properties or securities and certain other matters.
In addition, IPL is subject to the jurisdiction of the FERC with respect to, among other things, short-term borrowings not regulated by the IURC, the sale of electricity at wholesale, the transmission of electric energy in interstate commerce, the classification of accounts, reliability standards, and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act. 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 unregulated entities.
IPL is also affected by the regulatory jurisdiction of the EPA at the federal level, and the IDEM at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the NERC, the U.S. Department of Labor and the IOSHA.
Basic Rates and Charges
IPL’s basic rates and charges represent the largest component of its annual revenues. IPL’s basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. These basic rates and charges are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the IURC, the Indiana Office of Utility Consumer Counselor, and other interested stakeholders. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all Indiana utilities at least once every four years, but the IURC has the authority to review the rates of any Indiana utility at any time. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property.
IPL’s declining block rate structure generally provides for residential and commercial customers to be charged a lower per kWh rate at higher consumption levels. Therefore, as volumes increase, the weighted average price per kWh decreases. Numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual operating and maintenance expenditures, fuel costs, generating unit availability, and capital expenditures including those required by environmental regulations can affect the return realized.
Base Rate Orders
On October 31, 2018, the IURC issued an order approving an uncontested settlement agreement previously filed with the IURC by IPL for a $43.9 million, or 3.2%, increase to annual revenues (the "2018 Base Rate Order"). The 2018 Base Rate Order includes recovery through rates of the CCGT at Eagle Valley completed in the first half of 2018, as well as other construction projects and changes to operating income since the 2016 Base Rate Order (See below). New basic rates and charges became effective on December 5, 2018. The 2018 Base Rate Order also provides customers approximately $50 million in benefits, which are flowing to customers over the two-year period that began March 2019, via the ECCRA rate adjustment mechanism. This liability, less amounts returned to IPL's
customers during 2019, is recorded primarily in "Regulatory liabilities, current" with approximately $4.7 million in "Regulatory liabilities, non-current" as ofDecember 31, 2019 on the accompanying Consolidated Balance Sheets. In addition, the 2018 Base Rate Order provides that annual wholesale margins earned above (or below) the benchmark of $16.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. Similarly, the 2018 Base Rate Order provides that all capacity sales above (or below) a benchmark of $11.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. The 2018 Base Rate Order also approved changes to IPL's depreciation and amortization rates (including no longer deferring depreciation on the CCGT at Eagle Valley) which altogether represent a net expense increase of approximately $28.7 million annually.
In March 2016, the IURC issued the 2016 Base Rate Order authorizing IPL to increase its basic rates and charges by $30.8 million annually. IPL also received approval to implement three new rate riders for current recovery from customers ofongoing MISO costs and capacity costs, and for sharing with customers 50% of wholesale sales margins above and below the established benchmark of $6.3 million.
CCR
On April 26, 2017, the IURC approved IPL’s CCR compliance request to install a bottom ash dewatering system at its Petersburg generating station and to recover 80% of qualifying costs through a rate adjustment mechanism with the remainder recorded as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the CCR compliance plan was approximately $47 million. IPL’s bottom ash dewatering system at its Petersburg generating station went into service in September 2017.
NAAQS
On April 26, 2017, the IURC approved IPL’s request for NAAQS SO2 compliance at its Petersburg generation station with 80% of qualifying costs recovered through a rate adjustment mechanism and the remainder recorded as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the NAAQS SO2 compliance plan was approximately $29 million. This project went into service between August 2018 and August 2019.
Other
The DOE issued a Notice of Proposed Rule Making on September 29, 2017, which directed the FERC to exercise its authority to set just and reasonable rates that recognize the “resiliency” value provided by generation plants with certain characteristics, including having 90-days or more of on-site fuel and operating in markets where they do not receive rate base treatment through state ratemaking. Nuclear and coal-fired generation plants would have been most likely to be able to meet the requirements. As proposed, the DOE would value resiliency through rates that recover “compensable costs” that were defined to include the recovery of operating and fuel expenses, debt service and a fair return on equity. On January 8, 2018, the FERC issued an order terminating this docket stating that it failed to satisfy the legal requirements of Section 206 of the Federal Power Act of 1935. The FERC initiated a new docket to take additional steps to explore resilience issues in RTOs/ISOs. The goal of this new proceeding is to: (1) develop a common understanding among the FERC, State Commissions, RTOs/ISOs, transmission owners, and others as to what resilience of the bulk power system means and requires; (2) understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) use this information to evaluate whether additional action regarding resilience is appropriate at this time. It is not possible to predict the impact of this proceeding on our business, financial condition and results of operations.
FACand Authorized Annual Jurisdictional Net Operating Income
IPL may apply to the IURC for a change in IPL’s fuel charge every three months to recover IPL’s estimated fuel costs, including the energy portion of purchased power costs, which may be above or below the levels included in IPL’s basic rates and charges. IPL must present evidence in each FAC proceeding that it has made every reasonable effort to acquire fuel and generate or purchase power or both so as to provide electricity to its retail customers at the lowest fuel cost reasonably possible.
Independent of the IURC’s ability to review basic rates and charges, Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in the FAC. A utility may be unable to recover all of its fuel costs if its rolling twelve-month
operating income, determined at quarterly measurement dates, exceeds its authorized annual jurisdictional net operating income and there are not sufficient applicable cumulative net operating income deficiencies (“Cumulative Deficiencies”) to offset it. The Cumulative Deficiencies calculation provides that only five years’ worth of historical earnings deficiencies or surpluses are included, unless it has been greater than five years since the most recent rate case.
In each of the last three calendar years, IPL has reported earnings in excess of the authorized level for each of the four quarterly reporting periods in those years. IPL was not required to reduce its fuel cost recovery, because of its Cumulative Deficiencies. The historical periods when IPL earned less than the authorized level, which put IPL in a Cumulative Deficiency position, all relate to earnings prior to IPL’s 2018 Base Rate Order and therefore each quarter one of those underearning periods drops out of the Cumulative Deficiency calculation. Consequently, it is likely that IPL’s Cumulative Deficiencies will drop to zero in 2020 and IPL may then be required to decrease its fuel factor if it continues to earn above the authorized level.
ECCRA
IPL may apply to the IURC for approval of a rate adjustment known as the ECCRA periodically to recover costs (including a return) to comply with certain environmental regulations applicable to IPL’s generating stations. The total amount of IPL’s equipment approved for ECCRA recovery as of December 31, 2019 was $17.4 million. The jurisdictional revenue requirement approved by the IURC to be included in IPL’s rates for the twelve-month period ending February 2020 was a net credit to customers of $28.4 million. This amount is significantly lower than prior ECCRA periods as a result of (i) having the vast majority of the ECCRA projects rolled into IPL’s basic rates and charges effective December 5, 2018 as a result of the 2018 Base Rate Order and (ii) the approximately $50 million
of customer benefits being flowed through the ECCRA as a result of the 2018 Base Rate Order, as described above. The only equipment still remaining in the ECCRA as of December 31, 2019 are certain projects associated with NAAQS compliance.
DSM
Through various rate orders from the IURC, IPL has been able to recover its costs of implementing various DSM programs throughout the periods covered by this report. In 2019 and 2018, IPL also had the ability to receive performance incentives, dependent upon the level of success of the programs. Performance incentives included in revenues for the years ended December 31, 2019, 2018 and 2017 were $7.5 million, $3.8 million and $0.0 million, respectively.
On February 7, 2018, the IURC approved a settlement agreement establishing a new three year DSM plan for IPL through 2020. The approval included cost recovery of programs as well as performance incentives, depending on the level of success of the programs. The order also approved recovery of lost revenues, consistent with the provisions of the settlement agreement.
Wind and Solar Power Purchase Agreements
IPL is committed under a power purchase agreement to purchase all wind-generated electricity through 2029 from a wind project in Indiana. IPL is also committed under another agreement to purchase all wind-generated electricity through 2031 from a project in Minnesota. The Indiana project has a maximum output capacity of approximately 100 MW and the Minnesota project has a maximum output capacity of approximately 200 MW. In addition, IPL has 96.4 MW of solar-generated electricity in its service territory under long-term contracts (these long-term contracts have expiration dates ranging from 2021 to 2033), of which 95.9 MW was in operation as of December 31, 2019. IPL has authority from the IURC to recover the costs for all of these agreements through an adjustment mechanism administered within the FAC. If and when IPL sells the renewable energy attributes (in the form of renewable energy credits) generated from these facilities, the proceeds would pass back to benefit IPL’s retail customers through the FAC.
Taxes
On January 3, 2018, the IURC opened a generic investigation to review and consider the impacts from the TCJA and how any resulting benefits should be realized by customers. The IURC’s order opening this investigation directed Indiana utilities to apply regulatory accounting treatment, such as the use of regulatory assets and regulatory liabilities, for all estimated impacts resulting from the TCJA. On February 16, 2018, the IURC issued an
order establishing two phases of the investigation. The first phase (“Phase I”) directed respondent utilities (including IPL) to make a filing to remove from respondents’ rates and charges for service, the impact of a lower federal income tax rate. The second phase (“Phase II”) was established to address remaining issues from the TCJA, including treatment of deferred taxes and how these benefits will be realized by customers. On August 29, 2018, the IURC approved a settlement agreement filed by IPL and various other parties to resolve the Phase I issues of the TCJA tax expense via a credit through the ECCRA rate adjustment mechanism of $9.5 million. The 2018 Base Rate Order described above resolved the Phase II and all other issues regarding the TCJA impact on IPL's rates and includes an additional credit of $14.3 million to be paid by IPL to its customers through the ECCRA rate adjustment mechanism over two years beginning in March 2019. See also Note 8, “Income Taxes - U.S. Tax Reform” for further information.
TDSIC Filing
In 2013, Senate Enrolled Act 560, the Transmission, Distribution, and Storage System Improvement Charge ("TDSIC") statute, was signed into law. The TDSIC statute was revised in 2019. Among other provisions, this legislation provides for cost recovery outside of a base rate proceeding for new or replacement electric and gas transmission, distribution, and storage projects that a public utility undertakes for the purposes of safety, reliability, system modernization, or economic development. Provisions of the TDSIC statute require that, among other things, requests for recovery include a plan of at least five years and not more than seven for eligible investments. Once the plan is approved by the IURC, 80 percent of eligible costs can be recovered using a periodic rate adjustment mechanism. The cost recovery mechanism is referred to as a TDSIC mechanism. Recoverable costs include a return on, and of, the investment, including AFUDC, post-in-service carrying charges, operation and maintenance expenses, depreciation and property taxes. The remaining 20 percent of recoverable costs are to be deferred for future recovery in the public utility’s next base rate case. The periodic rate adjustment mechanism is capped at an annual increase of no more than 2 percent of total retail revenues.
On July 24, 2019, IPL filed a petition with the IURC seeking approval of a seven-year TDSIC Plan for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027. An IURC order is expected in the first quarter of 2020. There will be no revenues and/or cost recovery until approval of the TDSIC rider, which is not expected to occur until later in 2020.
IRP Filing
In December 2019, IPL filed its IRP, which describes IPL's Preferred Resource Portfolio for meeting generation capacity needs for serving IPL's retail customers over the next several years. IPL's Preferred Resource Portfolio is its reasonable least cost option and provides a cleaner and more diverse generation mix for customers. IPL's Preferred Resource Portfolio includes the retirement of 630 MW of coal-fired generation by 2023. Based on extensive modeling, IPL has determined that the cost of operating Petersburg Units 1 and 2 exceeds the value customers receive compared to alternative resources. Retirement of these units allows the company to cost-effectively diversify the portfolio and transition to lower cost and cleaner resources while maintaining a reliable system.
IPL issued an all-source Request for Proposal on December 20, 2019, in order to competitively procure replacement capacity by June 1, 2023, which is the first year IPL is expected to have a capacity shortfall. Current modeling indicates that a combination of wind, solar, storage, and energy efficiency would be the lowest reasonable cost option for the replacement capacity, but IPL will assess the type, size, and location of resources after bids are received. As a result of the decision to retire Petersburg Units 1 and 2, IPL recorded a $6.2 million obsolescence loss in December 2019 for materials and supplies inventory IPL does not believe will be utilized by the planned retirement dates, which is recorded in "Operating expenses - Operation and maintenance" on the accompanying Consolidated Statements of Operations.
Regulatory Assets and Liabilities
Regulatory assets represent deferred costs or credits that have been included as allowable costs or credits for ratemaking purposes. IPL has recorded regulatory assets or liabilities relating to certain costs or credits as authorized by the IURC or established regulatory practices in accordance with ASC 980. IPL is amortizing non tax-related regulatory assets to expense over periods ranging from 1 to 45 years. Tax-related regulatory assets represent the net income tax costs to be considered in future regulatory proceedings generally as the tax-related amounts are paid.
The amounts of regulatory assets and regulatory liabilities at December 31 are as follows: | | | | | | | | | | | | | | 2019 | | 2018 | | Recovery Period | | | (In Thousands) | | | Regulatory Assets | | | | | | | Current: | | | | | | | Undercollections of rate riders | | $ | 22,216 |
| | $ | 13,217 |
| | Approximately 1 year(1) | Costs being recovered through basic rates and charges | | 15,182 |
| | 15,182 |
| | Approximately 1 year(1) | Total current regulatory assets | | 37,398 |
| | 28,399 |
| | | Long-term: | | | | | | | Unrecognized pension and other | | | | | | | postretirement benefit plan costs | | 176,646 |
| | 195,559 |
| | Various(2) | Deferred MISO costs | | 74,660 |
| | 88,052 |
| | Through 2026(1) | Unamortized Petersburg Unit 4 carrying | | | | | | | charges and certain other costs | | 7,030 |
| | 8,084 |
| | Through 2026(1)(3) | Unamortized reacquisition premium on debt | | 18,330 |
| | 19,714 |
| | Over remaining life of debt | Environmental projects | | 78,021 |
| | 81,204 |
| | Through 2046(1)(3) | Other miscellaneous | | 927 |
| | 2,464 |
| | Various(4) | Total long-term regulatory assets | | 355,614 |
| | 395,077 |
| | | Total regulatory assets | | $ | 393,012 |
| | $ | 423,476 |
| | | Regulatory Liabilities | | | | | | | Current: | | | | | | | Overcollection or rate riders and other credits being passed | | | | | | | to customers through rate riders | | $ | 51,790 |
| | $ | 47,925 |
| | Approximately 1 year(1) | FTRs | | 864 |
| | 3,099 |
| | Approximately 1 year(1) | Total current regulatory liabilities | | 52,654 |
| | 51,024 |
| | | Long-term: | | | | | | | ARO and accrued asset removal costs | | 719,680 |
| | 707,662 |
| | Not applicable | Deferred income taxes payable through rates | | 122,156 |
| | 141,058 |
| | Various | Long-term portion or credits being passed to customers | | | | | | | through rate riders | | 3,337 |
| | 21,341 |
| | Through 2021 | Other miscellaneous | | 1,257 |
| | 194 |
| | To be determined | Total long-term regulatory liabilities | | 846,430 |
| | 870,255 |
| | | Total regulatory liabilities | | $ | 899,084 |
| | $ | 921,279 |
| | | |
| | (1) | Recovered (credited) per specific rate orders |
| | (2) | IPL receives a return on its discretionary funding |
| | (3) | Recovered with a current return |
(4) The majority of these costs are being recovered in basic rates and charges through 2026. For the remainder, recovery is probable, but the
timing is not yet determined.
Deferred Fuel
Deferred fuel costs are a component of current regulatory assets or liabilities (which is a result of IPL charging either more or less for fuel than our actual costs to our jurisdictional customers) and are expected to be recovered through future FAC proceedings. IPL records deferred fuel in accordance with standards prescribed by the FERC. The deferred fuel adjustment is the result of variances between estimated fuel and purchased power costs in IPL’s FAC and actual fuel and purchased power costs. IPL is generally permitted to recover underestimated fuel and purchased power costs in future rates through the FAC proceedings and therefore the costs are deferred when incurred and amortized into fuel expense in the same period that IPL’s rates are adjusted to reflect these costs.
Unrecognized Pension and Postretirement Benefit Plan Costs
In accordance with ASC 715 “Compensation – Retirement Benefits” and ASC 980, IPL recognizes a regulatory asset equal to the unrecognized actuarial gains and losses and prior service costs. Pension expenses are recorded based on the benefit plan’s actuarially determined pension liability and associated level of annual expenses to be recognized. The other postretirement benefit plan’s deferred benefit cost is the excess of the other postretirement benefit liability over the amount previously recognized.
Deferred Income Taxes Recoverable/Payable Through Rates
A deferred income tax asset or liability is created from a difference in timing of income recognition between tax laws and accounting methods. As a regulated utility, IPL includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets.
On December 22, 2017, the U.S. federal government enacted the TCJA, which includes a provision to, among other things, reduce the federal corporate income tax rate from 35% to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, IPL remeasured their deferred income tax assets and liabilities using the new tax rate. The impact of the reduction of the income tax rate on deferred income taxes will be used in future ratemaking to reduce jurisdictional retail rates. Accordingly, IPL has a net regulatory deferred income tax liability of $122.2 million and $141.1 million as of December 31, 2019 and 2018, respectively.
