UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
IPALCO ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Indiana
(State or other jurisdiction of incorporation)
1-8644
(Commission File Number)
35-1575582
(IRS Employer Identification No.)
One Monument Circle
Indianapolis, Indiana 46204
(Address of principal executive offices, including zip code)
317-261-8261
(Registrant's telephone number, including area code)
| | | | | | | | |
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| N/A | N/A | N/A |
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☑ No ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☑
(The registrant is a voluntary filer. The registrant has filed all applicable reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| | | | | | | | | | | | | | |
| Large accelerated filer | Accelerated filer | Non-accelerated filer | Smaller reporting company | Emerging growth company |
| ☐ | ☐ | ☑ | ☐ | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
At February 24, 2021, 108,907,318 shares of IPALCO Enterprises, Inc. common stock, no par value, were outstanding, of which 89,685,177 shares were owned by AES U.S. Investments, Inc. and 19,222,141 shares were owned by CDP Infrastructures Fund G.P., a wholly-owned subsidiary of La Caisse de dépôt et placement du Québec.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant’s Proxy Statement for its annual meeting of stockholders are incorporated by reference in Part III hereof.
| | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. |
| Annual Report on Form 10-K |
| For Fiscal Year Ended December 31, 2020 |
| | | |
| Table of Contents |
| Item No. | | | Page No. |
| |
| | DEFINED TERMS | |
| | | |
| | PART I | |
| ITEM 1. | BUSINESS | |
| ITEM 1A. | RISK FACTORS | |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS | |
| ITEM 2. | PROPERTIES | |
| ITEM 3. | LEGAL PROCEEDINGS | |
| ITEM 4. | MINE SAFETY DISCLOSURES | |
| PART II |
| ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES | |
| ITEM 6. | SELECTED FINANCIAL DATA | |
| ITEM 7. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
| IPALCO ENTERPRISES, INC. AND SUBSIDIARIES | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Statements of Operations | |
| Consolidated Statements of Comprehensive Income/(Loss) | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Cash Flows | |
| Consolidated Statements of Common Shareholders' Equity and Noncontrolling Interest | |
| Notes to Consolidated Financial Statements | |
| Note 1 - Overview and Summary of Significant Accounting Policies | |
| Note 2 - Regulatory Matters | |
| Note 3 - Property, Plant and Equipment | |
| Note 4 - Fair Value | |
| Note 5 - Derivative Instruments and Hedging Activities | |
| Note 6 - Equity | |
| Note 7 - Debt | |
| Note 8 - Income Taxes | |
| Note 9 - Benefit Plans | |
| Note 10 - Commitments and Contingencies | |
| | | | | | | | | | | |
| Note 11 - Related Party Transactions | |
| Note 12 - Business Segment Information | |
| Note 13 - Revenue | |
| Note 14 - Leases | |
| Note 15 - Risks and Uncertainties | |
| INDIANAPOLIS POWER & LIGHT COMPANY AND SUBSIDIARY | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Statements of Operations | |
| Consolidated Balance Sheets | |
| Consolidated Statements of Cash Flows | |
| Consolidated Statements of Common Shareholder's' Equity | |
| Notes to Consolidated Financial Statements | |
| Note 1 - Overview and Summary of Significant Accounting Policies | |
| Note 2 - Regulatory Matters | |
| Note 3 - Property, Plant and Equipment | |
| Note 4 - Fair Value | |
| Note 5 - Derivative Instruments and Hedging Activities | |
| Note 6 - Equity | |
| Note 7 - Debt | |
| Note 8 - Income Taxes | |
| Note 9 - Benefit Plans | |
| Note 10 - Commitments and Contingencies | |
| Note 11 - Related Party Transactions | |
| Note 12 - Business Segment Information | |
| Note 13 - Revenue | |
| Note 14 - Leases | |
| Note 15 - Risks and Uncertainties | |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | |
| ITEM 9A. | CONTROLS AND PROCEDURES | |
| ITEM 9B. | OTHER INFORMATION | |
| | | |
| PART III |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | |
| ITEM 11. | EXECUTIVE COMPENSATION | |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | |
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES | |
| | | |
| PART IV |
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES | |
| ITEM 16. | FORM 10-K SUMMARY | |
| | | |
| SIGNATURES | |
| | | | | |
| DEFINED TERMS |
| The following is a list of frequently used abbreviations or acronyms that are found in this Form 10-K: |
| |
| 2016 Base Rate Order | The order issued in March 2016 by the IURC authorizing IPL to, among other things, increase its basic rates and charges by $30.8 million annually |
| 2018 Base Rate Order | The order issued in October 2018 by the IURC authorizing IPL to, among other things, increase its basic rates and charges by $43.9 million annually |
| 2020 IPALCO Notes | $405 million of 3.45% Senior Secured Notes due July 15, 2020 |
| 2024 IPALCO Notes | $405 million of 3.70% Senior Secured Notes due September 1, 2024 |
| 2030 IPALCO Notes | $475 million of 4.25% Senior Secured Notes due May 1, 2030 |
| ACE | Affordable Clean Energy |
| AES | The AES Corporation |
| AES U.S. Investments | AES U.S. Investments, Inc. |
| AOCI | Accumulated Other Comprehensive Income |
| AOCL | Accumulated Other Comprehensive Loss |
| ARO | Asset Retirement Obligations |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
| BTA | Best Technology Available |
| CAA | U.S. Clean Air Act |
| CCGT | Combined Cycle Gas Turbine |
| CCR | Coal Combustion Residuals |
| CDPQ | CDP Infrastructures Fund G.P., a wholly-owned subsidiary of La Caisse de dépôt et placement du Québec |
| CECL | Current Expected Credit Loss |
| CERCLA | Comprehensive Environmental Response, Compensation, and Liability Act |
CO2 | Carbon Dioxide |
| COSO | Committee of Sponsoring Organizations of the Treadway Commission |
| COVID-19 | The disease caused by the novel coronavirus that caused a global pandemic beginning in 2020 |
| CPP | Clean Power Plan |
| Credit Agreement | $250 million IPL Revolving Credit Facilities Amended and Restated Credit Agreement, dated as of June 19, 2019 |
| CSAPR | Cross-State Air Pollution Rule |
| Cumulative Deficiencies | Cumulative Net Operating Income Deficiencies. 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. |
| CWA | U.S. Clean Water Act |
| D.C. Circuit | U.S. Court of Appeals for the District of Columbia Circuit |
| Defined Benefit Pension Plan | Employees’ Retirement Plan of Indianapolis Power & Light Company |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act |
| DOE | U.S. Department of Energy |
| DOJ | U.S. Department of Justice |
| DSM | Demand Side Management |
| ECCRA | Environmental Compliance Cost Recovery Adjustment |
| ELG | Effluent Limitation Guidelines |
| EPA | U.S. Environmental Protection Agency |
| EPAct | Energy Policy Act of 2005 |
| ERISA | Employee Retirement Income Security Act of 1974 |
| FAC | Fuel Adjustment Charge |
| FASB | Financial Accounting Standards Board |
| FERC | Federal Energy Regulatory Commission |
| Financial Statements | Audited Consolidated Financial Statements of IPALCO in “Item 8. Financial Statements and Supplementary Data” included in Part II of this Form 10-K |
| FTRs | Financial Transmission Rights |
| | | | | |
| GAAP | Generally Accepted Accounting Principles in the United States |
| GHG | Greenhouse Gas |
| IBEW | International Brotherhood of Electrical Workers |
| IDEM | Indiana Department of Environmental Management |
| IOSHA | Indiana Occupational Safety and Health Administration |
| IPALCO | IPALCO Enterprises, Inc. |
| IPL | Indianapolis Power & Light Company, which also does business as AES Indiana |
| IRP | Integrated Resource Plan |
| ISO | Independent System Operator |
| IURC | Indiana Utility Regulatory Commission |
| kWh | Kilowatt hours |
| LIBOR | London InterBank Offer Rate |
| MATS | Mercury and Air Toxics Standards |
| Mid-America | Mid-America Capital Resources, Inc. |
| MISO | Midcontinent Independent System Operator, Inc. |
| MW | Megawatts |
| MWh | Megawatt hours |
| NAAQS | National Ambient Air Quality Standards |
| NERC | North American Electric Reliability Corporation |
| NOV | Notice of Violation |
NOx | Nitrogen Oxides |
| NPDES | National Pollutant Discharge Elimination System |
| NSPS | New Source Performance Standards |
| NSR | New Source Review |
| NWP 12 | Nationwide Permit 12 |
| Pension Plans | Employees’ Retirement Plan of Indianapolis Power & Light Company and Supplemental Retirement Plan of Indianapolis Power & Light Company |
| PM2.5 | Fine particulate matter or particulate matter with an aerodynamic diameter less than or equal to a nominal 2.5 micrometers |
| PSD | Prevention of Significant Deterioration |
| RF | ReliabilityFirst |
| RSP | AES Retirement Savings Plan |
| RTO | Regional Transmission Organization |
| SEA | Senate Enrolled Act |
| SEC | United States Securities and Exchange Commission |
| Securities Act | Securities Act of 1933, as Amended |
| Service Company | AES US Services, LLC |
| SIP | State Implementation Plan |
SO2 | Sulfur Dioxides |
| Supplemental Retirement Plan | Supplemental Retirement Plan of Indianapolis Power & Light Company |
| TCJA | Tax Cuts and Jobs Act |
| Term Loan | $65 million IPALCO Term Loan Facility Credit Agreement, dated as of October 31, 2018 |
| Third Amended and Restated Articles of Incorporation | Third Amended and Restated Articles of Incorporation of IPALCO Enterprises, Inc. |
| Thrift Plan | Employees’ Thrift Plan of Indianapolis Power & Light Company |
| TDSIC | Transmission, Distribution, and Storage System Improvement Charge |
| U.S. | United States of America |
| U.S. SBU | AES U.S. Strategic Business Unit |
| USD | United States Dollars |
| VEBA | Voluntary Employees' Beneficiary Association |
PART I
Throughout this document, the terms “the Company,” “we,” “us,” and “our” refer to IPALCO and its consolidated subsidiaries.
We encourage investors, the media, our customers and others interested in the Company to review the information we post at https://www.iplpower.com. None of the information on our website is incorporated into, or deemed to be a part of, this Annual Report on Form 10-K or in any other report or document we file with the SEC, and any reference to our website is intended to be an inactive textual reference only.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 including, in particular, the statements about our plans, strategies and prospects under the headings “Item 1. Business,” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements express an expectation or belief and contain a projection, plan or assumption with regard to, among other things, our future revenues, income, expenses or capital structure. Such statements of future events or performance are not guarantees of future performance and involve estimates, assumptions and uncertainties. The words “could,” “may,” “predict,” “anticipate,” “would,” “believe,” “estimate,” “expect,” “forecast,” “project,” “objective,” “intend,” “continue,” “should,” “plan,” and similar expressions, or the negatives thereof, are intended to identify forward-looking statements unless the context requires otherwise.
Some important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to:
▪impacts of weather on retail sales;
▪growth in our service territory and changes in retail demand and demographic patterns;
▪weather-related damage to our electrical system;
▪commodity and other input costs;
▪performance of our suppliers;
▪transmission and distribution system reliability and capacity, including natural gas pipeline system and supply constraints;
▪regulatory actions and outcomes, including, but not limited to, the review and approval of our rates and charges by the IURC;
▪federal and state legislation and regulations;
▪changes in our credit ratings or the credit ratings of AES;
▪fluctuations in the value of pension plan assets, fluctuations in pension plan expenses and our ability to fund defined benefit pension plans;
▪changes in financial or regulatory accounting policies;
▪environmental matters, including costs of compliance with, and liabilities related to, current and future environmental laws and requirements;
▪interest rates and the use of interest rate hedges, inflation rates and other costs of capital;
▪the availability of capital;
▪the ability of subsidiaries to pay dividends or distributions to IPALCO;
▪level of creditworthiness of counterparties to contracts and transactions;
▪labor strikes or other workforce factors, including the ability to attract and retain key personnel;
▪facility or equipment maintenance, repairs and capital expenditures;
▪significant delays or unanticipated cost increases associated with construction projects;
▪the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material;
▪local economic conditions;
▪cyber-attacks and information security breaches;
▪catastrophic events such as fires, explosions, terrorist acts, acts of war, pandemic events, including the outbreak of the novel coronavirus COVID-19, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snow storms, droughts, or other similar occurrences;
▪costs and effects of legal and administrative proceedings, audits, settlements, investigations and claims and the ultimate disposition of litigation;
▪industry restructuring, deregulation and competition;
▪issues related to our participation in MISO, including the cost associated with membership, our continued ability to recover costs incurred, and the risk of default of other MISO participants;
▪changes in tax laws and the effects of our tax strategies;
▪the use of derivative contracts;
▪product development, technology changes, and changes in prices of products and technologies; and
▪the risks and other factors discussed in this report and other IPALCO filings with the SEC.
Most of these factors affect us through our consolidated subsidiary, IPL. All of the above factors are difficult to predict, contain uncertainties that may materially affect actual results, and many are beyond our control. See “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K for a more detailed discussion of the foregoing and certain other factors that could cause actual results to differ materially from those reflected in any forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to publicly update or review any forward-looking information, whether as a result of new information, future events or otherwise. If one or more forward-looking statements are updated, no inference should be drawn that additional updates will be made with respect to those or other forward-looking statements.
ITEM 1. BUSINESS
OVERVIEW
IPALCO is a holding company incorporated under the laws of the state of Indiana whose principal subsidiary is IPL. IPL, which also does business as AES Indiana, is a regulated electric utility operating in the state of Indiana. Substantially all of our business consists of the generation, transmission, distribution and sale of electric energy conducted through IPL. Our business segments are “utility” and “all other.” All of our operations are conducted within the U.S. and principally within the state of Indiana. Please see Note 12, “Business Segment Information” to the Financial Statements.
IPL
IPALCO owns all of the outstanding common stock of IPL. IPL was incorporated under the laws of the state of Indiana in 1926. IPL is engaged primarily in generating, transmitting, distributing and selling electric energy to approximately 512,000 retail customers in the city of Indianapolis and neighboring areas within the state of Indiana; the most distant point being about 40 miles from Indianapolis. IPL has an exclusive right to provide electric service to those customers. IPL’s service area covers about 528 square miles with an estimated population of approximately 965,000. IPL’s generation, transmission and distribution facilities, and changes to our sources of electric generation, are further described below under “Properties.” There have been no significant changes in the services rendered by IPL during 2020.
IPL is a transmission company member of RF. RF is one of eight Regional Reliability Councils under the NERC, which has been designated as the Electric Reliability Organization under the EPAct. RF seeks to preserve and enhance electric service reliability and security for the interconnected electric systems within the RF geographic area by setting and enforcing electric reliability standards. RF members cooperate under agreements to augment the reliability of its members’ electricity supply systems in the RF region through coordination of the planning and operation of the members’ generation and transmission facilities. Smaller electric utility systems, independent power producers and power marketers can participate as full members of RF.
HUMAN CAPITAL MANAGEMENT
IPL's employees are essential to delivering and maintaining reliable service to our customers. As of December 31, 2020, IPL had 1,192 employees of whom 1,123 were full time. Of the total employees, 819 were represented by the IBEW in two bargaining units: a physical unit and a clerical-technical unit. In February 2020, the membership of the IBEW clerical-technical unit ratified a three-year labor agreement with us that expires on February 13, 2023. In December 2018, the IBEW physical unit ratified a three-year agreement with us that expires on December 6, 2021. Both collective bargaining agreements shall continue in full force and effect from year to year unless either party provides prior written notice at least sixty (60) days prior to the expiration, or anniversary thereof, of its desire to amend or terminate the agreement. As of January 31, 2021, neither IPALCO nor any of its majority-owned subsidiaries other than IPL had any employees.
Safety
As part of AES, safety is one of our core values. Ensuring safe operations at our facilities, so each person can return home safely, is the cornerstone of our daily activities and decisions. Safety efforts are led globally by the AES Chief Operating Officer and supported by safety committees that operate at the local site level. Hazards in the workplace are actively identified and management tracks incidents so remedial actions can be taken to improve workplace safety.
We work with the Safety Management System (“SMS”), a Global Safety Standard that applies to all AES employees and employees of AES subsidiaries, as well as contractors working in AES facilities and construction projects. The SMS requires continuous safety performance monitoring; risk assessment and performance of periodic integrated environmental, health and safety audits. The SMS provides a consistent framework for all AES operational businesses and construction projects to set expectations for risk identification and reduction, measure performance and drive continuous improvements. The SMS standard is consistent with the OHSAS 18001/ISO 45001 standard.
Our safety performance is also measured by both leading and lagging metrics. Our leading safety metrics track safety observations, safety meeting engagement and the reporting of non-injury near misses. Our lagging safety metrics track lost workday cases, severity rate, and recordable incidents. We are committed to excellence in safety and have implemented various programs to increase safety awareness and improve work practices.
In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate. This includes having employees work from home to the extent they were able, while implementing additional safety measures for employees continuing critical on-site work.
Talent
We believe our success depends on our ability to attract, develop and retain key personnel. The skills, experience and industry knowledge of key employees significantly benefit our operations and performance. We have a comprehensive approach to managing our talent and developing our leaders in order to ensure our people have the right skills for today and tomorrow whether that requires us to build new business models or leverage leading technologies.
We emphasize employee development and training. To empower employees, we provide a range of development programs and opportunities, skills, and resources they need to be successful by focusing on experience and exposure as well as formal programs including our AES' ACE Academy for Talent Development, and our Trainee Program.
We believe that our individual differences make us stronger. Our Global Diversity and Inclusion Program is led by the AES Diversity and Inclusion Officer. Governance and standards are guided by the AES Chief Human Resources Officer, with input from members of AES' Executive Leadership Team.
