For Mr. Zagzebski, the in-the-money value of unvested stock options granted in February 2015;For Mr. Zagzebski, the value of outstanding PSUs granted in February 2016 and 2017 at the target payout level;
The value of outstanding RSUs granted in February 2015, 2016 and 2017; and
The value of unvested PUs granted in February 2016 and 2017, at the target payout level.
The following table provides further detail on accelerated vesting of LTC awards by award type.
|
| | | | | | | | | | | | | | | | | | |
| Name | Zagzebski | Jackson | Killer | Miller | Sobecki | Horrocks |
| Long-Term Award Type: | | | | | | |
| Stock Options | $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Performance Cash Units | $ | 410,676 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Performance Stock Units | $ | 426,973 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
| Restricted Stock Units | $ | 195,936 |
| $ | 174,276 |
| $ | 112,047 |
| $ | 148,934 |
| $ | 113,932 |
| $ | 122,271 |
|
| Performance Units | $ | — |
| $ | 177,531 |
| $ | 115,282 |
| $ | 152,250 |
| $ | 121,433 |
| $ | 122,689 |
|
| Total Accelerated LTC Vesting | $ | 1,033,585 |
| $ | 351,807 |
| $ | 227,329 |
| $ | 301,184 |
| $ | 235,265 |
| $ | 244,960 |
|
| |
(3)Consolidated Statements of Common Shareholders’ Equity and Noncontrolling Interest | Upon a termination without cause or a qualifying termination following a change in control, |
for the NEO may receive continued medical, dentalYears ended December 31, 2019, 2018 and vision benefits. The value2017 | |
| Notes to Consolidated Financial Statements | |
| |
| Indianapolis Power & Light Company and Subsidiary – Consolidated Financial Statements |
Report of this benefits continuation is based onIndependent Registered Public Accounting Firm – 2019, 2018 and 2017 | |
Consolidated Statements of Operations for the share of premiums paid by the employer on each NEO’s behalf inYears Ended December 31, 2019, 2018 and 2017 based on the coverage in place at the end | |
Consolidated Balance Sheets as of December 2017. For the benefit continuation period, each NEO is responsible for paying the portion of premiums previously paid as an employee. |
| 31, 2019 and 2018 | |
(4)Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 | Upon a termination without cause or a qualifying termination following a change in control, Mr. Zagzebski |
| Consolidated Statements of Common Shareholder’s Equity for the Years Ended | |
December 31, 2019, 2018 and Mr. Jackson are eligible for outplacement benefits. The estimated value of this benefit is $25,000.2017 | |
| Notes to Consolidated Financial Statements | |
Additional Information Relating to Potential Payments upon Termination of Employment or Change in Control
The following narrative outlining our compensatory arrangements with our NEOs is in addition to other summaries of their terms found in the CD&A of this Amendment.
Potential Payments upon Termination under the AES Corporation Severance Plan
The Severance Plan provides for certain payments and benefits to participants upon the Involuntary Termination or Termination for Good Reason of their employment under certain circumstances, including the execution of a release by the participant pursuant to the terms of the Severance Plan. All of our NEOs were entitled to the benefits provided by the Severance Plan in 2017.
Certain employees, including the NEOs, are eligible for severance benefits, including salary continuation, applicable benefits and severance payments under the Severance Plan if the employee separates from service due to Involuntarily Termination or for Good Reason (each as defined below). Benefits under the Severance Plan require a minimum one year of service eligibility, and are not available under the Severance Plan if the individual’s employment is terminated in connection with certain events as set forth in the Severance Plan, including, but not limited to, (a) an employee’s (i) voluntary resignation (other than for Good Reason), (ii) separation from service for Cause (or for reasons that the employer determines would be inconsistent with the purposes of the Severance Plan), (ii) declining a new job position located within 50 miles of the employee’s current work site, or (b) due to death or disability, the sale of a business, or in connection with a voluntary transfer of employment.
Upon the termination of employment under the above circumstances, Mr. Zagzebski and Mr. Jackson would be entitled to receive the following:
Salary continuation payments equal to the NEO’s annual base salary, which would be paid over time in accordance with our payroll practices and the terms of the Severance Plan;
An additional payment equal to a pro rata portion of the NEO’s annual cash bonus, to the extent earned, based upon the time the NEO was employed during the year in which his employment terminates, provided that applicable performance conditions are met;
In
Report of Independent Registered Public Accounting Firm
To the event that the NEO elects COBRA coverage under the health plan in which he participates, we would pay an amount of the premium he pays for such coverage (for up to 12 months) equal to the premium we pay for active employees. The Company would also provide the NEO with continuation of dental and vision benefit programs, with the NEO paying the same portion of the premiums as were previously paid as an employee;
The NEO will be provided with outplacement services provided by an independent agency, provided that the benefit is incurred by and may not extend beyond December 31 of the second calendar year following the calendar year in which the termination occurred; and
In the event that termination of the NEO’s employment occurs due to the circumstances described above and within two years after a “change in control,” the amount of the NEO’s salary continuation payment will be doubled,Shareholders and the length of the healthcare benefit continuation period will also be doubled, but can never be more than 18 months.
In the event of a qualifying termination under the Severance Plan, Mr. Miller and Mr. Horrocks each would be entitled to 12 months prorated annual compensation and continuation of health, dental and vision benefits during this 12-month period, and Mr. Killer and Ms. Sobecki each would be entitled to 8-months prorated annual compensation and continuation of health, dental and vision benefits during this 8-month period.
The obligation to provide these payments and benefits to the NEOs under the Severance Plan would be conditioned upon the execution and delivery of a written release of claims against the Company and AES. At our discretion, the release may also contain such noncompetition, nonsolicitation and nondisclosure provisions as we may consider necessary or appropriate.
Payment of Long-Term Compensation Awards in the Event of Termination or Change in Control as Determined by the Provisions Set Forth in the 2003 Long Term Compensation Plan (for all NEOs)
The vesting of PSUs, PCUs, RSUs, stock options and PUs and the ability of our NEOs to exercise or receive payments under those awards changes in the case of (1) termination of a NEO’s employment or (2) as a result of a change in control. The vesting conditions are defined by the provisions set forth in the 2003 Long Term Compensation Plan as outlined below:
Performance Stock Units, Performance Cash Units, Restricted Stock Units and Performance Units. Our CEO holds outstanding PSUs and PCUs. All of our NEOs hold outstanding RSUs, and all of our NEOs, except for Mr. Zagzebski hold outstanding PUs. If a NEO’s employment is terminated by reason of death or disability prior to the third anniversary of the grant date of a PSU, PCU, or a RSU, the PSUs (at target), the PCUs (at target) and/or RSUs will immediately vest and be delivered. If a NEO separates from service prior to the end of a performance period due to death or disability, all PUs will vest on such termination date and a cash amount equal to $1 for each PU generally will be paid to the NEO on such date or as soon as practicable thereafter.
If the NEO’s employment is terminated for any reason other than death or disability prior to the third anniversary of the grant date of a RSU, the NEO will forfeit all RSUs for which the service-based vesting condition has not been met.
The PSU grants and PCU grants provide that voluntary termination or termination for cause prior to the end of the three-year performance period will result in the forfeiture of all outstanding PSUs and PCUs. Involuntary termination or a qualified retirement, which requires the NEO to reach 60 years of age and seven years of service with AES or an affiliate, allow prorated time-vesting in increments of one-third or two-thirds vesting if the NEO has completed one or two years of service from the grant date, respectively.
With respect to PUs, if a NEO separates from service prior to (i) the payment date due to cause or (ii) the final vesting date by reason of a voluntary separation from service by the NEO, any unvested PUs will be forfeited in full and cancelled by AES on such termination date; provided, however, that if a NEO separates from service for any other reason (including due to qualified retirement), the NEO will be eligible to receive the value of his or her vested PUs, as of the date of the separation from service, on the payment date and in accordance with the terms of the applicable PU award agreement.
If a change in control occurs prior to the payment date of a PSU, PCU, RSU award, or PU award, outstanding PSUs and PCUs (at target), RSUs, and PUs will only become fully vested should a double-trigger occur. The double-trigger only allows for vesting if a qualifying termination occurs in connection with the change in control.
Stock Options. Mr. Zagzebski holds outstanding stock options. If a NEO’s employment is terminated by reason of death or disability, the stock options shall be immediately accelerated and become fully vested, exercisable, and payable, but such options will expire one year after the termination date or, if earlier, on the original expiration date of such stock option had the NEO remained employed through such date.
If the NEO’s employment is terminated for cause, all unvested stock options will be forfeited and all vested stock options will expire three months after the termination date or, if earlier, on the original expiration date of such stock option.
If the NEO’s employment is terminated for any other reason, all of the unvested stock options will be forfeited and all vested stock options will expire 180 days after the termination date or, if earlier, on the original expiration date of such stock option.
In the event of a change in control, all of the NEO’s stock options will only become fully vested should a double-trigger occur. The double-trigger only allows for vesting if a qualifying termination occurs in connection with the change in control. However, the AES Compensation Committee may cancel outstanding stock options (1) for consideration equal to an amount to which the NEO would otherwise be entitled to receive in the change in control transaction if the NEO exercised the stock options, less the exercise price of such stock options or (2) if the amount determined pursuant to (1) would be negative, for no consideration. Any such payment may be made in cash, securities, or other property.
The AES Corporation Restoration Supplemental Retirement Plan (RSRP)
In the event of a termination of the NEO’s employment (other than by reason of death) prior to reaching retirement eligibility, or, in the event of a change in control (defined in the same manner as the term “change-in-control” in the RSRP described below), the balances of all of the NEO’s deferral accounts under the RSRP will be paid in a lump sum. In the event of a NEO’s death or retirement, the balances in the NEO’s deferral accounts will be paid according to his or her elections if the NEO was 59 1/2 or more years old at the time of his or her death or retirement. In the event of the NEO’s death or retirement before age 59 1/2, the value of the deferral account will be paid in a lump sum.
Definition of Terms
The following definitions are provided in the Severance Plan and related Benefits Schedule used in this description:
“Cause” generally means termination of service due to the participant’s dishonesty, insubordination; continued and repeated failure to perform his or her assigned duties or willful misconduct in the performance of such duties; intentionally engaging in unsatisfactory job performance; failing to make a good faith effort to bring unsatisfactory job performance to an acceptable level; violation of the policies, procedures, work rules or recognized standards of behavior; misconduct related to his or her employment; or a charge, indictment or conviction of, or a plea of guilty or nolo contendere to, a felony, whether or not in connection with the performance of his or her duties.
“Change in Control” generally means the occurrence of one or more of the following events: (i) a transfer or sale of all or substantially all of AES’ assets, (ii) a person (other than someone in AES Management) becomes the beneficial owner of more than 35% of AES outstanding stock, (iii) during any one year period, individuals who at the beginning of such period constitute the Board of AES (together with any new Director whose election or nomination was approved by a majority of the Directors who were either in office at the beginning of such period or who were so approved, excluding anyone who became a Director as a result of a threatened or actual proxy contest or solicitation, including through the use of proxy access procedures as may be provided in the AES bylaws) cease
to constitute a majority of the Board, or (iv) the consummation of a merger or similar transaction involving AES securities representing 65% or more of the then-outstanding voting stock of the corporation resulting from such transaction are held subsequent to such transaction by beneficial owners of AES immediately prior to such transaction in substantially the same proportions as their ownership immediately prior to such transaction.
“Good Reason” or “Good Reason Termination” generally means, without a participant’s written consent, his or her separation from service (for reasons other than death, disability or Cause) by a participant due to the following events, within two years of the consummation of a Change in Control: (i) the relocation of a participant’s principal place of employment to a location that is more than 50 miles from his or her previous principal place of employment; (ii) a material diminution in the duties or responsibilities of a participant; and (iii) a material reduction in the base salary or annual incentive opportunity of a participant.
“Involuntary Termination” generally means an involuntary separation from service (that is not otherwise an ineligible termination) due to a reduction in force, permanent job elimination, the restructuring or reorganization of a business unit, division, department, or other business segment, a termination by mutual consent where AES agrees that the participant is entitled to benefits, or declining an offer to relocate to a new job position more than 50 miles from the participant’s current location (provided, however, that if the participant is an officer of AES, he or she will not incur an Involuntary Termination if he or she declines a new job position, regardless of its location).
The following definition is provided in the RSRP of the terms used in this description:
“Change-in-Control” means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of AES to any Person or Group (as that term is used in Section 13(d)(3) of the Exchange Act) of Persons; (ii) a Person or Group (as so defined) of Persons (other than AES Management on the date of the adoption of the RSRP or their affiliates) shall have become the beneficial owner of more than 35% of the outstanding voting stock of AES; or (iii) during any one-year period, individuals who at the beginning of such period constitute the Board of AES (together with any new Director whose election or nomination was approved by a majority of the Directors then in office who were either Directors at the beginning of such period or who were previously so approved, but excluding under all circumstances any such new Director whose initial assumption of office occurs as a result of an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of any individual, corporation, partnership or other entity or group) cease to constitute a majority of the Board of Directors. Notwithstanding the foregoing or any provision of the RSRP to the contrary, the foregoing definition of change-in-control shall be interpreted, administered and construed in manner necessary to ensure that the occurrence of any such event shall result in a change-in-control only if such event qualifies as a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as applicable, within the meaning of Treas. Reg. § 1.409A-3(i)(5).
The following definition is provided in the 2003 Long Term Compensation Plan of the terms used in this description:
“Change-in-Control” means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of AES to any Person or Group (as that term is used in Section 13(d) (3) of the Exchange Act) of Persons, (ii) a Person or Group (as so defined) of Persons (other than AES Management on the date of the adoption of the 2003 Long Term Compensation Plan or their affiliates) shall have become the beneficial owner of more than 35% of the outstanding voting stock of AES, or (iii) during any one-year period, individuals who at the beginning of such period constitute the Board of AES (together with any new Director whose election or nomination was approved by a majority of the Directors then in office who were either Directors at the beginning of such period or who were previously so approved, but excluding under all circumstances any such new Director whose initial assumption of office occurs as a result of an actual or threatened election contest or other actual or threatened solicitation of proxies or consents by or on behalf of any individual, corporation, partnership or other entity or group) cease to constitute a majority of the Board. Notwithstanding the foregoing or any provision of the 2003 Long Term Compensation Plan to the contrary, if an award is subject to Section 409A (and not excepted therefrom) and a Change of Control is a distribution event for purposes of an award, the foregoing definition of Change-in-Control
shall be interpreted, administered and construed in manner necessary to ensure that the occurrence of any such event shall result in a Change of Control only if such event qualifies as a change in the ownership or effective control of a corporation, or a change in the ownership of a substantial portion of the assets of a corporation, as applicable, within the meaning of Treas. Reg. § 1.409A-3(i)(5).
Director Compensation
None of our current directors receives any compensation for his services on the Board. The compensation for our NEOs who also serve as directors is fully reflected in the Summary Compensation Table and other tables set forth in this Amendment. No director who served on our Board for any part of 2017 that is or was also an employee of IPL, AES, or any of its affiliates, received any additional payment for their services on the Board. Information regarding the compensation received by current and former directors in their capacities as employees of our affiliates is set forth in “Item 13. Certain Relationships, Related Transactions and Director Independence” of this Amendment. We did not have any non-employee directors who received compensation for their services on the Board in 2017.
Compensation Committee Interlocks and Insider Participation
The Board of Directors of IPALCO does notEnterprises, Inc.