Deferred MISO Costs
These consist of administrative costs for transmission services, transmission expansion cost sharing, and certain other operational and administrative costs from the MISO market. These costs are being recovered per specific rate order.
Environmental Costs
These consist of various costs incurred to comply with environmental regulations. These costs were approved for recovery either through IPL's ECCRA proceedings or in the 2018 Base Rate Order. Amortization periods vary, but all costs should be recovered by 2064.
ARO and Accrued Asset Removal Costs
In accordance with ASC 410 and ASC 980, IPL recognizes the amount collected in customer rates for costs of removal that do not have an associated legal retirement obligation as a deferred regulatory liability. This amount is net of the portion of legal ARO costs that is also currently being recovered in rates.
3. PROPERTY, PLANT AND EQUIPMENT
The original cost of property, plant and equipment segregated by functional classifications follows: | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Production | | $ | 4,154,919 |
| | $ | 3,927,847 |
| Transmission | | 398,903 |
| | 394,621 |
| Distribution | | 1,594,208 |
| | 1,533,828 |
| General plant | | 250,582 |
| | 344,782 |
| Total property, plant and equipment | | $ | 6,398,612 |
| | $ | 6,201,078 |
| | | | | |
Substantially all of IPL’s property is subject to a $1,713.8 million direct first mortgage lien, as of December 31, 2019, securing IPL’s first mortgage bonds. Total non-contractually or legally required removal costs of utility plant in service at December 31, 2019 and 2018 were $788.3 million and $761.1 million, respectively; and total contractually or legally required removal costs of property, plant and equipment at December 31, 2019 and 2018 were $204.2 million and $129.5 million, respectively. Please see “ARO” below for further information.
ARO
ASC 410 “Asset Retirement and Environmental Obligations” addresses financial accounting and reporting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation. A legal obligation for purposes of ASC 410 is an obligation that a party is required to settle as a result of an existing law, statute, ordinance, written or oral contract or the doctrine of promissory estoppel.
IPL’s ARO relates primarily to environmental issues involving asbestos-containing materials, ash ponds, landfills and miscellaneous contaminants associated with its generating plants, transmission system and distribution system. The following is a roll forward of the ARO legal liability year end balances:
| | | | | | | | | | | | 2019 | | 2018 | | | (In Thousands) | Balance as of January 1 | | $ | 129,451 |
| | $ | 79,535 |
| Liabilities settled | | (9,891 | ) | | (8,932 | ) | Revisions to cash flow and timing estimates | | 78,153 |
| | 54,811 |
| Accretion expense | | 6,506 |
| | 4,037 |
| Balance as of December 31 | | $ | 204,219 |
| | $ | 129,451 |
| | | | | |
In 2019, IPL recorded adjustments to its ARO liabilities of $78.2 million primarily to reflect an increase to estimated ash pond closure costs, including groundwater remediation. In 2018, IPL recorded additional ARO liabilities of $54.8 million to reflect revisions to cash flow and timing estimates due to accelerated ash pond closure dates, revised estimated closure costs after review of updates to the CCR rule and revised estimated costs associated with our coal storage areas, landfills, and asbestos remediation. As of December 31, 2019 and 2018, IPL did not have any assets that are legally restricted for settling its ARO liability.
4. FAIR VALUE
The fair value of financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of IPL’s assets and liabilities have been determined using available market information. As these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
ASC 820 defined and established a framework for measuring fair value and expands disclosures about fair value measurements for financial assets and liabilities that are adjusted to fair value on a recurring basis and/or financial assets and liabilities that are measured at fair value on a nonrecurring basis, which have been adjusted to fair value during the period. In accordance with ASC 820, IPL has categorized its financial assets and liabilities that are adjusted to fair value, based on the priority of the inputs to the valuation technique, following the three-level fair value hierarchy prescribed by ASC 820 as follows:
Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets; and
Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Whenever possible, quoted prices in active markets are used to determine the fair value of IPL’s financial instruments. IPL’s financial instruments are not held for trading or other speculative purposes. The estimated fair value of financial instruments has been determined by 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 IPL could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Financial Assets
VEBA Assets
IPL has VEBA investments that are to be used to fund certain employee postretirement health care benefit plans. These assets are primarily comprised of open-ended mutual funds, which are valued using the net assets value per unit. These investments are recorded at fair value within "Other non-current assets" on the accompanying Consolidated Balance Sheets and classified as equity securities. ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” was effective as of January 1, 2018. This ASU requires the change in the fair value of equity instruments to be recorded in income. Equity Instruments were defined to include all mutual funds, regardless of the underlying investments. Therefore, all changes to fair value on the VEBA investments will be included in income in the period that the changes occur. These changes to fair value were not material for the years ended December 31, 2019, 2018, or 2017. Any unrealized gains or losses are recorded in "Other income / (expense), net" on the accompanying Consolidated Statements of Operations.
FTRs
In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. FTRs are used in the MISO market to hedge IPL’s exposure to congestion charges, which result from constraints on the transmission system. IPL’s FTRs are valued at the cleared auction prices for FTRs in MISO’s annual auction. Because of the infrequent nature of this valuation, the fair value assigned to the FTRs is considered a Level 3 input under the fair value hierarchy required by ASC 820. An offsetting regulatory liability has been recorded as these revenues or costs will be flowed through to customers through the FAC. As such, there is no impact on IPL’s Consolidated Statements of Operations.
Financial Liabilities
Other Financial Liabilities
As of December 31, 2018, IPL's other financial liabilities measured at fair value on a recurring basis were considered Level 3, based on the fair value hierarchy.
Summary
The fair value of assets and liabilities at December 31, 2019 measured on a recurring basis and the respective category within the fair value hierarchy for IPL was determined as follows:
| | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2019 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 25 |
| $ | 25 |
| $ | — |
| $ | — |
| Mutual funds | 2,854 |
| — |
| 2,854 |
| — |
| Total VEBA investments | 2,879 |
| 25 |
| 2,854 |
| — |
| Financial transmission rights | 864 |
| — |
| — |
| 864 |
| Total financial assets measured at fair value | $ | 3,743 |
| $ | 25 |
| $ | 2,854 |
| $ | 864 |
|
The fair value of assets and liabilities at December 31, 2018 measured on a recurring basis and the respective category within the fair value hierarchy for IPL was determined as follows:
| | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2018 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 21 |
| $ | 21 |
| $ | — |
| $ | — |
| Mutual funds | 2,565 |
| — |
| 2,565 |
| — |
| Total VEBA investments | 2,586 |
| 21 |
| 2,565 |
| — |
| Financial transmission rights | 3,099 |
| — |
| — |
| 3,099 |
| Total financial assets measured at fair value | $ | 5,685 |
| $ | 21 |
| $ | 2,565 |
| $ | 3,099 |
| Financial liabilities: | | | | | Other derivative liabilities | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
| Total financial liabilities measured at fair value | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
|
The following table sets forth a roll forward of financial instruments, measured at fair value on a recurring basis, classified as Level 3 in the fair value hierarchy (note, amounts in this table indicate carrying values, which approximate fair values):
| | | | | | Reconciliation of Financial Instruments Classified as Level 3 | | (In Thousands) | Balance at January 1, 2018 | $ | 2,454 |
| Unrealized gain recognized in earnings | 24 |
| Issuances | 9,295 |
| Settlements | (8,727 | ) | Balance at December 31, 2018 | 3,046 |
| Unrealized gain recognized in earnings | 53 |
| Issuances | 2,846 |
| Settlements | (5,081 | ) | Balance at December 31, 2019 | $ | 864 |
| | |
Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Debt
The fair value of IPL’s outstanding fixed-rate debt has been determined on the basis of the quoted market prices of the specific securities issued and outstanding. In certain circumstances, the market for such securities was inactive and therefore the valuation was adjusted to consider changes in market spreads for similar securities. Accordingly, the purpose of this disclosure is not to approximate the value on the basis of how the debt might be refinanced.
The following table shows the face value and the fair value of fixed-rate and variable-rate indebtedness (Level 2) for the periods ending:
| | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | | Face Value | | Fair Value | | Face Value | | Fair Value | | | (In Thousands) | Fixed-rate | | $ | 1,713,800 |
| | $ | 2,049,758 |
| | $ | 1,713,800 |
| | $ | 1,846,916 |
| Variable-rate | | 90,000 |
| | 90,000 |
| | 90,000 |
| | 90,000 |
| Total indebtedness | | $ | 1,803,800 |
| | $ | 2,139,758 |
| | $ | 1,803,800 |
| | $ | 1,936,916 |
| | | | | | | | | |
The difference between the face value and the carrying value of this indebtedness represents the following:
unamortized deferred financing costs of $16.7 million and $17.3 million at December 31, 2019 and 2018, respectively; and
unamortized discounts of $6.2 million and $6.3 million at December 31, 2019 and 2018, respectively.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.
At December 31, 2019, IPL's outstanding derivative instruments were as follows:
| | | | | | | | | | | | | | | Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) | FTRs | | Not Designated | | MWh | | 5,707 |
| | — |
| | 5,707 |
|
| | (a) | Refers to whether the derivative instruments have been designated as a cash flow hedge. |
Derivatives Not Designated as Hedge
FTRs do not qualify for hedge accounting or the normal purchases and sales exceptions under ASC 815. Accordingly, such contracts are recorded at fair value when acquired and subsequently amortized over the annual period as they are used. FTRs are initially recorded at fair value using the income approach.
Certain qualifying derivative instruments have been designated as normal purchases or normal sales contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to hedge or mark to market accounting and are recognized in the consolidated statements of operations on an accrual basis.
When applicable, IPL has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. As of December 31, 2019, IPL did not have any offsetting positions.
The following table summarizes the fair value, balance sheet classification and hedging designation of IPL's derivative instruments:
| | | | | | | | | | | | | | | | | | December 31, | Commodity | Hedging Designation | | Balance sheet classification | | 2019 | | 2018 | Financial transmission rights | Not a Cash Flow Hedge | | Prepayments and other current assets | | $ | 864 |
| | $ | 3,099 |
|
6. EQUITY
Paid In Capital and Capital Stock
On October 31, 2018, IPALCO closed on a new Term Loan consisting of a $65 million credit facility maturing July 1, 2020. The Term Loan is variable rate and is secured by IPALCO’s pledge of all the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’ existing senior secured notes. The Term Loan proceeds were used to repay amounts under IPL's Credit Agreement and for general corporate purposes.
IPL had capital contributions from IPALCO of $0.0 million, $65.0 million and $0.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
All of the outstanding common stock of IPL is owned by IPALCO. IPL’s common stock is pledged under the Term Loan, 2020 IPALCO Notes and 2024 IPALCO Notes. There have been no changes in the capital stock of IPL during the three years ended December 31, 2019.
Dividend Restrictions
IPL’s mortgage and deed of trust and its amended articles of incorporation contain restrictions on IPL’s ability to issue certain securities or pay cash dividends. So long as any of the several series of bonds of IPL issued under its mortgage remains outstanding, and subject to certain exceptions, 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 the mortgage, after December 31, 1939. In addition, pursuant to IPL’s articles, 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. As of December 31, 2019, and as of the filing of this report, IPL was in compliance with these restrictions.
IPL is also restricted in its ability to pay dividends if it is in default under the terms of its Credit Agreement and its unsecured notes, which could happen if IPL fails to comply with certain covenants. These covenants, among other things, require IPL to maintain a ratio of total debt to total capitalization not in excess of 0.65 to 1. As of December 31, 2019, and as of the filing of this report, IPL was in compliance with all covenants and no event of default existed.
During the years ended December 31, 2019, 2018 and 2017, IPL declared dividends to its shareholder totaling $159.0 million, $156.8 million, and $125.5 million, respectively.
Cumulative Preferred Stock
IPL has 5 separate series of cumulative preferred stock. Holders of preferred stock are entitled to receive dividends at rates per annum ranging from 4.0% to 5.65%. During each year ended December 31, 2019, 2018 and 2017, total preferred stock dividends declared were $3.2 million. Holders of preferred stock are entitled to 2 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 of IPL’s Board of Directors. Based on the preferred stockholders’ ability to elect a majority of IPL’s Board of Directors in this circumstance, the redemption of the preferred shares is considered to be not solely within the control of the issuer and the preferred stock was considered temporary equity and presented in the mezzanine level of the audited consolidated balance sheets in accordance with the relevant accounting guidance for non-controlling interests and redeemable securities. IPL has issued and outstanding 500,000 shares of 5.65% preferred stock, which are now redeemable at par value, subject to certain restrictions, in whole or in part. Additionally, IPL has 91,353 shares of preferred stock which are redeemable solely at the option of IPL and can be redeemed in whole or in part at any time at specific call prices.
At December 31, 2020, 2019 2018 and 2017,2018, preferred stock consisted of the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, | | | Shares Outstanding | | Call Price | | 2020 | | 2019 | | 2018 | | | | | Par Value, plus premium, if applicable | | | | | (In Thousands) | Cumulative $100 par value, | | | | | | | | | | | authorized 2,000,000 shares | | | | | | | | | | | 4% Series | | 47,611 | | | $ | 118.00 | | | $ | 5,410 | | | $ | 5,410 | | | $ | 5,410 | | 4.2% Series | | 19,331 | | | $ | 103.00 | | | 1,933 | | | 1,933 | | | 1,933 | | 4.6% Series | | 2,481 | | | $ | 103.00 | | | 248 | | | 248 | | | 248 | | 4.8% Series | | 21,930 | | | $ | 101.00 | | | 2,193 | | | 2,193 | | | 2,193 | | 5.65% Series | | 500,000 | | | $ | 100.00 | | | 50,000 | | | 50,000 | | | 50,000 | | Total cumulative preferred stock | | 591,353 | | | | | $ | 59,784 | | | $ | 59,784 | | | $ | 59,784 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, | | | Shares Outstanding | | Call Price | | 2019 | | 2018 | | 2017 | | | | | Par Value, plus premium, if applicable | | | | | (In Thousands) | Cumulative $100 par value, | | | | | | | | | | | authorized 2,000,000 shares | | | | | | | | | | | 4% Series | | 47,611 |
| | $ | 118.00 |
| | $ | 5,410 |
| | $ | 5,410 |
| | $ | 5,410 |
| 4.2% Series | | 19,331 |
| | $ | 103.00 |
| | 1,933 |
| | 1,933 |
| | 1,933 |
| 4.6% Series | | 2,481 |
| | $ | 103.00 |
| | 248 |
| | 248 |
| | 248 |
| 4.8% Series | | 21,930 |
| | $ | 101.00 |
| | 2,193 |
| | 2,193 |
| | 2,193 |
| 5.65% Series | | 500,000 |
| | $ | 100.00 |
| | 50,000 |
| | 50,000 |
| | 50,000 |
| Total cumulative preferred stock | | 591,353 |
| | |
| | $ | 59,784 |
| | $ | 59,784 |
| | $ | 59,784 |
| | | | | | | | | | | |
7. DEBT
Long-Term Debt
The following table presents IPL’s long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | Series | | Due | | 2020 | | 2019 | | | | | (In Thousands) | IPL first mortgage bonds: | | | | | 3.875% (1) | | August 2021 | | $ | 55,000 | | | $ | 55,000 | | 3.875% (1) | | August 2021 | | 40,000 | | | 40,000 | | 3.125% (1) | | December 2024 | | 40,000 | | | 40,000 | | 6.60% | | January 2034 | | 100,000 | | | 100,000 | | 6.05% | | October 2036 | | 158,800 | | | 158,800 | | 6.60% | | June 2037 | | 165,000 | | | 165,000 | | 4.875% | | November 2041 | | 140,000 | | | 140,000 | | 4.65% | | June 2043 | | 170,000 | | | 170,000 | | 4.50% | | June 2044 | | 130,000 | | | 130,000 | | 4.70% | | September 2045 | | 260,000 | | | 260,000 | | 4.05% | | May 2046 | | 350,000 | | | 350,000 | | 4.875% | | November 2048 | | 105,000 | | | 105,000 | | 0.75% (2) | | April 2026 | | 30,000 | | | 0 | | 0.95% (2) | | April 2026 | | 60,000 | | | 0 | | Unamortized discount – net | | | | (6,006) | | | (6,156) | | Deferred financing costs | | | | (17,384) | | | (16,629) | | Total IPL first mortgage bonds | | 1,780,410 | | | 1,691,015 | | IPL unsecured debt: | | | | | Variable (3) | | December 2020 | | 0 | | | 30,000 | | Variable (3) | | December 2020 | | 0 | | | 60,000 | | Deferred financing costs | | | | 0 | | | (114) | | Total IPL unsecured debt | | 0 | | | 89,886 | | Total consolidated IPL long-term debt | | 1,780,410 | | | 1,780,901 | | Less: current portion of long-term debt | | 94,907 | | | 89,886 | | Net consolidated IPL long-term debt | | $ | 1,685,503 | | | $ | 1,691,015 | | |
| | | | | | | | | | | | | | | | December 31, | Series | | Due | | 2019 | | 2018 | | | | | (In Thousands) | IPL first mortgage bonds: | | | | | 3.875% (1) | | August 2021 | | 55,000 |
| | 55,000 |
| 3.875% (1) | | August 2021 | | 40,000 |
| | 40,000 |
| 3.125% (1) | | December 2024 | | 40,000 |
| | 40,000 |
| 6.60% | | January 2034 | | 100,000 |
| | 100,000 |
| 6.05% | | October 2036 | | 158,800 |
| | 158,800 |
| 6.60% | | June 2037 | | 165,000 |
| | 165,000 |
| 4.875% | | November 2041 | | 140,000 |
| | 140,000 |
| 4.65% | | June 2043 | | 170,000 |
| | 170,000 |
| 4.50% | | June 2044 | | 130,000 |
| | 130,000 |
| 4.70% | | September 2045 | | 260,000 |
| | 260,000 |
| 4.05% | | May 2046 | | 350,000 |
| | 350,000 |
| 4.875% | | November 2048 | | 105,000 |
| | 105,000 |
| Unamortized discount – net | | | | (6,156 | ) | | (6,272 | ) | Deferred financing costs | | | | (16,629 | ) | | (17,115 | ) | Total IPL first mortgage bonds | | 1,691,015 |
| | 1,690,413 |
| IPL unsecured debt: | | | | | Variable (2) | | December 2020 | | 30,000 |
| | 30,000 |
| Variable (2) | | December 2020 | | 60,000 |
| | 60,000 |
| Deferred financing costs | | | | (114 | ) | | (229 | ) | Total IPL unsecured debt | | 89,886 |
| | 89,771 |
| Total consolidated IPL long-term debt | | 1,780,901 |
| | 1,780,184 |
| Less: current portion of long-term debt | | 89,886 |
| | — |
| Net consolidated IPL long-term debt | | $ | 1,691,015 |
| | $ | 1,780,184 |
| |
| | (1) | First mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority. |
| | (2) | Unsecured notes issued to the Indiana Finance Authority by IPL to facilitate the loan of proceeds from various tax-exempt notes issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but are subject to a mandatory put in December 2020. |
(1)First mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority.