Compensation
Our compensation philosophy emphasizes pay-for-performance. Our incentive plans are designed to reward strong performance, with greater compensation paid when performance exceeds expectations and less compensation paid when performance falls below expectations. We invest significant time and resources to ensure our compensation programs are competitive and reward the performance of our people. Every year, our people who are not part of a collective bargaining agreement are eligible for an annual merit-based salary increase. In addition, individuals are eligible for a salary increase if they receive a significant promotion. For non-collectively bargained employees at certain levels in the organization we offer annual incentives (bonus) and long-term compensation to reinforce the alignment between employees and AES.
SERVICE COMPANY
The Service Company provides services including operations, accounting, legal, human resources, information technology and other corporate services on behalf of companies that are part of the U.S. SBU, including among other companies, IPALCO and IPL. The Service Company allocates the costs for these services based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including IPL, are not subsidizing costs incurred for the benefit of other businesses. Please see Note 11, “Related Party Transactions – Service Company” to the Financial Statements and “Item 13. Certain Relationships and Related Transactions, and Director Independence” of this Form 10-K for additional details.
PROPERTIES
Our executive offices are located at One Monument Circle, Indianapolis, Indiana. This facility and the remainder of our material properties in our business and operations are owned directly by IPL. The following is a description of these material properties.
We own two distribution service centers in Indianapolis. We also own the building in Indianapolis that houses our customer service center.
We own and operate four generating stations, all within the state of Indiana. Our largest generating station, Petersburg, is coal-fired, and we have 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 in April 2018. The fourth station, Georgetown, is a small peaking station that uses natural gas to power combustion turbines. For electric generation, the net winter design capacity is 3,705 MW and net summer design capacity is 3,560 MW. Our highest summer peak level of 3,139 MW was recorded in August 2007 and the highest winter peak level of 2,971 MW was recorded in January 2009.
Our sources of electric generation are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fuel | | Name | | Number of
Units | | Winter
Capacity
(MW) | | Summer
Capacity
(MW) | | Location |
| Coal | | Petersburg(1) | | 4 | | 1,709 | | | 1,709 | | | Pike County, Indiana |
| | | Total | | 4 | | 1,709 | | | 1,709 | | | |
| Gas | | Harding Street | | 6 | | 1,026 | | | 963 | | | Marion County, Indiana |
| | Eagle Valley | | 1 | | 709 | | | 679 | | | Morgan County, Indiana |
| | | Georgetown | | 2 | | 200 | | | 158 | | | Marion County, Indiana |
| | | Total | | 9 | | 1,935 | | | 1,800 | | | |
| Oil | | Petersburg | | 3 | | 8 | | | 8 | | | Pike County, Indiana |
| | | Harding Street | | 3 | | 53 | | | 43 | | | Marion County, Indiana |
| | | Total | | 6 | | 61 | | | 51 | | | |
| Grand Total | | 19 | | 3,705 | | | 3,560 | | | |
|
(1) We have 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”).
Net electrical generation during 2020 at our Petersburg, Eagle Valley, Harding Street and Georgetown plants accounted for approximately 47.0%, 38.9%, 13.1% and 1.0%, respectively, of our total net generation. Even though the capacity of our Harding Street plant far exceeds that of the Eagle Valley plant, we expect the generation at Eagle Valley to continue to far exceed that of Harding Street due to the relatively lower cost to produce electricity at Eagle Valley.
Our electric system is directly interconnected with the electric systems of Indiana Michigan Power Company, Vectren Corporation, Hoosier Energy Rural Electric Cooperative, Inc., and the electric system jointly owned by Duke Energy Indiana, Indiana Municipal Power Agency and Wabash Valley Power Association, Inc. Our transmission
system includes 458 circuit miles of 345,000 volt lines and 408 circuit miles of 138,000 volt lines. The distribution system consists of 5,059 circuit miles of underground primary and secondary cables and 6,119 circuit miles of overhead primary and secondary wire. Underground street lighting facilities include 777 circuit miles of underground cable. Also included in the system are 139 substations. Depending on the voltage levels at the substation, some substations may be considered both a bulk power substation and a distribution substation. There are 73 bulk power substations and 114 distribution substations; 52 substations are considered both bulk power and distribution substations.
All critical facilities we own are well maintained, in good condition and meet our present needs. Our plants generally have enough capacity to meet the daily needs of our retail customers when all of our units are available. During periods when our generating capacity is not sufficient to meet our retail demand, or when MISO provides a lower cost alternative to some of our available generation, we purchase power on the MISO wholesale market.
SEASONALITY
The electric utility business is affected by seasonal weather patterns throughout the year and, therefore, the operating revenues and associated operating expenses are not generated evenly by month during the year. IPL’s business is not dependent on any single customer or group of customers. Additionally, retail kWh sales, after adjustments for weather variations, are impacted by changes in service territory economic activity and the number of retail customers we have, as well as DSM energy efficiency programs implemented by IPL. For the ten years ending in 2020, IPL’s retail kWh sales have decreased at a compound annual rate of 1.4%. This decrease also includes the impacts of COVID-19 in 2020. Conversely, the number of our retail customers grew at a compound annual rate of 0.9% during that same period. Going forward, we expect flat or modest retail kWh sales growth annually, which will continue to be negatively impacted by our DSM programs. Please see Note 2, “Regulatory Matters – DSM” to the Financial Statements for more details. IPL’s electricity sales for 2016 through 2020 are set forth in the table of statistical information included at the end of this section.
Weather and Weather-Related Damage in our Service Area
Extreme high and low temperatures in our service area have a significant impact on revenues as many of our retail customers use electricity to power air conditioners, electric furnaces and heat pumps. The impact is partially mitigated by our declining block rate structure, which 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. The effect is generally more significant with high temperatures than with low temperatures as many of our customers use gas heat. In addition, before the 2018 Base Rate Order was implemented on December 5, 2018, IPL had the opportunity to share 50% of wholesale margins above a stated benchmark, so extreme temperatures generally provided additional income by selling power on the wholesale market (see below). However, beginning December 5, 2018, 100% of annual wholesale margins earned above (or below) the benchmark of $16.3 million are passed back (or charged) to customer rates through a rider.
Storm activity can also have an adverse effect on our operating performance. Severe storms often damage transmission and distribution equipment, thereby causing power outages, which reduce revenues and increase repair costs. Partially mitigating this impact is IPL’s ability to timely recover certain operation and maintenance repair costs related to severe storms. In our 2016 and 2018 Base Rate Orders, we received approval for a storm damage restoration reserve account that allows us to defer major storm costs over a benchmark that meet certain criteria considered to be severe, for recovery in a future basic rate proceeding. Because IPL's basic rates and charges include an annual amount for recovery for such severe storm costs, if actual severe storm costs are below that level, IPL will record a regulatory liability for the shortfall to be passed to customers in a future basic rate proceeding. Conversely, if IPL's major storm costs are above the level in basic rates, IPL will defer the excess for future recovery.
MISO OPERATIONS
IPL is one of many transmission system owner members in MISO. MISO is a regional transmission organization which maintains functional control over the combined transmission systems of its members and manages one of the largest energy and ancillary services markets in the U.S. MISO policies are developed, in part, through a stakeholder process in which we are an active participant. We focus our participation in this process primarily on items that could impact our customers, shared cost of transmission expansion, resource adequacy, results of
operations, financial condition and cash flows. Additionally, we participate in the process to impact MISO and FERC policy by filing comments with MISO, the FERC, or the IURC.
MISO has functional control of our transmission facilities and our transmission operations are integrated with those of MISO. Our participation and authority to sell wholesale power at market-based rates are subject to the FERC jurisdiction. Transmission service over our facilities is provided through MISO’s tariff.
As a member of MISO, we offer our available electricity production of each of our generation assets into the MISO day-ahead and real-time markets. MISO dispatches generation assets in economic order considering transmission constraints and other reliability issues to meet the total demand in the MISO region. MISO settles hourly offers and bids based on locational marginal prices, which is pricing for energy at a given location based on a market clearing price that takes into account physical limitations, generation and demand throughout the MISO region. MISO evaluates the market participants’ energy offers and demand bids optimizing for energy and ancillary services products to economically and reliably dispatch the entire MISO system. The IURC has authorized IPL to recover its ongoing costs from MISO and such costs are being recovered per specific rate orders. The unamortized balance of total MISO costs deferred as regulatory assets was $69.9 million and $80.4 million as of December 31, 2020 and 2019, respectively.
We have preserved our right to withdraw from MISO by tendering our Notice of Withdrawal (subject to the FERC and the IURC approval). We have made no decision to seek withdrawal from MISO at this time. We will continue to assess the relative costs and benefits of being a MISO member, as well as actively advocate for our positions through the existing MISO stakeholder process and in filings with the FERC or IURC.
See also Note 2, “Regulatory Matters” to the Financial Statements for additional details on the regulatory oversight of the FERC and the IURC.
REGULATION
General
IPL is a regulated public utility principally engaged in providing electric service to the Indianapolis metropolitan area. An inherent business risk facing any regulated public utility is that of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Indiana, as it is elsewhere. We attempt to work cooperatively with regulators and those who participate in the regulatory process, while remaining vigilant in protecting or asserting our legal rights in the regulatory process. We take an active role in addressing regulatory policy issues in the current regulatory environment. Additionally, there is increased activity by environmental regulators, in particular under a President Biden administration, which has had and will continue to have a significant impact on our operations and financial statements for the foreseeable future. We maintain our books and records consistent with GAAP reflecting the impact of regulation. See Note 1, “Overview and Summary of Significant Accounting Policies” to the Financial Statements.
Retail Ratemaking
IPL’s tariff rates for electric service to retail customers consist of basic rates and charges which are set and approved by the IURC after public hearings. In addition, IPL’s rates include various adjustment mechanisms including, but not limited to: (i) a rider to reflect changes in fuel and purchased power costs to meet IPL’s retail load requirements, referred to as the FAC, (ii) a rider for the timely recovery of costs (including a return) incurred to comply with environmental laws and regulations, referred to as the ECCRA, (iii) a rider to reflect changes in ongoing MISO costs, referred to as the Regional Transmission Organization Adjustment, (iv) a rider to reflect changes in net capacity sales above and below an established annual benchmark of $11.3 million (beginning December 5, 2018), referred to as the Capacity Adjustment, (v) a rider for passing through to customers wholesale sales margins above and below an established annual benchmark of $16.3 million (beginning December 5, 2018), referred to as the Off-System Sales Margin Adjustment, (vi) a rider for a return on and of investments for eligible TDSIC improvements, and (vii) cost recovery, lost margin recoveries and performance incentives from our DSM programs. Each of these tariff rate components may be set and approved by the IURC in separate proceedings at different points in time (currently the FAC proceedings occur on a quarterly basis and IPL's other rider proceedings all occur on an annual basis). These components function somewhat independently of one another, but the overall structure of our rates and charges would be subject to review at the time of any review of our basic rates and charges.
For additional discussion of the regulatory environment related to our business, see the discussion in Note 2, “Regulatory Matters” to the Financial Statements, which is incorporated by reference herein.
ENVIRONMENTAL MATTERS
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, suspension or revocation of permits and/or facility shutdowns. There can be no assurance that we have been or will be at all times in full compliance with such laws, regulations and permits.
From time to time, we are subject to enforcement actions for claims of noncompliance with environmental laws and regulations. IPL cannot assure that it will be successful in defending against any claim of noncompliance. However, we do not believe any currently open environmental investigations will result in fines material to our results of operations, financial condition and cash flows.
Under certain environmental laws, we could be held responsible for costs relating to contamination at our past or present facilities and at third-party waste disposal sites. We could also be held liable for human exposure to hazardous substances or for other environmental damage. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances may adversely affect our business, results of operations, financial condition and cash flows. A discussion of the legislative and regulatory initiatives most likely to affect us follows.
MATS
In April 2012, the EPA’s rule to establish maximum achievable control technology standards for hazardous air pollutants regulated under the CAA emitted from coal and oil-fired electric utilities, known as “MATS”, became effective. IPL management developed and implemented a plan, which was approved by the IURC, to comply with this rule and all four Petersburg units have been and remain in compliance with the MATS rule since applicable deadlines.
In June 2015, the U.S. Supreme Court remanded MATS to the D.C. Circuit due to the EPA’s failure to consider costs before deciding to regulate power plants under Section 112 of the CAA and subsequently remanded MATS to the EPA without vacatur. The EPA published final appropriate and necessary findings in the Federal Register in April 2016, which was followed by several lawsuits appealing that finding in the D.C. Circuit, which ordered that these challenges be held in abeyance as the EPA reconsidered the finding. On May 22, 2020, the EPA published a final finding that it is not “appropriate and necessary” to regulate hazardous air pollutant emissions from coal- and oil-fired electric generating units (EGUs), but that the EPA would not remove the source category from the CAA Section 112(c) list of source categories and would not change the MATS requirements. Several petitioners have filed for judicial review of the final finding. Further rulemakings and/or proceedings are possible; however, in the meantime, MATS remains in effect. We currently cannot predict the outcome of the regulatory or judicial process, or its impact, if any, on our MATS compliance planning or ultimate costs.
Waste Management and CCR
In the course of operations, our facilities generate solid and liquid waste materials requiring eventual disposal or processing. Waste materials generated at our electric power and distribution facilities include asbestos, CCR, oil, scrap metal, rubbish, small quantities of industrial hazardous wastes such as spent solvents, tree-and-land-clearing wastes and polychlorinated biphenyl contaminated liquids and solids. We endeavor to ensure that all our solid and liquid wastes are disposed of in accordance with applicable national, regional, state and local regulations. With the exception of CCR, we do not usually physically dispose of waste materials on our property. Instead, they are usually shipped off-site for final disposal, treatment or recycling. Some of our CCRs are beneficially used on-site and off-site, including as a raw material for production of wallboard, concrete or cement and as agricultural soil amendment, and some are disposed off-site in permitted disposal facilities. A small amount of CCR, which consists of bottom
ash, fly ash and air pollution control wastes, is disposed of at our Petersburg coal-fired power generation plant using engineered, permitted landfills.
The EPA's final CCR rule became effective in October 2015 (the "CCR Rule"). Generally, the rule regulates CCR as nonhazardous solid waste and establishes national minimum criteria for existing and new CCR landfills and existing and new CCR ash ponds, including location restrictions, design and operating criteria, groundwater monitoring, corrective action and closure requirements and post-closure care. On December 16, 2016, President Obama signed into law the Water Infrastructure Improvements for the Nation Act ("WIIN Act"), which includes provisions to implement the CCR rule through a state permitting program, or if the state chooses not to participate, a possible federal permit program. On February 20, 2020, the EPA published a proposed rule to establish a federal CCR permit program that would operate in states without approved CCR permit programs. If this rule is finalized before Indiana establishes a state-level CCR permit program, IPL could eventually be required to apply for a federal CCR permit from the EPA.
The EPA has indicated that they will implement a phased approach to amending the CCR Rule. On November 12, 2020, EPA published its final Part B Rule, and indicated that it would address the issue of beneficial use of CCR for closure of ash ponds that are subject to forced closure in a separate and future rulemaking. This future rulemaking could impact IPL's Petersburg plant's ability to use CCR for closure of ash ponds. On August 28, 2020, EPA published final amendments to the CCR Rule titled "A Holistic Approach to Closure Part A: Deadline to Initiate Closure," which amends certain regulatory provisions that govern CCR. The CCR Rule, current or proposed amendments to the CCR Rule, the results of groundwater monitoring data or the outcome of CCR-related litigation could have a material impact on our business, financial condition and results of operations. We would seek recovery of any resulting expenditures; however, there is no guarantee we would be successful in this regard. See Note 3, “Property, Plant and Equipment - ARO” to the Financial Statements of this Form 10-K for further information.
On December 2, 2020, the EPA published its final rule declining to impose industry-wide CERCLA financial responsibility requirements on facilities in the electric power generation, transmission, and distribution industries. Under Section 108(b) of CERCLA, the EPA must impose regulations on classes of facilities to ensure that such entities establish and maintain evidence of financial responsibility consistent with the degree and duration of risk associated with the production, transportation, treatment and storage of hazardous substances. The level of financial responsibility required is determined by the President, in his discretion. Some constituents of the CCR wastewater leachate detected through the CCR rule could, theoretically be classified as hazardous substances. The final rule maintains the status quo in the Electric Power Generation, Transmission and Distribution industry that such financial responsibility demonstrations are not required.
Environmental Wastewater Requirements
In November 2015, the EPA published its final ELG rule to reduce toxic pollutants discharged into waterways by steam-electric power plants through technology applications. The wastewater treatment technologies installed and operated for compliance with the requirements of the October 2012 NPDES permit described above and the dry bottom ash handling system installed for compliance with the CCR Rule at Petersburg meet the requirements of the final ELG rule. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded portions of the EPA’s 2015 ELG Rule related to legacy wastewaters and combustion residual leachate. On October 13, 2020, the EPA published final revisions to the 2015 ELG Rule related to flue gas desulfurization wastewater and bottom ash transport water, but did not address the portions of the ELG rule that were remanded by the U.S. Court of Appeals for the Fifth Circuit. Petitions have been filed for judicial review of the final revisions. It is too early to determine whether any outcome of litigation or current or future revisions to the ELG rule might have a material impact on our business, financial condition and results of operations.
In June 2016, the EPA published the final national chronic aquatic life criterion for the pollutant, Selenium, in fresh water. IPL’s NPDES permits may be updated to include Selenium water-quality based effluent limits based on a site-specific evaluation process, which includes determining if there is a reasonable potential to exceed the revised final Selenium water quality standards for the specific receiving water body utilizing actual and/or projected discharge information for the IPL generating facilities. As a result, it is not yet possible to predict the potential impacts of this criteria. However, if additional capital expenditures are necessary, they could be material. We would seek recovery of these capital expenditures; however, there is no guarantee we would be successful.