Opinion on the Financial Statements
We have a compensation committee. Please seeaudited the CD&A in this Amendmentaccompanying consolidated balance sheets of IPALCO Enterprises, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, common shareholders’ equity and noncontrolling interest, and cash flows for a discussioneach of the process undertaken in setting executive compensation, including the persons who, during the last completed fiscal year, participatedthree years in the NEO compensation process.period ended December 31, 2019, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our CEO, togetherresponsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the other members of the Executive Compensation Review Team (consisting of our CEO, the AES COO,Public Company Accounting Oversight Board (United States) (PCAOB) and the AES CHRO) is responsible for reviewing and administering compensation for our NEOs, except for the CEO. Our CEO does not participate in the review and decision processare required to be independent with respect to his own compensation. Accordingly, nonethe 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 executive officers who are also membersaudits in accordance with the standards of our Board of Directors, participatethe PCAOB and in accordance with auditing standards generally accepted in the deliberations and/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 approvals regarding their own compensation.
For informationfraud. 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 board membershipsamounts and officerdisclosures in the financial statements. Our audits also included evaluating the accounting principles used and employee positions heldsignificant estimates made by our executive officers and directors with AES and other companies affiliated with IPALCO, seemanagement, as well as evaluating the biographies of our executive officers and directors included under “Item 10. Directors, Executive Officers and Corporate Governance” and the disclosures relating to these individuals included under “Item 13. Certain Relationships, Related Transactions and Director Independence,” each set forth in this Amendment and incorporated by reference herein as to this information.
CEO Pay Ratio
As required by SEC rules, we are disclosing the medianoverall presentation of the annual total compensation of all employees of IPL (excludingfinancial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the CEO), the annual total compensation of the CEO, and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer. Company’s auditor since 2008.
Consistent with SEC rules, the Company reviewed its employee population as of December 1, 2017 to prepare the analysis. As of December 1, 2017, the date selected by the Company for purposes of choosing the median employee, the employee population consisted of approximately 1,359 individuals. The median employee was selected using data for the following elements of compensation: salary, equity grants, and non-equity incentive compensation, over a trailing 12-month period.Indianapolis, Indiana
February 27, 2020
For purposes of reporting annual total compensation and the ratio of annual total compensation of the CEO to the median employee, both the CEO and median employee’s annual total compensation are calculated consistent with the disclosure requirements of executive compensation under Item 402(c)(2)(x) of Regulation S-K.
For fiscal 2017, the median employee’s annual total compensation was $116,510, and the total annual compensation of our CEO was $1,369,959. Based on this information, the ratio of the total annual compensation of our CEO to the total annual compensation of our median employee for fiscal 2017 is 12:1.
The Company has not made any of the adjustments permissible by the SEC, nor have any material assumptions or estimates been made to identify the median employee or to determine total annual compensation.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following two tables set forth information regarding the beneficial ownership of IPALCO’s Common Stock and the AES’ Common Stock as of March 15, 2018 by (a) each current Director of IPALCO and each NEO set forth in the Summary Compensation Table in this Amendment, (b) all Directors and Executive Officers of IPALCO as a group and (c) all persons who are known by IPALCO to be the beneficial owner of more than five percent (5%) of the Common Stock of IPALCO. Under SEC Rule 13d-3 of the Exchange Act, “beneficial ownership” includes shares for which the individual, directly or indirectly, has or shares voting power (which includes the power to vote or direct the voting of the shares) or investment power (which includes the power to dispose or direct the disposition of the shares), whether or not the shares are held for individual benefit. Under these rules, more than one person may be deemed the beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person has no economic interest. Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to the best of our knowledge, sole voting and investment power with respect to the indicated shares of IPALCO and AES Common Stock.
Except as otherwise indicated, the address for each person below is c/o IPALCO Enterprises, Inc. One Monument Circle, Indianapolis, Indiana 46204.
(a) Common Stock of IPALCO(1)
|
| | | | |
| Name and Address of Beneficial Holder | Amount and Nature of Beneficial Ownership | Percent of IPALCO Common Stock Outstanding |
| AES U.S. Investments, Inc. | 89,685,177 |
| 82.35% |
|
| CDP Infrastructure Fund, GP | | |
| 1000, Place Jean-Paul-Riopelle | | |
| Montréal (Québec) H2Z 2B3 | 19,222,141 |
| 17.65 | % |
All Directors and Executive Officers as a Group (13 people) | 0 |
| 0% |
|
|
| | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Consolidated Statements of Operations |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| | | 2019 | | 2018 | | 2017 |
| REVENUES | | $ | 1,481,643 |
| | $ | 1,450,505 |
| | $ | 1,349,588 |
|
| | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | |
| Fuel | | 340,466 |
| | 331,701 |
| | 281,542 |
|
| Power purchased | | 133,674 |
| | 164,542 |
| | 189,847 |
|
| Operation and maintenance | | 428,201 |
| | 431,620 |
| | 385,906 |
|
| Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
|
| Taxes other than income taxes | | 42,236 |
| | 53,952 |
| | 44,644 |
|
| Total operating expenses | | 1,184,891 |
| | 1,214,147 |
| | 1,110,390 |
|
| | | | | | | |
| OPERATING INCOME | | 296,752 |
| | 236,358 |
| | 239,198 |
|
| | | | | | | |
| OTHER INCOME / (EXPENSE), NET: | | | | | | |
| Allowance for equity funds used during construction | | 3,486 |
| | 8,477 |
| | 25,798 |
|
| Interest expense | | (121,771 | ) | | (95,509 | ) | | (101,130 | ) |
| Loss on early extinguishment of debt | | — |
| | — |
| | (8,875 | ) |
| Other income / (expense), net | | (10,546 | ) | | (1,852 | ) | | 2,753 |
|
| Total other income / (expense), net | | (128,831 | ) | | (88,884 | ) | | (81,454 | ) |
| | | | | | | |
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 167,921 |
| | 147,474 |
| | 157,744 |
|
| | | | | | | |
| Less: income tax expense | | 35,528 |
| | 13,449 |
| | 48,951 |
|
| NET INCOME | | 132,393 |
| | 134,025 |
| | 108,793 |
|
| | | | | | | |
| Less: dividends on preferred stock | | 3,213 |
| | 3,213 |
| | 3,213 |
|
| NET INCOME APPLICABLE TO COMMON STOCK | | $ | 129,180 |
| | $ | 130,812 |
| | $ | 105,580 |
|
| | | | | | | |
See notes to consolidated financial statements.
(b) Common Stock of The AES Corporation
|
| | | |
| Name/Address | Position Held With the Company | Shares of Common Stock Beneficially Owned (2)(3) | Percent of Class (2)(3) |
| Barry J. Bentley | Director | 13,471 | * |
| Renaud Faucher | Director | 0 | 0% |
| Paul L. Freedman | Director | 22,341 | * |
| Andrew J. Horrocks | Executive Officer | 5,549 | * |
| Craig L. Jackson | Director and Executive Officer | 34,923 | * |
| Jennifer Killer | Executive Officer | 21,935 | * |
| Frédéric Lesage | Director | 0 | 0% |
| Vincent W. Mathis | Executive Officer | 30,713 | * |
| Mark E. Miller | Director | 16,475 | * |
| Julian Nebreda | Director | 195,863 | * |
| Thomas M. O’Flynn | Director | 1,031,731 | * |
| Gustavo Pimenta | Director | 33,444 | * |
| Judi Sobecki | Director | 18,784 | * |
| Kenneth J. Zagzebski | Director and Executive Officer | 162,749 | * |
| All Directors and Executive Officers as a Group (13 people) | | 1,582,429 | * |
|
| | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Consolidated Statements of Comprehensive Income/(Loss) |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| | 2019 | 2018 | 2017 |
| | | | |
| Net income applicable to common stock | $ | 129,180 |
| $ | 130,812 |
| $ | 105,580 |
|
| | | | |
| Derivative activity: | | | |
| Change in derivative fair value, net of income tax benefit of $6,810, $0 and $0, for each respective period | (19,750 | ) | — |
| — |
|
| Net change in fair value of derivatives | (19,750 | ) | — |
| — |
|
| | | | |
| Other comprehensive loss | (19,750 | ) | — |
| — |
|
| | | | |
| Net comprehensive income | $ | 109,430 |
| $ | 130,812 |
| $ | 105,580 |
|
| | | | |
See notes to consolidated financial statements.
*Shares held represent less than 1% |
| | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Consolidated Balance Sheets |
| (In Thousands) |
| | | December 31, 2019 | | December 31, 2018 |
| ASSETS | | | | |
| CURRENT ASSETS: | | | | |
| Cash and cash equivalents | | $ | 48,152 |
| | $ | 33,199 |
|
| Restricted cash | | 400 |
| | 400 |
|
| Accounts receivable, net | | 161,090 |
| | 167,559 |
|
| Inventories | | 83,569 |
| | 99,668 |
|
| Regulatory assets, current | | 37,398 |
| | 28,399 |
|
| Taxes receivable | | 23,670 |
| | 13,773 |
|
| Prepayments and other current assets | | 17,264 |
| | 15,573 |
|
| Total current assets | | 371,543 |
| | 358,571 |
|
| NON-CURRENT ASSETS: | | | | |
| Property, plant and equipment | | 6,398,612 |
| | 6,201,078 |
|
| Less: Accumulated depreciation | | 2,414,652 |
| | 2,256,215 |
|
| | 3,983,960 |
| | 3,944,863 |
|
| Construction work in progress | | 130,609 |
| | 111,723 |
|
| Total net property, plant and equipment | | 4,114,569 |
| | 4,056,586 |
|
| OTHER NON-CURRENT ASSETS: | | |
| | |
|
| Intangible assets - net | | 64,861 |
| | 40,848 |
|
| Regulatory assets, non-current | | 355,614 |
| | 395,077 |
|
| Other non-current assets | | 22,082 |
| | 10,971 |
|
| Total other non-current assets | | 442,557 |
| | 446,896 |
|
| TOTAL ASSETS | | $ | 4,928,669 |
| | $ | 4,862,053 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
| CURRENT LIABILITIES: | | | | |
| Short-term and current portion of long-term debt (Note 7) | | $ | 559,199 |
| | $ | — |
|
| Accounts payable | | 128,521 |
| | 134,931 |
|
| Accrued taxes | | 22,012 |
| | 21,325 |
|
| Accrued interest | | 35,334 |
| | 34,790 |
|
| Customer deposits | | 34,635 |
| | 32,700 |
|
| Regulatory liabilities, current | | 52,654 |
| | 51,024 |
|
| Accrued and other current liabilities | | 49,860 |
| | 27,787 |
|
| Total current liabilities | | 882,215 |
| | 302,557 |
|
| NON-CURRENT LIABILITIES: | | | | |
| Long-term debt (Note 7) | | 2,092,430 |
| | 2,649,064 |
|
| Deferred income tax liabilities | | 272,861 |
| | 253,085 |
|
| Taxes payable | | 4,658 |
| | 4,658 |
|
| Regulatory liabilities, non-current | | 846,430 |
| | 870,255 |
|
| Accrued pension and other postretirement benefits | | 19,344 |
| | 19,329 |
|
| Asset retirement obligations | | 204,219 |
| | 129,451 |
|
| Other non-current liabilities | | 252 |
| | 604 |
|
| Total non-current liabilities | | 3,440,194 |
| | 3,926,446 |
|
| Total liabilities | | 4,322,409 |
| | 4,229,003 |
|
| COMMITMENTS AND CONTINGENCIES (Note 10) | | | | |
| SHAREHOLDERS' EQUITY: | | | | |
| Paid in capital | | 590,784 |
| | 597,824 |
|
| Accumulated other comprehensive loss | | (19,750 | ) | | — |
|
| Accumulated deficit | | (24,558 | ) | | (24,558 | ) |
| Total common shareholders' equity | | 546,476 |
| | 573,266 |
|
| Preferred stock of subsidiary | | 59,784 |
| | 59,784 |
|
| Total shareholders' equity | | 606,260 |
| | 633,050 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 4,928,669 |
| | $ | 4,862,053 |
|
| | | | | |
See notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Consolidated Statements of Cash Flows |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| | | 2019 | | 2018 | | 2017 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income | | $ | 132,393 |
| | $ | 134,025 |
| | $ | 108,793 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
|
| Amortization of deferred financing costs and debt premium | | 4,109 |
| | 3,975 |
| | 4,202 |
|
| Deferred income taxes and investment tax credit adjustments - net | | 15,277 |
| | (15,735 | ) | | (3,506 | ) |
| Loss on early extinguishment of debt | | — |
| | — |
| | 8,875 |
|
| Allowance for equity funds used during construction | | (3,486 | ) | | (8,477 | ) | | (25,798 | ) |
| Change in certain assets and liabilities: | | |
| | |
| | |
|
| Accounts receivable | | 6,469 |
| | (9,944 | ) | | (3,028 | ) |
| Inventories | | 13,574 |
| | (3,652 | ) | | (5,342 | ) |
| Accounts payable | | 3,047 |
| | 3,675 |
| | (12,917 | ) |
| Accrued and other current liabilities | | 4,413 |
| | (10,532 | ) | | 97 |
|
| Accrued taxes payable/receivable | | (15,698 | ) | | 3,180 |
| | (785 | ) |
| Accrued interest | | 544 |
| | 458 |
| | 1,791 |
|
| Pension and other postretirement benefit expenses | | 5,414 |
| | (30,740 | ) | | (14,069 | ) |
| Short-term and long-term regulatory assets and liabilities | | 921 |
| | 76,647 |
| | 17,011 |
|
| Prepayments and other current assets | | (2,119 | ) | | 4,711 |
| | (553 | ) |
| Other - net | | (7,357 | ) | | 1,089 |
| | 2,038 |
|
| Net cash provided by operating activities | | 397,815 |
| | 381,012 |
| | 285,260 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Capital expenditures | | (213,619 | ) | | (224,335 | ) | | (218,224 | ) |
| Project development costs | | (2,269 | ) | | (1,127 | ) | | (1,729 | ) |
| Cost of removal and regulatory recoverable ARO payments | | (21,838 | ) | | (29,543 | ) | | (16,802 | ) |
| Other | | 278 |
| | 1,053 |
| | 323 |
|
| Net cash used in investing activities | | (237,448 | ) | | (253,952 | ) | | (236,432 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
| | |
|
| Short-term debt borrowings | | 10,000 |
| | 100,000 |
| | 202,500 |
|
| Short-term debt repayments | | (10,000 | ) | | (248,000 | ) | | (129,150 | ) |
| Long-term borrowings, net of discount | | — |
| | 169,936 |
| | 404,633 |
|
| Retirement of long-term debt, including early payment premium | | — |
| | — |
| | (408,152 | ) |
| Distributions to shareholders | | (136,426 | ) | | (130,179 | ) | | (105,144 | ) |
| Preferred dividends of subsidiary | | (3,213 | ) | | (3,213 | ) | | (3,213 | ) |
| Deferred financing costs paid | | — |
| | (1,067 | ) | | (3,709 | ) |
| Payments for financed capital expenditures | | (5,623 | ) | | (11,429 | ) | | (10,637 | ) |
| Other | | (152 | ) | | (190 | ) | | (228 | ) |
| Net cash used in financing activities | | (145,414 | ) | | (124,142 | ) | | (53,100 | ) |
| Net change in cash, cash equivalents and restricted cash | | 14,953 |
| | 2,918 |
| | (4,272 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | | 33,599 |
| | 30,681 |
| | 34,953 |
|
| Cash, cash equivalents and restricted cash at end of period | | $ | 48,552 |
| | $ | 33,599 |
| | $ | 30,681 |
|
| | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest (net of amount capitalized) | | $ | 117,457 |
| | $ | 90,975 |
| | $ | 94,781 |
|
| Income taxes | | 29,600 |
| | 28,275 |
| | 65,050 |
|
| Non-cash investing activities: | | | | | | |
|
| Accruals for capital expenditures | | $ | 35,471 |
| | $ | 47,553 |
| | $ | 45,322 |
|
| | | | | | | |
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, 2019, 2018 and 2017 |
| (In Thousands) |
| | | Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Common Shareholders' Equity | | Cumulative Preferred Stock of Subsidiary |
| Balance at January 1, 2017 | | $ | 596,810 |
| | $ | — |
| | $ | (25,627 | ) | | $ | 571,183 |
| | $ | 59,784 |
|
| Net income | | — |
| | — |
| | 105,580 |
| | 105,580 |
| | 3,213 |
|
| Preferred stock dividends | | — |
| | — |
| | — |
| | — |
| | (3,213 | ) |
| Distributions to shareholders | | — |
| | — |
| | (105,144 | ) | | (105,144 | ) | | — |
|
| Other | | 657 |
| | — |
| | — |
| | 657 |
| | — |
|
| Balance at December 31, 2017 | | 597,467 |
| | — |
| | (25,191 | ) | | 572,276 |
| | 59,784 |
|
| 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 |
|
| | | | | | | | | | | |
1) IPALCO made return of capital payments of $7.2 million in 2019 for the portion of current year distributions to shareholders in excess of current year net income.
|
| |
See notes to consolidated financial statements.
IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
For the Years Ended December 31,2019, 2018 and2017
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IPALCO is a holding company incorporated under the laws of the total numberstate of outstanding shares of AES Common Stock.
| |
(1) | Pursuant to the terms of the Shareholders’ Agreement, AES U.S. Investments and CDPQ have agreed that, during the term of the Shareholders’ Agreement, each of AES U.S. Investments and CDPQ shall vote, or act by written consent with respect to, all shares ofIndiana. IPALCO, beneficially owned by them for the election to the Board of Directors of the individuals nominated by AES U.S. Investments and CDPQ. For additional information regarding the Shareholders’ Agreement, including the number of directors that may be nominated by AES and CDPQ, please refer to “Shareholders’ Agreement” under Item 13 of this Amendment. |
| |
(2) | The shares of AES Common Stock beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under the SEC rules, shares of AES Common Stock, which are subject to options, units or other securities that are exercisable or convertible into shares of AES Common Stock within 60 days of March 15, 2018, are deemed to be outstanding and beneficially owned by the persons holding such options, units or other securities. Such underlying shares of Common Stock are deemed to be outstanding for the purpose of computing such person’s ownership percentage, but not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. |
| |
(3) | Includes (a) the following shares issuable upon exercise of options outstanding as of March 15, 2018 that are able to be exercised within 60 days of March 15, 2018: Mr. Bentley - 0 shares; Mr. Faucher - 0 shares; Mr. Freedman - 0 shares; Mr. Horrocks - 0 shares; Mr. Jackson - 0 shares; Ms. Killer - 0 shares; Mr. Lesage - 0 shares; Mr. Mathis - 0 shares; Mr. Miller - 0 shares; Mr. Nebreda - 155,124 shares; Mr. O’Flynn - 693,313 shares; Mr. Pimenta - 0 shares; Ms. Sobecki - 0 shares; Mr. Zagzebski - 117,486 shares; all directors and executive officers as a group - 965,923shares; (b) the following units issuable under the AES 2003 Long Term Compensation Plan: Mr. Bentley - 13,399 shares; Mr. Freedman - 15,509 shares; Mr. Horrocks - 5,549 shares; Mr. Jackson - 16,296 shares; Ms. Killer - 10,681 shares; Mr. Mathis - 17,020 shares; Mr. Miller - 13,295 shares; Mr. Nebreda - 16,780 shares; Mr. O’Flynn - 117,935 shares; Mr. Pimenta - 23,273 shares; Ms. Sobecki - 11,302 shares; Mr. Zagzebski - 32,928 shares; all directors and executive officers as a group - 288,418shares; (c) the following shares held in The AES Retirement Savings Plan or IPL Thrift Plan: Mr. Bentley - 72 shares; Mr. Freedman - 2,350 shares; Mr. Horrocks - 0 shares; Mr. Jackson - 0 shares; Ms. Killer - 1,873 shares; Mr. Mathis - 0 shares; Mr. Miller - 3,180 shares; Mr. Nebreda - 23,959 shares; Mr. O’Flynn - 9,242 shares; Mr. Pimenta - 0 shares; Ms. Sobecki - 0 shares; Mr. Zagzebski - 12,335 shares; all directors and executive officers as a group - 53,011shares.
|
Change in Control
IPALCO was acquired by AES in March 2001, and currently is majority-ownedowned by AES U.S. Investments with a minority interest held by(82.35%) and CDPQ a wholly owned subsidiary of La Caisse de dépȏt et placement du Québec.(17.65%). AES U.S. Investments is owned by AES U.S. Holdings, LLC (85%) and CDPQ (15%). AESIPALCO owns all of the outstanding common stock of IPL. Substantially all of IPALCO’s business consists of generating, transmitting, distributing and selling of electric energy conducted through its principal subsidiary, IPL. IPL was incorporated under the laws of the state of Indiana in 1926. IPL has more than 500,000 retail customers in the city of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, with the most distant point being approximately 40 miles from Indianapolis. IPL has an exclusive right to provide electric service to those customers. IPL owns and operates 4 generating stations all within the state of Indiana. Our largest generating station, Petersburg, is coal-fired. The second largest station, Harding Street, uses natural gas and fuel oil to power combustion turbines. In addition, IPL operates a 20 MW battery energy storage unit at this location, which provides frequency response. The third station, Eagle Valley, is a CCGT natural gas plant. IPL took operational control and commenced commercial operations of this CCGT plant in April 2018. The fourth station, Georgetown, is a small peaking station that uses natural gas to power combustion turbines. As of December 31, 2019, IPL’s net electric generation capacity for winter is 3,705 MW and net summer capacity is 3,560 MW.
IPALCO’s other direct subsidiary is Mid-America. Mid-America is the holding company for IPALCO’s unregulated activities, which have not been material to the financial statements in the periods covered by this report. IPALCO’s regulated business is conducted through IPL. IPALCO has 2 business segments: utility and nonutility. The utility segment consists of the operations of IPL and everything else is included in the nonutility segment.
Principles of Consolidation
IPALCO’s consolidated financial statements are prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The consolidated financial statements include the accounts of IPALCO, its regulated utility subsidiary, IPL, and its unregulated subsidiary, Mid-America. All intercompany items have been eliminated in consolidation. Certain costs for shared resources amongst IPL and IPALCO, such as labor and benefits, are allocated to each entity based on allocation methodologies that management believes to be reasonable. We have evaluated subsequent events through the date this report is issued.
Financial Statement Presentation
During 2018, we adopted a change in presentation on our Consolidated Balance Sheets and Consolidated Statements of Operations from a utility format to a traditional format. These changes combined or revised the order of certain balance sheet and income statement line items and resulted in the movement of certain immaterial balances within the Consolidated Statements of Operations and Consolidated Balance Sheets, but did not result in any material changes to the classification of any such amounts or have any impact on net assets or net income.
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
The preparation of financial statements in conformity with GAAP requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may also be affected by the estimates and assumptions management is required to make. Actual results may differ from those estimates.
Regulatory Accounting
The retail utility operations of IPL are subject to the jurisdiction of the IURC. IPL’s wholesale power transactions are subject to the jurisdiction of the FERC. These agencies regulate IPL’s utility business operations, tariffs, accounting, depreciation allowances, services, issuances of securities and the sale and acquisition of utility properties. The
financial statements of IPL are based on GAAP, including the provisions of FASB ASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of these agencies. See also Note 2, “Regulatory Matters - Regulatory Assets and Liabilities” for a discussion of specific regulatory assets and liabilities.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents. Restricted cash includes cash which is restricted as to withdrawal or usage. The nature of the restrictions includes restrictions imposed by agreements related to deposits held as collateral. The following table provides a summary of cash, cash equivalents and restricted cash amounts as shown on the Consolidated Statements of Cash Flows:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Cash, cash equivalents and restricted cash | | | | |
| Cash and cash equivalents | | $ | 48,152 |
| | $ | 33,199 |
|
| Restricted cash | | 400 |
| | 400 |
|
| Total cash, cash equivalents and restricted cash | | $ | 48,552 |
| | $ | 33,599 |
|
| | | | | |
Revenuesand Accounts Receivable
Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to certain customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making its estimates of unbilled revenue, IPL uses complex models that consider various factors including daily generation volumes; known amounts of energy usage by nearly all residential, small commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. An allowance for potential credit losses is maintained and amounts are written off when normal collection efforts have been exhausted. Our provision for doubtful accounts included in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations was $5.5 million, $6.0 million and $5.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
IPL’s basic rates include a provision for fuel costs as established in IPL’s most recent rate proceeding, which last adjusted IPL’s rates in December 2018. IPL is permitted to recover actual costs of purchased power and fuel consumed, subject to certain restrictions. This is accomplished through quarterly FAC proceedings, in which IPL estimates the amount of fuel and purchased power costs in future periods. Through these proceedings, IPL is also permitted to recover, in future rates, underestimated fuel and purchased power costs from prior periods, subject to certain restrictions, and therefore the over or underestimated costs are deferred or accrued and amortized into fuel expense in the same period that IPL’s rates are adjusted. See also Note 2, “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. Holdings, LLCSee Note 13, "Revenue" for additional information of MISO sales and other revenue streams.
The following table summarizes our accounts receivable balances at December 31:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Accounts receivable, net | | | | |
| Customer receivables | | $ | 90,747 |
| | $ | 91,426 |
|
| Unbilled revenue | | 65,822 |
| | 68,893 |
|
| Amounts due from related parties | | 2,717 |
| | 5,720 |
|
| Other | | 3,857 |
| | 4,341 |
|
| Provision for uncollectible accounts | | (2,053 | ) | | (2,821 | ) |
| Total accounts receivable, net | | $ | 161,090 |
| | $ | 167,559 |
|
| | | | | |
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, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Inventories | | | | |
| Fuel | | $ | 26,907 |
| | $ | 32,457 |
|
| Materials and supplies | | 56,662 |
| | 67,211 |
|
| Total inventories | | $ | 83,569 |
| | $ | 99,668 |
|
| | | | | |
Property, Plant and Equipment
Property, plant and equipment is wholly ownedstated at original cost as defined for regulatory purposes. The cost of additions to property, plant and equipment and replacements of retirement units of property are charged to plant accounts. Units of property replaced or abandoned in the ordinary course of business are retired from the plant accounts at cost; such amounts, less salvage, are charged to accumulated depreciation. Depreciation is computed by the straight-line method based on functional rates approved by the IURC and averaged 3.7%, 4.2%, and 4.1% during 2019, 2018 and 2017, respectively. Depreciation expense was $228.2 million, $235.2 million, and $209.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. "Depreciation and amortization" expense on the accompanying Consolidated Statements of Operations is presented net of regulatory deferrals of depreciation expense and also includes amortization of intangible assets and amortization of previously deferred regulatory costs.
Allowance For Funds Used During Construction
In accordance with the Uniform System of Accounts prescribed by FERC, IPL capitalizes an allowance for the net cost of funds (interest on borrowed funds and a reasonable rate of return on equity funds) used for construction purposes during the period of construction with a corresponding credit to income. IPL capitalized amounts using pretax composite rates of 6.9%, 6.4% and 6.6% during 2019, 2018 and 2017, respectively.
Impairment of Long-lived Assets
GAAP requires that 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, 2019 and 2018. We do not believe any of these assets are currently impaired. In making this assessment, we consider such factors as: the overall condition and generating and distribution capacity of the assets; the expected ability to recover additional
expenditures in the assets; the anticipated demand and relative pricing of retail electricity in our service territory and wholesale electricity in the region; and the cost of fuel.
Intangible Assets
Intangible assets primarily include capitalized software of $139.6 million and $129.7 million and its corresponding accumulated amortization of $74.7 million and $88.8 million, as of December 31, 2019 and 2018, respectively. Amortization expense was $7.5 million, $5.5 million and $4.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. The estimated amortization expense of this capitalized software is approximately $50.0 million over the next 5 years ($10.0 million in 2020, $10.0 million in 2021, $10.0 million in 2022, $10.0 million in 2023 and $10.0 million in 2024).
Contingencies
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, 2019 and 2018, total loss contingencies accrued were $4.5 million and $4.6 million, respectively, which were included in “Accrued and Other Current Liabilities” on the accompanying Consolidated Balance Sheets.
Concentrations of Risk
Substantially all of IPL’s customers are located within the Indianapolis area. Approximately 69% of IPL’s employees are covered by collective bargaining agreements in two bargaining units: a physical unit and a clerical-technical unit. IPL’s contract with the physical unit expires on December 6, 2021, and the contract with the clerical-technical unit expires February 13, 2023. Additionally, IPL has long-term coal contracts with 4 suppliers, with about 33% of our existing coal under contract for the three-year period ending December 31, 2022 coming from one supplier. Substantially all of the coal is currently mined in the state of Indiana.
Financial Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Changes in the fair value are recorded in earnings unless the derivative is designated as a cash flow hedge of a forecasted transaction or it qualifies for the normal purchases and sales exception.
IPL has contracts involving the physical delivery of energy and fuel. Because these contracts qualify for the normal purchases and normal sales scope exception in ASC 815, IPL has elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
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 changes in the components of Accumulated Other Comprehensive Income/(Loss) during the year ended December 31, 2019 are as follows:
|
| | | | |
| | | Gains and losses on cash flow hedges |
| | | (In Thousands) |
| Balance at January 1, 2019 | | $ | — |
|
| Other comprehensive loss | | (19,750 | ) |
| Balance at December 31, 2019 | | $ | (19,750 | ) |
| | | |
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. The Company establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company’s tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting.
Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. The Company’s policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations.
Income tax assets or liabilities, which are included in allowable costs for ratemaking purposes in future years, are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 2, "Regulatory Matters" for additional information.
IPALCO and its subsidiaries file U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 8, "Income Taxes" for additional information.
Pension and Postretirement Benefits
We recognize in our Consolidated Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes in the funded status, that would otherwise be recognized in AOCI, recorded as a regulatory asset as this can be recovered through future rates. All plan assets are recorded at fair value. We follow the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
We account for and disclose pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of ASC 715, we apply a disaggregated discount rate approach for determining service cost and interest cost for our defined benefit pension plans and postretirement plans.
See Note 9, "Benefit Plans" for more information.
Repair and Maintenance Costs
Repair and maintenance costs are expensed as incurred.
Per Share Data
IPALCO is owned by AES U.S. Investments and CDPQ. IPALCO does not report earnings on a per-share basis.
New Accounting Pronouncements Adopted in 2019
The following table provides a brief description of recent accounting pronouncements that had an impact on the Company’s Financial Statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on the Company’s Financial Statements.
|
| | | |
| New Accounting Standards Adopted |
| ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption |
| 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities | The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity, and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that the entire change in the fair value of a hedging instrument will be recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item.
Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date. Prospective for presentation and disclosures.
| January 1, 2019 | The adoption of this standard did not have a material impact on the Financial Statements. |
| 2016-02, 2018-01, 2018-10, 2018-11, 2018-20, 2019-01, Leases (Topic 842) | See discussion of the ASUs below.
| January 1, 2019 | See impact upon adoption of the standard below.
|
On January 1, 2019, the Company adopted ASC 842 Leases and its subsequent corresponding updates (“ASC 842”). Under this standard, lessees are required to recognize assets and liabilities for most leases on the balance sheet, and recognize expenses in a manner similar to the current accounting method. For lessors, the guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. The guidance eliminates previous real estate-specific provisions.