(2)Unsecured notes issued to the Indiana Finance Authority by IPL to facilitate the loan of proceeds from various tax-exempt notes issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but were subject to a mandatory put in December 2020.
(3)First mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but are subject to a mandatory put in April 2026.
Debt Maturities
Maturities on long-term indebtedness subsequent to December 31, 2019,2020, are as follows: | | | | | | Year | Amount | | (In Thousands) | 2021 | $ | 95,000 | | 2022 | 0 | | 2023 | 0 | | 2024 | 40,000 | | 2025 | 0 | | Thereafter | 1,668,800 | | Total | $ | 1,803,800 | | | |
| | | | | Year | Amount | | (In Thousands) | 2020 | $ | 90,000 |
| 2021 | 95,000 |
| 2022 | — |
| 2023 | — |
| 2024 | 40,000 |
| Thereafter | 1,578,800 |
| Total | $ | 1,803,800 |
| | |
Significant Transactions
IPL First Mortgage Bonds and Recent Indiana Finance Authority Bond Issuances
The mortgage and deed of trust of IPL, together with the supplemental indentures thereto, secure the first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage, substantially all property owned by IPL is subject to a first mortgage lien securing indebtedness of $1,713.8$1,803.8 million as of December 31, 2019.2020. The IPL first mortgage bonds require net earnings as calculated thereunder be at least two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. IPL was in compliance with such requirements as of December 31, 2019.2020.
In November 2018, IPL issued $105 million aggregate principal amount of first mortgage bonds, 4.875% Series, due November 2048, pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from this offering were approximately $103.5 million, after deducting the initial purchasers’ discounts and fees and expenses for the offering. The net proceeds from this offering were used to repay amounts due under IPL's Credit Agreement and for general corporate purposes.
In August 2017, IPL repaid $24.7 million in outstanding borrowings of 5.40% IPL first mortgage bonds that were due in August 2017.
IPL Unsecured Notes
In December 2015,2020, the Indiana Finance Authority issued on behalf of IPL an aggregate principal amount of $90 million of Environmental Facilities Refunding Revenue NotesBonds, Series 2020A&B due December 2038 (Indianapolis Power & Light Company Project). These unsecured notes were2038. IPL issued $90 million aggregate principal amount of first mortgage bonds to the Indiana Finance Authority in two series: $30 million Series 2015A2020A notes at 0.75% and $60 million 2015B notes.Series 2020B notes at 0.95% to secure the loan of proceeds from these bonds issued by the Indiana Finance Authority. These notes were initially purchased bybonds are subject to a syndication of banks who will hold the notes until the mandatory put date of December 22, 2020.April 1, 2026. Proceeds of the bonds were used to refund $90 million of Indiana Finance Authority Environmental Facilities Refunding Revenue Bonds Series 2015A&B.
IPL has classified its outstanding $90$95 million aggregate principal amount of these unsecured notes as short-term indebtedness as they3.875% IPL first mortgage bonds that are due December 2020.August 1, 2021. Management plans to refinance these unsecured notesfirst mortgage bonds with new debt. In the event that we are unable to refinance these unsecured notesfirst mortgage bonds on acceptable terms, IPL has available borrowing capacity on its revolving credit facility that could be used to satisfy the obligation.
Line of Credit
IPL entered into an amendment and restatement of its 5-year $250 million revolving credit facility on June 19, 2019 with a syndication of bank lenders. This Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on June 19, 2024, and bears interest at variable rates as described in the Credit Agreement. It includes an uncommitted $150 million accordion feature to provide IPL with an option to request an increase in the size of the facility at any time prior to June 19, 2023, subject to approval by the lenders. The Credit Agreement also includes two one-year extension options, allowing IPL to extend the maturity
dates date subject to approval by the lenders. Prior to execution, IPL had existing general banking relationships with the parties to the Credit Agreement. As of December 31, 2020 and 2019, IPL had no$75.0 million and $0.0 million in outstanding borrowings on the committed line of credit, as of December 31, 2019 and 2018, respectively.
Restrictions on Issuance of Debt
All of IPL’s long-term borrowings must first be approved by the IURC and the aggregate amount of IPL’s short-term indebtedness must be approved by the FERC. IPL has approval from FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 26, 2020.2022. In December 2018, IPL received an order from
the IURC granting IPL authority through December 31, 2021 to, among other things, issue up to $350 million in aggregate principal amount of long-term debt, all of which authority remains available as of December 31, 2020, and refinance up to $185.0$185 million in existing indebtedness, all of which $95 million of authority remains available under the order as of December 31, 2019.2020. This order also grants IPL authority to have up to $500 million of long-term credit agreements and liquidity facilities outstanding at any one time, of which $250.0 million remains available under the order as of December 31, 2019.2020. As an alternative to the sale of all or a portion of $65 million in principal of the long-term debt mentioned above, we have the authority to issue up to $65 million of new preferred stock, all of which authority remains available under the order as of December 31, 2019.2020. IPL also has restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under our existing debt obligations. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its Credit Agreement, refinance existing debt and issue new debt approved by the IURC and issue certain other indebtedness.
Credit Ratings
IPL’s ability to borrow money or to refinance existing indebtedness and the interest rates at which IPL can borrow money or refinance existing indebtedness are affected by IPL’s credit ratings. In addition, the applicable interest rates on IPL’s Credit Agreement and other unsecured notes are dependent upon the credit ratings of IPL. Downgrades in the credit ratings of AES and/or IPALCO could result in IPL’s credit ratings being downgraded.
8. INCOME TAXES
IPL follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
AES files federal and state income tax returns which consolidate IPALCO and IPL. Under a tax sharing agreement with IPALCO, IPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPL filed separate income tax returns. IPL is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods. IPL made tax sharing payments to IPALCO of $27.0 million, $37.4 million and $33.8 million in 2020, 2019 and $87.0 million in 2019, 2018, and 2017 respectively.
On March 25, 2014, the state of Indiana amended Indiana Code 6-3-2-1 through Senate Bill 001, which phases in an additional 1.6% reduction to the state corporate income tax rate that was initially being reduced by 2%. While the statutory state income tax rate decreased to 5.625%5.375% for the calendar year 2019,2020, the deferred tax balances were adjusted according to the anticipated reversal of temporary differences. The change in required deferred taxes on plant and plant-related temporary differences resulted in a reduction to the associated regulatory asset of $1.3 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.1 million. The statutory state corporate income tax rate will be 5.375%5.075% for 2020.
In tax years prior to 2018, Internal Revenue Code Section 199 permitted taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL’s electric production activities qualify for this deduction. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for 2017 was $4.8 million. Due to the enactment of TCJA (as described below), the 2017 tax year was the final year for this deduction.
U.S. Tax Reform
On December 22, 2017, the U.S. federal government enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law. Notable items impacting the effective tax rate for the 2018 tax year related to the TCJA include a rate reduction in the corporate tax rate to 21% from 35% and an increase in the estimated flow-through depreciation partially offset by the repeal of the manufacturer’s production deduction.
In 2017, IPL recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, IPL’s financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined.
2021.
IPL completed its calculation of the impact of the TCJA in its income tax provision during the year ended December 31, 2018in accordance with its understanding of the TCJA and guidance available as of that date, and as a result recognized $0.0 million and $0.2 million of discrete tax expense in the fourth quarters of 2018 and 2017, respectively. This total results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $7.7 million and $215.5 million in 2018 and 2017, respectively, was recorded as a regulatory liability, which was a non-cash adjustment.
Income Tax Provision
Federal and state income taxes charged to income are as follows: | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | (In Thousands) | Components of income tax expense: | | | | | | | Current income taxes: | | | | | | | Federal | | $ | 23,941 |
| | $ | 26,021 |
| | $ | 56,377 |
| State | | 4,370 |
| | 11,215 |
| | 12,656 |
| Total current income taxes | | 28,311 |
| | 37,236 |
| | 69,033 |
| Deferred income taxes: | | |
| | |
| | |
| Federal | | 7,578 |
| | (15,080 | ) | | (1,634 | ) | State | | 7,556 |
| | 345 |
| | (353 | ) | Total deferred income taxes | | 15,134 |
| | (14,735 | ) | | (1,987 | ) | Net amortization of investment credit | | (15 | ) | | (911 | ) | | (1,455 | ) | Total income tax expense | | $ | 43,430 |
| | $ | 21,590 |
| | $ | 65,591 |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | | (In Thousands) | Components of income tax expense: | | | | | | | Current income taxes: | | | | | | | Federal | | $ | 28,395 | | | $ | 23,941 | | | $ | 26,021 | | State | | 8,661 | | | 4,370 | | | 11,215 | | Total current income taxes | | 37,056 | | | 28,311 | | | 37,236 | | Deferred income taxes: | | | | | | | Federal | | 503 | | | 7,578 | | | (15,080) | | State | | 2,576 | | | 7,556 | | | 345 | | Total deferred income taxes | | 3,079 | | | 15,134 | | | (14,735) | | Net amortization of investment credit | | 0 | | | (15) | | | (911) | | Total income tax expense | | $ | 40,135 | | | $ | 43,430 | | | $ | 21,590 | | | | | | | | |
Effective and Statutory Rate Reconciliation
The provision for income taxes (including net investment tax credit adjustments) is different 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: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | Federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % | State income tax, net of federal tax benefit | | 4.2 | % | | 4.4 | % | | 5.6 | % | Amortization of investment tax credits | | 0 | % | | 0 | % | | (0.5) | % | Research and development credit | | 0 | % | | 0 | % | | (1.6) | % | Depreciation flow through and amortization | | (5.1) | % | | (4.7) | % | | (12.6) | % | Additional funds used during construction - equity | | 0.7 | % | | 0.2 | % | | 0.3 | % | | | | | | | | Other – net | | 1.0 | % | | 0.8 | % | | (0.1) | % | Effective tax rate | | 21.8 | % | | 21.7 | % | | 12.1 | % | | | | | | | |
| | | | | | | | | | | | | 2019 | | 2018 | | 2017 | Federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % | State income tax, net of federal tax benefit | | 4.4 | % | | 5.6 | % | | 4.0 | % | Amortization of investment tax credits | | — | % | | (0.5 | )% | | (0.7 | )% | Research and development credit | | — | % | | (1.6 | )% | | — | % | Depreciation flow through and amortization | | (4.7 | )% | | (12.6 | )% | | (0.1 | )% | Additional funds used during construction - equity | | 0.2 | % | | 0.3 | % | | (3.1 | )% | Manufacturers’ Production Deduction (Sec. 199) | | — | % | | — | % | | (2.4 | )% | Other – net | | 0.8 | % | | (0.1 | )% | | (0.2 | )% | Effective tax rate | | 21.7 | % | | 12.1 | % | | 32.5 | % | | | | | | | |
Deferred Income Taxes
The significant items comprising IPL’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 20192020 and 2018,2019, are as follows: | | | | | | | | | | | | 2019 | | 2018 | | | (In Thousands) | Deferred tax liabilities: | | | | | Relating to utility property, net | | $ | 406,538 |
| | $ | 378,527 |
| Regulatory assets recoverable through future rates | | 62,051 |
| | 67,653 |
| Other | | 17,547 |
| | 11,812 |
| Total deferred tax liabilities | | 486,136 |
| | 457,992 |
| Deferred tax assets: | | |
| | |
| Investment tax credit | | 7 |
| | 11 |
| Regulatory liabilities including ARO | | 191,676 |
| | 184,413 |
| Employee benefit plans | | 8,556 |
| | 8,335 |
| Other | | 6,738 |
| | 12,504 |
| Total deferred tax assets | | 206,977 |
| | 205,263 |
| Deferred income tax liability – net | | $ | 279,159 |
| | $ | 252,729 |
| | | | | |
| | | | | | | | | | | | | | | | | 2020 | | 2019 | | | (In Thousands) | Deferred tax liabilities: | | | | | Relating to utility property, net | | $ | 408,291 | | | $ | 411,182 | | Regulatory assets recoverable through future rates | | 82,783 | | | 69,156 | | Other | | 5,323 | | | 5,742 | | Total deferred tax liabilities | | 496,397 | | | 486,080 | | Deferred tax assets: | | | | | Investment tax credit | | 6 | | | 7 | | Regulatory liabilities including ARO | | 197,657 | | | 191,676 | | Employee benefit plans | | 3,866 | | | 8,556 | | Other | | 5,069 | | | 6,682 | | Total deferred tax assets | | 206,598 | | | 206,921 | | Deferred income tax liability – net | | $ | 289,799 | | | $ | 279,159 | | | | | | |
Uncertain Tax Positions
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | | (In Thousands) | Unrecognized tax benefits at January 1 | | $ | 7,056 | | | $ | 7,056 | | | $ | 7,049 | | Gross increases – current period tax positions | | 312 | | | 0 | | | 0 | | Gross decreases – prior period tax positions | | 0 | | | 0 | | | 7 | | Unrecognized tax benefits at December 31 | | $ | 7,368 | | | $ | 7,056 | | | $ | 7,056 | | | | | | | | |
| | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | (In Thousands) | Unrecognized tax benefits at January 1 | | $ | 7,056 |
| | $ | 7,049 |
| | $ | 6,634 |
| Gross increases – current period tax positions | | — |
| | — |
| | 470 |
| Gross decreases – prior period tax positions | | — |
| | 7 |
| | (55 | ) | Unrecognized tax benefits at December 31 | | $ | 7,056 |
| | $ | 7,056 |
| | $ | 7,049 |
| | | | | | | |
The unrecognized tax benefits at December 31, 20192020 represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of
deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.
Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. There are no interest or penalties applicable to the periods contained in this report.
9. BENEFIT PLANS
Defined Contribution Plans
All of IPL’s employees are covered by one of two defined contribution plans, the Thrift Plan or the RSP:
The Thrift Plan
Approximately 82%80% of IPL’s active employees are covered by the Thrift Plan, a qualified defined contribution plan. All union new hires are covered under the Thrift Plan. Participants elect to make contributions to the Thrift Plan based on a percentage of their base compensation. Each participant’s contribution is matched up to certain thresholds of base compensation. The IBEW clerical-technical union new hires receive an annual lump sum
company contribution into the Thrift Plan in addition to the company match. Employer contributions to the Thrift Plan were $3.3$3.4 million, $3.3 million and $3.4$3.3 million for 2020, 2019 2018 and 2017,2018, respectively.
The RSP
Approximately 18%20% of IPL’s active employees are covered by the RSP, a qualified defined contribution plan containing a match and nondiscretionary and profit sharing component. All non-union new hires are covered under the RSP. Participants elect to make contributions to the RSP based on a percentage of their eligible compensation. Each participant’s contribution is matched in amounts up to, but not exceeding, 5% of the participant’s eligible compensation. Starting in 2018, the RSP also includes a 4% nondiscretionary contribution based as a percentage of each participant's eligible compensation. Finally, the RSP included a profit sharing component through 2017 whereby IPL contributed a percentage of each employee’s annual salary into the plan on a pre-tax basis. The profit sharing percentage was determined by the AES Board of Directors on an annual basis. Employer contributions (by IPL) relating to the RSP were $1.8 million, $1.6 million and $1.7 million for 2020, 2019 and $1.8 million for 2019, 2018, and 2017, respectively.