"Waters of the U.S." and “Navigable Waters Protection” Rules
In June 2015, the EPA and the U.S. Army Corps of Engineers ("the agencies") published a rule defining federal jurisdiction over waters of the U.S., known as the "Waters of the U.S." rule. This rule, which initially became effective in August 2015, could expand or otherwise change the number and types of waters or features subject to CWA permitting. However, after appealing the 2014 “Waters of the U.S.” rule on October 22, 2019, the agencies, on April 21, 2020, issued the final “Navigable Waters Protection” rule which again revised the definition of waters of the U.S. Petitions have been filed for judicial review of the final rule. It is too early to determine whether any outcome of litigation or current or future revisions to the ELG rule might have a material impact on our business, financial condition and results of operations.
Climate Change Legislation and Regulation
One byproduct of burning coal and other fossil fuels is the emission of GHGs, including CO2. We face certain risks related to existing and potential international, federal, state, regional and local GHG legislation and regulations, including risks related to increased capital expenditures or other compliance costs which could have a material adverse effect on our results of operations, financial condition and cash flows.
The possible impact of any existing or future international, federal, regional or state GHG legislation, regulations or proposals will depend on various factors, including but not limited to:
▪The geographic scope of legislation and/or regulation (e.g., international, federal, regional, state), which entities are subject to the legislation and/or regulation (e.g., electricity generators, load-serving entities, electricity deliverers, etc.), the enactment date of the legislation and/or regulation and the compliance deadlines set forth therein;
▪The level of reductions of GHGs being sought by the regulation and/or legislation (e.g., 10%, 20%, 50%, etc.) and the year selected as a baseline for determining the amount or percentage of mandated GHG reduction (e.g., 10% reduction from 1990 emission levels, 20% reduction from 2000 emission levels, etc.);
▪The legislative and/or regulatory structure (e.g., a GHG cap-and-trade program, a carbon tax, GHG emission limits, etc.);
▪In any cap-and-trade program, the mechanism used to determine the price of emission allowances or offsets to be auctioned by designated governmental authorities or representatives;
▪The price of offsets and emission allowances in the secondary market, including any price floors or price caps on the costs of offsets and emission allowances;
▪The operation of and emissions from regulated units;
▪The permissibility of using offsets to meet reduction requirements and the requirements of such offsets (e.g., type of offset projects allowed, the amount of offsets that can be used for compliance purposes, any geographic limitations regarding the origin or location of creditable offset projects), as well as the methods required to determine whether the offsets have resulted in reductions in GHG emissions and that those reductions are permanent (i.e., the verification method);
▪Whether the use of proceeds of any auction conducted by responsible governmental authorities is reinvested in developing new energy technologies, is used to offset any cost impact on certain energy consumers or is used to address issues unrelated to power;
▪How the price of electricity is determined, including whether the price includes any costs resulting from any new climate change legislation and the potential to transfer compliance costs pursuant to legislation, market or contract, to other parties;
▪Any impact on fuel demand and volatility that may affect the market clearing price for power;
▪The effects of any legislation or regulation on the operation of power generation facilities that may in turn affect reliability;
▪The availability and cost of carbon control technology;
▪Whether any federal legislation regulating GHG emissions will preclude the EPA from regulating GHG emissions under the CAA or preempt private nuisance suits or other litigation by third parties;
▪Any opportunities to change the use of fuel at the generation facilities or opportunities to increase efficiency; and
▪Our ability to recover any resulting costs from our customers and the timing of such recovery.
Except as noted in the discussion below, at this time, we cannot estimate the costs of compliance with existing, proposed or potential international, federal, state or regional GHG emissions reductions legislation or initiatives due in part to the fact that many of these proposals are in earlier stages of development and any final laws or regulations, if adopted, could vary drastically from current proposals. Any international, federal, state or regional
legislation adopted in the U.S. that would require the reduction of GHG emissions could have a material adverse effect on our business and/or results of operations, financial condition and cash flows.
The U.S. Congress has considered several different draft bills pertaining to GHG legislation, including comprehensive GHG legislation that would impact many industries and more limited legislation focusing only on the utility and electric generation industry. Although no legislation pertaining to GHG emissions has been passed to date by the U.S. Congress, similar legislation may be considered or passed by the U.S. Congress in the future. In addition, in the past Midwestern state governors (including the Governor of Indiana) and the premier of Manitoba, Canada committed to reduce GHG emissions through the implementation of a cap-and-trade program pursuant to the Midwestern Greenhouse Gas Reduction Accord. Though the participating states and province are no longer pursuing this commitment, similar applicable state or regional initiatives may be pursued in the future.
The final NSPS for CO2 emissions from new, modified and reconstructed fossil-fuel-fired power plants were published in the Federal Register on October 23, 2015. Several states and industry groups challenged the NSPS for CO2 in the D.C. Circuit Court. Pursuant to a court order issued in August 2017, the litigation is being held in indefinite abeyance pending further court order. On December 20, 2018, the EPA published proposed revisions to the final NSPS for new, modified and reconstructed coal-fired electric utility steam generating units. The EPA proposed that the Best System of Emissions Reduction (BSER) for these units is highly efficient generation that would be equivalent to supercritical steam conditions for larger units and sub-critical steam conditions for smaller units, and not partial carbon capture and sequestration (CCS), which had been the BSER for these units in the 2015 final NSPS. The EPA did not include revisions for natural-gas combined cycle or simple cycle units in the December 20, 2018 proposal. Challenges to the GHG NSPS are being held in abeyance at this time.
On August 31, 2018, the EPA published in the Federal Register proposed Emission Guidelines for Greenhouse Gas Emissions from Existing Electric Utility Generating Units, known as the ACE Rule. On July 8, 2019, the EPA published the final ACE Rule along with associated revisions to implementing regulations. The final ACE Rule established CO2 emission rules for existing power plants under CAA Section 111(d) and replaced the EPA's 2015 CPP. In accordance with the ACE rule, the EPA determined that heat rate improvement measures are the Best System of Emissions Reductions for existing coal-fired electric generating units. The final rule requires the State of Indiana to develop a State Plan to establish CO2 emission limits for designated facilities, including IPL Petersburg's coal-fired electric generating units. States have three years to develop their plans under the rule. On February 19, 2020, Indiana published a First Notice for the Indiana ACE Rule indicating that IDEM intends to determine the best system of emissions reductions and CO2 standards for affected units. Impacts remain largely uncertain because Indiana's State Plan has not yet been developed. On January 19, 2021, the D.C. Circuit vacated and remanded to EPA the ACE Rule, although the parties have an opportunity to request a rehearing at the D.C. Circuit or seek a review of the decision by the U.S. Supreme Court. The impact of this decision remains uncertain.
Due to the uncertainty of these regulations, and existing and potential associated litigation, it is too early to determine the potential impact, but any rule could have a material impact on our business, financial condition and results of operations. We would seek recovery of any resulting capital expenditures; however, there is no guarantee we would be successful in this regard.
On the international level, on December 12, 2015, 195 nations, including the U.S., finalized the text of an international climate change accord in Paris, France (the “Paris Agreement”), which agreement was signed and officially entered into on April 22, 2016. The Paris Agreement calls for countries to set their own GHG emissions targets, make these emissions targets more stringent over time and be transparent about the GHG emissions reporting and the measures each country will use to achieve its GHG emissions targets. A long-term goal of the Paris Agreement is to limit global temperature increase to well below two degrees Celsius from temperatures in the pre-industrial era. The U.S. withdrawal from the Paris Agreement became effective on November 4, 2020. However, on January 20, 2021, President Biden signed and submitted an instrument for the U.S. to rejoin the Paris Agreement, which will become effective on February 19, 2021.
Based on the above, there is some uncertainty with respect to the impact of GHG rules on IPL. The NSPS will not require us to comply with an emissions standard until we construct a new electric generating unit. We do not have any planned major modifications of an existing source or plans to construct a new major source which are expected to be subject to these regulations at this time. Furthermore, the EPA, states and other utilities are still evaluating potential impacts of the GHG regulations in our industry. In light of these uncertainties, we cannot predict the impact of the EPA’s current and future GHG regulations on our consolidated results of operations, cash flows, and financial condition, but it could be material.
Unit Retirements and Replacement Generation
Four coal-fired units at IPL’s Eagle Valley Station site in Indiana were retired in April 2016. IPL replaced this generation with a 671 MW CCGT at the Eagle Valley site, which was completed in April 2018, at a cost of $597 million. IPL also completed a refuel of its Harding Street Station Units 5, 6 and 7 from coal to natural gas (approximately 610 total MW net capacity) at a total cost of approximately $105 million. The Harding Street 5 and 6 refueling projects were completed in December 2015 and the Harding Street 7 refuel was completed in the second quarter of 2016. The costs to build and operate the CCGT and the Harding Street Station refueling projects, including a return, are reflected in the basic rates and charges from IPL's 2018 Base Rate Order effective on December 5, 2018.
In December 2019, IPL filed its IRP, which describes IPL's Preferred Resource Portfolio for meeting generation capacity needs for serving its retail customers over the next several years, which includes plans to retire approximately 630 MW of coal-fired generation at Petersburg Units 1 and 2 in 2021 and 2023, respectively. See Note 2, "Regulatory Matters - IRP Filing" to the Financial Statements for additional details.
New Source Review and Other CAA NOVs
See Note 10, “Commitments and Contingencies - Environmental Loss Contingencies - New Source Review and other CAA NOVs” to the Financial Statements for additional details.
CSAPR
CSAPR, which became effective in January 2015, addresses the "good neighbor" provision of the CAA, which prohibits sources within each state from emitting any air pollutant in an amount which will contribute significantly to any other state’s nonattainment, or interference with maintenance of, any NAAQS. The CSAPR is implemented, in part, through a market-based program under which compliance may be achievable through the acquisition and use of emissions allowances created by the EPA. In October 2016, the EPA published a final rule to update the CSAPR to address the 2008 ozone NAAQS (“CSAPR Update Rule”). The CSAPR Update Rule found that NOx ozone season emissions in 22 states (including Indiana) affect the ability of downwind states to attain and maintain the 2008 ozone NAAQS, and accordingly, the EPA issued federal implementation plans that both generally provide updated CSAPR NOx ozone season emission budgets for electric generating units within these states and that implement these budgets through modifications to the CSAPR NOx ozone season allowance trading program. Implementation began in the 2017 ozone season (May through September 2017). Affected facilities receive fewer ozone season NOx allowances in 2017 and later, possibly resulting in the need to purchase additional allowances. Additionally, on September 13, 2019, the D.C. Circuit remanded a portion of the October 2016 CSAPR Update Rule to the EPA. In December 2018, EPA determined that the 2016 CSAPR Update Rule fully satisfied 20 states (including Indiana) good neighbor obligations with respect to the 2008 Ozone NAAQS (“CSAPR Close-Out Rule”), obviating the need for EPA to promulgate Federal Implementation Plans (FIPs) in these states. In October 2019, the D.C. Circuit vacated and remanded the CSAPR Close-Out Rule. On July 28, 2020, the D.C. Circuit ordered EPA to issue FIPs addressing seven states’ (including Indiana) outstanding 2008 NAAQS “good neighbor” obligations by March 15, 2021. On October 30, 2020, EPA published a proposed rule addressing 21 states', including Indiana's, outstanding "good neighbor" obligations with respect to the 2008 ozone NAAQS. The proposed rule could result in affected facilities receiving fewer ozone season NOx allowances as soon as the 2021 Ozone Season.
At this time we cannot predict what the impact of these standards and requirements will be in future years, or if there will be an impact resulting from future rulemakings or legal outcomes, but any such impact could be material to our business, financial condition or results of operation.
NAAQS
Under the CAA, the EPA sets NAAQS for six criteria pollutants considered harmful to public health and the environment, including particulate matter, NOx, ozone and SO2, which result from fossil-fuel combustion. Areas meeting the NAAQS are designated attainment areas while those that do not meet the NAAQS are considered nonattainment areas. Each state must develop a plan to bring nonattainment areas into compliance with the NAAQS, which may include imposing operating limits on individual plants. The EPA is required to review NAAQS at five-year intervals.
Ozone. In October 2015, the EPA published a final rule lowering the NAAQS for ozone to 70 parts per billion from 75 parts per billion. The EPA published its final designations for the areas in which our operations are located on November 16, 2017. None of our operations are located in areas designated as nonattainment.
In March 2018, the state of New York submitted a petition to the EPA pursuant to Section 126 of the CAA requesting new limitations on NOx emissions from dozens of upwind generating stations, including IPL's Petersburg, Harding Street, and Eagle Valley stations on the basis that they are contributing significantly to New York’s ability to meet the 2008 ozone NAAQS. On July 14, 2020, the D.C. Circuit Court vacated and remanded EPA’s denial of the petition. EPA must now issue a new decision based on the Court’s decision. If the Section 126 petition is ultimately granted, our units could be subject to additional requirements, which could be material. We would seek recovery of any resulting capital expenditures; however, there is no guarantee we would be successful.
Fine Particulate Matter. In 2013, the EPA published the 2012 annual PM2.5 standard of 12 micrograms per cubic meter of air and the 24-hour PM2.5 standard of 35 micrograms per cubic meter of air. In 2015, the EPA published its final attainment designations for the 2012 PM2.5 standard. In addition to the PM2.5 standard, there is also a 24-hour PM10 standard of 150 micrograms per cubic meter of air. No IPL operations are currently located in nonattainment areas. On December 18, 2020, EPA issued a final rule retaining current particulate matter standards based on its required routine review of such standards. Petitioners subsequently filed for judicial review.
SO2. In 2010, a new one-hour SO2 primary NAAQS became effective. In 2013, the EPA published in the Federal Register its final designations, which include portions of Marion, Morgan, and Pike counties as nonattainment with respect to the one-hour SO2 standard. In 2015, IDEM published its final rule establishing reduced SO2 limits for IPL facilities in accordance with the new one-hour standard, for the areas in which IPL’s Harding Street, Petersburg, and Eagle Valley generating stations operate, with compliance required by January 1, 2017. Improvements to the existing FGD systems at Petersburg station were required to meet the emission limits imposed by the rule. The rule has not impacted IPL’s Eagle Valley or Harding Street generating stations as these facilities ceased coal combustion in advance of the compliance date.
On May 21, 2020, the EPA finalized the redesignation of Marion County, the county in which IPL Harding Street is located, to attainment of the SO2 NAAQS. On July 14, 2020, the EPA proposed redesignation of Morgan County, the county in which IPL Eagle Valley is located, to attainment of the SO2 NAAQS. IDEM has imposed additional SO2 limits on Petersburg and on August 17, 2020, EPA approved those limits as part of a SIP revision concluding that Indiana has appropriately demonstrated that the plan provides for attainment of the 2010 SO2 NAAQS.
Based on these current and potential national ambient air quality standards, the state of Indiana is required to determine whether certain areas within the state meet the NAAQS. With respect to Marion, Morgan and Pike Counties, as well as any other areas determined to be in "nonattainment," the state of Indiana will be required to modify its State Implementation Plan to detail how the state will regain its attainment status. As part of this process, it is possible that the IDEM or the EPA may require reductions of emissions from our generating stations to reach attainment status for ozone, fine particulate matter or SO2. At this time, we cannot predict what the impact will be to IPL with respect to these new ambient standards, but it could be material.
Cooling Water Intake Regulations
We use water as a coolant at our generating stations. Under the CWA, cooling water intake structures are required to reflect the BTA for minimizing adverse environmental impact. In 2014, the EPA's final standards became effective to protect fish and other aquatic organisms drawn into cooling water systems at large power plants and other facilities. These standards, based on Section 316(b) of the CWA, require affected facilities to choose amongst seven BTA options to reduce fish impingement. In addition, certain facilities must conduct studies to assist permitting authorities to determine whether and what site-specific controls, if any, would be required to reduce entrainment of aquatic organisms. It is possible this process, which includes permitting and public input, could result in the need to install closed-cycle cooling systems (closed-cycle cooling towers) or other technology. Finally, the standards require that new units added to an existing facility must reduce both impingement and entrainment that achieves one of two alternatives under national BTA standards. IPL’s NPDES permits will be updated with the requirements of this rule, including any source-specific requirements arising from the evaluation process described above. As a result, it is not yet possible to predict the total impacts of this final rule, including any challenges to such final rule and the outcome of any such challenges. However, if additional capital expenditures are necessary, they could be material. We would seek recovery of these capital expenditures; however, there is no guarantee we would be successful.
CWA - Regulation of Water Discharge
IPL and other utilities at times apply the Nationwide Permit 12 (NWP 12) issued by the U.S. Army Corps of Engineers (Corps) in completing transmission and distribution projects that may involve waters of the U.S. NWP 12 is the nationwide permit for Utility Line Activities, specifically activities required for construction and maintenance, provided the activity does not result in the loss of greater than ½-acre of waters of the U.S. for each single and complete project.