Under ASC 842, fewer of our contracts contain a lease. However, due to the elimination of the real estate-specific guidance and changes to certain lessor classification criteria, more leases qualify as sales-type leases and direct financing leases. Under these two models, a lessor derecognizes the asset and recognizes a lease receivable. According to ASC 842, the net investment in the lease includes the fair value of residual interest in AESthe asset after the contract period as well as the present value of the fixed lease payments, but does not include any variable payments under the lease. Therefore, the net investment in the lease could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized net investment in the lease and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.
During the course of adopting ASC 842, the Company applied various practical expedients including:
The package of practical expedients (applied to all leases) that allowed lessees and lessors not to reassess:
a. whether any expired or existing contracts are or contain leases,
b. lease classification for any expired or existing leases, and
c. whether initial direct costs for any expired or existing leases qualify for capitalization under ASC 842.
The transition practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements, and
The transition practical expedient for lessees that allowed businesses to not separate lease and non-lease components. The Company applied the practical expedient to all classes of underlying assets when valuing
right-of-use assets and lease liabilities. Contracts where the Company is the lessor were separated between the lease and non-lease components.
The Company applied the modified retrospective method of adoption and elected to continue to apply the guidance in ASC 840 Leases to the comparative periods presented in the year of adoption. Under this transition method, the Company applied the transition provisions starting at the date of adoption. The adoption of ASC 842 did not have a material impact on our Financial Statements.
New Accounting Pronouncements Issued But Not Yet Effective
The following table provides a brief description of recent accounting pronouncements that could have a material impact on the Company’s Financial Statements once adopted. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on the Company’s Financial Statements.
|
| | | |
| New Accounting Standards Issued But Not Yet Effective |
| ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption |
| 2019-12, Income Taxes (Topic 740): Simplifying the Accounting For Income Taxes | The standard removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.
Transition Method: various | January 1, 2021. Early adoption is permitted. | The Company is currently evaluating the impact of adopting the standard on the Financial Statements. |
| 2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments | See discussion of the ASU below.
| January 1, 2020. Early adoption is permitted only as of January 1, 2019. | The Company will adopt the standard on January 1, 2020; see below for the evaluation of the impact of the adoption on the standard on the Financial Statements. |
ASU 2016-13 and its subsequent corresponding updates will update the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, there will be no change to the measurement of credit losses, except that unrealized losses due to credit-related factors will be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement. There are various transition methods available upon adoption.
The Company is currently evaluating the impact of adopting the standard on its Financial Statements; however, it is expected that the new current expected credit loss model will primarily impact the calculation of the Company's expected credit losses on $163.1 million in gross trade accounts receivable. The Company does not expect a material impact to result from the application of CECL on our trade accounts receivable.
2. REGULATORY MATTERS
General
IPL is subject to regulation by the IURC as to its services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, retail rates and charges, the issuance of securities (other than evidences of indebtedness payable less than twelve months after the date of issue), the acquisition and sale of some public utility properties or securities and certain other matters.
In addition, IPL is subject to the jurisdiction of the FERC with respect to, among other things, short-term borrowings not regulated by the IURC, the sale of electricity at wholesale, the transmission of electric energy in interstate commerce, the classification of accounts, reliability standards, and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act. As a regulated entity, IPL is required to use certain accounting methods prescribed by regulatory bodies which may differ from those accounting methods required to be used by unregulated entities.
IPL is also affected by the regulatory jurisdiction of the EPA at the federal level, and the IDEM at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the NERC, the U.S. Holdings, LLCDepartment of Labor and the IOSHA.
Basic Rates and Charges
Our basic rates and charges represent the largest component of our annual revenues. Our basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. These basic rates and charges are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the IURC, the Indiana Office of Utility Consumer Counselor, and other interested stakeholders. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all Indiana utilities at least once every four years, but the IURC has the authority to review the rates of any Indiana utility at any time. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property.
Our declining block rate structure generally provides for residential and commercial customers to be charged a lower per kWh rate at higher consumption levels. Therefore, as volumes increase, the weighted average price per kWh decreases. Numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual operating and maintenance expenditures, fuel costs, generating unit availability, and capital expenditures including those required by environmental regulations can affect the return realized.
Base Rate Orders
On October 31, 2018, the IURC issued an order approving an uncontested settlement agreement previously filed with the IURC by IPL for a $43.9 million, or 3.2%, increase to annual revenues (the "2018 Base Rate Order"). The 2018 Base Rate Order includes recovery through rates of the CCGT at Eagle Valley completed in the first half of 2018, as well as other construction projects and changes to operating income since the 2016 Base Rate Order (See below). New basic rates and charges became effective on December 5, 2018. The 2018 Base Rate Order also provides customers approximately $50 million in benefits, which are flowing to customers over the two-year period that began March 2019, via the ECCRA rate adjustment mechanism. This liability, less amounts returned to IPL's customers during 2019, is recorded primarily in "Regulatory liabilities, current" with approximately $4.7 million in "Regulatory liabilities, non-current" as ofDecember 31, 2019 on the accompanying Consolidated Balance Sheets. In addition, the 2018 Base Rate Order provides that annual wholesale margins earned above (or below) the benchmark of $16.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. Similarly, the 2018 Base Rate Order provides that all capacity sales above (or below) a benchmark of $11.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. The 2018 Base Rate Order also approved changes to IPL's depreciation and amortization rates (including no longer deferring depreciation on the CCGT at Eagle Valley) which altogether represent a net expense increase of approximately $28.7 million annually.
In March 2016, the IURC issued the 2016 Base Rate Order authorizing IPL to increase its basic rates and charges by $30.8 million annually. IPL also received approval to implement three new rate riders for current recovery from customers ofongoing MISO costs and capacity costs, and for sharing with customers 50% of wholesale sales margins above and below the established benchmark of $6.3 million.
CCR
On April 26, 2017, the IURC approved IPL’s CCR compliance request to install a bottom ash dewatering system at its Petersburg generating station and to recover 80% of qualifying costs through a rate adjustment mechanism with the remainder recorded as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the CCR compliance plan was approximately $47 million. IPL’s bottom ash dewatering system at its Petersburg generating station went into service in September 2017.
NAAQS
On April 26, 2017, the IURC approved IPL’s request for NAAQS SO2 compliance at its Petersburg generation station with 80% of qualifying costs recovered through a rate adjustment mechanism and the remainder recorded
as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the NAAQS SO2 compliance plan was approximately $29 million. These projects went into service between August 2018 and August 2019.
Other
The DOE issued a Notice of Proposed Rule Making on September 29, 2017, which directed the FERC to exercise its authority to set just and reasonable rates that recognize the “resiliency” value provided by generation plants with certain characteristics, including having 90-days or more of on-site fuel and operating in markets where they do not receive rate base treatment through state ratemaking. Nuclear and coal-fired generation plants would have been most likely to be able to meet the requirements. As proposed, the DOE would value resiliency through rates that recover “compensable costs” that were defined to include the recovery of operating and fuel expenses, debt service and a fair return on equity. On January 8, 2018, the FERC issued an order terminating this docket stating that it failed to satisfy the legal requirements of Section 206 of the Federal Power Act of 1935. The FERC initiated a new docket to take additional steps to explore resilience issues in RTOs/ISOs. The goal of this new proceeding is to: (1) develop a common understanding among the FERC, State Commissions, RTOs/ISOs, transmission owners, and others as to what resilience of the bulk power system means and requires; (2) understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) use this information to evaluate whether additional action regarding resilience is appropriate at this time. It is not possible to predict the impact of this proceeding on our business, financial condition and results of operations.
FACand Authorized Annual Jurisdictional Net Operating Income
IPL may apply to the IURC for a change in IPL’s fuel charge every three months to recover IPL’s estimated fuel costs, including the energy portion of purchased power costs, which may be above or below the levels included in IPL’s basic rates and charges. IPL must present evidence in each FAC proceeding that it has made every reasonable effort to acquire fuel and generate or purchase power or both so as to provide electricity to its retail customers at the lowest fuel cost reasonably possible.
Independent of the IURC’s ability to review basic rates and charges, Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in the FAC. A utility may be unable to recover all of its fuel costs if its rolling twelve-month operating income, determined at quarterly measurement dates, exceeds its authorized annual jurisdictional net operating income and there are not sufficient applicable cumulative net operating income deficiencies (“Cumulative Deficiencies”) to offset it. The Cumulative Deficiencies calculation provides that only five years’ worth of historical earnings deficiencies or surpluses are included, unless it has been greater than five years since the most recent rate case.
In each of the last three calendar years, IPL has reported earnings in excess of the authorized level for each of the four quarterly reporting periods in those years. IPL was not required to reduce its fuel cost recovery, because of its Cumulative Deficiencies. The historical periods when IPL earned less than the authorized level, which put IPL in a Cumulative Deficiency position, all relate to earnings prior to IPL’s 2018 Base Rate Order and therefore each quarter one of those under-earning periods drops out of the Cumulative Deficiency calculation. Consequently, it is likely that IPL’s Cumulative Deficiencies will drop to zero in 2020 and IPL may then be required to decrease its fuel factor if it continues to earn above the authorized level.
ECCRA
IPL may apply to the IURC for approval of a rate adjustment known as the ECCRA periodically to recover costs (including a return) to comply with certain environmental regulations applicable to IPL’s generating stations. The total amount of IPL’s equipment approved for ECCRA recovery as of December 31, 2019 was $17.4 million. The jurisdictional revenue requirement approved by the IURC to be included in IPL’s rates for the twelve-month period ending February 2020 was a net credit to customers of $28.4 million. This amount is significantly lower than prior ECCRA periods as a result of (i) having the vast majority of the ECCRA projects rolled into IPL’s basic rates and charges effective December 5, 2018 as a result of the 2018 Base Rate Order and (ii) the approximately $50 million of customer benefits being flowed through the ECCRA as a result of the 2018 Base Rate Order, as described above. The only equipment still remaining in the ECCRA as of December 31, 2019 are certain projects associated with NAAQS compliance.
DSM
Through various rate orders from the IURC, IPL has been able to recover its costs of implementing various DSM programs throughout the periods covered by this report. In 2019 and 2018, IPL also had the ability to receive performance incentives, dependent upon the level of success of the programs. Performance incentives included in revenues for the years ended December 31, 2019, 2018 and 2017 were $7.5 million, $3.8 million and $0.0 million, respectively.
On February 7, 2018, the IURC approved a settlement agreement establishing a new three year DSM plan for IPL through 2020. The approval included cost recovery of programs as well as performance incentives, depending on the level of success of the programs. The order also approved recovery of lost revenues, consistent with the provisions of the settlement agreement.
Wind and Solar Power Purchase Agreements
We are committed under a power purchase agreement to purchase all wind-generated electricity through 2029 from a wind project in Indiana. We are also committed under another agreement to purchase all wind-generated electricity through 2031 from a project in Minnesota. The Indiana project has a maximum output capacity of approximately 100 MW and the Minnesota project has a maximum output capacity of approximately 200 MW. In addition, we have 96.4 MW of solar-generated electricity in our service territory under long-term contracts (these long-term contracts have expiration dates ranging from 2021 to 2033), of which 95.9 MW was in operation as of December 31, 2019. 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. See also Note 8, “Income Taxes - U.S. Tax Reform” for further information.
TDSIC Filing
In 2013, Senate Enrolled Act 560, the Transmission, Distribution, and Storage System Improvement Charge ("TDSIC") statute, was signed into law. The TDSIC statute was revised in 2019. Among other provisions, this legislation provides for cost recovery outside of a base rate proceeding for new or replacement electric and gas transmission, distribution, and storage projects that a public utility undertakes for the purposes of safety, reliability, system modernization, or economic development. Provisions of the TDSIC statute require that, among other things, requests for recovery include a plan of at least five years and not more than seven for eligible investments. Once the plan is approved by the IURC, 80 percent of eligible costs can be recovered using a periodic rate adjustment mechanism. The cost recovery mechanism is referred to as a TDSIC mechanism. Recoverable costs include a return on, and of, the investment, including AFUDC, post-in-service carrying charges, operation and maintenance expenses, depreciation and property taxes. The remaining 20 percent of recoverable costs are to be deferred for future recovery in the public utility’s next base rate case. The periodic rate adjustment mechanism is capped at an annual increase of no more than 2 percent of total retail revenues.
On July 24, 2019, IPL filed a petition with the IURC seeking approval of a seven-year TDSIC Plan for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027. An IURC order is expected in the first quarter of 2020. There will be no revenues and/or cost recovery until approval of the TDSIC rider, which is not expected to occur until later in 2020.
IRP Filing
In December 2019, IPL filed its IRP, which describes IPL's Preferred Resource Portfolio for meeting generation capacity needs for serving IPL's retail customers over the next several years. IPL's Preferred Resource Portfolio is IPL's reasonable least cost option and provides a cleaner and more diverse generation mix for customers. IPL's Preferred Resource Portfolio includes the retirement of 630 MW of coal-fired generation by 2023. Based on extensive modeling, IPL has determined that the cost of operating Petersburg Units 1 and 2 exceeds the value customers receive compared to alternative resources. Retirement of these units allows the company to cost-effectively diversify the portfolio and transition to lower cost and cleaner resources while maintaining a reliable system.
IPL issued an all-source Request for Proposal on December 20, 2019, in order to competitively procure replacement capacity by June 1, 2023, which is the first year IPL is expected to have a capacity shortfall. Current modeling indicates that a combination of wind, solar, storage, and energy efficiency would be the lowest reasonable cost option for the replacement capacity, but IPL will assess the type, size, and location of resources after bids are received. As a result of the decision to retire Petersburg Units 1 and 2, IPL recorded a $6.2 million obsolescence loss in December 2019 for materials and supplies inventory IPL does not believe will be utilized by the planned retirement dates, which is recorded in "Operating expenses - Operation and maintenance" on the accompanying Consolidated Statements of Operations.
Regulatory Assets and Liabilities
Regulatory assets represent deferred costs or credits that have been included as allowable costs or credits for ratemaking purposes. IPL has recorded regulatory assets or liabilities relating to certain costs or credits as authorized by the IURC or established regulatory practices in accordance with ASC 980. IPL is amortizing non tax-related regulatory assets to expense over periods ranging from 1 to 45 years. Tax-related regulatory assets represent the net income tax costs to be considered in future regulatory proceedings generally as the tax-related amounts are paid.