Defined Benefit Plans
Approximately 76%72% of IPL’s active employees are covered by the qualified Defined Benefit Pension Plan; while approximately 6%8% of active employees are IBEW clerical-technical unit employees who are only eligible for the Thrift Plan. The remaining 18%20% of active employees are covered by the RSP. All non-union new hires are covered under the RSP, while IBEW physical unit union new hires are covered under the Defined Benefit Pension Plan and Thrift Plan. The IBEW clerical-technical unit new hires are no longer covered under the Defined Benefit Pension Plan but do receive an annual lump sum company contribution into the Thrift Plan, in addition to the company match. The Defined Benefit Pension Plan is noncontributory and is funded by IPL through a trust. Benefits for non-union participants in the Defined Benefit Pension Plan are based on salary, years of service and accrued benefits at April 1, 2015. Benefits for eligible union participants 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.
Additionally, a small group of former officers and their surviving spouses are covered under a funded non-qualified Supplemental Retirement Plan. The total number of participants in the plan as of December 31, 20192020 was 22. The plan is closed to new participants.
IPL also provides postretirement health care benefits to certain active or retired employees and the spouses of certain active or retired employees. Approximately 147142 active employees and 1716 retirees (including spouses) were receiving such benefits or entitled to future benefits as of January 1, 2019.2020. The plan is unfunded. These postretirement health care benefits and the related unfunded obligation of $6.4$4.3 million and $6.7$6.4 million at December 31, 20192020 and 2018,2019, respectively, were not material to the consolidated financial statements in the periods covered by this report.
The following table presents information relating to the Pension Plans: | | | | | | | | | | | | | | | | | Pension benefits as of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Change in benefit obligation: | | | | | Projected benefit obligation at January 1 | | $ | 782,795 | | | $ | 697,228 | | Service cost | | 8,272 | | | 7,412 | | Interest cost | | 22,151 | | | 27,343 | | Actuarial loss/(gain) | | 66,827 | | | 88,311 | | Amendments (primarily increases in pension bands) | | 967 | | | 0 | | | | | | | | | | | | Benefits paid | | (38,487) | | | (37,499) | | Projected benefit obligation at December 31 | | 842,525 | | | 782,795 | | Change in plan assets: | | | | | Fair value of plan assets at January 1 | | 769,704 | | | 684,485 | | Actual return on plan assets | | 118,716 | | | 122,690 | | Employer contributions | | 87 | | | 28 | | | | | | | Benefits paid | | (38,487) | | | (37,499) | | Fair value of plan assets at December 31 | | 850,020 | | | 769,704 | | Funded (unfunded) status | | $ | 7,495 | | | $ | (13,091) | | Amounts recognized in the statement of financial position: | | | | | Non-current assets | | $ | 8,669 | | | $ | 0 | | Non-current liabilities | | (1,174) | | | (13,091) | | Net amount recognized at end of year | | $ | 7,495 | | | $ | (13,091) | | Sources of change in regulatory assets(1): | | | | | Prior service cost arising during period | | $ | 967 | | | $ | 0 | | Net (gain)/loss arising during period | | (14,110) | | | (4,472) | | Amortization of prior service cost | | (3,677) | | | (3,823) | | Amortization of loss | | (8,115) | | | (11,084) | | Total recognized in regulatory assets | | $ | (24,935) | | | $ | (19,379) | | Amounts included in regulatory assets: | | | | | Net loss | | $ | 145,526 | | | $ | 167,750 | | Prior service cost | | 11,613 | | | 14,323 | | Total amounts included in regulatory assets | | $ | 157,139 | | | $ | 182,073 | | | | | | |
| | | | | | | | | | | | Pension benefits as of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Change in benefit obligation: | | | | | Projected benefit obligation at January 1 | | $ | 697,228 |
| | $ | 782,108 |
| Service cost | | 7,412 |
| | 8,450 |
| Interest cost | | 27,343 |
| | 25,220 |
| Actuarial loss/(gain) | | 88,311 |
| | (62,303 | ) | Amendments (primarily increases in pension bands) | | — |
| | 5,446 |
| Curtailments(1) | | — |
| | 450 |
| Benefits paid | | (37,499 | ) | | (62,143 | ) | Projected benefit obligation at December 31 | | 782,795 |
| | 697,228 |
| Change in plan assets: | | |
| | |
| Fair value of plan assets at January 1 | | 684,485 |
| | 738,947 |
| Actual return on plan assets | | 122,690 |
| | (22,404 | ) | Employer contributions | | 28 |
| | 30,085 |
| Benefits paid | | (37,499 | ) | | (62,143 | ) | Fair value of plan assets at December 31 | | 769,704 |
| | 684,485 |
| Unfunded status | | $ | (13,091 | ) | | $ | (12,743 | ) | Amounts recognized in the statement of financial position: | | |
| | |
| Noncurrent liabilities | | $ | (13,091 | ) | | $ | (12,743 | ) | Net amount recognized at end of year | | $ | (13,091 | ) | | $ | (12,743 | ) | Sources of change in regulatory assets(2): | | |
| | |
| Prior service cost arising during period | | $ | — |
| | $ | 5,446 |
| Net (gain)/loss arising during period | | (4,472 | ) | | 902 |
| Amortization of prior service cost | | (3,823 | ) | | (4,618 | ) | Amortization of loss | | (11,084 | ) | | (11,403 | ) | Total recognized in regulatory assets | | $ | (19,379 | ) | | $ | (9,673 | ) | Amounts included in regulatory assets: | | |
| | |
| Net loss | | $ | 167,750 |
| | $ | 183,306 |
| Prior service cost | | 14,323 |
| | 18,146 |
| Total amounts included in regulatory assets | | $ | 182,073 |
| | $ | 201,452 |
| | | | | |
(1)Amounts that would otherwise be charged/credited to Accumulated Other Comprehensive Income or Loss upon application of ASC 715, “Compensation – Retirement Benefits,” are recorded as a regulatory asset or liability because IPL has historically recovered and currently recovers pension and other postretirement benefit expenses in rates. These are unrecognized amounts not yet recognized as components of net periodic benefit costs.
| | (1) | As a result of the announced AES restructuring in the first quarter of 2018, we recognized a plan curtailment of $1.2 million in the first quarter of 2018. |
| | (2) | Amounts that would otherwise be charged/credited to Accumulated Other Comprehensive Income or Loss upon application of ASC 715, “Compensation – Retirement Benefits,” are recorded as a regulatory asset or liability because IPL has historically recovered and currently recovers pension and other postretirement benefit expenses in rates. These are unrecognized amounts not yet recognized as components of net periodic benefit costs. |
Information for Pension Plans with a projected benefit obligation in excess of plan assets | | | | | | | | | | | | Pension benefits as of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Benefit obligation | | $ | 782,795 |
| | $ | 697,228 |
| Plan assets | | 769,704 |
| | 684,485 |
| Benefit obligation in excess of plan assets | | $ | 13,091 |
| | $ | 12,743 |
| | | | | |
| | | | | | | | | | | | | | | | | Pension benefits as of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Benefit obligation | | $ | 842,525 | | | $ | 782,795 | | Plan assets | | 850,020 | | | 769,704 | | Benefit obligation in excess of plan assets | | $ | (7,495) | | | $ | 13,091 | | | | | | |
IPL’s total plan assets in excess of projected benefit obligation was $7.5 million as of December 31, 2020 ($8.7 million Defined Benefit Pension Plan plan assets in excess of projected benefit obligation, partially offset by $1.2 million Supplemental Retirement Plan projected benefit obligation in excess of plan assets was $13.1 million as of December 31, 2019 ($12.0 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan)assets).
Information for Pension Plans with an accumulated benefit obligation in excess of plan assets | | | | | | | | | | | | | | | | | Pension benefits as of December 31, | | | 2020 | | 2019 | | | (In Thousands) | Accumulated benefit obligation | | $ | 830,458 | | | $ | 771,592 | | Plan assets | | 850,020 | | | 769,704 | | Accumulated benefit obligation in excess of plan assets | | $ | (19,562) | | | $ | 1,888 | | | | | | |
| | | | | | | | | | | | Pension benefits as of December 31, | | | 2019 | | 2018 | | | (In Thousands) | Accumulated benefit obligation | | $ | 771,592 |
| | $ | 687,136 |
| Plan assets | | 769,704 |
| | 684,485 |
| Accumulated benefit obligation in excess of plan assets | | $ | 1,888 |
| | $ | 2,651 |
| | | | | |
IPL’s total plan assets in excess of accumulated benefit obligation was $19.6 million as of December 31, 2020 ($20.7 million Defined Benefit Pension Plan plan assets in excess of accumulated benefit obligation, partially offset by $1.1 million Supplemental Retirement Plan accumulated benefit obligation in excess of plan assets was $1.9 million as of December 31, 2019 ($0.8 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan)assets).
Significant Gains and Losses Related to Changes in the Benefit Obligation for the Period
As shown in the table above, an actuarial loss of $66.8 million increased the benefit obligation for the year ended December 31, 2020 and an actuarial loss of $88.3 million increased the benefit obligation for the year ended December 31, 2019 and an actuarial gain of $62.3 million reduced the benefit obligation for the year ended December 31, 2018.2019. The actuarial losslosses in 2020 and 2019 waswere primarily due to a decrease in the discount rate, while the actuarial gain in 2018 was primarily due to an increasedecreases in the discount rate.
Pension Benefits and Expense
Reported expenses relevant to the Defined Benefit Pension Plan are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience, including the performance of plan assets and actual benefits paid out in future years. Pension costs associated with the Defined Benefit Pension Plan are impacted by the level of contributions made to the plan, earnings on plan assets, the adoption of new mortality tables, and employee demographics, including age, job responsibilities, salary and employment periods. Changes made to the provisions of the Defined Benefit Pension Plan may impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the corporate bond discount rates, as well as, the adoption of a new mortality table used in determining the projected benefit obligation and pension costs.
The 20192020 net actuarial gain of $4.5$14.1 million recognized in regulatory assets is comprised of two parts: (1) a $92.8an $80.9 million pension asset actuarial gain primarily due to higher than expected return on assets; partially offset by (2) an $88.3a $66.8 million pension liability actuarial loss primarily due to a decrease in the discount rate used to value pension liabilities. The unrecognized net loss of $167.8$145.5 million in the Pension Plans has accumulated over time primarily due to the long-term declining trend in corporate bond rates and the adoption of new mortality tables which increased the expected benefit obligation due to the longer expected lives of plan participants. During 2019,2020, the accumulated net gain increased due to lower discount rates used to value pension liabilities, which was partially offset by a combination of higher than expected return on pension assets, as well as the year 20192020 amortization of accumulated loss. The unrecognized net loss, to the extent that it exceeds 10% of the greater of the benefit obligation or the assets, will be amortized and included as a component of net periodic benefit cost in future years. The amortization period is approximately 10.9610.84 years based on estimated demographic data as of December 31,
2019. 2020. The projected benefit obligation of $782.8$842.5 million less the fair value of assets of $769.7$850.0 million results in an unfundedoverfunded status of $13.1$7.5 million at December 31, 2019.
2020.
| | | | | | | | | | | | | | | | Pension benefits for years ended December 31, | | | 2019 | | 2018 | | 2017 | | | (In Thousands) | Components of net periodic benefit cost: | | | | | | | Service cost | | $ | 7,412 |
| | $ | 8,450 |
| | $ | 7,344 |
| Interest cost | | 27,343 |
| | 25,220 |
| | 25,305 |
| Expected return on plan assets | | (29,907 | ) | | (40,801 | ) | | (44,672 | ) | Amortization of prior service cost | | 3,823 |
| | 3,837 |
| | 4,240 |
| Recognized actuarial loss | | 11,084 |
| | 11,403 |
| | 13,195 |
| Recognized settlement loss | | — |
| | 1,230 |
| | 146 |
| Total pension cost | | 19,755 |
| | 9,339 |
| | 5,558 |
| Less: amounts capitalized | | 1,237 |
| | 1,223 |
| | 845 |
| Amount charged to expense | | $ | 18,518 |
| | $ | 8,116 |
| | $ | 4,713 |
| Rates relevant to each year’s expense calculations: | | | | | | | Discount rate – defined benefit pension plan | | 4.36 | % | | 3.67 | % | | 4.29 | % | Discount rate – supplemental retirement plan | | 4.24 | % | | 3.60 | % | | 4.00 | % | Expected return on defined benefit pension plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % | Expected return on supplemental retirement plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % | | | | | | | |
132
| | | | | | | | | | | | | | | | | | | | | | | Pension benefits for years ended December 31, | | | 2020 | | 2019 | | 2018 | | | (In Thousands) | Components of net periodic benefit cost: | | | | | | | Service cost | | $ | 8,272 | | | $ | 7,412 | | | $ | 8,450 | | Interest cost | | 22,151 | | | 27,343 | | | 25,220 | | Expected return on plan assets | | (37,779) | | | (29,907) | | | (40,801) | | Amortization of prior service cost | | 3,677 | | | 3,823 | | | 3,837 | | Recognized actuarial loss | | 8,115 | | | 11,084 | | | 11,403 | | Recognized settlement loss | | 0 | | | 0 | | | 1,230 | | Total pension cost | | 4,436 | | | 19,755 | | | 9,339 | | Less: amounts capitalized | | 372 | | | 1,237 | | | 1,223 | | Amount charged to expense | | $ | 4,064 | | | $ | 18,518 | | | $ | 8,116 | | Rates relevant to each year’s expense calculations: | | | | | | | Discount rate – defined benefit pension plan | | 3.33 | % | | 4.36 | % | | 3.67 | % | Discount rate – supplemental retirement plan | | 3.05 | % | | 4.24 | % | | 3.60 | % | Expected return on defined benefit pension plan assets | | 5.05 | % | | 4.50 | % | | 5.45 | % | Expected return on supplemental retirement plan assets | | 4.45 | % | | 4.50 | % | | 5.45 | % | | | | | | | |
Pension expense for the following year is determined as of the December 31 measurement date based on the fair value of the Pension Plans’ assets, the expected long-term rate of return on plan assets, a mortality table assumption that reflects the life expectancy of plan participants, and a discount rate used to determine the projected benefit obligation. For 2019,2020, pension expense was determined using an assumed long-term rate of return on plan assets of 4.50%.5.05% for the Defined Benefit Pension Plan and 4.45% for the Supplemental Retirement Plan. As of the December 31, 20192020 measurement date, IPL decreased the discount rate from 4.36%3.33% to 3.33%2.46% for the Defined Benefit Pension Plan and decreased the discount rate from 4.24%3.05% to 3.05%2.31% for the Supplemental Retirement Plan. The discount rate assumptions affect the pension expense determined for 2020.2021. In addition, IPL increasedmaintained the expected long-term rate of return on plan assets at 5.05% for the Defined Benefit Pension Plan and decreased the expected long-term rate of return for the Supplemental Retirement Plan from 4.50%4.45% to 5.05% effective January 1, 2020.3.60% for 2021. The expected long-term rate of return assumption affects the pension expense determined for 2020.2021. The effect on 20202021 total pension expense of a 25 basis point increase and decrease in the assumed discount rate is $(1.2)$(1.4) million and $1.1$1.3 million, respectively.
In determining the discount rate to use for valuing liabilities we use the market yield curve on high-quality fixed income investments as of December 31, 2019.2020. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Pension Plan Assets and Fair Value Measurements
Pension plan assets consist of investments in cash and cash equivalents, government debt securities, and mutual funds (equity and debt). Differences between actual portfolio returns and expected returns may result in increased or reduced pension costs in future periods. Pension costs are determined as of the plans' measurement date of December 31, 2019.2020. Pension costs are determined for the following year based on the market value of pension plan assets, expected employer contributions, a discount rate used to determine the projected benefit obligation and the expected long-term rate of return on plan assets.
Fair value is defined under ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The fair value
hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned. Dividends are recorded on the ex-dividend date. Net appreciation includes the Pension Plans’ gains and losses on investments bought and sold, as well as held, during the year. A description of the valuation methodologies used for each major class of assets and liabilities measured at fair value follows: For 2019, the•The non-qualified Supplemental Retirement Plan investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy.
For 2019, the•The qualified Defined Benefit Pension Plan investments in common collective trusts are valued based on the daily net asset value and are categorized as Level 2 in the fair value hierarchy except for cash and cash equivalents which are categorized as level 1.
For 2018, all the Pension Plans’ investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy. The investments in U.S. government agency fixed income securities are valued from third-party pricing sources, but they generally do not represent transaction prices for the identical security in an active market nor does it represent data obtained from an exchange.
The primary objective of the Pension Plans’ is to provide a source of retirement income for its participants and beneficiaries, while the primary financial objective is to improve the unfunded status of the Pension Plans. A secondary financial objective is, where possible, to minimize pension expense volatility. The objective is based on a long-term investment horizon, so that interim fluctuations should be viewed with appropriate perspective. There can be no assurance that these objectives will be met.
In establishing IPL’s expected long-term rate of return assumption, we utilize a methodology developed by the plan’s investment consultant who maintains a capital market assumption model that takes into consideration risk, return and correlation assumptions across asset classes. A combination of quantitative analysis of historical data and qualitative judgment is used to capture trends, structural changes and potential scenarios not reflected in historical data.
The result of the analyses is a series of inputs that produce a picture of how the plan consultant believes portfolios are likely to behave through time. Capital market assumptions are intended to reflect the behavior of asset classes observed over several market cycles. Stress assumptions are also examined, since the characteristics of asset classes are constantly changing. A dynamic model is employed to manage the numerous assumptions required to estimate portfolio characteristics under different base currencies, time horizons and inflation expectations.