On April 15, 2020, in a proceeding involving the construction of the Keystone XL pipeline, the U.S. District Court for the District of Montana (Montana District Court) vacated NWP 12 and enjoined its application. On April 27, 2020, the Corps moved for the Montana District Court to stay pending appeal those portions of the April 15, 2020 order that vacate NWP 12 and enjoin its application. In the alternative, the Corps asked the Montana District Court to stay its vacatur and injunction as they relate to anything other than the Keystone XL pipeline. On May 11, 2020, following request from the Corps, the Montana District Court amended its order to vacate NWP 12 only for oil and gas pipeline construction projects, allowing electric utility transmission and distribution projects to continue. On May 13, the Corps appealed the Montana District Court decision with the Ninth Circuit Court and requested a stay. On May 28, 2020, the Ninth Circuit denied a motion to stay. On June 16, 2020, the Solicitor General, on behalf of the U.S. Army Corps of Engineers, filed an application with the U.S. Supreme Court asking the Court to stay the district court order that vacated and enjoined the Corps from issuing authorizations under NWP 12 as it relates to the construction of new oil and gas pipelines. On July 6, 2020, the U.S. Supreme Court stayed the district court order, allowing the use of NWP 12 for oil and gas pipeline projects except for Keystone XL. On January 13, 2021, the U.S. Army Corps of Engineers published a final rulemaking for the reissuance and modification of NWPs, including NWP 12 relating exclusively to the construction of oil or natural gas pipelines and the new NWP 57 for construction of electric or telecommunication utility lines. It is too early to determine whether future outcomes or decisions related to this matter may have a material impact on our business, financial condition or results of operations.
On April 23, 2020, the U.S. Supreme Court issued a decision in the Hawaii Wildlife Fund v. County of Maui case related to whether a CWA permit is required when pollutants originate from a point source but are conveyed to navigable waters through a nonpoint source such as groundwater. The Court held that discharges to groundwater require a permit if the addition of the pollutants through groundwater is the functional equivalent of a direct discharge from the point source into navigable waters. On December 10, 2020, EPA published a Notice of Availability of draft guidance memorandum addressing how the Supreme Court's decision applies to NPDES permits. It is too early to determine whether this decision may have a material impact on our business, financial condition or results of operations.
Biden Administration Actions Affecting Environmental Regulations
On January 20, 2021, President Biden issued an Executive Order (EO) titled “Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis” directing Agencies to, among other tasks, review regulations issued under the prior Administration to determine whether they should be suspended, revoked, or revised. As provided for by the EO, EPA submitted a letter to DOJ seeking to obtain abeyances or stays of proceedings in pending litigation that seeks review of regulations promulgated during the Trump Administration. The Biden Administration also issued a Memorandum titled “Regulatory Freeze Pending Review” directing Agencies to refrain from proposing or issuing any rules until the Biden Administration has reviewed and approved those rules. These actions may have an impact on regulations that may affect our business, financial condition, or results of operations.
Summary
Environmental laws and regulations presently require us to incur material capital expenditures and operating costs. See “Capital Expenditures” discussion in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity - Capital Requirements" for additional details regarding our environmental capital projects. We would expect to seek recovery of both capital and operating costs related to such compliance, although there can be no assurances that we would be successful. In addition, environmental laws and regulations are complex, change frequently and have tended to become more stringent over time. As a result, our operating expenses and continuing capital expenditures associated with environmental matters may increase. More stringent standards may also limit our operating flexibility and have a negative impact on our wholesale volumes and margins. Depending on the level and timing of recovery allowed by the IURC, these costs
could materially and adversely affect our results of operations, financial condition and cash flows. We may seek recovery of any operating or capital expenditures; however, there can be no assurances that we would be successful.
ENERGY SUPPLY
Approximately 48% of the total kWh we generated in 2020 was from coal as compared to approximately 58% and 69% in 2019 and 2018, respectively. Our existing coal contracts provide for approximately 96% of our current projected requirements in 2021 and approximately 28% in total for the three-year period ending December 31, 2023. We have long-term coal contracts with two suppliers.
Pricing provisions in some of our long-term coal contracts allow for price changes under certain circumstances. Substantially all of our coal is currently mined in the state of Indiana, and all of our coal supply is mined by unaffiliated suppliers or third parties. Our goal is to carry a 25-50 day system supply of coal to offset unforeseen occurrences such as equipment breakdowns and transportation or mine delays. Our present inventory is within our target range.
Natural gas and fuel oil provided the remaining kWh generation in 2020. Natural gas is used in our steam boiler units at Harding Street Station, our CCGT at Eagle Valley and combustion turbines. IPL sources natural gas from the wholesale market delivered to our plants by interstate pipeline and local distribution companies. IPL holds firm pipeline transportation commitments on Texas Gas Transmission interstate pipeline and has firm redelivery contracts with the local distribution companies that serve IPL plants. IPL has established physical natural gas hedges for firm supply of approximately 96% of the expected consumption at Eagle Valley during the 2021 winter period, which price off the daily natural gas index for the respective physical hubs. We do not maintain a natural gas inventory; however, our experience has been that natural gas is readily available at liquid supply points on interstate pipelines, and we expect this availability to continue in the future. Fuel oil is used for start-up and flame stabilization in coal-fired generating units, as primary fuel in two older combustion turbines, and as an alternate fuel in two other combustion turbines.
As a result of the completion of the CCGT at the Eagle Valley Station in April 2018, the Harding Street Station refueling projects and the retirement of coal-fired units at Eagle Valley in the second quarter of 2016, we have experienced and expect to continue experiencing an increase in the percentage of generation from natural gas. The generation fuel mix from coal and natural gas will continue to change as the relative prices of the commodities change. Currently, approximately 52% of the total kWh we generate is from natural gas and approximately 48% is from coal.
Additionally, we meet the electricity demands of our retail customers with energy purchased under power purchase agreements and by purchases in MISO. We are committed under long-term power purchase agreements to purchase all energy from two wind projects that have a combined maximum output capacity of 300 MW. We have 96.4 MW of solar-generated electricity in our service territory under long-term contracts, of which 95.9 MW was in operation as of December 31, 2020. We also purchase up to 8 MW of energy from a combined heat and power facility located in Indianapolis, Indiana.
Total electricity sold to our retail customers in 2020 came from the following sources: 46.5% from IPL-owned natural gas-fired units, 37.8% from IPL-owned coal-fired steam generation, and 15.7% from power purchased under power purchase agreements (primarily wind and solar) and from the wholesale power market.
STATISTICAL INFORMATION ON OPERATIONS
The following table of statistical information presents additional data on our operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Revenues (In Thousands): | | | | | | | | | | |
| Residential | | $ | 575,329 | | | $ | 597,809 | | | $ | 592,625 | | | $ | 541,055 | | | $ | 532,564 | |
| Small commercial and industrial | | 194,904 | | | 215,878 | | | 217,896 | | | 205,473 | | | 208,928 | |
| Large commercial and industrial | | 500,208 | | | 564,216 | | | 565,720 | | | 561,194 | | | 557,491 | |
| Public lighting | | 9,257 | | | 7,335 | | | 9,797 | | | 9,906 | | | 10,023 | |
Other(1) | | 14,402 | | | 14,136 | | | 10,427 | | | 9,967 | | | 8,610 | |
| Retail electric revenues | | 1,294,100 | | | 1,399,374 | | | 1,396,465 | | | 1,327,595 | | | 1,317,616 | |
| Wholesale | | 46,482 | | | 68,474 | | | 38,789 | | | 8,574 | | | 15,804 | |
| Miscellaneous | | 12,403 | | | 13,795 | | | 15,251 | | | 13,419 | | | 14,010 | |
| Total revenues | | $ | 1,352,985 | | | $ | 1,481,643 | | | $ | 1,450,505 | | | $ | 1,349,588 | | | $ | 1,347,430 | |
kWh Sales (In Millions): | | | | | | | | | | |
| Residential | | 5,115 | | | 5,200 | | | 5,335 | | | 4,915 | | | 5,152 | |
| Small commercial and industrial | | 1,709 | | | 1,840 | | | 1,907 | | | 1,800 | | | 1,850 | |
| Large commercial and industrial | | 5,839 | | | 6,283 | | | 6,558 | | | 6,448 | | | 6,620 | |
| Public lighting | | 30 | | | 42 | | | 51 | | | 53 | | | 57 | |
| Sales – retail customers | | 12,693 | | | 13,365 | | | 13,851 | | | 13,216 | | | 13,679 | |
| Wholesale | | 1,866 | | | 2,718 | | | 1,241 | | | 268 | | | 507 | |
| Total kWh sold | | 14,559 | | | 16,083 | | | 15,092 | | | 13,484 | | | 14,186 | |
| Retail Customers at End of Year: | | | | | | | | | | |
| Residential | | 451,735 | | | 448,210 | | | 443,184 | | | 439,741 | | | 435,622 | |
| Small commercial and industrial | | 54,253 | | | 53,751 | | | 49,239 | | | 48,684 | | | 48,204 | |
| Large commercial and industrial | | 4,567 | | | 4,635 | | | 4,680 | | | 4,705 | | | 4,763 | |
| Public lighting | | 986 | | | 980 | | | 976 | | | 959 | | | 955 | |
| Total retail customers | | 511,541 | | | 507,576 | | | 498,079 | | | 494,089 | | | 489,544 | |
| | | | | | | | | | |
(1) Other retail revenue includes miscellaneous charges to customers.
HOW TO CONTACT IPALCO AND SOURCES OF OTHER INFORMATION
Our principal executive offices are located at One Monument Circle, Indianapolis, Indiana 46204, and our telephone number is (317) 261-8261. Our website address is www.iplpower.com. The information on our website is not incorporated by reference into this report. The SEC maintains an internet website that contains this report and other information that we file electronically with the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Investors should consider carefully the following risk factors that could cause our business, operating results and financial condition to be materially adversely affected. We routinely encounter and address risks, some of which may cause our future results to be materially different than we presently anticipate. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our business or financial performance. The categories of risk we have identified in "Item 1A. Risk Factors" include risks associated with our operations, governmental regulation and laws, our indebtedness and financial condition. These risk factors should be read in conjunction with the other detailed information concerning IPALCO and IPL set forth in the Notes to the Financial Statements and in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. The risks and uncertainties described below are not the only ones we face.
RISKS ASSOCIATED WITH OUR OPERATIONS
Our electric generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and/or maintenance expenses, increased fuel or purchased power costs and other significant liabilities for which we may not have adequate insurance coverage.
We operate coal, oil and natural gas generating facilities, which involve certain risks that can adversely affect energy costs, output and efficiency levels. These risks include:
•unit or facility shutdowns due to a breakdown or failure of equipment or processes;
•increased prices for fuel and fuel transportation as existing contracts expire or as such contracts are adjusted through price re-opener provisions or automatic adjustments;
•disruptions in the availability or delivery of fuel and lack of adequate inventories;
•shortages of or delays in obtaining equipment;
•loss of cost-effective disposal options for solid waste generated by the facilities;
•accidents and injuries;
•reliability of our suppliers;
•inability to comply with regulatory or permit requirements;
•operational restrictions resulting from environmental or permit limitations or governmental interventions;
•construction delays and cost overruns;
•disruptions in the delivery of electricity;
•labor disputes or work stoppages by employees;
•the availability of qualified personnel;
•events occurring on third party systems that interconnect to and affect our system;
•operator error; and
•catastrophic events.
The above risks could result in unscheduled plant outages, unanticipated operation and/or maintenance expenses, increased capital expenditures and/or increased fuel and purchased power costs, any of which could have a material adverse effect on our results of operations, financial condition and cash flows. These risks are partially mitigated by our ability to generally pass fuel and purchased power costs through to customers through the Fuel Adjustment Charge (“FAC”). If unexpected plant outages occur frequently and/or for extended periods of time, this could result in adverse regulatory action.
Additionally, as a result of the above risks and other potential hazards associated with the power generation industry, we may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. Power generation involves hazardous activities, including acquiring, transporting and unloading fuel, operating large pieces of rotating equipment and delivering electricity to transmission and distribution systems. The control and management of these risks depend upon adequate development and training of personnel and on the existence of operational procedures, preventative maintenance plans and specific programs supported by quality control systems which reduce, but do not eliminate, the possibility of the occurrence and impact of these risks.
The hazardous activities described above can also cause significant personal injury or loss of life, severe damage to and destruction of property, plant and equipment, contamination of, or damage to, the environment and suspension of operations. The occurrence of any one of these events may result in us being named as a defendant in lawsuits asserting claims for substantial damages, environmental cleanup costs, personal injury and fines and/or penalties. We maintain an amount of insurance protection that we believe is adequate, but there can be no assurance that our insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. A successful claim for which we are not fully insured could adversely affect our results of operations, financial condition and cash flows. In addition, except for our large substations, transmission and distribution assets are not covered by insurance and are considered to be outside the scope of property insurance. Further, due to rising insurance costs and changes in the insurance markets, we cannot provide assurance that insurance coverage will continue to be available on terms similar to those presently available to us or at all. Any such losses not covered by insurance could have a material adverse effect on our financial condition, results of operations and cash flows.
The current outbreak of the novel coronavirus, or COVID-19, has adversely affected, and it or the future outbreak of any other highly infectious or contagious diseases could materially and adversely affect, our generation facilities, transmission and distribution systems, results of operations, financial condition and cash flows. Further, the spread of the COVID-19 outbreak has caused disruptions in the U.S. and global economy and financial markets and could potentially create widespread business continuity issues of an as yet unknown magnitude and duration.
In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. COVID-19 has since spread to over 150 countries, including every state in the U.S. On March 11, 2020 the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020 the U.S. declared a national emergency with respect to COVID-19.
The outbreak of COVID-19 has impacted global economic activity, caused significant volatility and negative pressure in financial markets and reduced the demand for energy in our service territory. In addition to reduced revenues and lower margins resulting from decreased energy demand within our service territory, we also have incurred and expect to continue to incur expenses relating to COVID-19, including expenses relating to events outside of our control. 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 as well as restricting travel. In addition to triggering a period of global economic slowdown or a global recession, COVID-19 or another pandemic could have material and adverse effects on our results of operations, financial condition and cash flows due to, among other factors:
•further decline in customer demand as a result of general decline in business activity;
•further destabilization of the markets and decline in business activity negatively impacting our customer growth or the number of customers in our service territory as well as our customers’ ability to pay for our services when due (or at all);
•delay or inability in obtaining regulatory actions and outcomes that could be material to our business, including for recovery of COVID-19 related expenses and losses, such as uncollectible customer amounts, and the review and approval of our applications, rates and charges by the IURC;
•difficulty accessing the capital and credit markets on favorable terms, or at all, and a severe disruption and instability in the global financial markets, or deteriorations in credit and financing conditions which could affect our access to capital necessary to fund business operations or address maturing liabilities on a timely basis;
•negative impacts on the health of our essential personnel, especially if a significant number of them are affected, and on our operations as a result of implementing stay-at-home, quarantine and other social distancing measures;
•a deterioration in our ability to ensure business continuity during a disruption, including increased cybersecurity attacks related to the work-from-home environment;
•delays or inability to access, transport and deliver fuel or other materials to our facilities due to restrictions on business operations or other factors affecting us and our third-party suppliers;
•the inability to hedge the entire exposure of our operations from availability and cost of fuel and other commodities that experience significant volatility;
•delays or inability to access equipment or the availability of personnel to perform planned and unplanned maintenance, which can, in turn, lead to disruption in operations;
•delays or inability in achieving our financial goals, growth strategy and digital transformation; and
•delays in the implementation of expected rules and regulations.
We continue to review and modify our plans as conditions change. Despite our efforts to manage and remedy these impacts to the Company, their ultimate impact also depends on factors beyond our knowledge or control, including the duration and severity of this outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects.
COVID-19 continues to present material uncertainty which could materially and adversely affect our generation facilities, transmission and distribution systems, results of operations, financial condition and cash flows. To the extent COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
We may be negatively affected by a lack of growth or a decline in the number of customers or in customer usage.
Customer growth and customer usage are affected by a number of factors outside our control, such as energy efficiency and DSM measures, population changes, job and income growth, housing starts, new business formation and the overall level of economic activity. A lack of growth, or a decline, in the number of customers in our service territory or in customer demand for electricity could have a material adverse effect on our results of operations, financial condition and cash flows and may cause us to fail to fully realize anticipated benefits from investments and expenditures.
The availability and cost of fuel and other commodities have experienced and could continue to experience significant volatility and we may not be able to hedge the entire exposure of our operations from availability and price volatility. In addition, a significant amount of our electricity is generated by coal.
Our business is sensitive to changes in the price of coal, natural gas, purchased power and emissions allowances. In addition, changes in the prices of steel, copper and other raw materials can have a significant impact on our costs. We also are dependent on purchased power, in part, to meet our seasonal planning reserve margins. Any changes in fuel prices could affect the prices we charge, our operating costs and our competitive position with respect to our products and services.
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 FAC every three months to recover our estimated fuel costs, which may be above or below the levels included in our basic rates and charges. In addition, we may generally recover the energy portion of our purchased power costs in these quarterly FAC proceedings subject to a benchmark (please see Note 2, “Regulatory Matters – FAC and Authorized Annual Jurisdictional Net Operating Income” to the Financial Statements for additional details regarding the benchmark and the process to recover fuel costs). As part of this cost-recovery process, we must present evidence in each 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. If we are unable to timely or fully recover our fuel and purchased power costs, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Approximately 48% of the energy we produced in 2020 was generated by coal as compared to approximately 58% and 69% in 2019 and 2018, respectively. While we have approximately 28% in total of our current coal requirements for the three-year period ending December 31, 2023 under long-term contracts as of the date of this report, the balance is yet to be purchased and will be purchased under a combination of long-term contracts, short-term contracts and on the spot market. Prices can be highly volatile in both the short-term market and on the spot market. The coal market has experienced significant price volatility in the last several years. We are now in a global market for coal in which our domestic price is increasingly affected by international supply disruptions and demand balance. Coal exports from the U.S. have increased significantly at times in recent years. In addition, domestic developments such as government-imposed direct costs and permitting issues that affect mining costs and supply availability, and the variable demand of retail customer load and the performance of our generation fleet have an impact on our fuel procurement operations. In addition, pricing provisions in some of our coal contracts with terms of one year or more allow for price changes under certain circumstances.