The amounts of regulatory assets and regulatory liabilities at December 31 are as follows: |
| | | | | | | | | | |
| | | 2019 | | 2018 | | Recovery Period |
| | | (In Thousands) | | |
| Regulatory Assets | | | | | | |
| Current: | | | | | | |
| Undercollections of rate riders | | $ | 22,216 |
| | $ | 13,217 |
| | Approximately 1 year(1) |
| Costs being recovered through basic rates and charges | | 15,182 |
| | 15,182 |
| | Approximately 1 year(1) |
| Total current regulatory assets | | 37,398 |
| | 28,399 |
| | |
| Long-term: | | | | | | |
| Unrecognized pension and other | | | | | | |
| postretirement benefit plan costs | | 176,646 |
| | 195,559 |
| | Various (2) |
| Deferred MISO costs | | 74,660 |
| | 88,052 |
| | Through 2026(1) |
| Unamortized Petersburg Unit 4 carrying | | | | | | |
| charges and certain other costs | | 7,030 |
| | 8,084 |
| | Through 2026(1)(3) |
| Unamortized reacquisition premium on debt | | 18,330 |
| | 19,714 |
| | Over remaining life of debt |
| Environmental projects | | 78,021 |
| | 81,204 |
| | Through 2046(1)(3) |
| Other miscellaneous | | 927 |
| | 2,464 |
| | Various (4) |
| Total long-term regulatory assets | | 355,614 |
| | 395,077 |
| | |
| Total regulatory assets | | $ | 393,012 |
| | $ | 423,476 |
| | |
| Regulatory Liabilities | | | | | | |
| Current: | | | | | | |
| Overcollections and other credits being passed | | | | | | |
| to customers through rate riders | | $ | 51,790 |
| | $ | 47,925 |
| | Approximately 1 year(1) |
| FTRs | | 864 |
| | 3,099 |
| | Approximately 1 year(1) |
| Total current regulatory liabilities | | 52,654 |
| | 51,024 |
| | |
| Long-term: | | | | | | |
| ARO and accrued asset removal costs | | 719,680 |
| | 707,662 |
| | Not applicable |
| Income taxes payable to customers through rates | | 122,156 |
| | 141,058 |
| | Various |
| Long-term portion of credits being passed to customers | | | | | | |
| through rate riders | | 3,337 |
| | 21,341 |
| | Through 2021 |
| Other miscellaneous | | 1,257 |
| | 194 |
| | To be determined |
| Total long-term regulatory liabilities | | 846,430 |
| | 870,255 |
| | |
| Total regulatory liabilities | | $ | 899,084 |
| | $ | 921,279 |
| | |
| |
| |
| (1) | Recovered (credited) per specific rate orders |
| |
| (2) | IPL receives a return on its discretionary funding |
| |
| (3) | Recovered with a current return |
(4) The majority of these costs are being recovered in basic rates and charges through 2026. For the remainder, recovery is probable, but the
timing is not yet determined.
Deferred Fuel
Deferred fuel costs are a component of current regulatory assets or liabilities (which is a result of IPL charging either more or less for fuel than our actual costs to our jurisdictional customers) and are expected to be recovered through future FAC proceedings. IPL records deferred fuel in accordance with standards prescribed by the FERC. The deferred fuel adjustment is the result of variances between estimated fuel and purchased power costs in IPL’s FAC and actual fuel and purchased power costs. IPL is generally permitted to recover underestimated fuel and purchased power costs in future rates through the FAC proceedings and therefore the costs are deferred when incurred and amortized into fuel expense in the same period that IPL’s rates are adjusted to reflect these costs.
Unrecognized Pension and Postretirement Benefit Plan Costs
In accordance with ASC 715 “Compensation – Retirement Benefits” and ASC 980, 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 Income Taxes Recoverable/Payable Through Rates
A deferred income tax asset or liability is created from a difference in timing of income recognition between tax laws and accounting methods. As a regulated utility, IPL includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets.
On December 22, 2017, the U.S. federal government enacted the TCJA, which, among other things, reduced the federal corporate income tax rate from 35% to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, IPL and IPALCO remeasured their deferred income tax assets and liabilities using the new tax rate. The impact of the reduction of the income tax rate on deferred income taxes was utilized in the 2018 Base Rate Order to reduce jurisdictional retail rates. Accordingly, we have a net regulatory deferred income tax liability of $122.2 million and $141.1 million as of December 31, 2019 and 2018, respectively.
Deferred MISO Costs
These consist of administrative costs for transmission services, transmission expansion cost sharing, and certain other operational and administrative costs from the MISO market. These costs are being recovered per specific rate order.
Environmental Costs
These consist of various costs incurred to comply with environmental regulations. These costs were approved for recovery either through IPL's ECCRA proceedings or in the 2018 Base Rate Order. Amortization periods vary, but all costs should be recovered by 2064.
ARO and Accrued Asset Removal Costs
In accordance with ASC 410 and ASC 980, IPL recognizes the amount collected in customer rates for costs of removal that do not have an associated legal retirement obligation as a deferred regulatory liability. This amount is net of the portion of legal ARO costs that is also currently being recovered in rates.
3. PROPERTY, PLANT AND EQUIPMENT
The original cost of property, plant and equipment segregated by functional classifications follows: |
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Production | | $ | 4,154,919 |
| | $ | 3,927,847 |
|
| Transmission | | 398,903 |
| | 394,621 |
|
| Distribution | | 1,594,208 |
| | 1,533,828 |
|
| General plant | | 250,582 |
| | 344,782 |
|
| Total property, plant and equipment | | $ | 6,398,612 |
| | $ | 6,201,078 |
|
| | | | | |
Substantially all of IPL’s property is subject to a $1,713.8 million direct first mortgage lien, as of December 31, 2019, securing IPL’s first mortgage bonds. Total non-contractually or legally required removal costs of utility plant in service at December 31, 2019 and 2018 were $788.3 million and $761.1 million, respectively; and total contractually or legally required removal costs of property, plant and equipment at December 31, 2019 and 2018 were $204.2 million and $129.5 million, respectively. Please see “ARO” below for further information.
ARO
ASC 410 “Asset Retirement and Environmental Obligations” addresses financial accounting and reporting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation. A legal obligation for purposes of ASC 410 is an obligation that a party is required to settle as a result of an existing law, statute, ordinance, written or oral contract or the doctrine of promissory estoppel.
IPL’s ARO relates primarily to environmental issues involving asbestos-containing materials, ash ponds, landfills and miscellaneous contaminants associated with its generating plants, transmission system and distribution system. The following is a roll forward of the ARO legal liability year end balances:
|
| | | | | | | | |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Balance as of January 1 | | $ | 129,451 |
| | $ | 79,535 |
|
| Liabilities settled | | (9,891 | ) | | (8,932 | ) |
| Revisions to cash flow and timing estimates | | 78,153 |
| | 54,811 |
|
| Accretion expense | | 6,506 |
| | 4,037 |
|
| Balance as of December 31 | | $ | 204,219 |
| | $ | 129,451 |
|
| | | | | |
In 2019, IPL recorded adjustments to its ARO liabilities of $78.2 million primarily to reflect an increase to estimated ash pond closure costs, including groundwater remediation. In 2018, IPL recorded additional ARO liabilities of $54.8 million to reflect revisions to cash flow and timing estimates due to accelerated ash pond closure dates, revised estimated closure costs after review of updates to the CCR rule and revised estimated costs associated with our coal storage areas, landfills, and asbestos remediation. As of December 31, 2019 and 2018, IPL did not have any assets that are legally restricted for settling its ARO liability.
4. FAIR VALUE
The fair value of financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of 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
IPL has VEBA investments that are to be used to fund certain employee postretirement health care benefit plans. These assets are primarily comprised of open-ended mutual funds, which are valued using the net assets value per unit. These investments are recorded at fair value within "Other non-current assets" on the accompanying Consolidated Balance Sheets and classified as equity securities. ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” was effective as of January 1, 2018. This ASU requires the change in the fair value of equity instruments to be recorded in income. Equity Instruments were defined to include all mutual funds, regardless of the underlying investments. Therefore, all changes to fair value on the VEBA investments will be included in income in the period that the changes occur. These changes to fair value were not material for the years ended December 31, 2019, 2018, or 2017. Any unrealized gains or losses are recorded in "Other income / (expense), net" on the accompanying Consolidated Statements of Operations.
FTRs
In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. FTRs are used in the MISO market to hedge IPL’s exposure to congestion charges, which result from constraints on the transmission system. IPL’s FTRs are valued at the cleared auction prices for FTRs in MISO’s annual auction. Because of the infrequent nature of this valuation, the fair value assigned to the FTRs is considered a Level 3 input under the fair value hierarchy required by ASC 820. An offsetting regulatory liability has been recorded as these revenues or costs will be flowed through to customers through the FAC. As such, there is no impact on our Consolidated Statements of Operations.
Financial Liabilities
Interest Rate Hedges
In March 2019, we entered into forward interest rate hedges related to the 2020 IPALCO Notes and Term Loan that have maturities in July 2020. The interest rate hedges have a combined notional amount of $400.0 million, which will settle when we refinance the debt. All changes in the market value of the interest rate hedges will be recorded in AOCI. See also Note 5, "Derivative Instruments and Hedging Activities - Cash Flow Hedges" for further information.
Other Financial Liabilities
As of December 31, 2018, IPALCO's other financial liabilities measured at fair value on a recurring basis were considered Level 3, based on the fair value hierarchy.
Summary
The fair value of assets and liabilities at December 31, 2019 measured on a recurring basis and the respective category within the fair value hierarchy for 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 |
| $ | — |
| $ | — |
|
| Mutual funds | 2,854 |
| — |
| 2,854 |
| — |
|
| Total VEBA investments | 2,879 |
| 25 |
| 2,854 |
| — |
|
| Financial transmission rights | 864 |
| — |
| — |
| 864 |
|
| Total financial assets measured at fair value | $ | 3,743 |
| $ | 25 |
| $ | 2,854 |
| $ | 864 |
|
| Financial liabilities: | | | | |
| Interest rate hedges | $ | 26,560 |
| $ | — |
| $ | 26,560 |
| $ | — |
|
| Total financial liabilities measured at fair value | $ | 26,560 |
| $ | — |
| $ | 26,560 |
| $ | — |
|
The fair value of assets and liabilities at December 31, 2018 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCO was determined as follows:
|
| | | | | | | | | | | | |
| Assets and Liabilities at Fair Value |
| | | Level 1 | Level 2 | Level 3 |
| | Fair value at December 31, 2018 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs |
| | (In Thousands) |
| Financial assets: | | | | |
| VEBA investments: | | | | |
| Money market funds | $ | 21 |
| $ | 21 |
| $ | — |
| $ | — |
|
| Mutual funds | 2,565 |
| — |
| 2,565 |
| — |
|
| Total VEBA investments | 2,586 |
| 21 |
| 2,565 |
| — |
|
| Financial transmission rights | 3,099 |
| — |
| — |
| 3,099 |
|
| Total financial assets measured at fair value | $ | 5,685 |
| $ | 21 |
| $ | 2,565 |
| $ | 3,099 |
|
| Financial liabilities: | | | | |
| Other derivative liabilities | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
|
| Total financial liabilities measured at fair value | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
|
The following table sets forth a roll forward of financial instruments, measured at fair value on a recurring basis, classified as Level 3 in the fair value hierarchy (note, amounts in this table indicate carrying values, which approximate fair values):
|
| | | |
| | Reconciliation of Financial Instruments Classified as Level 3 |
| | (In Thousands) |
| Balance at January 1, 2018 | $ | 2,454 |
|
| Unrealized gain recognized in earnings | 24 |
|
| Issuances | 9,295 |
|
| Settlements | (8,727 | ) |
| Balance at December 31, 2018 | $ | 3,046 |
|
| Unrealized gain recognized in earnings | 53 |
|
| Issuances | 2,846 |
|
| Settlements | (5,081 | ) |
| Balance at December 31, 2019 | $ | 864 |
|
| | |
Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Debt
The fair value of 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, 2019 | | December 31, 2018 |
| | | Face Value | | Fair Value | | Face Value | | Fair Value |
| | | (In Thousands) |
| Fixed-rate | | $ | 2,523,800 |
| | $ | 2,876,140 |
| | $ | 2,523,800 |
| | $ | 2,649,265 |
|
| Variable-rate | | 155,000 |
| | 155,000 |
| | 155,000 |
| | 155,000 |
|
| Total indebtedness | | $ | 2,678,800 |
| | $ | 3,031,140 |
| | $ | 2,678,800 |
| | $ | 2,804,265 |
|
| | | | | | | | | |
The difference between the face value and the carrying value of this indebtedness represents the following:
unamortized deferred financing costs of $20.7 million and $23.0 million at December 31, 2019 and 2018, respectively; and
unamortized discounts of $6.5 million and $6.7 million at December 31, 2019 and 2018, respectively.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.
At December 31, 2019, IPL's outstanding derivative instruments were as follows:
|
| | | | | | | | | | | | | | | | |
| Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) |
| Interest rate hedges | | Designated | | USD | | $ | 400,000 |
| | $ | — |
| | $ | 400,000 |
|
| FTRs | | Not Designated | | MWh | | 5,707 |
| | — |
| | 5,707 |
|
| |
| (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 and will be settled when the associated debt is refinanced. The AOCI associated with the interest rate swaps will be amortized out of AOCI into interest expense over the remaining life of the underlying debt.
We use the income approach to value the swaps, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward rates with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. We will reclassify gains and losses on the swaps out of AOCI and into earnings in those periods in which hedged interest payments occur.
The following tables provide information on gains or losses recognized in AOCI for the cash flow hedges for the period indicated:
|
| | | | |
| | | Interest Rate Hedges for the Year Ended December 31, 2019 |
| $ in thousands (net of tax) | |
| Beginning accumulated derivative gain / (loss) in AOCI | | $ | — |
|
| | | |
| Net losses associated with current period hedging transactions | | (19,750 | ) |
| Ending accumulated derivative loss in AOCI | | $ | (19,750 | ) |
| | | |
| Portion expected to be reclassified to earnings in the next twelve months | | $ | — |
|
| Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months) | | 7 |
|
Derivatives Not Designated as Hedge
FTRs do not qualify for hedge accounting or the normal purchases and sales exceptions under ASC 815. Accordingly, such contracts are recorded at fair value when acquired and subsequently amortized over the annual period as they are used. FTRs are initially recorded at fair value using the income approach.
Certain qualifying derivative instruments have been designated as normal purchases or normal sales contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to hedge or mark to market accounting and are recognized in the consolidated statements of operations on an accrual basis.
When applicable, 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 by AES(an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. As of December 31, 2019, IPALCO did not have any offsetting positions.
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 | | 2019 | | 2018 |
| Financial transmission rights | Not a Cash Flow Hedge | | Prepayments and other current assets | | $ | 864 |
| | $ | 3,099 |
|
| Interest rate hedges | Cash Flow Hedge | | Accrued and other current liabilities | | $ | 26,560 |
| | $ | — |
|
6. EQUITY
Dividend Restrictions
IPL’s mortgage and deed of trust and its amended articles of incorporation contain restrictions on IPL’s ability to issue certain securities or pay cash dividends. So long as any of the several series of bonds of IPL issued under its mortgage remains outstanding, and subject to certain exceptions, IPL is restricted in the declaration and payment of dividends, or other distribution on shares of its capital stock of any class, or in the purchase or redemption of such shares, to the aggregate of its net income, as defined in the mortgage, after December 31, 1939. In addition, pursuant to IPL’s articles, no dividends may be paid or accrued, and no other distribution may be made on IPL’s common stock unless dividends on all outstanding shares of IPL preferred stock have been paid or declared and set apart for payment. As of December 31, 2019, and as of the filing of this report, IPL was in compliance with these restrictions.
IPL is also restricted in its ability to pay dividends if it is in default under the terms of its credit agreement providing forCredit Agreement and its senior secured credit facility. Any exerciseunsecured notes, which could happen if IPL fails to comply with certain covenants. These covenants, among other things, require IPL to maintain a ratio of remedies under this pledge could result at a subsequent datetotal debt to total capitalization not in a change in controlexcess of IPALCO.