The Pension Plans’ consultant develops forward-looking, long-term capital market assumptions for risk, return and correlations for a variety of global asset classes, interest rates and inflation. These assumptions are created using a combination of historical analysis, current market environment assessment and by applying the consultant’s own judgment. The consultant then determines an equilibrium long-term rate of return. IPL then takes into consideration the investment manager/consultant expenses, as well as any other expenses expected to be paid out of the Pension Plans’ trust. Finally, IPL has the Pension Plans’ actuary perform a tolerance test of the consultant’s equilibrium expected long-term rate of return. IPL uses an expected long-term rate of return compatible with the actuary’s tolerance level. The following table summarizes IPL’s target pension plan allocation for 2019:2020: | | | | | | Asset Category: | Target Allocations | Equity Securities | 27%36% | Debt Securities | 73%64% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2020 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Cash and cash equivalents | | $ | 2,221 | | | $ | 2,221 | | | $ | — | | | 0 | % | Government debt securities | | 118,255 | | | 131 | | | 118,124 | | | 14 | % | Mutual fund - equities | | 323,253 | | | 2,839 | | | 320,414 | | | 38 | % | Mutual fund - debt | | 406,291 | | | 1,578 | | | 404,713 | | | 48 | % | Total | | $ | 850,020 | | | $ | 6,769 | | | $ | 843,251 | | | 100 | % | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2019 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Cash and cash equivalents | | $ | 2,599 | | | $ | 2,599 | | | $ | — | | | 0 | % | Government debt securities | | 154,798 | | | 39 | | | 154,759 | | | 20 | % | Mutual fund - equities | | 214,369 | | | 2,744 | | | 211,625 | | | 28 | % | Mutual fund - debt | | 397,938 | | | 1,664 | | | 396,274 | | | 52 | % | Total(1) | | $ | 769,704 | | | $ | 7,046 | | | $ | 762,658 | | | 100 | % | | | | | | | | | |
(1) In 2019, the qualified Defined Benefit Pension Plan moved all investments except for cash and cash equivalents into collective trusts; therefore, the 2019 balances under the Government debt securities, Mutual fund - equities, and Mutual fund - debt categories shown above as level 2 represent investments through collective trusts. The Defined Benefit Pension Plan has chosen collective trusts for which the underlying investments are mutual funds, mutual funds categories for which debt securities are the primary underlying investment, or real estate in alignment with the target asset allocation. | | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2019 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Cash and cash equivalents | | $ | 2,599 |
| | $ | 2,599 |
| | $ | — |
| | — | % | Government debt securities | | 154,798 |
| | 39 |
| | 154,759 |
| | 20 | % | Mutual fund - equities | | 214,369 |
| | 2,744 |
| | 211,625 |
| | 28 | % | Mutual fund - debt | | 397,938 |
| | 1,664 |
| | 396,274 |
| | 52 | % | Total(1) | | $ | 769,704 |
| | $ | 7,046 |
| | $ | 762,658 |
| | 100 | % | | | | | | | | | |
| | (1) | In 2019, the qualified Defined Benefit Pension Plan moved all investments except for cash and cash equivalents into collective trusts; therefore, the 2019 balances under the Government debt securities, Mutual fund - equities, and Mutual fund - debt categories shown above as level 2 represent investments through collective trusts. The Defined Benefit Pension Plan has chosen collective trusts for which the underlying investments are mutual funds, mutual funds categories for which debt securities are the primary underlying investment, or real estate in alignment with the target asset allocation. |
| | | | | | | | | | | | | | | | | | | Fair Value Measurements at | | | December 31, 2018 | | | (in thousands) | | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | | Asset Category | | Total | | (Level 1) | | (Level 2) | | % | Short-term investments | | $ | 3,597 |
| | $ | 3,597 |
| | $ | — |
| | 1 | % | Mutual funds: | | | | | | | | |
| U.S. equities | | 1,906 |
| | 1,906 |
| | — |
| | — | % | International equities | | 52,354 |
| | 52,354 |
| | — |
| | 8 | % | Fixed income | | 497,323 |
| | 497,323 |
| | — |
| | 72 | % | Fixed income securities: | | | | | | | | |
| U.S. Treasury securities | | 129,305 |
| | 129,305 |
| | — |
| | 19 | % | Total | | $ | 684,485 |
| | $ | 684,485 |
| | $ | — |
| | 100 | % | | | | | | | | | |
Pension Funding
IPL contributed $0.1 million, $0.0 million, $30.1 million, and $7.2$30.1 million to the Pension Plans in 2020, 2019 2018 and 2017,2018, respectively. Funding for the qualified Defined Benefit Pension Plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, IPL’s funded target liability percentage was estimated to be 101%100%. In general, IPL must contribute the normal service cost earned by active participants during the plan year; however, this amount can be offset by any surplus or credit balance carried by the Pension Plan. The normal cost is expected to be approximately $7.6$6.1 million in 20202021 (including $2.3$0.4 million for plan expenses), which is expected to be fully offset by the surplus amount. Each year thereafter, if the Pension Plans' underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over a seven-year period. IPL does not expect to make an employer contribution for the calendar year 2020.2021. IPL’s funding policy for the Pension Plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments made from the Pension Plans for the years ended December 31, 2020, 2019 and 2018 and 2017 were $38.5 million, $37.5 million $62.1 million and $35.5$62.1 million, respectively. Expected benefit payments are expected to be paid out of the Pension Plans as follows: | | | | | | Year | Pension Benefits | | (In Thousands) | 2021 | $ | 41,552 | | 2022 | 42,715 | | 2023 | 43,371 | | 2024 | 43,827 | | 2025 | 44,467 | | 2026 through 2030 | 224,933 | | | |
| | | | | Year | Pension Benefits | | (In Thousands) | 2020 | $ | 42,215 |
| 2021 | 43,552 |
| 2022 | 44,606 |
| 2023 | 45,095 |
| 2024 | 45,362 |
| 2024 through 2028 | 231,475 |
| | |
10. COMMITMENTS AND CONTINGENCIES
Legal Loss Contingencies
IPL is involved in litigation arising in the normal course of business. We accrue for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. As of December 31, 2020 and 2019, total legal loss contingencies accrued were $13.4 million and $2.6 million, respectively, which were included in “Accrued and Other Current Liabilities” and "Other Non-Current Liabilities," respectively, on the accompanying Consolidated Balance Sheets. A significant portion of these accrued liabilities relate to a personal injury legal claim involving injuries to a contractor. We maintain an amount of insurance protection for such litigation that we believe is adequate. While the resultsultimate outcome of such litigation cannot be predicted with certainty, management believes that the final outcomeoutcomes will not have a material adverse effect on IPL’sIPL's results of operations, financial condition and cash flows. Amounts accrued or expensed for legal or environmental contingencies collectively during the periods covered by this report have not been material to IPL’s audited consolidated financial statements.
Environmental Loss Contingencies
IPL is subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; 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. IPL cannot assure that it has been or will be at all times in full compliance with such laws, regulations and permits.
New Source Review and other CAA NOVs
In October 2009, IPL received a NOV and Finding of Violation from the EPA pursuant to the CAA Section 113(a). The NOV allegesalleged violations of the CAA at IPL’s 3 primarily coal-fired electric generating facilities at the time, dating back to 1986. The alleged violations primarily pertain to the PSD and nonattainmentnon-attainment New Source Review (NSR) requirements under the CAA. In addition, on October 1, 2015, IPL received a NOV from the EPA pursuant to CAA Section 113(a) alleging violations of the CAA, the Indiana SIP, and the Title V operating permit related to alleged particulate matter and opacity violations at IPL Petersburg Unit 3. Also, on February 5, 2016, the EPA issued a NOV pursuant to CAA Section 113(a) alleging violations of New Source ReviewPSD, non-attainment NSR and other CAA regulations, the Indiana SIP, and the Title V operating permit at Petersburg Generating Station. Since receiving the letters,On August 31, 2020, IPL management has been workingreached a settlement with the EPA, staff regarding possible resolutionsthe DOJ and IDEM resolving the purported violations of the NOVs. SettlementsCAA with respect to IPL's four coal-fired generation units currently operating at IPL's Petersburg location. The settlement agreement, in the form of a proposed judicial consent decree, includes, among other items, the following requirements: annual caps on NOx and litigated outcomesSO2 emissions and more stringent emissions limits than IPL's current Title V air permit; payment of similar New Source Review cases have required companies to pay civil penalties totaling $1.525 million; a $5 million environmental mitigation project consisting of the construction and operation of a new, non-emitting source of generation at the site; expenditure of $0.325 million on a state-only environmentally beneficial project to preserve local, ecologically-significant lands; and retirement of Units 1 and 2
prior to July 1, 2023. If IPL does not meet this retirement obligation, it must install additional pollution control technologya Selective Non-Catalytic Reduction System (SNCR) on coal-fired electric generating units, retire existing generating units,Unit 4. The proposed Consent Decree is subject to final review and invest in additional environmental projects. A similar outcome in these cases could haveapproval by the U.S. District Court for the Southern District of Indiana. On January 14, 2021, the U.S. and Indiana, on behalf of EPA and IDEM, respectively, filed a material impactmotion asking the court to enter the proposed Consent Decree, along with the U.S.' response to the adverse public comments on our business. At this time, IPL cannot determine whether these NOVs could have a material impact on its business, financial condition and results of operations. IPL would seek recovery of any operating or capital expenditures, but not fines or penalties, related to air pollution control technology to reduce regulated air emissions; however, there can be no assurances that IPL would be successful in recovering any operating or capital expenditures.the proposed settlements. IPL has recorded a contingent liability recorded related to these New Source Review cases and other CAA NOV matters.
11. RELATED PARTY TRANSACTIONS
IPL participates in a property insurance program in which IPL buys insurance from AES Global Insurance Company, a wholly-owned subsidiary of AES. IPL is not self-insured on property insurance, but does take a $5 million per occurrence deductible. Except for IPL’s large substations, IPL does not carry insurance on transmission and distribution assets, which are considered to be outside the scope of property insurance. AES and other AES subsidiaries, including IPL, also participate in the AES global insurance program. IPL pays premiums for a policy that is written and administered by a third-party insurance company. The premiums paid to this third-party administrator by the participants are paid to AES Global Insurance Company and all claims are paid from a trust fund funded by and owned by AES Global Insurance Company, but controlled by the third-party administrator. IPL also has third-party insurance in which the premiums are paid directly to the third-party insurers. The cost to IPL of coverage under thisthe property insurance program with AES Global Insurance Company was approximately $4.3$5.6 million, $3.1$4.3 million, and $3.1 million in 2020, 2019 2018 and 2017,2018, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. As of December 31, 20192020 and 2018,2019, IPL had prepaid approximately of $2.3 million and $2.0 million, and $1.6 million, respectively, for coverage under these plans, which is recorded in “"Prepayments and other current assets”assets" on the accompanying Consolidated Balance Sheets.
IPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments. The cost of coverage under this program was approximately $21.0 million, $20.2 million, and $21.5 million in 2020, 2019 and $24.9 million in 2019, 2018, and 2017, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. IPL had no prepaids for coverage under this plan as of December 31, 20192020 and 2018,2019, respectively.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries, including IPL. Under a tax sharing agreement with IPALCO, IPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. IPL had a receivable balance under this agreement of $23.1$12.5 million and $13.5$23.1 million as of December 31, 20192020 and 2018,2019, respectively, which is recorded in “Prepayments and other current assets”Taxes receivable” on the accompanying Consolidated Balance Sheets. See Note 8, "Income Taxes" for more information.
Long-term Compensation Plan
During 2020, 2019 2018 and 2017,2018, many of IPL’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2020, 2019 2018 and 20172018 was $0.3 million, $0.5$0.3 million and $0.8$0.5 million, respectively, and was included in “Operating expenses - Operation and maintenance” on IPL’s Consolidated Statements of Operations. The value of these benefits is being recognized over the 36 month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder recorded as “Paid in capital” on IPL’s Consolidated Balance Sheets in accordance with ASC 718 “Compensation – Stock Compensation.” See also Note 9, “Benefit Plans” to the audited consolidated financial statements of IPL for a description of benefits awarded to IPL employees by AES under the RSP.
Service Company
Total costs incurred by the Service Company on behalf of IPL were $55.5 million, $41.8 million and $44.1 million during 2020, 2019 and $34.1 million during 2019, 2018, and 2017, respectively. Total costs incurred by IPL on behalf of the Service Company during 2020, 2019 and 2018 and 2017 were $10.6 million, $9.7 million $10.1 million and $10.7$10.1 million, respectively, which are included as a reduction to charges from the Service Company. These costs were included in “Operating expenses - Operation and maintenance” on IPL’s Consolidated Statements of Operations. IPL had a payable balance with the Service Company of $8.4$4.5 million and $3.8$8.4 million as of December 31, 20192020 and December 31, 2018,2019, respectively, which is recorded in “Accounts payable” on the accompanying Consolidated Balance Sheets.
Other
A member of the AES Board of Directors is also a member of the Supervisory Board of a third party vendor that IPL engaged in 2014 for certain construction projects. As the transactions with this vendor related to capital projects, there was no direct impact on the Consolidated Statements of Operations for the periods presented. Over the life of the project, IPL had total net charges from this vendor of $474.9 million. This vendor completed its service in 2018.
IPL made loans to IPALCO, net of repayments, of $6.1 million during the year ended December 31, 2020. IPL has a loan receivable in the same amount recorded in “Prepayments and other current assets” on the accompanying Consolidated Balance Sheets as of December 31, 2020.
Additionally, transactions with various other related parties were $6.5 million, $3.0 million and $5.7 million during 2020, 2019 and $2.4 million during 2019, 2018, and 2017, respectively. These expenses were primarily recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations.
12. BUSINESS SEGMENT INFORMATION
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, for which separate financial information is available, and is evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate resources. All of IPL’s current business consists of the generation, transmission, distribution and sale of electric energy, and therefore IPL had only 1 reportable segment.
13. REVENUE
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenues - IPL energy sales to utility customers are based on the reading of meters at the customer’s location that occurs on a systematic basis throughout the month. IPL sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Retail revenues have a single performance obligation, as the promise to transfer energy and other distribution and/or transmission services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. Additionally, as the performance obligation is satisfied over time as energy is delivered, and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series.
In exchange for the exclusive right to sell or distribute electricity in our service area, IPL is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that IPL is allowed to charge customers for electric services. Since tariffs are approved by the regulator, the price that IPL has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff. Customer payments are typically due on a monthly basis.basis, though see Note 2, "Regulatory Matters - IURC COVID-19 Orders" for a discussion of the orders requiring expanded payment arrangements for customers.
Wholesale revenues - Power produced at the generation stations in excess of our retail load is sold into the MISO market. Such sales are made at either the day-ahead or real-time hourly market price, and these sales are classified as wholesale revenues. We sell to and purchase power from MISO, and such sales and purchases are settled and accounted for on a net hourly basis.
In the MISO market, wholesale revenue is recorded at the spot price based on the quantities of MWh delivered in each hour during each month. As a member of MISO, we are obligated to declare the availability of our energy production into the wholesale energy market, but we are not obligated to commit our previously declared availability. As such, contract terms end as the energy for each day is delivered to the market in the case of the day-ahead market and for each hour in the case of the real-time market.
Miscellaneous revenues - Miscellaneous revenues are mainly comprised of MISO transmission revenues. MISO transmission revenues are earned when IPL’s power lines are used in transmission of energy by power producers other than IPL. As IPL owns and operates transmission lines in central and southern Indiana, demand charges collected from network customers by MISO are allocated to the appropriate transmission owners (including IPL) and recognized as transmission revenues. Capacity revenues are also included in miscellaneous revenues, but these were not material for the period presented.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that the transmission operator has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period as the price paid is the transmission operator's allocation of the tariff rate (as approved by the regulator) charged to network participants.