Because of our dependence on coal to meet customer demand for electricity, our business and operations could be materially adversely affected by unexpected price volatility in the coal market, price increases pursuant to the provisions of certain of our long-term coal contracts, and the continued regulatory and political scrutiny of coal. As discussed below, regulators, politicians and non-governmental organizations have expressed concern about GHG emissions and are taking actions which, in addition to the potential physical risk associated with climate change, could have a material adverse impact on our results of operations, financial condition and cash flows. Our dependence on coal also means that the output of our coal-fired generation units can be greatly affected by the costs of other fuels combusted by generation facilities that compete with our coal-fired generation units. Natural gas prices over the last several years have been relatively low and some gas-fired generators that previously were primarily used during periods of peak and intermediate electric demand have run even during periods of relatively low demand. This has caused many coal-fired generators, including ours, to run fewer hours during these periods of base-load demand.
In addition, substantially all of our coal supply is currently mined in the state of Indiana, and all of our coal supply is currently mined by unaffiliated suppliers or third parties. Our current goal is to carry a 25-50 day system supply of
coal to offset unforeseen occurrences such as equipment breakdowns and transportation or mine delays. IPL has long-term contracts with two suppliers. In recent years, the coal industry has undergone significant restructuring as a result of debt restructurings, bankruptcy proceedings and other factors. Further restructuring may result in a failure of our suppliers to fulfill their contractual obligations or fewer suppliers and, consequently, increased dependency on any one supplier. Any significant disruption in the ability of our suppliers, particularly our most significant suppliers, to mine or deliver coal or other fuel, or any failure on the part of our suppliers to fulfill their contractual obligations could have a material adverse effect on our business. In the event of disruptions or failures, there can be no assurance that we would be able to purchase power or find another supplier of fuel on similarly favorable terms, which could also limit our ability to recover fuel costs through the FAC proceedings.
Catastrophic events could adversely affect our facilities, systems and operations.
Catastrophic events such as fires, explosions, cyber-attacks, terrorist acts, acts of war, pandemic events, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snow storms, droughts or other similar occurrences could adversely affect our generation facilities, transmission and distribution systems, results of operations, financial condition and cash flows. Our Petersburg Plant, which is our largest source of generating capacity, is located in the Wabash Valley seismic zone, adjacent to the New Madrid seismic zone, which are both areas of significant seismic activity in the central U.S.
Our business is sensitive to weather and seasonal variations.
Weather conditions significantly affect the demand for electric power, and accordingly, our business is affected by variations in general weather conditions and unusually severe weather. As a result of these factors, our operating revenues and associated operating expenses are not generated evenly by month during the year. We forecast electric sales on the basis of normal weather, which represents a long-term historical average. Significant variations from normal weather (such as warmer winters and cooler summers) could have a material impact on our revenue, operating income and net income and cash flows. In addition, severe or unusual weather, such as floods, tornadoes and ice or snow storms, may cause outages and property damage that may require us to incur additional costs that may not be insured or recoverable from customers. While we are permitted to seek recovery of certain severe storm damage costs, if we are unable to fully recover such costs in a timely manner, it could have a material adverse effect on our results of operations, financial condition and cash flows.
Our membership in a regional transmission organization presents risks that could have a material adverse effect on our results of operations, financial condition and cash flows.
We are a member of MISO, a FERC-regulated regional transmission organization. MISO serves the electrical transmission needs of a 15-state area including much of the Mid-U.S. and Canada and maintains functional operational control over our electric transmission facilities, as well as that of the other utility members of MISO. We retain control over our distribution facilities. As a result of membership in MISO and its operational control, our continued ability to import power, when necessary, and export power to the wholesale market has been, and may continue to be, impacted. We offer our generation and bid our load into this market on a day-ahead basis and settle differences in real time. Given the nature of MISO’s policies regarding use of transmission facilities, and its administration of the energy and ancillary services markets, it is difficult to predict near-term operational impacts. We cannot assure MISO’s reliable operation of the regional transmission system, or the impact of its operation of the energy and ancillary services markets.
The rules governing the various regional power markets may also change from time to time which could affect our costs and revenues and have a material adverse effect on our results of operations, financial condition and cash flows. We may expand or otherwise change our transmission system according to decisions made by MISO in addition to our internal planning process. In addition, various proposals and proceedings before the FERC relating to MISO or otherwise may cause transmission rates to change from time to time. We also incur fees and costs to participate in MISO.
To the extent that we rely, at least in part, on the performance of MISO to maintain the reliability of our transmission system, it puts us at some risk for the performance of MISO. In addition, actions taken by MISO to secure the reliable operation of the entire transmission system operated by MISO could result in voltage reductions, rolling blackouts, or sustained system-wide blackouts on IPL’s transmission and distribution system, any of which could have a material adverse effect on our results of operations, financial condition and cash flows. See also “Item 1. Business - MISO Operations and “Item 1. Business - Regulation – Retail Ratemaking.”
Our transmission and distribution system is subject to operational, reliability and capacity risks.
The ongoing reliable performance of our transmission and distribution system is subject to risks due to, among other things, weather damage, intentional or unintentional damage, equipment or process failure, catastrophic events, such as fires and/or explosions, facility outages, labor disputes, accidents or injuries, operator error, or inoperability of key infrastructure internal or external to us and events occurring on third party systems that interconnect to and affect our system. The failure of our transmission and distribution system to fully operate and deliver the energy demanded by customers could have a material adverse effect on our results of operations, financial condition and cash flows, and if such failures occur frequently and/or for extended periods of time, could result in adverse regulatory action. In addition, the advent and quick adaptation of new products and services that require increased levels of electrical energy cannot be predicted and could result in insufficient transmission and distribution system capacity. As with all utilities, potential concern with the adequacy of transmission capacity on IPL’s system or the regional systems operated by MISO could result in MISO, the NERC, the FERC or the IURC requiring us to upgrade or expand our transmission system through additional capital expenditures or share in the costs of regional expansion. Also, as a result of the above risks and other potential risks and hazards associated with transmission and distribution operations, we may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. Except for IPL’s large substations, transmission and distribution assets are not covered by insurance and are considered to be outside the scope of property insurance. Otherwise, we maintain an amount of insurance protection that we believe is adequate, but there can be no assurance that our insurance will be sufficient or effective under all circumstances and against all hazards or liabilities to which we may be subject. Further, any increased costs or adverse changes in the insurance markets may cause delays or inability in maintaining insurance coverage on terms similar to those presently available to us or at all. A successful claim for which we are not fully insured could have an adverse impact on our results of operations, financial condition and cash flows.
Current and future conditions in the economy may adversely affect our customers, suppliers and other counterparties, which may adversely affect our results of operations, financial condition and cash flows.
Our business, results of operations, financial condition and cash flows have been and will continue to be affected by general economic conditions. Slowing economic growth, credit market conditions, fluctuating consumer and business confidence, fluctuating commodity prices, and other challenges affecting the general economy, have caused and may continue to cause some of our customers to experience deterioration of their businesses, cash flow shortages, and difficulty obtaining financing. As a result, existing customers may reduce their electricity consumption and may not be able to fulfill their payment obligations to us in the normal, timely fashion. In addition, some existing commercial and industrial customers may discontinue their operations. Sustained downturns, recessions or a sluggish economy generally affect the markets in which we operate and negatively influence our energy operations. A contracting, slow or sluggish economy could reduce the demand for energy in areas in which we are doing business. For example, during economic downturns, our commercial and industrial customers may see a decrease in demand for their products, which in turn may lead to a decrease in the amount of energy they require. Furthermore, projects which may result in potential new customers may be delayed until economic conditions improve. Some of our suppliers, customers and other counterparties, and others with whom we transact business experience financial difficulties, which may impact their ability to fulfill their obligations to us. For example, our counterparties on forward purchase contracts and financial institutions involved in our credit facility may become unable to fulfill their contractual obligations to us or result in their declaring bankruptcy or similar insolvency-like proceedings. We may not be able to enter into replacement agreements on terms as favorable as our existing agreements. Reduced demand for our electric services, failure by our customers to timely remit full payment owed to us and supply delays or unavailability could have a material adverse effect on our results of operations, financial condition and cash flows. In particular, the projected economic growth and total employment in Indianapolis are important to the realization of our forecasts for annual energy sales.
Economic conditions relating to the asset performance and interest rates of the Pension Plans could materially and adversely impact our results of operations, financial condition and cash flows.
Pension costs are based upon a number of actuarial assumptions, including an expected long-term rate of return on pension plan assets, level of employer contributions, the expected life span of pension plan beneficiaries and the discount rate used to determine the present value of future pension obligations. Any of these assumptions could prove to be wrong, resulting in a shortfall of our Pension Plans’ assets compared to pension obligations under the Pension Plans. Further, the performance of the capital markets affects the values of the assets that are held in trust
to satisfy future obligations under the Pension Plans. These assets are subject to market fluctuations and will yield uncertain returns, which may fall below our projected return rates. A decline in the market value of the Pension Plans’ assets will increase the funding requirements under the Pension Plans if the actual asset returns do not recover these declines in value in the foreseeable future. Future pension funding requirements, and the timing of funding payments, may also be subject to changes in legislation. We are responsible for funding any shortfall of our Pension Plans’ assets compared to obligations under the Pension Plans, and a significant increase in our pension liabilities could materially and adversely impact our results of operations, financial condition, and cash flows. We are subject to the Pension Protection Act of 2006, which requires underfunded pension plans to improve their funding ratios within prescribed intervals based on the level of their underfunding. As a result, our required contributions to these plans, at times, have increased and may increase in the future. In addition, our pension and postemployment benefit plan liabilities are sensitive to changes in interest rates. As interest rates decrease, the discounted liabilities increase benefit expense and funding requirements. Further, changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions, may also increase the funding requirements for the obligations related to the pension and other postemployment benefit plans. Declines in market values and increased funding requirements could have a material adverse effect on our results of operations, financial condition and cash flows. Please see Note 9, “Benefit Plans” to the Financial Statements included in this Form 10-K for further discussion.
Counterparties providing materials or services may fail to perform their obligations, which could harm our results of operations, financial condition and cash flows.
We enter into transactions with and rely on many counterparties in connection with our business, including for the purchase and delivery of inventory, including fuel and equipment components, for our capital improvements and additions and to provide professional services, such as actuarial calculations, payroll processing and various consulting services. If any of these counterparties fails to perform its obligations to us or becomes unavailable, our business plans may be materially disrupted, we may be forced to discontinue or delay certain operations if a cost-effective alternative is not readily available or we may be forced to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause delays. Although our agreements are designed to mitigate the consequences of a potential default by the counterparty, our actual exposure may be greater than the relief provided by these mitigation provisions. Any of the foregoing could result in regulatory actions, cost overruns, delays or other losses, any of which (or a combination of which) could have a material adverse effect on our results of operations, financial condition and cash flows.
Further, our construction program calls for extensive expenditures for capital improvements and additions, including the installation of environmental upgrades, improvements to and replacements of generation, transmission and distribution facilities, as well as other initiatives. As a result, we have engaged, and will continue to engage, numerous contractors and have entered into a number of agreements to acquire the necessary materials and/or obtain the required construction related services. In addition, some contracts provide for us to assume the risk of price escalation and availability of certain metals and key components. This could force us to enter into alternative arrangements at then-current market prices that may exceed our contractual prices and cause construction delays. It could also subject us to enforcement action by regulatory authorities to the extent that such a contractor failure resulted in a failure by IPL to comply with requirements or expectations, particularly with regard to the cost of the project. As a result of these events, we might incur losses or delays in completing construction.
Accidental improprieties and undetected errors in our internal controls and information reporting could result in the disallowance of cost recovery, noncompliant disclosure or incorrect payment processing.
Our internal controls, accounting policies and practices and internal information systems are designed to enable us to capture and process transactions and information in a timely and accurate manner in compliance with GAAP, laws and regulations, taxation requirements and federal securities laws and regulations in order to, among other things, disclose and report financial and other information in connection with the recovery of our costs and with our reporting requirements under federal securities, tax and other laws and regulations and to properly process payments. We have also implemented corporate governance, internal control and accounting policies and procedures in connection with the Sarbanes-Oxley Act of 2002. Our internal controls and policies have been and continue to be closely monitored by management and our Board of Directors. While we believe these controls, policies, practices and systems are adequate to verify data integrity, unanticipated and unauthorized actions of employees, temporary lapses in internal controls due to shortfalls in oversight or resource constraints could lead to improprieties and undetected errors that could result in the disallowance of cost recovery, noncompliant disclosure
and reporting or incorrect payment processing. The consequences of these events could have a material adverse effect on our results of operations, financial condition and cash flows.
If we are unable to maintain a qualified and properly motivated workforce, it could have a material adverse effect on our results of operations, financial condition and cash flows.
One of the challenges we face is to retain a skilled, efficient and cost-effective workforce while recruiting new talent to replace losses in knowledge and skills due to resignations, terminations or retirements. This undertaking could require us to make additional financial commitments and incur increased costs. If we are unable to successfully attract and retain an appropriately qualified workforce, it could have a material adverse effect on our results of operations, financial condition and cash flows. In addition, we have employee compensation plans that reward the performance of our employees. We seek to ensure that our compensation plans encourage acceptable levels for risk and high performance through pay mix, performance metrics and timing. We also have policies and procedures in place to mitigate potential excessive risk-taking by employees to achieve performance targets which could result in events that could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to collective bargaining agreements that could adversely affect our business, results of operations, financial condition and cash flows.
We are subject to collective bargaining agreements with employees who are members of a union. Approximately 69% of our employees are represented by a union in two bargaining units: a physical unit and a clerical-technical unit. While we believe that we maintain a satisfactory relationship with our employees, it is possible that labor disruptions affecting some or all of our operations could occur during the period of the collective bargaining agreements or at the expiration of the collective bargaining agreements before new agreements are negotiated. We may not be able to successfully train new personnel as current workers with significant knowledge and expertise retire. We also may be unable to staff our business with qualified personnel in the event of significant absenteeism related to a pandemic illness. Work stoppages by, or poor relations or ineffective negotiations with, our employees or other workforce issues could have a material adverse effect on our results of operations, financial condition and cash flows.
The use of non-derivative and derivative instruments in the normal course of business could result in losses that could negatively impact our results of operations, financial position and cash flows.
We sometimes use non-derivative and derivative instruments, such as swaps, options, futures and forwards, to manage commodity and financial risks. We may at times enter into forward contracts to hedge the risk of volatility in earnings from wholesale marketing activities. These trades are affected by a range of factors, including variations in power demand, fluctuations in market prices, market prices for alternative commodities and optimization opportunities. We have attempted to manage our commodities price risk exposure by establishing and enforcing risk limits and risk management policies. Despite our efforts, however, these risk limits and management policies may not work as planned and fluctuating prices and other events could adversely affect our results of operations, financial condition and cash flows. In the absence of actively quoted market prices and pricing information from external sources, the valuation of these instruments can involve management’s judgment or the use of estimates. As a result, changes in the underlying assumptions or use of alternative valuation methods could affect the reported fair value of some of these contracts. We could also recognize financial losses as a result of volatility in the market values of these contracts, a counterparty failing to perform, or the underlying transactions which the instruments are intended to hedge failing to materialize, which could result in a material adverse effect on our results of operations, financial condition and cash flows.
Potential security breaches (including cyber-security breaches) and terrorism risks could adversely affect our businesses.
We operate in a highly regulated industry that requires the continued operation of sophisticated systems and network infrastructure at our generation stations, fuel storage facilities and transmission and distribution facilities. We also use various financial, accounting and other systems in our businesses. These systems and facilities are vulnerable to unauthorized access due to hacking, viruses, other cyber-security attacks and other causes. In particular, given the importance of energy and the electric grid, there is the possibility that our systems and facilities could be targets of terrorism or acts of war. We have implemented measures to help prevent unauthorized access to our systems and facilities, including network and system monitoring, identification and deployment of secure technologies, and certain other measures to comply with mandatory regulatory reliability
standards. Pursuant to NERC requirements, we have a robust cyber-security plan in place and are subject to regular audits by an independent auditor approved by NERC. We routinely test our systems and facilities against these regulatory requirements in order to measure compliance, assess potential security risks, and identify areas for improvement. In addition, we provide cyber-security training for our employees and perform exercises designed to raise employee awareness of cyber risks on a regular basis. To date, cyber-attacks on our business and operations have not had a material impact on our operations or financial results. Despite our efforts, if our systems or facilities were to be breached or disabled, we may be unable to recover them in a timely manner to fulfill critical business functions, including the supply of electric services to our customers, and we could experience decreases in revenues and increases in costs that could adversely affect our results of operations, cash flows and financial condition.
In the course of our business, we also store and use customer, employee, and other personal information and other confidential and sensitive information, including personally identifiable information and personal financial information. If our or our third-party vendors’ systems were to be breached or disabled, sensitive and confidential information and other data could be compromised, which could result in negative publicity, remediation costs and potential litigation, damages, consent orders, injunctions, fines and other relief.
To help mitigate these risks, we maintain insurance coverage against some, but not all, potential losses, including coverage for illegal acts against us. However, insurance may not be adequate to protect us against all costs and liabilities associated with these risks.
RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LAWS
We may not always be able to recover our costs to deliver electricity to our retail customers. The costs we can recover and the return on capital we are permitted to earn for certain aspects of our business are regulated and governed by the laws of Indiana and the rules, policies and procedures of the IURC.