Equity Securities under Compensation Plans
0.65 to 1. As described in this Amendment, there are no equity compensation plans under which equity securities of IPALCO are authorized for issuance. All equity compensation plans provide for the issuance of AES Common Stock. For information regarding AES’ LTC Plan, see the “Securities Authorized for Issuance under Equity Compensation Plans (as of December 31, 2017)” table2019. 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 AES Form 10-K.articles) and no such event of default would result from the making of the distribution or loan; and either (b)(i) at the time of, and/or as a result of, the distribution or loan, IPALCO’sleverage ratio does not exceed 0.67 to 1 and IPALCO’s interest coverage ratio is not less than 2.50 to 1 or, (b)(ii) if such ratios are not within the parameters, IPALCO’s senior long-term debt rating from one of the three major credit rating agencies is at least investment grade. As of December 31, 2019, and as of the filing of this report, IPALCO was in compliance with all covenants and no event of default existed.
IPALCO is also restricted in its ability to pay dividends if it is in default under the terms of its Term Loan, which could happen if IPALCO fails to comply with certain covenants. These covenants, among other things, require IPALCO to maintain a ratio of total debt to total capitalization not in excess of 0.67 to 1. As of December 31, 2019, and as of the filing of this report, IPALCO was in compliance with all covenants and no event of default existed.
During the years ended December 31, 2019, 2018 and 2017, IPALCO paid distributions to its shareholders totaling $136.4 million, $130.2 million and $105.1 million, respectively.
Cumulative Preferred Stock
IPL has 5 separate series of cumulative preferred stock. Holders of preferred stock are entitled to receive dividends at rates per annum ranging from 4.0% to 5.65%. During each year ended December 31, 2019, 2018 and 2017, total preferred stock dividends declared were $3.2 million. Holders of preferred stock are entitled to 2 votes per share for IPL matters, and if four full quarterly dividends are in default on all shares of the preferred stock then outstanding, they are entitled to elect the smallest number of IPL directors to constitute a majority of IPL’s Board of
37
Directors. Based on the preferred stockholders’ ability to elect a majority of IPL’s Board of Directors in this circumstance, the redemption of the preferred shares is considered to be not solely within the control of the issuer and the preferred stock was considered temporary equity and presented in the mezzanine level of the audited consolidated balance sheets in accordance with the relevant accounting guidance for non-controlling interests and redeemable securities. IPL has issued and outstanding 500,000 shares of 5.65% preferred stock, which are now redeemable at par value, subject to certain restrictions, in whole or in part. Additionally, IPL has 91,353 shares of preferred stock which are redeemable solely at the option of IPL and can be redeemed in whole or in part at any time at specific call prices.
At December 31, 2019, 2018 and 2017, preferred stock consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, |
| | | Shares
Outstanding | | Call Price | | 2019 | | 2018 | | 2017 |
| | | | | Par Value, plus premium, if applicable |
| | | | | (In Thousands) |
| Cumulative $100 par value, | | | | | | | | | | |
| authorized 2,000,000 shares | | | | | | | | | | |
| 4% Series | | 47,611 |
| | $ | 118.00 |
| | $ | 5,410 |
| | $ | 5,410 |
| | $ | 5,410 |
|
| 4.2% Series | | 19,331 |
| | $ | 103.00 |
| | 1,933 |
| | 1,933 |
| | 1,933 |
|
| 4.6% Series | | 2,481 |
| | $ | 103.00 |
| | 248 |
| | 248 |
| | 248 |
|
| 4.8% Series | | 21,930 |
| | $ | 101.00 |
| | 2,193 |
| | 2,193 |
| | 2,193 |
|
| 5.65% Series | | 500,000 |
| | $ | 100.00 |
| | 50,000 |
| | 50,000 |
| | 50,000 |
|
| Total cumulative preferred stock | | 591,353 |
| | |
| | $ | 59,784 |
| | $ | 59,784 |
| | $ | 59,784 |
|
| | | | | | | | | | | |
Long-Term Debt
The following table presents our long-term debt:
|
| | | | | | | | | | |
| | | | | December 31, |
| Series | | Due | | 2019 | | 2018 |
| | | | | (In Thousands) |
| IPL first mortgage bonds: | | | | |
3.875% (1) | | August 2021 | | $ | 55,000 |
| | $ | 55,000 |
|
3.875% (1) | | August 2021 | | 40,000 |
| | 40,000 |
|
3.125% (1) | | December 2024 | | 40,000 |
| | 40,000 |
|
| 6.60% | | January 2034 | | 100,000 |
| | 100,000 |
|
| 6.05% | | October 2036 | | 158,800 |
| | 158,800 |
|
| 6.60% | | June 2037 | | 165,000 |
| | 165,000 |
|
| 4.875% | | November 2041 | | 140,000 |
| | 140,000 |
|
| 4.65% | | June 2043 | | 170,000 |
| | 170,000 |
|
| 4.50% | | June 2044 | | 130,000 |
| | 130,000 |
|
| 4.70% | | September 2045 | | 260,000 |
| | 260,000 |
|
| 4.05% | | May 2046 | | 350,000 |
| | 350,000 |
|
| 4.875% | | November 2048 | | 105,000 |
| | 105,000 |
|
| Unamortized discount – net | | | | (6,156 | ) | | (6,272 | ) |
| Deferred financing costs | | | | (16,629 | ) | | (17,115 | ) |
| Total IPL first mortgage bonds | | 1,691,015 |
| | 1,690,413 |
|
| IPL unsecured debt: | | | | |
Variable (2) | | December 2020 | | 30,000 |
| | 30,000 |
|
Variable (2) | | December 2020 | | 60,000 |
| | 60,000 |
|
| Deferred financing costs | | | | (114 | ) | | (229 | ) |
| Total IPL unsecured debt | | 89,886 |
| | 89,771 |
|
| Total long-term debt – IPL | | 1,780,901 |
| | 1,780,184 |
|
| Long-term debt – IPALCO: | | |
| | |
|
| Term Loan | | July 2020 | | 65,000 |
| | 65,000 |
|
| 3.45% Senior Secured Notes | | July 2020 | | 405,000 |
| | 405,000 |
|
| 3.70% Senior Secured Notes | | September 2024 | | 405,000 |
| | 405,000 |
|
| Unamortized discount – net | | | | (313 | ) | | (424 | ) |
| Deferred financing costs | | | | (3,959 | ) | | (5,696 | ) |
| Total long-term debt – IPALCO | | 870,728 |
| | 868,880 |
|
| Total consolidated IPALCO long-term debt | | 2,651,629 |
| | 2,649,064 |
|
| Less: current portion of long-term debt | | 559,199 |
| | — |
|
| Net consolidated IPALCO long-term debt | | $ | 2,092,430 |
| | $ | 2,649,064 |
|
| |
| |
ITEM 13.(1) | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEFirst mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority. |
| |
| (2) | Unsecured notes issued to the Indiana Finance Authority by IPL to facilitate the loan of proceeds from various tax-exempt notes issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but are subject to a mandatory put in December 2020. |
Insurance, Employee
Debt Maturities
Maturities on long-term indebtedness subsequent to December 31, 2019, are as follows:
|
| | | |
| Year | Amount |
| | (In Thousands) |
| 2020 | $ | 560,000 |
|
| 2021 | 95,000 |
|
| 2022 | — |
|
| 2023 | — |
|
| 2024 | 445,000 |
|
| Thereafter | 1,578,800 |
|
| Total | $ | 2,678,800 |
|
| | |
Significant Transactions
IPL First Mortgage Bonds and Recent Indiana Finance Authority Bond Issuances
The mortgage and deed of trust of IPL, together with the supplemental indentures thereto, secure the first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage, substantially all property owned by IPL is subject to a first mortgage lien securing indebtedness of $1,713.8 million as of December 31, 2019. The IPL first mortgage bonds require net earnings as calculated thereunder be at least two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. IPL was in compliance with such requirements as of December 31, 2019.
In November 2018, IPL issued $105 million aggregate principal amount of first mortgage bonds, 4.875% Series, due November 2048, pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from this offering were approximately $103.5 million, after deducting the initial purchasers’ discounts and fees and expenses for the offering. The net proceeds from this offering were used to repay amounts due under IPL's Credit Agreement and for general corporate purposes.
In August 2017, IPL repaid $24.7 million in outstanding borrowings of 5.40% IPL first mortgage bonds that were due in August 2017.
IPL Unsecured Notes
In December 2015, the Indiana Finance Authority issued on behalf of IPL an aggregate principal amount of $90 million of Environmental Facilities Refunding Revenue Notes due December 2038 (Indianapolis Power & Light Company Project). These unsecured notes were issued in two series: $30 million Series 2015A notes and $60 million 2015B notes. These notes were initially purchased by a syndication of banks who will hold the notes until the mandatory put date of December 22, 2020.
IPL has classified its outstanding $90 million aggregate principal amount of these unsecured notes as short-term indebtedness as they are due December 2020. Management plans to refinance these unsecured notes with new debt. In the event that we are unable to refinance these unsecured notes on acceptable terms, IPL has available borrowing capacity on its revolving credit facility that could be used to satisfy the obligation.
IPALCO’s Senior Secured Notes and Term Loan
IPALCO has $405 million of 3.45% Senior Secured Notes due July 15, 2020 ("2020 IPALCO Notes") and a $65 million Term Loan due July 1, 2020. Although current liquid funds are not sufficient to pay the collective amounts due under the 2020 IPALCO Notes and Term Loan at their maturities, we believe that we will be able to refinance the 2020 IPALCO Notes and Term Loan based on our conversations with investment bankers, which currently indicate more than adequate demand for new IPALCO debt at our current credit ratings, and our previous successful issuance of our $405 million IPALCO senior secured notes in 2017, which served to refinance notes existing at the time. Should the capital markets not be accessible to us at the time of the maturity of the 2020
IPALCO Notes and Term Loan, management believes that other financing options are at its disposal to meet the needs of the maturities.
IPALCO Term Loan
On October 31, 2018, IPALCO closed on a new Term Loan consisting of a $65 million credit facility maturing July 1, 2020. The Term Loan is variable rate and is secured by IPALCO’s pledge of all the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’ existing senior secured notes. The Term Loan proceeds were used to repay amounts under IPL's Credit Agreement and for general corporate purposes.
IPALCO’s Senior Secured Notes
In August 2017, IPALCO completed the sale of the $405 million 2024 IPALCO Notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 2024 IPALCO Notes were issued pursuant to an Indenture dated August 22, 2017, by and between IPALCO and U.S. Bank, National Association, as trustee. The 2024 IPALCO Notes were priced to the public at 99.901% of the principal amount. Net proceeds to IPALCO were approximately $399.3 million after deducting underwriting costs and estimated offering expenses. These costs are being amortized to the maturity date using the effective interest method. We used the net proceeds from this offering, together with cash on hand, to redeem the $400 million 2018 IPALCO Notes on September 21, 2017, and to pay certain related fees, expenses and make-whole premiums. A loss on early extinguishment of debt of $8.9 million for the 2018 IPALCO Notes is included as a separate line item within “Other Income/(Expense), Net” in the accompanying Consolidated Statements of Operations.
The 2020 IPALCO Notes and 2024 IPALCO Notes are secured by IPALCO’s pledge of all of the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s Term Loan. IPALCO filed its registration statement on Form S-4 with respect to the 2024 IPALCO Notes with the SEC on November 13, 2017, and this registration statement was declared effective on December 5, 2017. The exchange offer was completed on January 12, 2018.
Line of Credit
IPL entered into an amendment and restatement of its 5-year $250 million revolving credit facility on June 19, 2019 with a syndication of bank lenders. This Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on June 19, 2024, and bears interest at variable rates as described in the Credit Agreement. It includes an uncommitted $150 million accordion feature to provide IPL with an option to request an increase in the size of the facility at any time prior to June 19, 2023, subject to approval by the lenders. The Credit Agreement also includes two one-year extension options, allowing IPL to extend the maturity date subject to approval by the lenders. Prior to execution, IPL and IPALCO had existing general banking relationships with the parties to the Credit Agreement. IPL had no outstanding borrowings on the committed line of credit as of December 31, 2019 and 2018, respectively.
Restrictions on Issuance ofDebt
All of IPL’s long-term borrowings must first be approved by the IURC and the aggregate amount of IPL’s short-term indebtedness must be approved by the FERC. IPL has approval from FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 26, 2020. In December 2018, IPL received an order from the IURC granting IPL authority through December 31, 2021 to, among other things, issue up to $350 million in aggregate principal amount of long-term debt and refinance up to $185.0 million in existing indebtedness, all of which authority remains available under the order as of December 31, 2019. This order also grants IPL authority to have up to $500 million of long-term credit agreements and liquidity facilities outstanding at any one time, of which $250.0 million remains available under the order as of December 31, 2019. As an alternative to the sale of all or a portion of $65 million in principal of the long-term debt mentioned above, we have the authority to issue up to $65 million of new preferred stock, all of which authority remains available under the order as of December 31, 2019. IPL also has restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under our existing debt obligations. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its Credit Agreement, refinance existing debt and issue new debt approved by the IURC and issue certain other indebtedness.
Credit Ratings
Our ability to borrow money or to refinance existing indebtedness and the interest rates at which we can borrow money or refinance existing indebtedness are affected by our credit ratings. In addition, the applicable interest rates on IPL’s Credit Agreement and other unsecured notes are dependent upon the credit ratings of IPL. Downgrades in the credit ratings of AES could result in IPL’s and/or IPALCO’s credit ratings being downgraded.
8. INCOME TAXES
IPALCO follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPALCO and its subsidiaries each filed separate income tax returns. IPALCO is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods. IPALCO made tax sharing payments to AES of $29.6 million, $28.3 million and $65.1 million in 2019, 2018 and 2017 respectively.
On March 25, 2014, the state of Indiana amended Indiana Code 6-3-2-1 through Senate Bill 001, which phases in an additional 1.6% reduction to the state corporate income tax rate that was initially being reduced by 2%. While the statutory state income tax rate decreased to 5.625% for the calendar year 2019, the deferred tax balances were adjusted according to the anticipated reversal of temporary differences. The change in required deferred taxes on plant and plant-related temporary differences resulted in a reduction to the associated regulatory asset of $1.3 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.1 million. The statutory state corporate income tax rate will be 5.375% for 2020.
In tax years prior to 2018, Internal Revenue Code Section 199 permitted taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL’s electric production activities qualify for this deduction. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for the tax year 2017 was $3.9 million. Due to the enactment of TCJA (as described below), the 2017 tax year was the final year for this deduction.
U.S. Tax Reform
On December 22, 2017, the U.S. federal government enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law. Notable items impacting the effective tax rate for the 2018 tax year related to the TCJA include a rate reduction in the corporate tax rate to 21% from 35% and an increase in the estimated flow-through depreciation partially offset by the repeal of the manufacturer’s production deduction.
In 2017, the Company recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, the Company’s financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined.
The Company completed its calculation of the impact of the TCJA in its income tax provision during the year ended December 31, 2018in accordance with its understanding of the TCJA and guidance available as of that date, and as a result recognized $0.0 million and $0.2 million of discrete tax expense in the fourth quarters of 2018 and 2017, respectively. This total results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $7.7 million and $215.5 million in 2018 and 2017, respectively, was recorded as a regulatory liability, which was a non-cash adjustment.