IPL’s revenue from contracts with customers was $1,455.3$1,326.6 million, $1,455.3 million and $1,428.9$1,440.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. The following table presents IPL's revenue from contracts with customers and other revenue (in thousands): | | | For the Year Ended, | | For the Years Ended December 31, | | December 31, 2019 | December 31, 2018 | | 2020 | 2019 | 2018 | Retail Revenues | | Retail Revenues | | Retail revenue from contracts with customers | $ | 1,375,533 |
| $ | 1,380,042 |
| | Other retail revenues (1) | 23,841 |
| 16,423 |
| | Retail revenue from contracts with customers: | | Retail revenue from contracts with customers: | | Residential | | Residential | $ | 566,668 | | $ | 589,719 | | $ | 588,031 | | Small commercial and industrial | | Small commercial and industrial | 194,904 | | 215,878 | | 217,896 | | Large commercial and industrial | | Large commercial and industrial | 484,230 | | 548,551 | | 565,720 | | Public lighting | | Public lighting | 9,115 | | 7,249 | | 9,797 | | Other (1) | | Other (1) | 14,402 | | 14,136 | | 10,427 | | Total retail revenue from contracts with customers | | Total retail revenue from contracts with customers | 1,269,319 | | 1,375,533 | | 1,391,871 | | Alternative revenue programs | | Alternative revenue programs | 24,781 | | 23,841 | | 4,594 | | Wholesale Revenues | 68,474 |
| 38,789 |
| Wholesale Revenues | | Wholesale revenues from contracts with customers | | Wholesale revenues from contracts with customers | 46,482 | | 68,474 | | 38,789 | | Miscellaneous Revenues | | Miscellaneous Revenues | | Transmission and other revenue from contracts with customers | 11,335 |
| 10,057 |
| Transmission and other revenue from contracts with customers | 10,794 | | 11,335 | | 10,057 | | Other miscellaneous revenues (2) | 2,460 |
| 5,194 |
| Other miscellaneous revenues (2) | 1,609 | | 2,460 | | 5,194 | | Total Revenues | $ | 1,481,643 |
| $ | 1,450,505 |
| Total Revenues | $ | 1,352,985 | | $ | 1,481,643 | | $ | 1,450,505 | |
(1) Other retail revenue represents alternative revenue programs not accounted for under ASC 606from contracts with customers includes miscellaneous charges to customers (2) Other miscellaneous revenue includes lease and other miscellaneous revenues not accounted for under ASC 606
The balances of receivables from contracts with customers are $155.0$163.8 million and $160.8$155.0 million as of December 31, 20192020 and December 31, 2018,2019, respectively. Payment terms for all receivables from contracts with customers typically do not extend beyond 30 days.days, though see Note 2, "Regulatory Matters - IURC COVID-19 Order" for a discussion of orders requiring expanded payment arrangements for customers.
IPL has elected to apply the optional disclosure exemptions under ASC 606. Therefore, IPL has not included disclosure pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we recognize revenue based on the amount we have the right to invoice for services performed, and contracts with variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which IPL expects to be entitled.
Contract Balances — The timing of revenue recognition, billings, and cash collections results in accounts receivable and contract liabilities. The contract liabilities from contracts with customers were $0.5 million as of December 31, 2020. During the year ended December 31, 2020, we recognized revenue of $1.3 million related to this contract liability balance, respectively.
14. LEASES
LESSEE
The Company enters into long-term non-cancelable lease arrangements which are classified as either operating or finance leases; however, lease balances were not material to the Financial Statements in the periods covered by this report.
LESSOR
The Company is the lessor under operating leases for land, office space and operating equipment. Minimum lease payments from such contracts are recognized as operating lease revenue on a straight-line basis over the lease term whereas contingent rentals are recognized when earned. Lease revenue included in the Consolidated Statements of Operations was $0.9 million and $1.0 million for the yearyears ended December 31, 2019.2020 and 2019, respectively. Underlying gross assets and accumulated depreciation of operating leases included in Total net property, plant and equipment on the Consolidated Balance Sheet were $4.3 million and $0.8 million, respectively, as of December 31, 2020 and $4.3 million and $0.7 million, respectively, as of December 31, 2019.
The option to extend or terminate a lease is based on customary early termination provisions in the contract. The Company has not recognized any early terminations as of December 31, 2019.2020.
The following table shows the future minimum lease receipts through 20242025 and thereafter (in thousands): | | | | | | | Operating Leases | 2021 | $ | 886 | | 2022 | 906 | | 2023 | 906 | | 2024 | 786 | | 2025 | 544 | | Thereafter | 2,074 | | Total | $ | 6,102 | |
| | | | | | Operating Leases | 2020 | $ | 941 |
| 2021 | 994 |
| 2022 | 906 |
| 2023 | 906 |
| 2024 | 786 |
| Thereafter | 2,628 |
| Total | $ | 7,161 |
|
15. RISKS AND UNCERTAINTIES
The COVID-19 pandemic has severely impacted global economic activity, including electricity and energy consumption, and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the U.S., have reacted by instituting quarantines, mandating business and school closures and social distancing measures as well as restricting travel. The State of Indiana implemented, among other things, stay-at-home and other social distancing measures to slow the spread of the virus, which has impacted energy demand within our service territory, though the stay-at-home restrictions have now been lifted in our service territory. Also, the Executive Order previously issued by the Governor of Indiana prohibiting electric utilities, including us, from discontinuing electric utility service to customers through August 14, 2020 has lapsed. We are taking a variety of measures in response to the spread of COVID-19 to ensure our ability to generate, transmit, distribute and sell electric energy, ensure the health and safety of our employees, contractors, customers and communities and provide essential services to the communities in which we operate. In addition to the impacts to demand within our service territory, we also have incurred and expect to continue to incur expenses relating to COVID-19, including those that relate to events outside of our control.
As the economic impact of the COVID-19 pandemic started to materialize in Indiana in the second half of March 2020 and continued for the duration of 2020, the COVID-19 pandemic primarily impacted our retail sales demand as shown by the changes in weather-normalized volumes of kWh sold compared to the weather-normalized volumes for the same periods in 2019:
| | | | | | | | | | | | | | | | | | | Customer class | | For the three months ended | For the year ended | | March 31, 2020 | June 30, 2020 | September 30, 2020 | December 31, 2020 | December 31, 2020 | Residential | | 1.6 | % | 6.6 | % | 3.9 | % | 2.4 | % | 3.4 | % | Small commercial and industrial | | (1.8) | % | (10.3) | % | (4.2) | % | (5.3) | % | (5.2) | % | Large commercial and industrial | | (2.8) | % | (11.0) | % | (7.9) | % | (5.7) | % | (6.9) | % | | | | | | | |
As noted above, we also have incurred and expect to continue to incur expenses relating to COVID-19, however see Note 2, "Regulatory Matters - IURC COVID-19 Orders" for a discussion of regulatory measures which partially mitigate the impact of these expenses. We continued to experience COVID-19 impacts into 2021. The magnitude and duration of the COVID-19 pandemic is unknown at this time and may have material and adverse effects on our results of operations, financial condition and cash flows in future periods.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosures.
The Company carried out the evaluation required by Rules 13a-15(b) and 15d-15(b), under the supervision and with the participation of our management, including the CEO and CFO, of the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, the CEO and CFO concluded that as of December 31, 2019,2020, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•provide reasonable assurance that unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements are prevented or detected timely.
Management, including our CEO and CFO, does not expect that our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, or that the degree of compliance with the policies or procedures deteriorates.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2020. In making this assessment, management used the criteria established in Internal Control – Integrated Framework issued by the COSO in 2013. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2019.2020.
Changes in Internal Control Over Financial Reporting:
During the second quarter of 2019, we implemented a new core enterprise resource planning (ERP) system, which we expect to enhance our system of internal controls over financial reporting. As a result of this implementation, we modified certain existing internal controls as well as implemented new controls and procedures related to the new ERP. We continued to evaluate the design and operating effectiveness of these internal controls during the fourth quarter of 2019.
Except with respect to the implementation of the ERP, thereThere were no changes in our internal controls over financial reporting that occurred induring the quarter endingended December 31, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required to be furnished pursuant to this item with respect to Directors and Executive Officers of IPALCO will be set forth under the captions “Directors” and “Executive Officers” in IPALCO’s Proxy Statement to be furnished to shareholders in connection with the solicitation of proxies by our Board of Directors, which information is incorporated herein by reference.
The information required to be furnished pursuant to this item for IPALCO with respect to the identification of the Audit Committee, the Audit Committee financial expert and the registrant’s code of ethics will be set forth under the caption “Corporate Governance” in the Proxy Statement, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished pursuant to this item for IPALCO will be set forth under the caption “Executive Compensation” in the Proxy Statement, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required to be furnished pursuant to this item for IPALCO will be set forth under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in the Proxy Statement, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required to be furnished pursuant to this item for IPALCO will be set forth under the caption “Certain Relationships and Related Transactions and Director Independence” in the Proxy Statement, which information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The Financial Audit Committee of AES pre-approves the audit and non-audit services provided by the independent auditors for itself and its subsidiaries, including IPALCO and its subsidiaries. The AES Financial Audit Committee maintained its policy established in 2002 within which to judge if the independent auditor may be eligible to provide certain services outside of its main role as outside auditor. Services within the established framework include audit and related services and certain tax services. Services outside of the framework require AES Financial Audit Committee approval prior to the performance of the service. The Sarbanes-Oxley Act of 2002 addresses auditor independence and this framework is consistent with the provisions of the Act. No services performed by the independent auditor with respect to IPALCO and its subsidiaries were approved after the fact by the AES Financial Audit Committee other than those that were considered to be de minimis and approved in accordance with Regulation 2-01(c)(7)(i)(C) to Regulation S-X of the Exchange Act.
In addition to the pre-approval policies of the AES Financial Audit Committee, the IPALCO Board of Directors has established a pre-approval policy for audit, audit related, and certain tax and other non-audit services. The Board of Directors will specifically approve the annual audit services engagement letter, including terms and fees, with the independent auditor. Other audit, audit related and tax consultation services are specifically identified in the pre-approval policy and the policy is subject to review at least annually. This pre-approval allows management to request the specified services on an as-needed basis during the year. Any such services are reviewed with the Board of Directors on a timely basis. Any audit or non-audit services that involve a service not listed on the pre-approval list must be specifically approved by the Board of Directors prior to commencement of such work. No services were approved after the fact by the IPALCO Board of Directors other than those that were considered to be de minimis and approved in accordance with Regulation 2-01 (c)(7)(i)(c) to Regulation S-X of the Exchange Act.
Audit fees are fees billed or expected to be billed by our principal accountant for professional services for the audit of the Financial Statements, included in IPALCO’s annual report on Form 10-K and review of financial statements included in IPALCO’s quarterly reports on Form 10-Q, services that are normally provided by our principal accountants in connection with statutory, regulatory or other filings or engagements or any other service performed to comply with generally accepted auditing standards and include comfort and consent letters in connection with SEC filings and financing transactions.
The following table lists fees billed to IPALCO for products and services provided by our principal accountants: | | | | | | | | | | | | | | | | | Years Ended December 31, | | | 2020 | | 2019 | Audit Fees | | $ | 855,233 | | | $ | 1,021,700 | | Audit Related Fees: | | | | | Fees for the audit of IPL’s employee benefit plans | | 61,200 | | | 61,200 | | Assurance services for debt offering documents | | 116,525 | | | — | | Fees for tax services | | — | | | — | | Other | | 8,500 | | | 8,500 | | Total Principal Accounting Fees and Services | | $ | 1,041,458 | | | $ | 1,091,400 | | | | | | |
| | | | | | | | | | | | Years Ended December 31, | | | 2019 | | 2018 | Audit Fees | | $ | 1,021,700 |
| | $ | 929,600 |
| Audit Related Fees: | | | | | Fees for the audit of IPL’s employee benefit plans | | 61,200 |
| | 60,000 |
| Assurance services for debt offering documents | | — |
| | 68,000 |
| Fees for tax services | | — |
| | — |
| Other | | 8,500 |
| | 17,000 |
| Total Principal Accounting Fees and Services | | $ | 1,091,400 |
| | $ | 1,074,600 |
| | | | | |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES (a) Index to the financial statements, supplementary data and financial statement schedules | | | | | | IPALCO Enterprises, Inc. and Subsidiaries – Consolidated Financial Statements | Page | Report of Independent Registered Public Accounting Firm – 2020, 2019 2018 and 20172018 | | Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2020, 2019, 2018 and 2017
2018 | | Consolidated Balance Sheets as of December 31, 20192020 and 20182019 | | Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Notes to Consolidated Financial Statements | | Schedule I – Condensed Financial Information of Registrant | | Schedule II – Valuation and Qualifying Accounts and Reserves | | | | Indianapolis Power & Light Company and Subsidiary – Consolidated Financial Statements | | Report of Independent Registered Public Accounting Firm – 2020, 2019 2018 and 20172018 | | Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Balance Sheets as of December 31, 20192020 and 20182019 | | Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Consolidated Statements of Common Shareholder’s Equity for the Years Ended December 31, 2020, 2019 2018 and 20172018 | | Notes to Consolidated Financial Statements | | Schedule II – Valuation and Qualifying Accounts and Reserves | |
| | | | | | (b) Exhibits | | | | (b) ExhibitsExhibit No. | Document | | | Exhibit No. | Document | 3.1 | | 3.2 | | 4.1 | | 4.2 | | 4.3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.5 | | 4.6 | | 4.4 | | 4.74.5 | | 4.84.6 | | 10.14.7 | | 4.8 | | 4.9 | |
| | | 10.3 | | 10.4 | | 10.5 | $250,000,000 Revolving Credit Facility Amended and Restated Credit Agreement, dated June 19, 2019, among Indianapolis Power & Light Company, each lender from time to time party thereto, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets LLC, as Joint Bookrunner and Joint Lead Arranger, U.S. Bank, National Association, as Syndication Agent, Joint Bookrunner and Joint Lead Arranger and BMO Harris Bank, N.A. and Fifth Third Bank, as Co-Documentation Agents (Incorporated by reference to Exhibit 10.1 to IPALCO's Current Report on Form 8-K filed on June 21, 2019)
| 10.6 | | 10.7 | | 10.8 | First Amendment to Credit Agreement by and among IPL, the Lenders party thereto, Fifth Third Bank, as syndication agent, BMO Harris Bank N.A., as documentation agent and PNC Bank, National Association, as administrative agent, dated as of October 16, 2015 (Incorporated by reference to Exhibit No. 10.1 to IPALCO’s September 30, 2015 10-Q)
| 10.9 |
| 10.10 | Note Purchase and Covenants Agreement by and among Indianapolis Power & Light Company the Lenders Party Hereto and PNC Bank, National Association, as administrative agent relating to $30,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015A (Indianapolis Power & Light Company Project) and $60,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015B (Indianapolis Power & Light Company Project) dated as of December 22, 2015 (Incorporated by reference to Exhibit 10.11 to IPALCO’s December 31, 2015 10-K)
| 10.11 | Second Amendment dated as of April 22, 2016 to Credit Agreement by and among IPL, the Lenders party thereto, Fifth Third Bank, as syndication agent, BMO Harris Bank N.A., as document agent and PNC Bank, National Association, as administrative agent, dated as of May 6, 2014, as amended by First Amendment thereto dated as of October 16, 2015 (Incorporated by reference to Exhibit No. 10.1 to IPALCO’s June 30, 2016 10-Q)
| 10.12 | First Amendment dated as of April 29, 2016 to Note Purchase and Covenants Agreement by and among IPL, the Lenders party thereto and PNC Bank, National Association, as administrative agent relating to $30,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015A (Indianapolis Power & Light Company Project) and $60,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015B (Indianapolis Power & Light Company Project) dated as of December 22, 2015 (Incorporated by reference to Exhibit No. 10.3 to IPALCO’s June 30, 2016 10-Q) | 10.13 | | 10.1410.9 | | 10.1510.10 | | 10.1610.11 |
| 10.1710.12 | | 10.1810.13 | | 10.1910.14 | | 10.2010.15 | | 10.2110.16 | | 21 | | 31.1 | | 31.2 | | 32.1 | | 32.2 | |
| 101.INS | | 101.INS | XBRL Instance Document (furnished herewith as provided in Rule 406T of Regulation S-T) | 101.SCH | XBRL Taxonomy Extension Schema Document (furnished herewith as provided in Rule 406T of Regulation S-T) | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished herewith as provided in Rule 406T of Regulation S-T) | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (furnished herewith as provided in Rule 406T of Regulation S-T) | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document (furnished herewith as provided in Rule 406T of Regulation S-T) | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (furnished herewith as provided in Rule 406T of Regulation S-T) | | | |
(c) Financial Statement Schedules Schedules other than those listed below are omitted as the information is either not applicable, not required, or has been furnished in the financial statements or notes thereto included in Item 8 hereof.