We are currently obligated to supply electric energy to retail customers in our service territory. Even though rate regulation is premised on full recovery of prudently incurred costs and a reasonable rate of return on invested capital, there can be no assurance that the IURC will agree that all of our costs have been prudently incurred or are recoverable. There also is no assurance that the regulatory process in which rates are determined will always result in rates that will produce a full or timely recovery of our costs and authorized return. From time to time, the demand for electric energy required to meet our service obligations could exceed our available electric generating capacity. When our retail customer demand exceeds our generating capacity for units operating under MISO economic dispatch, recovery of our cost to purchase electric energy in the MISO market to meet that demand is subject to a stipulation and settlement agreement. The agreement includes a benchmark which compares hourly purchased power costs to daily natural gas prices. Purchased power costs above the benchmark must meet certain criteria in order for us to fully recover them from our retail customers, such as consideration of the capacity of units available but not selected by the MISO economic dispatch. We may not always have the ability to pass all of the purchased power costs on to our customers, and even if we are able to do so, there may be a significant delay between the time the costs are incurred and the time the costs are recovered. Since these situations most often occur during periods of peak demand, the market price for electric energy at the time we purchase it could be very high, and we may not be allowed to recover all of such costs through our FAC. Even if a supply shortage were brief, we could suffer substantial losses that could adversely affect our results of operations, financial condition and cash flows.
Changes in, or reinterpretations of, the laws, rules, policies and procedures that set electric rates, permitted rates of return, changes in IPL’s rate structure, regulations regarding ownership of generation assets and electric service, the supply of generation, reliability initiatives, fuel and purchased power (which account for a substantial portion of our operating costs), capital expenditures and investments and the recovery of these and other costs on a full or timely basis through rates, power market prices and changes to the frequency and timing of rate increases could have a material adverse effect on our results of operations, financial condition and cash flows.
Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our business.
One byproduct of burning coal and other fossil fuels is the emission of GHGs, including CO2. At the federal, state and regional levels, policies are under development or have been developed to regulate GHG emissions. In 2020, IPL emitted approximately 10 million tons of CO2 from our power plants. IPL uses CO2 emission estimation methodologies supported by “The Greenhouse Gas Protocol” reporting standard on GHG emissions. Our CO2
emissions are determined from emissions monitoring data and calculations using actual fuel heat inputs and fuel type CO2 emission factors.
There currently is no U.S. federal legislation imposing mandatory GHG emission reductions (including for CO2) that affects our electric power generation facilities. However, in 2015, the EPA promulgated a rule establishing NSPS for CO2 emissions for newly constructed and modified/reconstructed fossil-fueled EUSGUs larger than 25 MW, and the EPA proposed revisions to this rule in December 2018. In addition, in July 2019, the EPA published the final ACE Rule along with associated revisions to implementing regulations, which established CO2 emission rules for existing power plants under CAA Section 111(d) and replaced the EPA's 2015 CPP, although the D.C. Circuit vacated and remanded the ACE Rule in January 2021. In addition, it is likely that there will be increased focus on climate change from a President Biden administration and a Democrat-controlled U.S. Congress, both of which may result in additional legislation and regulations regarding GHG emissions.
For further discussion of the regulation of GHG emissions in the U.S., see "Item 1. Business -Environmental Matters - Climate Change Legislation and Regulation."
In December 2015, the Parties to the United Nations Framework Convention on Climate Change convened for the 21st Conference of the Parties and the resulting Paris Agreement established a long-term goal of keeping the increase in global average temperature well below 2°C above pre-industrial levels. We anticipate that the Paris Agreement will continue the trend toward efforts to de-carbonize the global economy. Although the U.S. was officially able to withdraw from the Paris Agreement on November 4, 2020, on January 20, 2021, President Biden began the 30-day process of rejoining the Paris Agreement, which will become effective for the U.S. on February 19, 2021.
Any existing or future international, federal, state or regional legislation or regulation of GHG emissions could have a material adverse impact on our financial performance. The actual impact on our financial performance will depend on a number of factors, including among others, the degree and timing of GHG emissions reductions required under any such legislation or regulations, the price and availability of offsets, the extent to which market-based compliance options are available, the extent to which we would be entitled to receive GHG emissions allowances without having to purchase them in an auction or on the open market and the impact of such legislation or regulation on our ability to recover costs incurred through rate increases or otherwise. Our cost of compliance could be substantial. Although we would seek recovery of costs associated with new climate change or GHG regulations, our inability to fully or timely recover such costs could have a material adverse effect on our results of operations, financial condition and cash flows. Additionally, concerns over GHG emissions and their effect on the environment have led, and could lead further, to reduced demand for coal-fired power, which could have a material adverse effect on our results of operations, financial condition and cash flows.
Furthermore, according to the Intergovernmental Panel on Climate Change, physical risks from climate change could include, but are not limited to, increased runoff and earlier spring peak discharge in many glacier and snow-fed rivers, warming of lakes and rivers, an increase in sea level, changes and variability in precipitation and in the intensity and frequency of extreme weather events. Physical impacts may have the potential to significantly affect our business and operations. For example, extreme weather events could result in increased downtime and operation and maintenance costs at our electric power generation facilities and our support facilities. Variations in weather conditions, primarily temperature and humidity, would also be expected to affect the energy needs of customers. A decrease in energy consumption could decrease our revenues. In addition, while revenues would be expected to increase if the energy consumption of customers increased, such increase could prompt the need for additional investment in generation capacity. Changes in the temperature of lakes and rivers and changes in precipitation that result in drought could adversely affect the operations of our fossil-fuel fired electric power generation facilities.
If any of the foregoing risks materialize, costs may increase or revenues may decrease and there could be a material adverse effect on our business and on our consolidated results of operations, financial condition, cash flows and reputation. Please see “Item 1. Business - Environmental Matters” for additional information of environmental matters impacting us, including those relating to regulation of GHG emissions.
We are subject to numerous environmental laws, rules and regulations that require capital expenditures, increase our cost of operations, may expose us to environmental liabilities or make continued operation of certain generating units unprofitable.
We are subject to various federal, state, regional and local environmental protection and health and safety laws, rules and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including CCR; 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. Such laws, rules and regulations can become stricter over time, and we could also become subject to additional environmental laws, rules and regulations and other requirements in the future. Environmental laws, rules and regulations also generally require us to comply with inspections and obtain and comply with a wide variety of environmental licenses, permits, and other governmental authorizations. These laws and regulations often require a lengthy and complex process of obtaining and renewing licenses, permits and other governmental authorizations from federal, state and local agencies. If we are not able to timely comply with inspections and obtain, maintain or comply with all environmental laws, rules and regulations, and all licenses, permits, and other government authorizations required to operate our business, then our operations could be prevented, delayed or subject to additional costs. A violation of environmental laws, rules, regulations, permits or other requirements can result in substantial fines, penalties, other sanctions, permit revocation, facility shutdowns, the imposition of stricter environmental standards and controls or other injunctive measures affecting operating assets. Compliance with these laws, regulations and other requirements requires us to expend significant funds and resources and could at some point become prohibitively expensive or result in our shutting down (temporarily or permanently) or altering the operation of our facilities. Under certain environmental laws, we could also be held responsible for costs relating to contamination at our past or present facilities and at third-party waste disposal sites. We could also be held strictly, jointly and severally liable for human exposure to hazardous substances or for other environmental damage. From time to time we are subject to enforcement and litigation actions for claims of noncompliance with environmental laws, rules and regulations or other environmental requirements. We cannot assure that we will be successful in defending against any claim of noncompliance. Any actual or alleged violation of environmental laws, rules, regulations and other requirements also may require us to expend significant resources to defend against any such alleged violations and expose us to unexpected costs. Our costs and liabilities relating to environmental matters could have a material adverse effect on our results of operations, financial condition and cash flows.
In addition, we are subject to potentially significant remediation expenses, enforcement initiatives, private party lawsuits and reputational risk associated with CCR, which consists of bottom ash, fly ash, and air pollution control wastes generated at our current and former coal-fired generation plant sites. We expect to incur substantial costs to comply with CCR rules and requirements and any changes to existing CCR rules or requirements or other new rules or requirements addressing CCR may require us to incur additional costs. Also, we may become subject to CCR-related lawsuits or involved in other CCR-related litigation that may require us to incur other costs or expose us to unexpected liabilities, which could be significant. In addition, CCR and its production at our facilities have been the subject of interest from environmental non-governmental organizations and the media. Any of the foregoing could have a material adverse effect on our results of operations, financial condition and cash flows.
Please see “Item 1. Business - Environmental Matters” for additional information of environmental matters impacting us.
If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, which likely would not be recoverable from customers through regulated rates.
As an owner and operator of a bulk power transmission system, IPL is subject to mandatory reliability standards promulgated by the NERC and enforced by the FERC. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and is guided by reliability and market interface principles. Compliance with reliability standards may subject us to higher operating costs or increased capital expenditures. Although we expect to recover costs and expenditures from customers through regulated rates, there can be no assurance that the IURC will approve full recovery in a timely manner. If we were found not to be in compliance with the mandatory reliability standards, we could be subject to sanctions, including substantial monetary penalties, which likely would not be recoverable from customers through regulated rates and could have a material adverse effect on our results of operations, financial condition and cash flows.
We are subject to extensive laws and local, state and federal regulation, as well as litigation and other proceedings that could affect our operations and costs.
We are subject to extensive regulation at the federal, state and local levels. For example, at the federal level, IPL, as an electric utility, is regulated by the FERC and the NERC and, at the state level, we are regulated by the IURC. The regulatory power of the IURC over IPL is both comprehensive and typical of the traditional form of regulation generally imposed by state public utility commissions. We face the risk of unexpected or adverse regulatory action. Regulatory discretion is reasonably broad in Indiana. IPL is subject to regulation by the IURC as to our services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, the increase or decrease in retail rates and charges, the issuance of securities and long-term debt, the acquisition and sale of some public utility properties or securities and certain other matters.
IPL’s tariff rates for electric service to retail customers consist of basic rates and charges which are set and approved by the IURC after public hearings. In addition, IPL’s rates typically include various adjustment mechanisms and we must seek approval from the IURC through such public proceedings of our rate adjustment mechanism factors to reflect changes in certain costs. There can be no assurance that we will be granted approval of rate adjustment mechanism factors that we request from the IURC. The failure to obtain IURC approval of requested relief, or any other adverse rate determination by the IURC could have a material adverse effect on our results of operations, financial condition and cash flows.
As a result of the EPAct and subsequent legislation affecting the electric utility industry, we have been required to comply with rules and regulations in areas including mandatory reliability standards, cyber security, transmission expansion and energy efficiency. We are currently unable to predict the long-term impact, if any, to our results of operations, financial condition and cash flows as a result of these rules and regulations. Complying with the regulatory environment to which we are subject requires us to expend a significant amount of funds and resources. The failure to comply with this regulatory environment could subject us to substantial financial costs and penalties and changes, either forced or voluntary, in the way we operate our business.
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. Additionally, the fuel charge applied for can be reduced if a utility’s rolling twelve-month operating income, determined at quarterly measurement dates, exceeds a utility’s authorized annual jurisdictional net operating income and there are not sufficient applicable cumulative net operating income deficiencies against which the excess rolling twelve-month jurisdictional net operating income can be offset.
Future events, including the advent of retail competition within IPL’s service territory, could result in the deregulation of part of IPL’s existing regulated business. In addition to effects on our business that could result from any deregulation, such as a loss of customers and increased costs to retain or attract customers upon deregulation, adjustments to IPL’s accounting records may be required to eliminate the historical impact of regulatory accounting. Such adjustments, as required by FASB ASC 980 “Regulated Operations,” could eliminate the effects of any actions of regulators that have been recognized as assets and liabilities. Required adjustments could include the expensing of any unamortized net regulatory assets, the elimination of certain tax liabilities, and a write down of any impaired utility plant balances. We expect IPL to meet the criteria for the application of ASC 980 for the foreseeable future.
We are subject to litigation, regulatory proceedings, administrative proceedings, audits, settlements, investigations and claims from time to time that require us to expend significant funds to address. There can be no assurance that the outcome of these matters will not have a material adverse effect on our business, results of operations, financial condition and cash flows. Asbestos and other regulated substances are, and may continue to be, present at our facilities, and we have been named as a defendant in asbestos litigation. The continued presence of asbestos and other regulated substances at these facilities could result in additional litigation being brought against us, which could have a material adverse effect on our results of operations, financial condition and cash flows. Please see Note 2, “Regulatory Matters” and Note 10, “Commitments and Contingencies” to the Financial Statements for a summary of significant regulatory matters and legal proceedings involving us.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are subject to the tax laws and regulations of the U.S. federal, state and local governments. From time to time, legislative measures may be enacted that could adversely affect our overall tax positions regarding income or other taxes. There can be no assurance that our effective tax rate or tax payments will not be adversely affected by these legislative measures.
For example, the U.S. federal government enacted tax reform in 2017 that, among other things, reduces U.S. federal corporate income tax rates, imposes limits on tax deductions for interest expense and changes the rules related to capital expenditure cost recovery. There are a number of uncertainties and ambiguities as to the interpretation and application of many of the provisions of the tax reform measure. Given the unpredictability of these possible changes and their potential interdependency, it remains difficult to assess the overall effect such tax changes will have on our earnings and cash flow, and the extent to which such changes could adversely impact our results of operations. As the impacts of the law are determined, and as yet-to-be released regulations and other guidance interpreting the new law are issued and finalized, our financial results could be materially impacted.
In addition, U.S. federal, state and local tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our tax positions will be sustained if challenged by relevant tax authorities and if not sustained, there could be a material impact on our results of operations.
RISKS RELATED TO OUR INDEBTEDNESS AND FINANCIAL CONDITION
We rely on access to the financial markets. General economic conditions and disruptions in the financial markets could adversely affect our ability to raise capital on favorable terms or at all, and cause increases in our interest expense.
From time to time we rely on access to the capital and credit markets as a source of liquidity for capital requirements not satisfied by operating cash flows. These capital and credit markets experience volatility and disruption from time to time and the ability of corporations to raise capital can be negatively impacted. Disruptions in the capital and credit markets make it harder and more expensive to raise capital. Our ability to raise capital on favorable terms or at all can be adversely affected by unfavorable market conditions or declines in our creditworthiness, and we may be unable to access adequate funding to refinance our debt as it becomes due or finance capital expenditures. The extent of any impact will depend on several factors, including our operating cash flows, financial condition and prospects, the overall supply and demand in the credit markets, our credit ratings, credit capacity, the cost of financing, the financial condition, performance and prospects of other companies in our industry or with similar financial circumstances and other general economic and business conditions. It may also depend on the performance of credit counterparties and financial institutions with which we do business. Access to funds under our existing financing arrangements is also dependent on the ability of our counterparties to meet their financing commitments and our satisfying conditions to borrowing. Our inability to obtain financing on reasonable terms, or at all, with creditworthy counterparties could adversely affect our results of operations, financial condition and cash flows. If our available funding is limited or we are forced to fund our operations at a higher cost, these conditions may require us to curtail our business activities and increase our cost of funding, both of which would adversely impact our profitability.
See Note 7, “Debt” to the Financial Statements for information regarding indebtedness. See also “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for information related to market risks.
The level of our indebtedness, and the security provided for this indebtedness, could adversely affect our financial flexibility.
As of December 31, 2020, we had on a consolidated basis $2,726.2 million of indebtedness and total common shareholders’ equity of $521.0 million. IPL had $1,803.8 million of first mortgage bonds outstanding as of December 31, 2020, which are secured by the pledge of substantially all of the assets of IPL under the terms of IPL’s mortgage and deed of trust. This level of indebtedness and related security could have important consequences, including the following:
•increasing our vulnerability to general adverse economic and industry conditions;
•requiring us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund other corporate purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
•limiting, along with the financial and other restrictive covenants in our indebtedness, our ability to borrow additional funds, as needed.
We expect to incur additional debt in the future, subject to the terms of our debt agreements and regulatory approvals for any IPL debt. To the extent we become more leveraged, the risks described above would increase. Further, actual cash requirements in the future may be greater than expected. Accordingly, our cash flow from operations may not be sufficient to repay at maturity all of the outstanding debt as it becomes due and, in that event, we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms or at all to refinance our debt as it becomes due. For a further discussion of outstanding debt, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Note 7, “Debt” to the Financial Statements of this Form 10-K.
We have variable rate debt that bears interest based on a prevailing rate that is reset based on a market index that can be affected by market demand, supply, market interest rates and other market conditions. We also maintain both cash on deposit and investments in cash equivalents from time to time that could be impacted by interest rate fluctuations. As such, any event which impacts market interest rates could have a material effect on our results of operations, financial condition and cash flows. In addition, ratings agencies issue credit ratings on us and our debt that affect our borrowing costs under our financial arrangements and affect our potential pool of investors and funding sources. Our credit ratings also govern the collateral provisions of certain of our contracts. If the rating agencies were to downgrade our credit ratings, our borrowing costs would likely further increase, our potential pool of investors and funding resources could be reduced, and we could be required to post additional cash collateral under selected contracts. These events would likely reduce our liquidity and profitability and could have a material adverse effect on our results of operations, financial condition and cash flows.
IPALCO is a holding company and parent of IPL and other subsidiaries. IPALCO’s cash flow is dependent on operating cash flows of IPL and its ability to pay cash to IPALCO.
IPALCO is a holding company with no material assets other than the common stock of its subsidiaries, and accordingly all cash is generated by the operating activities of our subsidiaries, principally IPL. As such, IPALCO’s cash flow is largely dependent on the operating cash flows of IPL and its ability to pay cash to IPALCO. IPL’s mortgage and deed of trust, its amended articles of incorporation and its Credit Agreement contain restrictions on IPL’s ability to issue certain securities or pay cash dividends to IPALCO. For example, there are restrictions that require maintenance of a leverage ratio which could limit the ability of IPL to pay dividends. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity” for a discussion of these restrictions. See Note 7, “Debt” to the Financial Statements for information regarding indebtedness. In addition, IPL is regulated by the IURC, which possesses broad oversight powers to ensure that the needs of utility customers are being met. The IURC could impose additional restrictions on the ability of IPL to distribute, loan or advance cash to IPALCO pursuant to these broad powers. While we do not expect any of the foregoing restrictions to significantly affect IPL’s ability to pay funds to IPALCO in the future, a significant limitation on IPL’s ability to pay dividends or loan or advance funds to IPALCO would have a material adverse effect on IPALCO’s results of operations, financial condition and cash flows.