Income Tax Provision
Federal and state income taxes charged to income are as follows:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | (In Thousands) |
| Components of income tax expense: | | | | | | |
| Current income taxes: | | | | | | |
| Federal | | $ | 17,229 |
| | $ | 20,341 |
| | $ | 42,542 |
|
| State | | 3,022 |
| | 8,843 |
| | 9,916 |
|
| Total current income taxes | | 20,251 |
| | 29,184 |
| | 52,458 |
|
| Deferred income taxes: | | |
| | |
| | |
|
| Federal | | 7,547 |
| | (15,150 | ) | | (1,720 | ) |
| State | | 7,745 |
| | 326 |
| | (332 | ) |
| Total deferred income taxes | | 15,292 |
| | (14,824 | ) | | (2,052 | ) |
| Net amortization of investment credit | | (15 | ) | | (911 | ) | | (1,455 | ) |
| Total income tax expense | | $ | 35,528 |
| | $ | 13,449 |
| | $ | 48,951 |
|
| | | | | | | |
Effective and Statutory Rate Reconciliation
The provision for income taxes (including net investment tax credit adjustments) is different than the amount computed by applying the statutory tax rate to pretax income. The reasons for the difference, stated as a percentage of pretax income, are as follows:
|
| | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State income tax, net of federal tax benefit | | 4.4 | % | | 5.6 | % | | 4.1 | % |
| Research and development credit | | — | % | | (1.9 | )% | | — | % |
| Depreciation flow through and amortization | | (5.7 | )% | | (15.6 | )% | | (0.1 | )% |
| Additional funds used during construction - equity | | 0.2 | % | | 0.3 | % | | (4.1 | )% |
| Manufacturers’ Production Deduction (Sec. 199) | | — | % | | — | % | | (2.5 | )% |
| Other – net | | 1.3 | % | | (0.3 | )% | | (1.4 | )% |
| Effective tax rate | | 21.2 | % | | 9.1 | % | | 31.0 | % |
| | | | | | | |
Deferred Income Taxes
The significant items comprising IPALCO’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2019 and 2018, are as follows:
|
| | | | | | | | |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Deferred tax liabilities: | | | | |
| Relating to utility property, net | | $ | 406,605 |
| | $ | 378,460 |
|
| Regulatory assets recoverable through future rates | | 61,984 |
| | 67,721 |
|
| Other | | 17,996 |
| | 12,161 |
|
| Total deferred tax liabilities | | 486,585 |
| | 458,342 |
|
| Deferred tax assets: | | |
| | |
|
| Investment tax credit | | 7 |
| | 11 |
|
| Regulatory liabilities including ARO | | 191,676 |
| | 184,413 |
|
| Employee benefit plans | | 8,556 |
| | 8,335 |
|
| Other | | 13,485 |
| | 12,498 |
|
| Total deferred tax assets | | 213,724 |
| | 205,257 |
|
| Deferred income tax liability – net | | $ | 272,861 |
| | $ | 253,085 |
|
| | | | | |
Uncertain Tax Positions
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | (In Thousands) |
| Unrecognized tax benefits at January 1 | | $ | 7,056 |
| | $ | 7,049 |
| | $ | 6,634 |
|
| Gross increases – current period tax positions | | — |
| | — |
| | 470 |
|
| Gross decreases – prior period tax positions | | — |
| | 7 |
| | (55 | ) |
| Unrecognized tax benefits at December 31 | | $ | 7,056 |
| | $ | 7,056 |
| | $ | 7,049 |
|
| | | | | | | |
The unrecognized tax benefits at December 31, 2019 represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.
Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. There are no interest or penalties applicable to the periods contained in this report.
9. BENEFIT PLANS
Defined Contribution Plans
All of IPL’s employees are covered by one of two defined contribution plans, the Thrift Plan or the RSP:
The Thrift Plan
Approximately 82% of IPL’s active employees are covered by the Thrift Plan, a qualified defined contribution plan. All union new hires are covered under the Thrift Plan. Participants elect to make contributions to the Thrift Plan based on a percentage of their base compensation. Each participant’s contribution is matched up to certain thresholds of base compensation. The IBEW clerical-technical union new hires receive an annual lump sum company contribution into the Thrift Plan in addition to the company match. Employer contributions to the Thrift Plan were $3.3 million, $3.3 million and $3.4 million for 2019, 2018 and 2017, respectively.
The RSP
Approximately 18% of IPL’s active employees are covered by the RSP, a qualified defined contribution plan containing a match, nondiscretionary and profit sharing component. All non-union new hires are covered under the RSP. Participants elect to make contributions to the RSP based on a percentage of their eligible compensation. Each participant’s contribution is matched in amounts up to, but not exceeding, 5% of the participant’s eligible compensation. Starting in 2018, the RSP also includes a 4% nondiscretionary contribution based as a percentage of each participant's eligible compensation. Finally, the RSP included a profit sharing component through 2017 whereby IPL contributed a percentage of each employee’s annual salary into the plan on a pre-tax basis. The profit sharing percentage was determined by the AES Board of Directors on an annual basis. Employer contributions (by IPL) relating to the RSP were $1.6 million, $1.7 million and $1.8 million for 2019, 2018 and 2017, respectively.
Defined Benefit Plans
Approximately 76% of IPL’s active employees are covered by the qualified Defined Benefit Pension Plan; while approximately 6% of active employees are IBEW clerical-technical unit employees who are only eligible for the Thrift Plan. The remaining 18% of active employees are covered by the RSP. All non-union new hires are covered under the RSP, while IBEW physical unit union new hires are covered under the Defined Benefit Pension Plan and Tax ArrangementsThrift Plan. The IBEW clerical-technical unit new hires are no longer covered under the Defined Benefit Pension Plan but do receive an annual lump sum company contribution into the Thrift Plan, in addition to the company match. The Defined Benefit Pension Plan is noncontributory and is funded by IPL through a trust. Benefits for non-union participants in the Defined Benefit Pension Plan are based on salary, years of service and accrued benefits at April 1, 2015. Benefits for eligible union participants are based on each individual employee's pension band and years of service as opposed to their compensation. Pension bands are based primarily on job duties and responsibilities.
Additionally, a small group of former officers and their surviving spouses are covered under a funded non-qualified Supplemental Retirement Plan. The total number of participants in the plan as of December 31, 2019 was 22. The plan is closed to new participants.
IPL also provides postretirement health care benefits to certain active or retired employees and the spouses of certain active or retired employees. Approximately 147 active employees and 17 retirees (including spouses) were receiving such benefits or entitled to future benefits as of January 1, 2019. The plan is unfunded. These postretirement health care benefits and the related unfunded obligation of $6.4 million and $6.7 million at December 31, 2019 and 2018, respectively, were not material to the consolidated financial statements in the periods covered by this report.
The following table presents information relating to the Pension Plans:
|
| | | | | | | | |
| | | Pension benefits
as of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Change in benefit obligation: | | | | |
| Projected benefit obligation at January 1 | | $ | 697,228 |
| | $ | 782,108 |
|
| Service cost | | 7,412 |
| | 8,450 |
|
| Interest cost | | 27,343 |
| | 25,220 |
|
| Actuarial loss/(gain) | | 88,311 |
| | (62,303 | ) |
| Amendments (primarily increases in pension bands) | | — |
| | 5,446 |
|
Curtailments(1) | | — |
| | 450 |
|
| Benefits paid | | (37,499 | ) | | (62,143 | ) |
| Projected benefit obligation at December 31 | | 782,795 |
| | 697,228 |
|
| Change in plan assets: | | |
| | |
|
| Fair value of plan assets at January 1 | | 684,485 |
| | 738,947 |
|
| Actual return on plan assets | | 122,690 |
| | (22,404 | ) |
| Employer contributions | | 28 |
| | 30,085 |
|
| Benefits paid | | (37,499 | ) | | (62,143 | ) |
| Fair value of plan assets at December 31 | | 769,704 |
| | 684,485 |
|
| Unfunded status | | $ | (13,091 | ) | | $ | (12,743 | ) |
| Amounts recognized in the statement of financial position: | | |
| | |
|
| Noncurrent liabilities | | $ | (13,091 | ) | | $ | (12,743 | ) |
| Net amount recognized at end of year | | $ | (13,091 | ) | | $ | (12,743 | ) |
Sources of change in regulatory assets(2): | | |
| | |
|
| Prior service cost arising during period | | $ | — |
| | $ | 5,446 |
|
| Net (gain)/loss arising during period | | (4,472 | ) | | 902 |
|
| Amortization of prior service cost | | (3,823 | ) | | (4,618 | ) |
| Amortization of loss | | (11,084 | ) | | (11,403 | ) |
| Total recognized in regulatory assets | | $ | (19,379 | ) | | $ | (9,673 | ) |
| Amounts included in regulatory assets: | | |
| | |
|
| Net loss | | $ | 167,750 |
| | $ | 183,306 |
|
| Prior service cost | | 14,323 |
| | 18,146 |
|
| Total amounts included in regulatory assets | | $ | 182,073 |
| | $ | 201,452 |
|
| | | | | |
| |
| (1) | As a result of the announced AES restructuring in the first quarter of 2018, we recognized a plan curtailment of $1.2 million in the first quarter of 2018. |
| |
| (2) | Amounts that would otherwise be charged/credited to Accumulated Other Comprehensive Income or Loss upon application of ASC 715, “Compensation – Retirement Benefits,” are recorded as a regulatory asset or liability because IPL has historically recovered and currently recovers pension and other postretirement benefit expenses in rates. These are unrecognized amounts not yet recognized as components of net periodic benefit costs. |
Information for Pension Plans with AESaprojectedbenefit obligation in excess of plan assets
|
| | | | | | | | |
| | | Pension benefits
as of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Benefit obligation | | $ | 782,795 |
| | $ | 697,228 |
|
| Plan assets | | 769,704 |
| | 684,485 |
|
| Benefit obligation in excess of plan assets | | $ | 13,091 |
| | $ | 12,743 |
|
| | | | | |
IPL’s total benefit obligation in excess of plan assets was $13.1 million as of December 31, 2019 ($12.0 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan).
Information for Pension Plans with an accumulated benefit obligation in excess of plan assets
|
| | | | | | | | |
| | | Pension benefits
as of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Accumulated benefit obligation | | $ | 771,592 |
| | $ | 687,136 |
|
| Plan assets | | 769,704 |
| | 684,485 |
|
| Accumulated benefit obligation in excess of plan assets | | $ | 1,888 |
| | $ | 2,651 |
|
| | | | | |
IPL’s total accumulated benefit obligation in excess of plan assets was $1.9 million as of December 31, 2019 ($0.8 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan).
Significant Gains and Losses Related to Changes in the Benefit Obligation for the Period
As shown in the table above, an actuarial loss of $88.3 million increased the benefit obligation for the year ended December 31, 2019 and an actuarial gain of $62.3 million reduced the benefit obligation for the year ended December 31, 2018. The actuarial loss in 2019 was primarily due to a decrease in the discount rate, while the actuarial gain in 2018 was primarily due to an increase in the discount rate.
Pension Benefits and Expense
Reported expenses relevant to the Defined Benefit Pension Plan are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience, including the performance of plan assets and actual benefits paid out in future years. Pension costs associated with the Defined Benefit Pension Plan are impacted by the level of contributions made to the plan, earnings on plan assets, the adoption of new mortality tables, and employee demographics, including age, job responsibilities, salary and employment periods. Changes made to the provisions of the Defined Benefit Pension Plan may impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the corporate bond discount rates, as well as, the adoption of a new mortality table used in determining the projected benefit obligation and pension costs.
The 2019 net actuarial gain of $4.5 million recognized in regulatory assets is comprised of two parts: (1) a $92.8 million pension asset actuarial gain primarily due to higher than expected return on assets; partially offset by (2) an $88.3 million pension liability actuarial loss primarily due to a decrease in the discount rate used to value pension liabilities. The unrecognized net loss of $167.8 million in the Pension Plans has accumulated over time primarily due to the long-term declining trend in corporate bond rates and the adoption of new mortality tables which increased the expected benefit obligation due to the longer expected lives of plan participants. During 2019, the accumulated net gain increased due to lower discount rates used to value pension liabilities; which was partially offset by a combination of higher than expected return on pension assets, as well as the year 2019 amortization of accumulated loss. The unrecognized net loss, to the extent that it exceeds 10% of the greater of the benefit obligation or the assets, will be amortized and included as a component of net periodic benefit cost in future years. The amortization period is approximately 10.96 years based on estimated demographic data as of December 31, 2019. The projected benefit obligation of $782.8 million less the fair value of assets of $769.7 million results in an unfunded status of $13.1 million at December 31, 2019.
|
| | | | | | | | | | | | |
| | | Pension benefits for
years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In Thousands) |
| Components of net periodic benefit cost: | | | | | | |
| Service cost | | $ | 7,412 |
| | $ | 8,450 |
| | $ | 7,344 |
|
| Interest cost | | 27,343 |
| | 25,220 |
| | 25,305 |
|
| Expected return on plan assets | | (29,907 | ) | | (40,801 | ) | | (44,672 | ) |
| Amortization of prior service cost | | 3,823 |
| | 3,837 |
| | 4,240 |
|
| Recognized actuarial loss | | 11,084 |
| | 11,403 |
| | 13,195 |
|
| Recognized settlement loss | | — |
| | 1,230 |
|
| 146 |
|
| Total pension cost | | 19,755 |
| | 9,339 |
| | 5,558 |
|
| Less: amounts capitalized | | 1,237 |
| | 1,223 |
| | 845 |
|
| Amount charged to expense | | $ | 18,518 |
| | $ | 8,116 |
| | $ | 4,713 |
|
| Rates relevant to each year’s expense calculations: | | | | | | |
| Discount rate – defined benefit pension plan | | 4.36 | % | | 3.67 | % | | 4.29 | % |
| Discount rate – supplemental retirement plan | | 4.24 | % | | 3.60 | % | | 4.00 | % |
| Expected return on defined benefit pension plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % |
| Expected return on supplemental retirement plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % |
| | | | | | | |
Pension expense for the following year is determined as of the December 31 measurement date based on the fair value of the Pension Plans’ assets, the expected long-term rate of return on plan assets, a mortality table assumption that reflects the life expectancy of plan participants, and a discount rate used to determine the projected benefit obligation. For 2019, pension expense was determined using an assumed long-term rate of return on plan assets of 4.50%. As of the December 31, 2019 measurement date, IPL decreased the discount rate from 4.36% to 3.33% for the Defined Benefit Pension Plan and decreased the discount rate from 4.24% to 3.05% for the Supplemental Retirement Plan. The discount rate assumptions affect the pension expense determined for 2020. In addition, IPL increased the expected long-term rate of return on plan assets from 4.50% to 5.05% effective January 1, 2020. The expected long-term rate of return assumption affects the pension expense determined for 2020. The effect on 2020 total pension expense of a 25 basis point increase and decrease in the assumed discount rate is $(1.2) million and $1.1 million, respectively.
In determining the discount rate to use for valuing liabilities we use the market yield curve on high-quality fixed income investments as of December 31, 2019. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Pension Plan Assets and Fair Value Measurements
Pension plan assets consist of investments in cash and cash equivalents, government debt securities, and mutual funds (equity and debt). Differences between actual portfolio returns and expected returns may result in increased or reduced pension costs in future periods. Pension costs are determined as of the plans' measurement date of December 31, 2019. Pension costs are determined for the following year based on the market value of pension plan assets, expected employer contributions, a discount rate used to determine the projected benefit obligation and the expected long-term rate of return on plan assets.
Fair value is defined under ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned. Dividends are recorded on the ex-dividend date. Net appreciation includes the Pension Plans’ gains and losses on investments bought and sold, as well as held, during the year.
A description of the valuation methodologies used for each major class of assets and liabilities measured at fair value follows:
For 2019, the non-qualified Supplemental Retirement Plan investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy.
For 2019, the qualified Defined Benefit Pension Plan investments in common collective trusts are valued based on the daily net asset value and are categorized as Level 2 in the fair value hierarchy except for cash and cash equivalents which are categorized as level 1.