SCHEDULE I – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
| | | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I – Condensed Financial Information of Registrant | Unconsolidated Balance Sheets | (In Thousands) | | | December 31, | | | 2020 | | 2019 | ASSETS | | | CURRENT ASSETS: | | | | | Cash and cash equivalents | | $ | 302 | | | $ | 3,709 | | Restricted cash | | 6,115 | | | 0 | | Taxes receivable | | 11,862 | | | 541 | | Prepayments and other current assets | | 7,508 | | | 14,500 | | Total current assets | | 25,787 | | | 18,750 | | OTHER NON-CURRENT ASSETS: | | | | | Investment in subsidiaries | | 1,426,739 | | | 1,427,141 | | Deferred tax asset – long term | | 14,289 | | | 6,764 | | Other non-current assets | | 3,194 | | | 2,843 | | Total other non-current assets | | 1,444,222 | | | 1,436,748 | | TOTAL ASSETS | | $ | 1,470,009 | | | $ | 1,455,498 | | LIABILITIES AND SHAREHOLDERS' EQUITY | CURRENT LIABILITIES: | | | | | Short-term and current portion of long-term debt | | $ | 0 | | | $ | 469,313 | | Loans payable to subsidiary | | 6,110 | | | 0 | | Accounts payable | | 365 | | | 292 | | | | | | | Accrued interest | | 8,556 | | | 11,442 | | Derivative liabilities, current | | 0 | | | 26,560 | | Total current liabilities | | 15,031 | | | 507,607 | | NON-CURRENT LIABILITIES: | | | | | Long-term debt | | 870,775 | | | 401,415 | | Derivative liabilities, non-current | | 63,215 | | | 0 | | Total non-current liabilities | | 933,990 | | | 401,415 | | Total liabilities | | 949,021 | | | 909,022 | | SHAREHOLDERS' EQUITY | | | | | Paid in capital | | 588,966 | | | 590,784 | | Accumulated other comprehensive loss | | (43,420) | | | (19,750) | | Accumulated deficit | | (24,558) | | | (24,558) | | Total shareholders' equity | | 520,988 | | | 546,476 | | TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 1,470,009 | | | $ | 1,455,498 | | | | | | |
| | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I – Condensed Financial Information of Registrant | Unconsolidated Balance Sheets | (In Thousands) | | | December 31, | | | 2019 | | 2018 | ASSETS | | | CURRENT ASSETS: | | | | | Cash and cash equivalents | | $ | 3,709 |
| | $ | 4,409 |
| Prepayments and other current assets | | 15,041 |
| | 15,246 |
| Total current assets | | 18,750 |
| | 19,655 |
| OTHER NON-CURRENT ASSETS: | | |
| | |
| Investment in subsidiaries | | 1,427,141 |
| | 1,431,856 |
| Deferred tax asset – long term | | 6,764 |
| | 112 |
| Other non-current assets | | 2,843 |
| | 2,539 |
| Total other non-current assets | | 1,436,748 |
| | 1,434,507 |
| TOTAL ASSETS | | $ | 1,455,498 |
| | $ | 1,454,162 |
| LIABILITIES AND SHAREHOLDERS' EQUITY | CURRENT LIABILITIES: | | |
| | |
| Short-term and current portion of long-term debt | | $ | 469,313 |
| | $ | — |
| Accounts payable | | 292 |
| | 326 |
| Accrued taxes | | — |
| | 243 |
| Accrued interest | | 11,442 |
| | 11,444 |
| Accrued and other current liabilities | | 26,560 |
| | 3 |
| Total current liabilities | | 507,607 |
| | 12,016 |
| NON-CURRENT LIABILITIES: | | | | | Long-term debt | | 401,415 |
| | 868,880 |
| Other non-current liabilities | | — |
| | — |
| Total non-current liabilities | | 401,415 |
| | 868,880 |
| Total liabilities | | 909,022 |
| | 880,896 |
| SHAREHOLDERS' EQUITY | | |
| | |
| Paid in capital | | 590,784 |
| | 597,824 |
| Accumulated other comprehensive loss | | (19,750 | ) | | — |
| Accumulated deficit | | (24,558 | ) | | (24,558 | ) | Total shareholders' equity | | 546,476 |
| | 573,266 |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 1,455,498 |
| | $ | 1,454,162 |
| | | | | |
See notes to Schedule I.
| | IPALCO ENTERPRISES, INC. | IPALCO ENTERPRISES, INC. | IPALCO ENTERPRISES, INC. | Schedule I – Condensed Financial Information of Registrant | Schedule I – Condensed Financial Information of Registrant | Schedule I – Condensed Financial Information of Registrant | Unconsolidated Statements of Operations | Unconsolidated Statements of Operations | Unconsolidated Statements of Operations | (In Thousands) | (In Thousands) | (In Thousands) | | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | OTHER INCOME / (EXPENSE), NET: | | | | | | | OTHER INCOME / (EXPENSE), NET: | | Equity in earnings of subsidiaries | | $ | 154,078 |
| | $ | 154,150 |
| | $ | 133,725 |
| Equity in earnings of subsidiaries | | $ | 140,030 | | | $ | 154,078 | | | $ | 154,150 | | Interest expense | | (32,761 | ) | | (31,038 | ) | | (35,791 | ) | Interest expense | | (42,212) | | | (32,761) | | | (31,038) | | Loss on early extinguishment of debt | | — |
| | — |
| | (8,875 | ) | Loss on early extinguishment of debt | | (2,415) | | | 0 | | | 0 | | Other income / (expense), net | | (46 | ) | | (443 | ) | | 26 |
| Other income / (expense), net | | 73 | | | (46) | | | (443) | | Total other income / (expense), net | | 121,271 |
| | 122,669 |
| | 89,085 |
| Total other income / (expense), net | | 95,476 | | | 121,271 | | | 122,669 | | EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 121,271 |
| | 122,669 |
| | 89,085 |
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 95,476 | | | 121,271 | | | 122,669 | | Less: income tax expense / (benefit) | | (7,909 | ) | | (8,143 | ) | | (16,495 | ) | Less: income tax expense / (benefit) | | (11,278) | | | (7,909) | | | (8,143) | | NET INCOME | | $ | 129,180 |
| | $ | 130,812 |
| | $ | 105,580 |
| NET INCOME | | $ | 106,754 | | | $ | 129,180 | | | $ | 130,812 | | | | | | | | | | |
See notes to Schedule I.
| | | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I - Condensed Financial Information of Registrant | Unconsolidated Statements of Comprehensive Income/(Loss) | (In Thousands) | | | | | 2020 | 2019 | 2018 | | | | | | | | Net income | | | | $ | 106,754 | | $ | 129,180 | | $ | 130,812 | | | | | | | | | Derivative activity: | | | | | | | Change in derivative fair value, net of income tax benefit of $8,876, $6,810 and $0, for each respective period | | | | (27,779) | | (19,750) | | 0 | | Reclassification to earnings, net of income tax benefit of $1,313, $0 and $0, for each respective period | | | | 4,109 | | 0 | | 0 | | Net change in fair value of derivatives | | | | (23,670) | | (19,750) | | 0 | | | | | | | | | Other comprehensive loss | | | | (23,670) | | (19,750) | | 0 | | | | | | | | | Net comprehensive income | | | | $ | 83,084 | | $ | 109,430 | | $ | 130,812 | | | | | | | | |
| | | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I - Condensed Financial Information of Registrant | Unconsolidated Statements of Comprehensive Income/(Loss) | (In Thousands) | | 2019 | 2018 | 2017 | | | | | Net income | $ | 129,180 |
| $ | 130,812 |
| $ | 105,580 |
| | | | | Derivative activity: | | | | Change in derivative fair value, net of income tax benefit of $6,810, $0 and $0, for each respective period | (19,750 | ) | — |
| — |
| Net change in fair value of derivatives | (19,750 | ) | — |
| — |
| | | | | Other comprehensive loss | (19,750 | ) | — |
| — |
| | | | | Net comprehensive income | $ | 109,430 |
| $ | 130,812 |
| $ | 105,580 |
| | | | |
See notes to Schedule I.
| | | | | | | | | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I – Condensed Financial Information of Registrant | Unconsolidated Statements of Cash Flows | (In Thousands) | | | 2020 | | 2019 | | 2018 | CASH FLOWS FROM OPERATIONS: | | | | | | | Net income | | $ | 106,754 | | | $ | 129,180 | | | $ | 130,812 | | Adjustments to reconcile net income to net cash | | | | | | | provided by operating activities: | | | | | | | Equity in earnings of subsidiaries | | (140,030) | | | (154,078) | | | (154,150) | | Cash dividends received from subsidiary companies | | 147,600 | | | 159,000 | | | 142,250 | | Amortization of deferred financing costs and debt premium | | 1,607 | | | 1,847 | | | 1,964 | | Deferred income taxes – net | | (224) | | | 157 | | | (89) | | Charges related to early extinguishment of debt | | 2,415 | | | 0 | | | 0 | | Change in certain assets and liabilities: | | | | | | | Accounts payable | | 299 | | | 231 | | | (405) | | Accrued and other current liabilities | | 0 | | | (3) | | | (876) | | Accrued taxes payable/receivable | | (11,317) | | | (261) | | | 0 | | Accrued interest | | (3,083) | | | (2) | | | (368) | | Other – net | | 5,005 | | | (623) | | | (1,838) | | Net cash provided by operating activities | | 109,026 | | | 135,448 | | | 117,300 | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | Investment in subsidiaries | | 0 | | | 0 | | | (65,000) | | Other | | 0 | | | 278 | | | 1,053 | | Net cash provided by (used in) investing activities | | 0 | | | 278 | | | (63,947) | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | Long-term borrowings, net of discount | | 474,568 | | | 0 | | | 65,000 | | Retirement of long-term debt and early tender premium | | (472,135) | | | 0 | | | 0 | | Loans from subsidiary | | 26,110 | | | 0 | | | 0 | | Repayments of loans to subsidiary | | (20,000) | | | 0 | | | 0 | | Distributions to shareholders | | (108,739) | | | (136,426) | | | (130,179) | | | | | | | | | | | | | | | | Deferred financing costs paid | | (6,122) | | | 0 | | | (148) | | Net cash used in financing activities | | (106,318) | | | (136,426) | | | (65,327) | | Net change in cash and cash equivalents | | 2,708 | | | (700) | | | (11,974) | | Cash, cash equivalents and restricted cash at beginning of period | | 3,709 | | | 4,409 | | | 16,383 | | Cash, cash equivalents and restricted cash at end of period | | $ | 6,417 | | | $ | 3,709 | | | $ | 4,409 | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Interest (net of amount capitalized) | | $ | 38,069 | | | $ | 28,911 | | | $ | 29,665 | | Income taxes | | 27,000 | | | 29,600 | | | 28,275 | | | | | | | | |
| | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I – Condensed Financial Information of Registrant | Unconsolidated Statements of Cash Flows | (In Thousands) | | | 2019 | | 2018 | | 2017 | CASH FLOWS FROM OPERATIONS: | | | | | | | Net income | | $ | 129,180 |
| | $ | 130,812 |
| | $ | 105,580 |
| Adjustments to reconcile net income to net cash | | |
| | |
| | |
| provided by operating activities: | | |
| | |
| | |
| Equity in earnings of subsidiaries | | (154,078 | ) | | (154,150 | ) | | (133,725 | ) | Cash dividends received from subsidiary companies | | 159,000 |
| | 142,250 |
| | 132,516 |
| Amortization of deferred financing costs and debt premium | | 1,847 |
| | 1,964 |
| | 2,003 |
| Deferred income taxes – net | | 157 |
| | (89 | ) | | 78 |
| Charges related to early extinguishment of debt | | — |
| | — |
| | 8,875 |
| Change in certain assets and liabilities: | | |
| | |
| | |
| Accounts payable | | 231 |
| | (405 | ) | | (1,833 | ) | Accrued and other current liabilities | | (3 | ) | | (1,244 | ) | | 7,413 |
| Other – net | | (886 | ) | | (1,838 | ) | | 370 |
| Net cash provided by operating activities | | 135,448 |
| | 117,300 |
| | 121,277 |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| | |
| | |
| Investment in subsidiaries | | — |
| | (65,000 | ) | | — |
| Other | | 278 |
| | 1,053 |
| | — |
| Net cash provided by (used in) investing activities | | 278 |
| | (63,947 | ) | | — |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
| | |
| Long-term borrowings, net of discount | | — |
| | 65,000 |
| | 404,633 |
| Retirement of long-term debt and early tender premium | | — |
| | — |
| | (408,152 | ) | Distributions to shareholders | | (136,426 | ) | | (130,179 | ) | | (105,144 | ) | Other | | — |
| | (148 | ) | | (3,601 | ) | Net cash used in financing activities | | (136,426 | ) | | (65,327 | ) | | (112,264 | ) | Net change in cash and cash equivalents | | (700 | ) | | (11,974 | ) | | 9,013 |
| Cash and cash equivalents at beginning of period | | 4,409 |
| | 16,383 |
| | 7,370 |
| Cash and cash equivalents at end of period | | $ | 3,709 |
| | $ | 4,409 |
| | $ | 16,383 |
| | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Interest (net of amount capitalized) | | $ | 28,911 |
| | $ | 29,665 |
| | $ | 31,750 |
| Income taxes | | 29,600 |
| | 28,275 |
| | 65,050 |
| | | | | | | |
See notes to Schedule I.
| | | | | | | | | | | | | | | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I - Condensed Financial Information of Registrant | Unconsolidated Statements of Common Shareholders' Equity (Deficit) | (In Thousands) | | | Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total | Balance at January 1, 2018 | | $ | 597,467 | | | $ | — | | | $ | (25,191) | | | $ | 572,276 | | Net comprehensive income | | — | | | — | | | 130,812 | | | 130,812 | | Distributions to shareholders | | — | | | — | | | (130,179) | | | (130,179) | | Other | | 357 | | | — | | | — | | | 357 | | Balance at December 31, 2018 | | 597,824 | | | — | | | (24,558) | | | 573,266 | | Net comprehensive income | | — | | | (19,750) | | | 129,180 | | | 109,430 | | Distributions to shareholders(1) | | (7,246) | | | — | | | (129,180) | | | (136,426) | | Other | | 206 | | | — | | | — | | | 206 | | Balance at December 31, 2019 | | 590,784 | | | (19,750) | | | (24,558) | | | 546,476 | | Net comprehensive income | | — | | | (23,670) | | | 106,754 | | | 83,084 | | Distributions to shareholders(1) | | (1,985) | | | — | | | (106,754) | | | (108,739) | | | | | | | | | | | | | | | | | | | | Other | | 167 | | | — | | | — | | | 167 | | Balance at December 31, 2020 | | $ | 588,966 | | | $ | (43,420) | | | $ | (24,558) | | | $ | 520,988 | | | | | | | | | | | 1) IPALCO made return of capital payments of $2.0 million, $7.2 million and $0.0 million in 2020, 2019 and 2018, respectively, for the portion of current year distributions to shareholders in excess of current year net income.
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. | Schedule I - Condensed Financial Information of Registrant | Unconsolidated Statements of Common Shareholders' Equity (Deficit) | (In Thousands) | | | Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total | Balance at January 1, 2017 | | $ | 596,810 |
| | $ | — |
| | $ | (25,627 | ) | | $ | 571,183 |
| Net income | | — |
| | — |
| | 105,580 |
| | 105,580 |
| Distributions to shareholders | | — |
| | — |
| | (105,144 | ) | | (105,144 | ) | Other | | 657 |
| | — |
| | — |
| | 657 |
| Balance at December 31, 2017 | | 597,467 |
| | — |
| | (25,191 | ) | | 572,276 |
| Net income | | — |
| | — |
| | 130,812 |
| | 130,812 |
| Distributions to shareholders | | — |
| | — |
| | (130,179 | ) | | (130,179 | ) | Other | | 357 |
| | — |
| | — |
| | 357 |
| Balance at December 31, 2018 | | 597,824 |
| | — |
| | (24,558 | ) | | 573,266 |
| Net comprehensive income | | — |
| | (19,750 | ) | | 129,180 |
| | 109,430 |
| Distributions to shareholders | | (7,246 | ) | | — |
| | (129,180 | ) | | (136,426 | ) | Other | | 206 |
| | — |
| | — |
| | 206 |
| Balance at December 31, 2019 | | $ | 590,784 |
| | $ | (19,750 | ) | | $ | (24,558 | ) | | $ | 546,476 |
| | | | | | | | | | 1) IPALCO made return of capital payments of $7.2 million in 2019 for the portion of current year distributions to shareholders in excess of current year net income.
| | | | | | | | | |
See notes to Schedule I.
IPALCO ENTERPRISES, INC. Schedule I – Condensed Financial Information of Registrant Notes to Schedule I
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting for Subsidiaries and Affiliates – IPALCO has accounted for the earnings of its subsidiaries on the equity method in the unconsolidated condensed financial information.
2. FAIR VALUE
The fair value of financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of the Company’s assets and liabilities have been determined using available market information. As these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
ASC 820 defined and established a framework for measuring fair value and expands disclosures about fair value measurements for financial assets and liabilities that are adjusted to fair value on a recurring basis and/or financial assets and liabilities that are measured at fair value on a nonrecurring basis, which have been adjusted to fair value during the period. In accordance with ASC 820, we have categorized our financial assets and liabilities that are adjusted to fair value, based on the priority of the inputs to the valuation technique, following the three-level fair value hierarchy prescribed by ASC 820 as follows:
Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets; and
Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Whenever possible, quoted prices in active markets are used to determine the fair value of our financial instruments. Our financial instruments are not held for trading or other speculative purposes. The estimated fair value of financial instruments has been determined by 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 we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Financial Assets
VEBA Assets
IPALCO has VEBA investments that are to be used to fund certain employee postretirement health care benefit plans. These assets are primarily comprised of open-ended mutual funds, which are valued using the net assets value per unit. These investments are recorded at fair value within "Other non-current assets" on the accompanying Consolidated Balance Sheets and classified as equity securities. All changes to fair value on the VEBA investments are included in income in the period that the changes occur. These changes to fair value were not material for the years ended December 31, 2020, 2019, or 2018. Any unrealized gains or losses are recorded in "Other income / (expense), net" on the accompanying Unconsolidated Statements of Operations.
Financial Liabilities
Interest Rate Hedges
In March 2019, we entered into forward interest rate hedges, which were amended in April 2020. The interest rate hedges have a combined notional amount of $400.0 million. All changes in the market value of the interest rate hedges are recorded in AOCL. See also Note 3, "Derivative Instruments and Hedging Activities - Cash Flow Hedges" for further information.