Our ownership by AES subjects us to potential risks that are beyond our control.
All of IPL’s common stock is owned by IPALCO, all of whose common stock is owned by AES U.S. Investments (82.35%) and CDPQ (17.65%). Due to our relationship with AES, any adverse developments and announcements concerning AES may impair our ability to access the capital markets and to otherwise conduct business. In particular, downgrades in AES’s credit ratings could result in IPL’s or IPALCO’s credit ratings being downgraded.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Information relating to our properties is contained in “Item 1. Business – Properties.”
Mortgage Financing on Properties
IPL’s mortgage and deed of trust secures first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage and deed of trust, substantially all property owned by IPL is subject to a direct first mortgage lien securing indebtedness of $1,803.8 million at December 31, 2020. In addition, IPALCO has outstanding $880.0 million of debt obligations which are secured by its pledge of all of the outstanding common stock of IPL.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, we are subject to various lawsuits, actions, claims, and other proceedings. We are also from time to time involved in other reviews, investigations and proceedings by governmental and regulatory agencies regarding our business, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. We have accrued in our Financial Statements for litigation and claims where it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We believe the amounts provided in our Financial Statements, as prescribed by GAAP, for these matters are adequate in light of the probable and estimable contingencies. However, there can be no assurances that the actual amounts required to satisfy alleged liabilities from various legal proceedings, claims and other matters (including those matters noted below), and to comply with applicable laws and regulations will not exceed the amounts reflected in our Financial Statements. As such, costs, if any, that may be incurred in excess of those amounts provided for in our Financial Statements, cannot be reasonably determined, but could be material. Please see Note 2, “Regulatory Matters” and Note 10, “Commitments and Contingencies” to the Financial Statements for summaries of significant legal proceedings involving us, which are incorporated by reference herein.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
As of February 24, 2021, all of the outstanding common stock of IPALCO is owned by AES U.S. Investments (82.35%) and CDPQ (17.65%). As a result, our stock is not listed for trading on any stock exchange.
Dividends
During the years ended December 31, 2020, 2019 and 2018, we declared and paid distributions to our shareholders totaling $108.7 million, $136.4 million and $130.2 million, respectively. Future distributions to our shareholders will be determined at the discretion of our Board of Directors and will depend primarily on dividends received from IPL and such other factors as our Board of Directors deems relevant. Please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity” of this Form 10-K for a discussion of limitations on dividends from IPL. In order for us to make any dividend payments to our shareholders, we must, at the time and as a result of such dividends, either maintain certain credit ratings on our senior long-term debt or be in compliance with leverage and interest coverage ratios contained in IPALCO’s Third Amended and Restated Articles of Incorporation. We do not believe this requirement will be a limiting factor in paying dividends in the ordinary course of prudent business operations.
Dividend and Capital Structure 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 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’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, 2020, and as of the filing of this report, IPALCO was in compliance with all covenants and no event of default existed.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial data which should be read in conjunction with our Financial Statements and the related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The “Results of Operations” discussion in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” addresses significant fluctuations in operating data. IPALCO is owned by AES U.S. Investments and CDPQ, and therefore does not report earnings or dividends on a per-share basis. Other data that management believes is important in understanding trends in our business is also included in this table.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| | | (In Thousands) |
| Statement of Operations Data: | | | | | | | | | | |
| Revenues | | $ | 1,352,985 | | | $ | 1,481,643 | | | $ | 1,450,505 | | | $ | 1,349,588 | | | $ | 1,347,430 | |
| Operating income | | $ | 262,532 | | | $ | 296,752 | | | $ | 236,358 | | | $ | 239,198 | | | $ | 261,829 | |
| Earnings from operations before income tax | | $ | 138,559 | | | $ | 167,921 | | | $ | 147,474 | | | $ | 157,744 | | | $ | 192,270 | |
| Net income | | $ | 109,967 | | | $ | 132,393 | | | $ | 134,025 | | | $ | 108,793 | | | $ | 131,060 | |
| Balance Sheet Data (end of period): | | | | | | | | | | |
| Total assets | | $ | 4,969,919 | | | $ | 4,928,669 | | | $ | 4,862,053 | | | $ | 4,740,561 | | | $ | 4,702,281 | |
| Long-term debt (less current maturities) | | $ | 2,556,278 | | | $ | 2,092,430 | | | $ | 2,649,064 | | | $ | 2,477,538 | | | $ | 2,474,840 | |
| Common shareholders’ equity | | $ | 520,988 | | | $ | 546,476 | | | $ | 573,266 | | | $ | 572,276 | | | $ | 571,183 | |
| Cumulative preferred stock of subsidiary | | $ | 59,784 | | | $ | 59,784 | | | $ | 59,784 | | | $ | 59,784 | | | $ | 59,784 | |
| Other Data: | | | | | | | | | | |
Capital expenditures(1) | | $ | 235,736 | | | $ | 219,242 | | | $ | 235,764 | | | $ | 228,861 | | | $ | 607,716 | |
| | | | | | | | | | |
(1)Capital expenditures includes $0.0 million, $5.6 million, $11.4 million, $10.6 million and $15.5 of payments for financed capital expenditures in 2020, 2019, 2018, 2017 and 2016, respectively.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Financial Statements and the notes thereto. The following discussion contains forward-looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. Please see “Forward-Looking Statements” and “Item 1A. Risk Factors.” For a list of certain abbreviations or acronyms in this discussion, see “Defined Terms” at the beginning of this Form 10-K.
EXECUTIVE SUMMARY
Compared with the prior year, the results for the year ended December 31, 2020 reflect lower earnings from operations before income tax of $29.4 million, or 17%, primarily due to factors including, but not limited to:
•a net decrease in the volume of retail kWh sold mostly due to milder weather and lower demand due to the impact of COVID-19; and
•a reduction in revenues due to an accrued regulatory liability for excess earnings under the FAC provisions.
These were partially offset by:
•a decrease in maintenance expenses; and
•lower pension costs.
See "Results of Operations" below for further discussion.
OVERVIEW OF 2020 RESULTS AND STRATEGIC PERFORMANCE
The most important matters on which we focus in evaluating our financial condition and operating performance and allocating our resources include: (i) recurring factors which have significant impacts on operating performance such as: regulatory action, environmental matters, weather and weather-related damage in our service area, customer growth and the local economy; (ii) our progress on performance improvement and growth strategies designed to maintain high standards in several operating areas (including safety, customer satisfaction, operations, financial and enterprise-wide performance, talent management/people, capital allocation/sustainability and corporate social responsibility) simultaneously; and (iii) our short-term and long-term financial and operating strategies. For a discussion of how we are impacted by regulation and environmental matters, please see Note 2, “Regulatory Matters” to the Financial Statements and “Environmental Matters” in “Item 1. Business.”
Operational Excellence
Our objective is to optimize IPL’s performance in the U.S. utility industry by focusing on the following areas: safety, operations (reliability and customer satisfaction), financial and enterprise-wide performance (efficiency and cost savings, talent management/people, capital allocation/sustainability and corporate social responsibility). We set and measure these objectives carefully, balancing them in a way and to a degree necessary to ensure a sustainable high level of performance in these areas simultaneously as compared to our peers. We monitor our performance in these areas, and where practical and meaningful, compare performance in some areas to peer utilities. Because some of our financial and enterprise-wide performance measures are company-specific performance goals, they are not benchmarked.
Our safety performance is measured by both leading and lagging metrics. Our leading safety metrics track safety observations, safety meeting engagement and the reporting of non-injury near misses. Our lagging safety metrics track lost workday cases, severity rate, and recordable incidents. We are committed to excellence in safety and have implemented various programs to increase safety awareness and improve work practices.
IPL measures delivery reliability by Customer Average Interruption Duration Index ("CAIDI"), System Average Interruption Duration Index ("SAIDI") and System Average Interruption Frequency Index ("SAIFI") and benchmarks the reliability metrics against other utilities at both the state and national levels. IPL also measures customer centricity on more of an individual basis by the industry metric of Customers that Experience Multiple Interruption of five or more times ("CEMI-5"). IPL measures generation reliability by Commercial Availability (“CA”), Equivalent Forced Outage Factor (“EFOF”) and Equivalent Availability Factor (“EAF”) metrics and benchmarks both EFOF and EAF results nationally. We measure Customer Satisfaction using J.D. Power in their Electric Utility Residential Customer Satisfaction Study and Research America Market Research - Consumer Insight. Monitoring performance in the areas such as competitive rates, operational reliability and customer service supports our ongoing work to deliver reliable service to our customers.
RESULTS OF OPERATIONS
The following review of consolidated results of operations and "Capital Resources and Liquidity" sections compare the results for the year ended December 31, 2020 to the results for the year ended December 31, 2019. For discussion comparing the results for the year ended December 31, 2019 to the results for the year ended December 31, 2018, see Item 7.—Management's Discussion and Analysis of Financial Condition and Results of Operations of our 2019 Annual Report on Form 10-K, filed with the SEC on February 27, 2020.
In addition to the discussion on operations below, please see the “Statistical Information on Operations” table included in “Item 1. Business” of this report for additional data such as kWh sales and number of customers by customer class.
Statements of Operations Highlights
| | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| (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 | |
| Operation and maintenance | | 416,169 | | | 428,201 | | | 431,620 | |
| Depreciation and amortization | | 246,896 | | | 240,314 | | | 232,332 | |
| Taxes other than income taxes | | 44,516 | | | 42,236 | | | 53,952 | |
| | | | | | |
| Total operating expenses | | 1,090,453 | | | 1,184,891 | | | 1,214,147 | |
| | | | | | |
| OPERATING INCOME | | 262,532 | | | 296,752 | | | 236,358 | |
| | | | | | |
| OTHER INCOME / (EXPENSE), NET: | | | | | | |
| Allowance for equity funds used during construction | | 4,574 | | | 3,486 | | | 8,477 | |
| Interest expense | | (129,493) | | | (121,771) | | | (95,509) | |
| Loss on early extinguishment of debt | | (2,424) | | | — | | | — | |
| Other income / (expense), net | | 3,370 | | | (10,546) | | | (1,852) | |
| Total other income / (expense), net | | (123,973) | | | (128,831) | | | (88,884) | |
| | | | | | |
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 138,559 | | | 167,921 | | | 147,474 | |
| | | | | | |
| Less: income tax expense | | 28,592 | | | 35,528 | | | 13,449 | |
| NET INCOME | | 109,967 | | | 132,393 | | | 134,025 | |
| | | | | | |
| Less: dividends on preferred stock | | 3,213 | | | 3,213 | | | 3,213 | |
| NET INCOME APPLICABLE TO COMMON STOCK | | $ | 106,754 | | | $ | 129,180 | | | $ | 130,812 | |
2020 versus 2019
Revenues
Revenues decreased in 2020 from the prior year by $128.7 million, which resulted from the following changes (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 | | 2019 | | Change | | Percentage Change |
| Revenues: | | | | | | | | |
| Retail Revenues | | $ | 1,294,100 | | | $ | 1,399,374 | | | $ | (105,274) | | | (7.5) | % |
| Wholesale Revenues | | 46,482 | | | 68,474 | | | (21,992) | | | (32.1) | % |
| Miscellaneous Revenues | | 12,403 | | | 13,795 | | | (1,392) | | | (10.1) | % |
| Total Revenues | | $ | 1,352,985 | | | $ | 1,481,643 | | | $ | (128,658) | | | (8.7) | % |
Heating Degree Days(1): | | | | | | | | |
| Actual | | 4,905 | | | 5,298 | | | (393) | | | (7.4) | % |
| 30-year Average | | 5,350 | | | 5,365 | | | | | |
Cooling Degree Days(1): | | | | | | | | |
| Actual | | 1,192 | | | 1,318 | | | (126) | | | (9.6) | % |
| 30-year Average | | 1,078 | | | 1,074 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Heating and cooling degree-days are a measure of the relative heating or cooling required for a home or business. The heating degrees in a day are calculated as the degrees that the average actual daily temperature is below 65 degrees Fahrenheit. For example, if the average temperature on March 20th was 40 degrees Fahrenheit, the heating degree days for that day would be the 25-degree difference between 65 degrees and 40 degrees. Similarly, cooling degree days in a day are calculated as the degrees that the average actual daily temperature is above 65 degrees Fahrenheit.
Retail Revenues
The decrease in retail revenues of $105.3 million was primarily due to the following (in millions):
| | | | | |
| Volume: | |
| Net decrease in the volume of kWh sold, primarily due to milder weather in our service territory versus the comparable period and lower demand resulting from impacts of COVID-19 | $ | (65.8) | |
| Price: | |
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) | |
| |
| Other: | 1.2 | |
| |
| Net decrease in retail revenues | $ | (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 decrease in wholesale revenues of $22.0 million was primarily due to a $21.5 million volume decrease and a $0.5 million decrease in the weighted average price per kWh sold. We sold 1,866.0 million kWh in the wholesale market during 2020 compared to 2,718.4 million kWh during 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.
Operating Costs and Expenses
The following table illustrates changes in Operating costs and expenses from 2019 to 2020 (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) | % |
| | | | |
Fuel
The decrease in fuel costs of $93.4 million was primarily due to the following:
•a $38.0 million decrease due to the lower price of natural gas consumed versus the comparable period;
•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
•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.
Power Purchased
The increase in purchased power costs of $2.1 million was primarily due to the following:
•a $48.6 million increase due to a 45% increase in the volume of power purchased during the period; partially offset by
•a $46.7 million decrease 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 $48.6 million volume increase was due to IPL's generation units running less frequently during 2020 due to lower market prices of 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 $12.0 million was primarily due to the following:
•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 $3.2 million (these program costs are recoverable through customer rates and are offset by an increase in DSM revenues).
Depreciation and Amortization
The increase in Depreciation and amortization expense of $6.6 million was mostly attributed to the impact of additional assets placed in service.
Taxes Other Than Income Taxes
The increase in Taxes other than income taxes of $2.3 million was mostly attributed to higher property taxes of $1.9 million primarily as a result of higher assessed values.
Other Income / (Expense), Net
The following table illustrates changes in Other income / (expense), net from 2019 to 2020 (in thousands):
| | | | | | | | | | | | | | |
| 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 $7.7 million was primarily due to (i) amortization of unrealized losses on interest rate hedges of $5.4 million beginning in April 2020 and (ii) higher interest expense on long-term debt of $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 increase in Other income/(expense), net of $13.9 million was primarily due to a decrease in defined benefit plan costs of $16.1 million due to a higher expected return on plan assets compared to the prior year.
Income Tax Expense
The following table illustrates changes in income tax expense from 2019 to 2020 (in thousands):
| | | | | | | | | | | | | | |
| Years Ended | | |
| December 31, | | |
| 2020 | 2019 | $ Change | % Change |
| Income tax expense | $ | 28,592 | | $ | 35,528 | | $ | (6,936) | | (19.5) | % |
| | | | |
The decrease in income tax expense of $6.9 million was primarily due to lower pretax income versus the comparable period.
KEY TRENDS AND UNCERTAINTIES
During 2021 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.
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 factors, or other 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
As part of IPL's December 2019 Integrated Resource Plan filing, IPL has plans to retire 630 MW of coal-fired generation at Petersburg Units 1 and 2. IPL issued an all-source request for proposal to competitively procure replacement capacity by June 1, 2023, which 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" of this Form 10-K.
Regulatory Environment
For a discussion of the regulatory environment related to our business, see “Item 1. Business – Regulation” and Note 2, “Regulatory Matters” to the Financial Statements of this Form 10-K.
Macroeconomic and Political
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. On 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 that use LIBOR as an interest rate benchmark. Although the full impact of the reform remains unknown, we have begun to engage with our counterparties to discuss specific action items to be undertaken in order to prepare for amendments when they become due.
CAPITAL RESOURCES AND LIQUIDITY
As of December 31, 2020, we had unrestricted cash and cash equivalents of $20.5 million and available borrowing capacity of $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, 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, all of which authority remains available under the order 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 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, 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, 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 First 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 $95 million of 3.875% IPL first mortgage bonds that are due August 1, 2021. For further discussion, please see Note 7, “Debt - IPL First Mortgage Bonds.”
IPALCO’s Senior Secured Notes and Term Loan
In April 2020, IPALCO completed the sale of the $475 million 2030 IPALCO Notes 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 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) | | |
| | | | | | | | | |
2020 versus 2019
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) | | |
| | | | | | | | | |
The net change in operating assets and liabilities for the year ended December 31, 2020 compared to the year ended December 31, 2019 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) | |
Investing Activities
Net cash used in investing activities increased $38.3 million for the year ended December 31, 2020 compared to the year ended December 31, 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) | |
Financing Activities
Net cash used in financing activities decreased $103.8 million for the year ended December 31, 2020 compared to the year ended December 31, 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 | |
Capital Requirements
Capital Expenditures
Our capital expenditure program, including development and permitting costs, for the three-year period from 2021 through 2023 is currently estimated to cost approximately $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.
Additionally, estimated capital expenditure spending on environmental compliance costs for the three-year period from 2021 through 2023 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. |
Please see “Item 1. Business - Environmental Matters" for additional details on each of these projects.