Summary
The fair value of assets and liabilities at December 31, 2020 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCO was determined as follows: | | | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2020 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 16 | | $ | 16 | | $ | 0 | | $ | 0 | | Mutual funds | 3,209 | | 0 | | 3,209 | | 0 | | Total VEBA investments | 3,225 | | 16 | | 3,209 | | 0 | | Total financial assets measured at fair value | $ | 3,225 | | $ | 16 | | $ | 3,209 | | $ | 0 | | Financial liabilities: | | | | | Interest rate hedges | $ | 63,215 | | $ | 0 | | $ | 63,215 | | $ | 0 | | Total financial liabilities measured at fair value | $ | 63,215 | | $ | 0 | | $ | 63,215 | | $ | 0 | |
The fair value of assets and liabilities at December 31, 2019 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCO was determined as follows: | | | | | | | | | | | | | | | Assets and Liabilities at Fair Value | | | Level 1 | Level 2 | Level 3 | | Fair value at December 31, 2019 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs | | (In Thousands) | Financial assets: | | | | | VEBA investments: | | | | | Money market funds | $ | 25 | | $ | 25 | | $ | 0 | | $ | 0 | | Mutual funds | 2,854 | | 0 | | 2,854 | | 0 | | Total VEBA investments | 2,879 | | 25 | | 2,854 | | 0 | | Total financial assets measured at fair value | $ | 2,879 | | $ | 25 | | $ | 2,854 | | $ | 0 | | Financial liabilities: | | | | | Interest rate hedges | $ | 26,560 | | $ | 0 | | $ | 26,560 | | $ | 0 | | Total financial liabilities measured at fair value | $ | 26,560 | | $ | 0 | | $ | 26,560 | | $ | 0 | |
Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Debt
The fair value of our outstanding fixed-rate debt has been determined on the basis of the quoted market prices of the specific securities issued and outstanding. In certain circumstances, the market for such securities was inactive and therefore the valuation was adjusted to consider changes in market spreads for similar securities. Accordingly, the purpose of this disclosure is not to approximate the value on the basis of how the debt might be refinanced.
The following table shows the face value and the fair value of fixed-rate and variable-rate indebtedness (Level 2) for the periods ending: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | Face Value | | Fair Value | | Face Value | | Fair Value | | | (In Thousands) | Fixed-rate | | $ | 880,000 | | | $ | 992,615 | | | $ | 810,000 | | | $ | 826,382 | | Variable-rate | | 0 | | | 0 | | | 65,000 | | | 65,000 | | Total indebtedness | | $ | 880,000 | | | $ | 992,615 | | | $ | 875,000 | | | $ | 891,382 | | | | | | | | | | |
The difference between the face value and the carrying value of this indebtedness represents the following:
•unamortized deferred financing costs of $8.6 million and $4.0 million at December 31, 2020 and 2019, respectively; and •unamortized discounts of $0.6 million and $0.3 million at December 31, 2020 and 2019, respectively.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.
At December 31, 20192020, IPALCO's outstanding derivative instruments were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) | Interest rate hedges | | Designated | | USD | | $ | 400,000 | | | $ | 0 | | | $ | 400,000 | |
| | | | | | | | | | | | | | | | | | Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) | Interest rate hedges | | Designated | | USD | | $ | 400,000 |
| | $ | — |
| | $ | 400,000 |
|
(a) Refers to whether the derivative instruments have been designated as a cash flow hedge. | | (a) | Refers to whether the derivative instruments have been designated as a cash flow hedge. |
Cash Flow Hedges
As part of our risk management processes, we identify the relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The fair values of cash flow hedges determined by current public market prices will continue to fluctuate with changes in market prices up to contract expiration. With the adoption of ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities effective January 1, 2019, we are no longer required to calculate effectiveness and thus the entire change in the fair value of a hedging instrument is now recorded in other comprehensive income and amounts deferred are reclassified to earnings in the same income statement line as the hedged item in the period in which it settles.
In March 2019, we entered into 3 forward interest rate swaps to hedge the interest risk associated with refinancing future debt. The 3 interest rate swaps have a combined notional amount of $400.0 million. In April 2020, we de-designated the swaps as cash flow hedges and froze the AOCL of $72.3 million at the date of de-
designation. The interest rate swaps were then amended and re-designated as cash flow hedges to hedge the interest rate risk associated with refinancing the 2024 IPALCO Notes. The amended interest rate swaps have a combined notional amount of $400.0 million and will be settled when the associated debt is2024 IPALCO Notes are refinanced. The AOCI$72.3 million of AOCL associated with the interest rate swaps through the date of the amendment will be amortized out of AOCIAOCL into interest expense over the remaining life of the underlying debt.
We use the income approach to2030 IPALCO Notes, while any changes in fair value the swaps, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward ratesassociated with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. Weamended interest rate swaps will reclassify gains and losses on the swaps out of AOCI and into earningsbe recognized in those periods in which hedged interest payments occur.AOCL going forward.
The following tables provide information on gains or losses recognized in AOCIAOCL for the cash flow hedges for the period indicated: | | | | Interest Rate Hedges for the Year Ended December 31, 2019 | | Interest Rate Hedges for the Year Ended December 31, | $ in thousands (net of tax) | | $ in thousands (net of tax) | | 2020 | 2019 | 2018 | Beginning accumulated derivative gain / (loss) in AOCI | | $ | — |
| | Beginning accumulated derivative gain / (loss) in AOCL | | Beginning accumulated derivative gain / (loss) in AOCL | | $ | (19,750) | | $ | 0 | | $ | 0 | | | | | | Net losses associated with current period hedging transactions | | (19,750 | ) | Net losses associated with current period hedging transactions | | (27,779) | | (19,750) | | 0 | | Ending accumulated derivative loss in AOCI | | $ | (19,750 | ) | | Net losses reclassified to interest expense, net of tax | | Net losses reclassified to interest expense, net of tax | | 4,109 | | 0 | | 0 | | Ending accumulated derivative loss in AOCL | | Ending accumulated derivative loss in AOCL | | $ | (43,420) | | $ | (19,750) | | $ | 0 | | | | | | | | Portion expected to be reclassified to earnings in the next twelve months | | $ | — |
| | Loss expected to be reclassified to earnings in the next twelve months | | Loss expected to be reclassified to earnings in the next twelve months | | $ | (5,375) | | | Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months) | | 7 |
| Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months) | | 45 | |
When applicable, IPALCO has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. As of December 31, 2019,2020, IPALCO did not have any offsetting positions.had $6.1 million of collateral in a broker margin account which offsets our loss positions on the interest rate hedges.
The following table summarizes the fair value, balance sheet classification and hedging designation of IPALCO's derivative instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | Commodity | Hedging Designation | | Balance sheet classification | | 2020 | | 2019 | Interest rate hedges | Cash Flow Hedge | | Accrued and other current liabilities | | $ | 0 | | | $ | 26,560 | | Interest rate hedges | Cash Flow Hedge | | Derivative liabilities, non-current | | $ | 63,215 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | December 31, | Commodity | Hedging Designation | | Balance sheet classification | | 2019 | | 2018 | Interest rate hedges | Cash Flow Hedge | | Accrued and other current liabilities | | $ | 26,560 |
| | $ | — |
|
3.4. DEBT
The following table presents IPALCO’s long-term indebtedness: | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | Series | | Due | | 2020 | | 2019 | | | | | (In Thousands) | Long-Term Debt | | | | | Term Loan | | July 2020 | | $ | 0 | | | $ | 65,000 | | 3.45% Senior Secured Notes | | July 2020 | — | | 0 | | | 405,000 | | 3.70% Senior Secured Notes | | September 2024 | — | | 405,000 | | | 405,000 | | 4.25% Senior Secured Notes | | May 2030 | | 475,000 | | | 0 | | Unamortized discount – net | | (625) | | | (313) | | Deferred financing costs – net | | (8,600) | | | (3,959) | | Total long-term debt | | 870,775 | | | 870,728 | | Less: current portion of long-term debt | | 0 | | | 469,313 | | Net long-term debt | | $ | 870,775 | | | $ | 401,415 | | |
| | | | | | | | | | | | | | | | | December 31, | Series | | Due | | 2019 | | 2018 | | | | | (In Thousands) | Long-Term Debt | | | | | Term Loan | | July 2020 | | $ | 65,000 |
| | $ | 65,000 |
| 3.45% Senior Secured Notes | | July 2020 | — |
| 405,000 |
| | 405,000 |
| 3.70% Senior Secured Notes | | September 2024 | — |
| 405,000 |
| | 405,000 |
| Unamortized discount – net | | (313 | ) | | (424 | ) | Deferred financing costs – net | | (3,959 | ) | | (5,696 | ) | Total long-term debt | | 870,728 |
| | 868,880 |
| Less: current portion of long-term debt | | 469,313 |
| | — |
| Net long-term debt | | $ | 401,415 |
| | $ | 868,880 |
| |
IPALCO Term Loan
On October 31, 2018, IPALCO closed on a new Term Loan consisting of a $65 million credit facility maturing July 1, 2020. The term Loan is variable rate and is secured by IPALCO’s pledge of all the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s existing senior secured notes. The Term Loan proceeds were used to repay amounts due under IPL's Credit Agreement and for general corporate purposes.
IPALCO’s Senior Secured Notes and Term Loan
In August 2017,April 2020, IPALCO completed the sale of the $405$475 million 2024aggregate principal amount of 4.25% 2030 IPALCO Notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 2024 IPALCO Notes were issued pursuant to an Indenture dated August 22, 2017, by and between IPALCO and U.S. Bank, National Association, as trustee. The 2024 IPALCO Notes were priced to the public at 99.901% of the principal amount. Net proceeds to IPALCO were approximately $399.3 million after deducting underwriting costs and estimated offering expenses. These costs are being amortized to the maturity date using the effective interest method. We used the net proceeds from this offering to retire the $65 million Term Loan on April 14, 2020. The remaining net proceeds, together with cash on hand, were used to redeem the $400 million 20182020 IPALCO Notes on September 21, 2017,May 14, 2020, and to pay certain related fees, expenses and make-whole premiums. A loss on early extinguishment of debt of $8.9$2.4 million for the 20182020 IPALCO Notes is included as a separate line item within "Other Income/(Expense), Net" in the accompanying Unconsolidated Statements of Operations.
The 2020 IPALCO Notes and 20242030 IPALCO Notes are secured by IPALCO’s pledge of all of the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s Term Loan.existing senior secured notes. IPALCO filed itshas also agreed to register the 2030 IPALCO Notes under the Securities Act by filing an exchange offer registration statement on Form S-4 with respect to the 2024 IPALCO Notesor, under specified circumstances, a shelf registration statement with the SEC on November 13, 2017, and this registration statement was declared effective on December 5, 2017. The exchange offer was completed on January 12, 2018.pursuant to a Registration Rights Agreement dated April 14, 2020.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
| | | | | | | | | | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | Valuation and Qualifying Accounts and Reserves | For the Years Ended December 31, 2019, 2018 and 2017 | (In Thousands) | Column A – Description | | Column B | | Column C – Additions | | Column D – Deductions | | Column E | | | Balance at Beginning of Period | | Charged to Income | | Charged to Other Accounts | | Net Write-offs | | Balance at End of Period | Year ended December 31, 2019 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,821 |
| | $ | 4,760 |
| | $ | — |
| | $ | 5,528 |
| | $ | 2,053 |
| Year ended December 31, 2018 | | |
| | |
| | |
| | |
| | |
| Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,830 |
| | $ | 6,008 |
| | $ | — |
| | $ | 6,017 |
| | $ | 2,821 |
| Year ended December 31, 2017 | | |
| | |
| | |
| | |
| | |
| Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,365 |
| | $ | 5,854 |
| | $ | — |
| | $ | 5,389 |
| | $ | 2,830 |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | IPALCO ENTERPRISES, INC. and SUBSIDIARIES | Valuation and Qualifying Accounts and Reserves | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | Column A – Description | | Column B | | Column C – Additions | | Column D – Deductions | | Column E | | | Balance at Beginning of Period | | Charged to Income | | Charged to Other Accounts | | Net Write-offs | | Balance at End of Period | Year ended December 31, 2020 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,053 | | | $ | 5,861 | | | $ | (1,132) | | | $ | 3,627 | | | $ | 3,155 | | Deducted from Inventories | | | | | | | | | | | Valuation Allowance for Materials and Supplies | | $ | 6,204 | | | $ | 0 | | | $ | 0 | | | $ | 71 | | | $ | 6,133 | | Year ended December 31, 2019 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,821 | | | $ | 4,760 | | | $ | 0 | | | $ | 5,528 | | | $ | 2,053 | | Deducted from Inventories | | | | | | | | | | | Valuation Allowance for Materials and Supplies | | $ | 0 | | | $ | 6,204 | | | $ | 0 | | | $ | 0 | | | $ | 6,204 | | Year ended December 31, 2018 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,830 | | | $ | 6,008 | | | $ | 0 | | | $ | 6,017 | | | $ | 2,821 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Valuation and Qualifying Accounts and Reserves | For the Years Ended December 31, 2019, 2018 and 2017 | (In Thousands) | Column A – Description | | Column B | | Column C – Additions | | Column D – Deductions | | Column E | | | Balance at Beginning of Period | | Charged to Income | | Charged to Other Accounts | | Net Write-offs | | Balance at End of Period | Year ended December 31, 2019 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,821 |
| | $ | 4,760 |
| | $ | — |
| | $ | 5,528 |
| | $ | 2,053 |
| Year ended December 31, 2018 | | |
| | |
| | |
| | |
| | |
| Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,830 |
| | $ | 6,008 |
| | $ | — |
| | $ | 6,017 |
| | $ | 2,821 |
| Year ended December 31, 2017 | | |
| | |
| | |
| | |
| | |
| Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,365 |
| | $ | 5,854 |
| | $ | — |
| | $ | 5,389 |
| | $ | 2,830 |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY | Valuation and Qualifying Accounts and Reserves | For the Years Ended December 31, 2020, 2019 and 2018 | (In Thousands) | Column A – Description | | Column B | | Column C – Additions | | Column D – Deductions | | Column E | | | Balance at Beginning of Period | | Charged to Income | | Charged to Other Accounts | | Net Write-offs | | Balance at End of Period | Year ended December 31, 2020 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,053 | | | $ | 5,861 | | | $ | (1,132) | | | $ | 3,627 | | | $ | 3,155 | | Deducted from Inventories | | | | | | | | | | | Valuation Allowance for Materials and Supplies | | $ | 6,204 | | | 0 | | 0 | | $ | 71 | | | $ | 6,133 | | Year ended December 31, 2019 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,821 | | | $ | 4,760 | | | $ | 0 | | | $ | 5,528 | | | $ | 2,053 | | Deducted from Inventories | | | | | | | | | | | Valuation Allowance for Materials and Supplies | | $ | 0 | | | $ | 6,204 | | | $ | 0 | | | $ | 0 | | | $ | 6,204 | | Year ended December 31, 2018 | | | | | | | | | | | Accumulated Provisions Deducted from | | | | | | | | | | | Assets – Doubtful Accounts | | $ | 2,830 | | | $ | 6,008 | | | $ | 0 | | | $ | 6,017 | | | $ | 2,821 | | | | | | | | | | | | |
ITEM 16. FORM 10-K SUMMARY
None.
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. (Registrant)
Date: February 27, 202024, 2021 /s/ Barry J. BentleyKristina Lund Barry J. Bentley Kristina Lund
Interim President and Chief Executive Officer
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 | | Capacity | | Date | /s/ Barry J. BentleyKristina Lund | | Interim President and Chief Executive Officer, and Director (Principal Executive Officer) | | February 27, 202024, 2021 | Barry J. BentleyKristina Lund | | | /s/ Lisa Krueger | | Director and Executive Chairman | | February 24, 2021 | Lisa Krueger | | | /s/ Kenneth J. Zagzebski | | Director and Chairman | | February 27, 202024, 2021 | Kenneth J. Zagzebski | | | /s/ Sanjeev AddalaBernerd Da Santos | | Director | | February 27, 202024, 2021 | Sanjeev AddalaBernerd Da Santos | | | /s/ Paul L. Freedman | | Director | | February 27, 202024, 2021 | Paul L. Freedman | | | /s/ Mark E. MillerSusan Harcourt | | Director | | February 27, 202024, 2021 | Mark E. MillerSusan Harcourt | | | /s/ Marc Michael | | Director | | February 27, 202024, 2021 | Marc Michael
| | | /s/ Gustavo Pimenta | | Director | | February 27, 202024, 2021 | Gustavo Pimenta | | | /s/ Lisa KruegerBarry J. Bentley | | Director | | February 27, 202024, 2021 | Lisa Krueger
Barry J. Bentley | | | /s/ Vincent Parisi | | Director | | February 27, 2020 | Vincent Parisi
| | | /s/ Frédéric Lesage | | Director | | February 27, 202024, 2021 | Frédéric Lesage
| | | /s/ Antoine RezeFady Mansour | | Director | | February 27, 202024, 2021 | Antoine RezeFady Mansour | | | /s/ Gustavo Garavaglia | | Chief Financial Officer (Principal Financial Officer) | | February 27, 202024, 2021 | Gustavo Garavaglia | | | /s/ Karin M. Nyhuis | | Controller (Principal Accounting Officer) | | February 27, 202024, 2021 | Karin M. Nyhuis | | | | | | | |
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15 (d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act No annual report or proxy material has been sent to security holders.
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