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 2024 IPALCO Notes or the 2030 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 2024 IPALCO Notes and the 2030 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 interest rate and commodity hedges, taxes and dividend payments. For 2021 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 | |
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 (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 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(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, 2020 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 | |
| | | | | | | | | | |
Short-term and long-term debt:
Our short-term and long-term debt at December 31, 2020 consists of outstanding borrowings on the committed line of credit, IPL first mortgage bonds 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 Financial 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, 2020.
Purchase obligations:
Purchase commitments for coal, gas, purchased power and related transportation:
IPL enters into long-term contracts for the purchase of 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, 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 $7.4 million at December 31, 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 2020 revenues and ending unbilled revenues of a one percentage point change in estimated line losses for the month of December 2020 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 2018, 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 2.6% 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 have a material impact on 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 a significant portion of our current projected burn through 2021 and approximately 28% of our current projected burn for the three-year period ending December 31, 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 100% of the expected consumption at Eagle Valley during the 2021 winter 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. Existing coal purchases made in 2021 are expected to be made at prices that are slightly higher than our weighted average price in 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 Price 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 $32.3 million reduction in fair value as of December 31, 2020 and approximately a $8.2 million increase to the 2021 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 bears interest at a variable rate based either on the Prime interest rate or on the LIBOR. Fair values relating to financial instruments are dependent upon prevalent market rates of interest, primarily the LIBOR. At December 31, 2020, we had approximately $2,683.8 million principal amount of fixed rate debt and $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, 2020 was comprised of $75.0 million under IPL's Credit Agreement. Based on amounts outstanding as of December 31, 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 $0.2 million and $(0.2 million), respectively.
The following table shows our consolidated indebtedness (in millions) by maturity as of December 31, 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% | | |
| | | | | | | | | | | | | | | | |
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 and 2018 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Balance Sheets as of December 31, 2020 and 2019 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Statements of Common Shareholders’ Equity and Noncontrolling Interest | |
| for the Years ended December 31, 2020, 2019 and 2018 | |
| Notes to Consolidated Financial Statements | |
| | |
| Indianapolis Power & Light Company and Subsidiary – Consolidated Financial Statements |
| Report of Independent Registered Public Accounting Firm – 2020, 2019 and 2018 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Balance Sheets as of December 31, 2020 and 2019 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Statements of Common Shareholder’s Equity for the Years Ended | |
| December 31, 2020, 2019 and 2018 | |
| 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, 2020 and 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, 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, 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
| | | | | | | | | | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| 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 | |
| Operation and maintenance | | 416,169 | | | 428,201 | | | 431,620 | |
| Depreciation and amortization | | 246,896 | | | 240,314 | | | 232,332 | |
| Taxes other than income taxes | | 44,516 | | | 42,236 | | | 53,952 | |
| | | | | | |
| Total operating expenses | | 1,090,453 | | | 1,184,891 | | | 1,214,147 | |
| | | | | | |
| OPERATING INCOME | | 262,532 | | | 296,752 | | | 236,358 | |
| | | | | | |
| OTHER INCOME / (EXPENSE), NET: | | | | | | |
| Allowance for equity funds used during construction | | 4,574 | | | 3,486 | | | 8,477 | |
| Interest expense | | (129,493) | | | (121,771) | | | (95,509) | |
| Loss on early extinguishment of debt | | (2,424) | | | 0 | | | 0 | |
| Other income / (expense), net | | 3,370 | | | (10,546) | | | (1,852) | |
| Total other income / (expense), net | | (123,973) | | | (128,831) | | | (88,884) | |
| | | | | | |
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 138,559 | | | 167,921 | | | 147,474 | |
| | | | | | |
| Less: income tax expense | | 28,592 | | | 35,528 | | | 13,449 | |
| NET INCOME | | 109,967 | | | 132,393 | | | 134,025 | |
| | | | | | |
| Less: dividends on preferred stock | | 3,213 | | | 3,213 | | | 3,213 | |
| NET INCOME APPLICABLE TO COMMON STOCK | | $ | 106,754 | | | $ | 129,180 | | | $ | 130,812 | |
| | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Consolidated Statements of Comprehensive Income/(Loss) |
| For the Years Ended December 31, 2020, 2019 and 2018 |
| (In Thousands) |
| | | | | 2020 | 2019 | 2018 |
| | | | | | |
| Net income applicable to common stock | | | | $ | 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 | |
| | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Consolidated Balance Sheets |
| (In Thousands) |
| | | December 31, 2020 | | December 31, 2019 |
| ASSETS | | | | |
| CURRENT ASSETS: | | | | |
| Cash and cash equivalents | | $ | 20,502 | | | $ | 48,152 | |
| Restricted cash | | 6,120 | | | 400 | |
| Accounts receivable, net of allowance for credit losses of $3,155 and $921, respectively | | 165,193 | | | 161,090 | |
| Inventories | | 95,506 | | | 83,569 | |
| Regulatory assets, current | | 45,430 | | | 37,398 | |
| Taxes receivable | | 24,384 | | | 23,670 | |
| Prepayments and other current assets | | 17,842 | | | 17,264 | |
| Total current assets | | 374,977 | | | 371,543 | |
| 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 | | 46,716 | | | 22,082 | |
| Total other non-current assets | | 498,658 | | | 442,557 | |
| TOTAL ASSETS | | $ | 4,969,919 | | | $ | 4,928,669 | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
| CURRENT LIABILITIES: | | | | |
| Short-term debt and current portion of long-term debt (Note 7) | | $ | 169,907 | | | $ | 559,199 | |
| Accounts payable | | 127,089 | | | 128,521 | |
| Accrued taxes | | 26,620 | | | 22,012 | |
| Accrued interest | | 31,733 | | | 35,334 | |
| Customer deposits | | 27,929 | | | 34,635 | |
| Regulatory liabilities, current | | 30,036 | | | 52,654 | |
| Derivative liabilities, current | | 0 | | | 26,560 | |
| Accrued and other current liabilities | | 19,453 | | | 23,300 | |
| Total current liabilities | | 432,767 | | | 882,215 | |
| NON-CURRENT LIABILITIES: | | | | |
| Long-term debt (Note 7) | | 2,556,278 | | | 2,092,430 | |
| Deferred income tax liabilities | | 275,714 | | | 272,861 | |
| 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 | |
| Derivative liabilities, non-current | | 63,215 | | | 0 | |
| Other non-current liabilities | | 13,785 | | | 252 | |
| Total non-current liabilities | | 3,956,380 | | | 3,440,194 | |
| Total liabilities | | 4,389,147 | | | 4,322,409 | |
COMMITMENTS AND CONTINGENCIES (Note 10) | | | | |
| SHAREHOLDERS' EQUITY: | | | | |
| Paid in capital | | 588,966 | | | 590,784 | |
| Accumulated other comprehensive loss | | (43,420) | | | (19,750) | |
| Accumulated deficit | | (24,558) | | | (24,558) | |
| Total common shareholders' equity | | 520,988 | | | 546,476 | |
| Preferred stock of subsidiary | | 59,784 | | | 59,784 | |
| Total shareholders' equity | | 580,772 | | | 606,260 | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 4,969,919 | | | $ | 4,928,669 | |
| | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| 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 | | $ | 109,967 | | | $ | 132,393 | | | $ | 134,025 | |
| 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 | | 3,942 | | | 4,109 | | | 3,975 | |
| Deferred income taxes and investment tax credit adjustments - net | | 2,854 | | | 15,277 | | | (15,735) | |
| Loss on early extinguishment of debt | | 2,424 | | | 0 | | | 0 | |
| Allowance for equity funds used during construction | | (4,574) | | | (3,486) | | | (8,477) | |
| Change in certain assets and liabilities: | | | | | | |
| Accounts receivable | | (4,103) | | | 6,469 | | | (9,944) | |
| Inventories | | (15,240) | | | 13,574 | | | (3,652) | |
| Accounts payable | | (20,322) | | | 3,047 | | | 3,675 | |
| Accrued and other current liabilities | | (8,214) | | | 4,413 | | | (10,532) | |
| Accrued taxes payable/receivable | | 6,695 | | | (15,698) | | | 3,180 | |
| Accrued interest | | (3,601) | | | 544 | | | 458 | |
| 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 | | (578) | | | (2,119) | | | 4,711 | |
| Other - net | | (340) | | | (7,357) | | | 1,089 | |
| Net cash provided by operating activities | | 295,425 | | | 397,815 | | | 381,012 | |
| 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) | |
| Other | | 118 | | | 278 | | | 1,053 | |
| Net cash used in investing activities | | (275,769) | | | (237,448) | | | (253,952) | |
| 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 | | 564,568 | | | 0 | | | 169,936 | |
| Retirement of long-term debt, including early payment premium | | (562,135) | | | 0 | | | 0 | |
| Distributions to shareholders | | (108,739) | | | (136,426) | | | (130,179) | |
| | | | | | |
| | | | | | |
| Preferred dividends of subsidiary | | (3,213) | | | (3,213) | | | (3,213) | |
| Deferred financing costs paid | | (6,914) | | | 0 | | | (1,067) | |
| Payments for financed capital expenditures | | (36) | | | (5,623) | | | (11,429) | |
| Other | | (117) | | | (152) | | | (190) | |
| Net cash used in financing activities | | (41,586) | | | (145,414) | | | (124,142) | |
| 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 | | 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: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest (net of amount capitalized) | | $ | 122,938 | | | $ | 117,457 | | | $ | 90,975 | |
| Income taxes | | 27,000 | | | 29,600 | | | 28,275 | |
| Non-cash investing activities: | | | | | | |
| Accruals for capital expenditures | | $ | 54,360 | | | $ | 35,471 | | | $ | 47,553 | |
| | | | | | |
See notes to consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Consolidated Statements of Common Shareholders' Equity |
| and Noncontrolling Interest |
| For the Years Ended December 31, 2020, 2019 and 2018 |
| (In Thousands) |
| | | Paid in
Capital | | Accumulated Other Comprehensive Loss | | Accumulated
Deficit | | Total Common Shareholders' Equity | | Cumulative Preferred Stock of Subsidiary |
| Balance at January 1, 2018 | | $ | 597,467 | | | $ | — | | | $ | (25,191) | | | $ | 572,276 | | | $ | 59,784 | |
| Net income | | — | | | — | | | 130,812 | | | 130,812 | | | 3,213 | |
| Preferred stock dividends | | — | | | — | | | — | | | — | | | (3,213) | |
| Distributions to shareholders | | — | | | — | | | (130,179) | | | (130,179) | | | — | |
| Other | | 357 | | | — | | | — | | | 357 | | | — | |
| Balance at December 31, 2018 | | 597,824 | | | — | | | (24,558) | | | 573,266 | | | 59,784 | |
| Net comprehensive income | | — | | | (19,750) | | | 129,180 | | | 109,430 | | | 3,213 | |
| Preferred stock dividends | | — | | | — | | | — | | | — | | | (3,213) | |
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 | | | 59,784 | |
| Net comprehensive income | | — | | | (23,670) | | | 106,754 | | | 83,084 | | | 3,213 | |
| Preferred stock dividends | | — | | | — | | | — | | | — | | | (3,213) | |
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 | | | $ | 59,784 | |
| | | | | | | | | | |
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 and 2018
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 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.
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.
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 | |
| | | | |
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. Our 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, “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 | |
| | | | |
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 | |
| | | | |
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 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, 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” 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 $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
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, 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.
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 years ended December 31, 2020, 2019, and 2018 are as 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 | |
| | | | |
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 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 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 |
| 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.
|
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. 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 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.
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, 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 million and $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
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, 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’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, 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 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, 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 a projected benefit 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.
Service Company
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 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, 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, “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, 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” and Note 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.
|
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 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.
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, 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 million and $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.
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, 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 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 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, |
| | | 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 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
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.
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 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 | |
| | | | |
| | | | |
| | | | |
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: | | | | |
| Financial transmission rights | $ | 864 | | $ | 0 | | $ | 0 | | $ | 864 | |
| Total financial assets measured at fair value | $ | 864 | | $ | 0 | | $ | 0 | | $ | 864 | |
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 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, 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 | |
| | | | | | | | |
The difference between the face value and the carrying value of this indebtedness represents the following:
•unamortized deferred financing costs of $17.4 million and $16.7 million at December 31, 2020 and 2019, respectively; and
•unamortized discounts of $6.0 million and $6.2 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) |
| FTRs | | Not Designated | | MWh | | 3,168 | | | 0 | | | 3,168 | |
(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, 2020, 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 | | 2020 | | 2019 |
| Financial transmission rights | Not a Cash Flow Hedge | | Prepayments and other current assets | | $ | 543 | | | $ | 864 | |
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, 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.
During the years ended December 31, 2020, 2019 and 2018, IPL declared dividends to its shareholder totaling $140.6 million, $159.0 million, and $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, 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 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 | |
|
(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 | 40,000 | |
| 2025 | 0 | |
| Thereafter | 1,668,800 | |
| 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 $1,803.8 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.
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 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 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, 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
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 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 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 | | $ | 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 | % |
| | | | | | |
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, 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 | | 5,323 | | | 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 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 and 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 a projected benefit 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 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 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
IPL 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
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 ultimate outcome of such litigation cannot be predicted with certainty, management believes that final outcomes will not have a material adverse effect on IPL's results of operations, financial condition and cash flows.
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 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 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 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, IPL had prepaid approximately of $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. IPL 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, 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 $12.5 million and $23.1 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 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 2018, respectively. Total costs incurred by IPL 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 IPL’s Consolidated Statements of Operations. IPL 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.
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 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. 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, 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 IPL's 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.
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
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.
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, 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, 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, 2020.
Changes in Internal Control Over Financial Reporting:
There were no changes that occurred during the quarter ended December 31, 2020 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 | |
| | | | |
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 and 2018 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2020, 2019, and 2018 | |
| Consolidated Balance Sheets as of December 31, 2020 and 2019 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31, 2020, 2019 and 2018 | |
| 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 and 2018 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Balance Sheets as of December 31, 2020 and 2019 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019 and 2018 | |
| Consolidated Statements of Common Shareholder’s Equity for the Years Ended December 31, 2020, 2019 and 2018 | |
| Notes to Consolidated Financial Statements | |
| Schedule II – Valuation and Qualifying Accounts and Reserves | |
| | | | | |
| (b) Exhibits | |
| |
| Exhibit No. | Document |
| 3.1 | |
| 3.2 | |
| 4.1 | |
| 4.2 | |
| 4.3 | The following supplemental indentures to the Mortgage and Deed of Trust referenced in 4.2 above: |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| 4.4 | |
| 4.5 | |
| 4.6 | |
| 4.7 | |
| 4.8 | |
| 4.9 | |
| | | | | |
| 10.1 | |
| 10.2 | |
| 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 | |
| 10.9 | |
| 10.10 | |
| 10.11 |
|
| 10.12 | |
| 10.13 | |
| 10.14 | |
| 10.15 | |
| 10.16 | |
| 21 | |
| 31.1 | |
| 31.2 | |
| 32.1 | |
| 32.2 | |
| 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 | |
| | | | |
See notes to Schedule I.
| | | | | | | | | | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. |
| Schedule I – Condensed Financial Information of Registrant |
| Unconsolidated Statements of Operations |
| (In Thousands) |
| | | 2020 | | 2019 | | 2018 |
| OTHER INCOME / (EXPENSE), NET: | | | | | | |
| Equity in earnings of subsidiaries | | $ | 140,030 | | | $ | 154,078 | | | $ | 154,150 | |
| Interest expense | | (42,212) | | | (32,761) | | | (31,038) | |
| Loss on early extinguishment of debt | | (2,415) | | | 0 | | | 0 | |
| Other income / (expense), net | | 73 | | | (46) | | | (443) | |
| Total other income / (expense), net | | 95,476 | | | 121,271 | | | 122,669 | |
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 95,476 | | | 121,271 | | | 122,669 | |
| Less: income tax expense / (benefit) | | (11,278) | | | (7,909) | | | (8,143) | |
| 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 | |
| | | | | | |
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 | |
| | | | | | |
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.
|
| | | | | | | | |
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, 2020, 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 | |
(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 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 period 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 | | |
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 |
| 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 | |
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 | |
|
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 Unconsolidated 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.
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, 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, 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 24, 2021 /s/ Kristina Lund
Kristina Lund
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/ Kristina Lund | | President and Chief Executive Officer, and Director (Principal Executive Officer) | | February 24, 2021 |
| Kristina Lund | | |
| /s/ Lisa Krueger | | Director and Executive Chairman | | February 24, 2021 |
| Lisa Krueger | | |
| /s/ Kenneth J. Zagzebski | | Director | | February 24, 2021 |
| Kenneth J. Zagzebski | | |
| /s/ Bernerd Da Santos | | Director | | February 24, 2021 |
| Bernerd Da Santos | | |
| /s/ Paul L. Freedman | | Director | | February 24, 2021 |
| Paul L. Freedman | | |
| /s/ Susan Harcourt | | Director | | February 24, 2021 |
| Susan Harcourt | | |
| /s/ Marc Michael | | Director | | February 24, 2021 |
Marc Michael
| | |
| /s/ Gustavo Pimenta | | Director | | February 24, 2021 |
| Gustavo Pimenta | | |
| /s/ Barry J. Bentley | | Director | | February 24, 2021 |
| Barry J. Bentley | | |
| /s/ Frédéric Lesage | | Director | | February 24, 2021 |
Frédéric Lesage
| | |
| /s/ Fady Mansour | | Director | | February 24, 2021 |
| Fady Mansour | | |
| /s/ Gustavo Garavaglia | | Chief Financial Officer (Principal Financial Officer) | | February 24, 2021 |
| Gustavo Garavaglia | | |
| /s/ Karin M. Nyhuis | | Controller (Principal Accounting Officer) | | February 24, 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.