For 2018, all the Pension Plans’ investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy. The investments in U.S. government agency fixed income securities are valued from third-party pricing sources, but they generally do not represent transaction prices for the identical security in an active market nor does it represent data obtained from an exchange.
The primary objective of the Pension Plans’ is to provide a source of retirement income for its participants and beneficiaries, while the primary financial objective is to improve the unfunded status of the Pension Plans. A secondary financial objective is, where possible, to minimize pension expense volatility. The objective is based on a long-term investment horizon, so that interim fluctuations should be viewed with appropriate perspective. There can be no assurance that these objectives will be met.
In establishing our expected long-term rate of return assumption, we utilize a methodology developed by the plan’s investment consultant who maintains a capital market assumption model that takes into consideration risk, return and correlation assumptions across asset classes. A combination of quantitative analysis of historical data and qualitative judgment is used to capture trends, structural changes and potential scenarios not reflected in historical data.
The result of the analyses is a series of inputs that produce a picture of how the plan consultant believes portfolios are likely to behave through time. Capital market assumptions are intended to reflect the behavior of asset classes observed over several market cycles. Stress assumptions are also examined, since the characteristics of asset classes are constantly changing. A dynamic model is employed to manage the numerous assumptions required to estimate portfolio characteristics under different base currencies, time horizons and inflation expectations.
The Pension Plans’ consultant develops forward-looking, long-term capital market assumptions for risk, return and correlations for a variety of global asset classes, interest rates and inflation. These assumptions are created using a combination of historical analysis, current market environment assessment and by applying the consultant’s own judgment. The consultant then determines an equilibrium long-term rate of return. We then take into consideration the investment manager/consultant expenses, as well as any other expenses expected to be paid out of the Pension Plans’ trust. Finally, we have the Pension Plans’ actuary perform a tolerance test of the consultant’s equilibrium expected long-term rate of return. We use an expected long-term rate of return compatible with the actuary’s tolerance level.
The following table summarizes the Company’s target pension plan allocation for 2019:
|
| |
| Asset Category: | Target Allocations |
| Equity Securities | 27% |
| Debt Securities | 73% |
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at |
| | | December 31, 2019 |
| | | (in thousands) |
| | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | |
| Asset Category | | Total | | (Level 1) | | (Level 2) | | % |
| Cash and cash equivalents | | $ | 2,599 |
| | $ | 2,599 |
| | $ | — |
| | — | % |
| Government debt securities | | 154,798 |
| | 39 |
| | 154,759 |
| | 20 | % |
| Mutual fund - equities | | 214,369 |
| | 2,744 |
| | 211,625 |
| | 28 | % |
| Mutual fund - debt | | 397,938 |
| | 1,664 |
| | 396,274 |
| | 52 | % |
Total(1) | | $ | 769,704 |
| | $ | 7,046 |
| | $ | 762,658 |
| | 100 | % |
| | | | | | | | | |
| |
| (1) | In 2019, the qualified Defined Benefit Pension Plan moved all investments except for cash and cash equivalents into collective trusts; therefore, the 2019 balances under the Government debt securities, Mutual fund - equities, and Mutual fund - debt categories shown above as level 2 represent investments through collective trusts. The Defined Benefit Pension Plan has chosen collective trusts for which the underlying investments are mutual funds, mutual funds categories for which debt securities are the primary underlying investment, or real estate in alignment with the target asset allocation. |
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at |
| | | December 31, 2018 |
| | | (in thousands) |
| | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | |
| Asset Category | | Total | | (Level 1) | | (Level 2) | | % |
| Short-term investments | | $ | 3,597 |
| | $ | 3,597 |
| | $ | — |
| | 1 | % |
| Mutual funds: | | | | | | | | |
|
| U.S. equities | | 1,906 |
| | 1,906 |
| | — |
| | — | % |
| International equities | | 52,354 |
| | 52,354 |
| | — |
| | 8 | % |
| Fixed income | | 497,323 |
| | 497,323 |
| | — |
| | 72 | % |
| Fixed income securities: | | | | | | | | |
|
| U.S. Treasury securities | | 129,305 |
| | 129,305 |
| | — |
| | 19 | % |
| Total | | $ | 684,485 |
| | $ | 684,485 |
| | $ | — |
| | 100 | % |
| | | | | | | | | |
Pension Funding
We contributed $0.0 million, $30.1 million, and $7.2 million to the Pension Plans in 2019, 2018 and 2017, respectively. Funding for the qualified Defined Benefit Pension Plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, IPL’s funded target liability percentage was estimated to be 101%. In general, IPL must contribute the normal service cost earned by active participants during the plan year; however, this amount can be offset by any surplus or credit balance carried by the Pension Plan. The normal cost is expected to be approximately $7.6 million in 2020 (including $2.3 million for plan expenses), which is expected to be fully offset by the surplus amount. Each year thereafter, if the Pension Plans’ underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over a seven-year period. IPL does not expect to make an employer contribution for the calendar year 2020. IPL’s funding policy for the Pension Plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments made from the Pension Plans for the years ended December 31, 2019, 2018 and 2017 were $37.5 million, $62.1 million and $35.5 million, respectively. Expected benefit payments are expected to be paid out of the Pension Plans as follows:
|
| | | |
| Year | Pension Benefits |
| | (In Thousands) |
| 2020 | $ | 42,215 |
|
| 2021 | 43,552 |
|
| 2022 | 44,606 |
|
| 2023 | 45,095 |
|
| 2024 | 45,362 |
|
| 2024 through 2028 | 231,475 |
|
| | |
10. COMMITMENTS AND CONTINGENCIES
Legal Loss Contingencies
IPALCO and IPL are involved in litigation arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management believes that the final outcome will not have a material adverse effect on IPALCO’s results of operations, financial condition and cash flows. Amounts accrued or expensed for legal or environmental contingencies collectively during the periods covered by this report have not been material to the Financial Statements.
Environmental Loss Contingencies
We are subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
New Source Review and other CAA NOVs
In October 2009, IPL received a NOV and Finding of Violation from the EPA pursuant to the CAA Section 113(a). The NOV alleges violations of the CAA at IPL’s 3 primarily coal-fired electric generating facilities at the time, dating back to 1986. The alleged violations primarily pertain to the PSD and nonattainment New Source Review requirements under the CAA. In addition, on October 1, 2015, IPL received a NOV from the EPA pursuant to CAA Section 113(a) alleging violations of the CAA, the Indiana SIP, and the Title V operating permit related to alleged particulate matter and opacity violations at IPL Petersburg Unit 3. Also, on February 5, 2016, the EPA issued a NOV pursuant to CAA Section 113(a) alleging violations of New Source Review and other CAA regulations, the Indiana SIP, and the Title V operating permit at Petersburg Generating Station. Since receiving the letters, IPL management has been working with the EPA staff regarding possible resolutions of the NOVs. Settlements and litigated outcomes of similar New Source Review cases have required companies to pay civil penalties, install additional pollution control technology on coal-fired electric generating units, retire existing generating units, and invest in additional environmental projects. A similar outcome in these cases could have a material impact on our business. At this time, we cannot determine whether these NOVs could have a material impact on our business, financial condition and results of operations. We would seek recovery of any operating or capital expenditures, but not fines or penalties, related to air pollution control technology to reduce regulated air emissions; however, there can be no assurances that we would be successful in recovering any operating or capital expenditures. IPL has recorded a contingent liability related to these New Source Review cases and other CAA NOV matters.
11. RELATED PARTY TRANSACTIONS
IPL participates in a property insurance program in which IPL buys insurance from AES Global Insurance Company, a wholly ownedwholly-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 athe third-party administrator. IPL also has third-party insurance in which the premiums are paid directly to the third-party insurers. The cost to IPL of coverage under this program with AES Global Insurance Company was approximately $3.1$4.3 million, $3.1 million, and $2.7$3.1 million in 2017, 20162019, 2018 and 2015,2017, respectively, and is recorded in “Other operating expenses”Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. As of December 31, 20172019 and 2016,2018, we had prepaid approximately $1.9$2.0 million and $2.0$1.6 million, respectively, which is recorded in “Prepayments and other current assets” on the accompanying Consolidated Balance Sheets.
IPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments. The costscost of coverage under this program werewas approximately $20.2 million, $21.5 million, and $24.9 million $23.2 millionin 2019, 2018 and $24.5 million in 2017, 2016 and 2015, respectively, and is recorded in “Other operating expenses”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, 20172019 and 2016,2018, respectively.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries. Under a tax sharing agreement with AES, IPALCO is responsible for the income taxes associated with its own taxable income and records the provision for income taxes using a separate return method. IPALCO had a receivable balance under this agreement of $14.7$23.7 million and $2.1$13.8 million as of December 31, 20172019 and 2016,2018, respectively, which is recorded in “Prepayments and other current assets” on the accompanying Consolidated Balance Sheets.
Long Term
Long-term Compensation Plan
During 2017, 20162019, 2018 and 2015,2017, many of IPL’s non-union employees received benefits under AES’ LTC Plan.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 PUsperformance units payable in cash and AES RSUsrestricted 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 optionsare subject to purchase shares ofcertain AES Common Stock.performance criteria. Total deferred compensation expense recorded during 2019, 2018 and 2017 2016 and 2015 was $0.8$0.3 million, $0.9$0.5 million and $0.7$0.8 million, respectively, and was included in “Other operating expenses”Operating expenses - Operation and maintenance” on IPALCO’s Consolidated Statements of Operations. The value of these benefits is being recognized over the 36-month36 month vesting period and a portion is recorded as miscellaneous deferred credits with the remainder recorded as “Paid in capital” on IPALCO’s Consolidated Balance Sheets in accordance with ASC 718 “Compensation -– Stock Compensation.”
See also Note 9, “Benefit Plans” to the Financial Statements for a description of benefits awarded to IPL employees by AES under the RSP.
ServiceCompany
Total costs incurred by the Service Company on behalf of IPALCO were $42.0 million, $44.5 million and $34.4 million during 2019, 2018 and 2017, respectively. Total costs incurred by IPALCO on behalf of the Service Company during 2019, 2018 and 2017 were $9.7 million, $10.1 million and $10.7 million, respectively, which are included as a reduction to charges from the Service Company. These costs were included in “Operating expenses - Operation and maintenance” on IPALCO’s Consolidated Statements of Operations. IPALCO had a payable balance with the Service Company of $8.4 million and $3.8 million as of December 31, 2019 and December 31, 2018, respectively, which is recorded in “Accounts payable” on the accompanying Consolidated Balance Sheets.
Other
A member of the AES Board of Directors is also a member of the Supervisory Board of a third party vendor that IPL engaged in 2014 for certain construction projects. As the transactions with this vendor related to capital projects, there was no direct impact on the Consolidated Statements of Operations for the periods presented. Over the life of the project, IPL had total net charges from this vendor of $474.9 million. This vendor completed its service in 2018.
Additionally, transactions with various other related parties were $3.0 million, $5.7 million and $2.4 million during 2019, 2018 and 2017, respectively. These expenses were primarily recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations.
12. BUSINESS SEGMENT INFORMATION
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, for which separate financial information is available, and is evaluated regularly by the chief operating decision maker in assessing performance and deciding how to allocate resources. Substantially all of our business consists of the generation, transmission, distribution and sale of electric energy conducted through IPL which is a vertically integrated electric utility. IPALCO’s reportable business segment is its utility segment, with all other non-utility business activities aggregated separately. The "All Other" non-utility category primarily includes the Term Loan, 2020 IPALCO Notes and 2024 IPALCO Notes; approximately $6.0 million and $6.4 million of cash and cash equivalents, as of December 31, 2019 and 2018, respectively; long-term investments of $2.8 million and $4.0 million as of December 31, 2019 and 2018, respectively; long-term liabilities for interest rate hedges of $26.6 million and $0 million as of December 31, 2019 and December 31, 2018, respectively; and income taxes and interest related to those items. All other assets represented less than 1% of IPALCO’s total assets as of December 31, 2019 and 2018. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies.
The following table provides information about IPALCO’s business segments (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | Utility | | All Other | | Total | | Utility | | All Other | | Total | | Utility | | All Other | | Total |
| Revenues | | $ | 1,481,643 |
| | $ | — |
| | $ | 1,481,643 |
| | $ | 1,450,505 |
| | $ | — |
| | $ | 1,450,505 |
| | $ | 1,349,588 |
| | $ | — |
| | $ | 1,349,588 |
|
| Depreciation and amortization | | $ | 240,314 |
| | $ | — |
| | $ | 240,314 |
| | $ | 232,332 |
| | $ | — |
| | $ | 232,332 |
| | $ | 208,451 |
| | $ | — |
| | $ | 208,451 |
|
| Interest expense | | $ | 89,014 |
| | $ | 32,757 |
| | $ | 121,771 |
| | $ | 64,472 |
| | $ | 31,037 |
| | $ | 95,509 |
| | $ | 65,340 |
| | $ | 35,790 |
| | $ | 101,130 |
|
| Earnings/(loss) from operations before income tax | | $ | 200,707 |
| | $ | (32,786 | ) | | $ | 167,921 |
| | $ | 178,953 |
| | $ | (31,479 | ) | | $ | 147,474 |
| | $ | 202,106 |
| | $ | (44,362 | ) | | $ | 157,744 |
|
Capital expenditures(1) | | $ | 219,242 |
| | $ | — |
| | $ | 219,242 |
| | $ | 235,764 |
| | $ | — |
| | $ | 235,764 |
| | $ | 228,861 |
| | $ | — |
| | $ | 228,861 |
|
(1) Capital expenditures includes $5.6 million, $11.4 million and $10.6 million of payments for financed capital expenditures in 2019, 2018 and 2017, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| | | As of December 31, 2019 | | As of December 31, 2018 | | As of December 31, 2017 |
| Total assets | | $ | 4,918,408 |
| | $ | 10,261 |
| | $ | 4,928,669 |
| | $ | 4,851,712 |
| | $ | 10,341 |
| | $ | 4,862,053 |
| | $ | 4,719,547 |
| | $ | 21,014 |
| | $ | 4,740,561 |
|
| | | | | | | | | | | | | | | | | | | |
13. REVENUE
Revenue is primarily earned from retail and wholesale electricity sales and electricity transmission and distribution delivery services. Revenue is recognized upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recorded net of any taxes assessed on and collected from customers, which are remitted to the governmental authorities.
Retail revenues - IPL energy sales to utility customers are based on the reading of meters at the customer’s location that occurs on a systematic basis throughout the month. IPL sells electricity directly to end-users, such as homes and businesses, and bills customers directly. Retail revenues have a single performance obligation, as the promise to transfer energy and other distribution and/or transmission services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. Additionally, as the performance obligation is satisfied over time as energy is delivered, and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series.
In exchange for the exclusive right to sell or distribute electricity in our service area, IPL is subject to rate regulation by federal and state regulators. This regulation sets the framework for the prices (“tariffs”) that IPLis allowed to charge customers for electric services. Since tariffs are approved by the regulator, the price that IPL has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff. Customer payments are typically due on a monthly basis.
Wholesale revenues - Power produced at the generation stations in excess of our retail load is sold into the MISO market. Such sales are made at either the day-ahead or real-time hourly market price, and these sales are classified as wholesale revenues. We sell to and purchase power from MISO, and such sales and purchases are settled and accounted for on a net hourly basis.
In the MISO market, wholesale revenue is recorded at the spot price based on the quantities of MWh delivered in each hour during each month. As a member of MISO, we are obligated to declare the availability of our energy production into the wholesale energy market, but we are not obligated to commit our previously declared availability. As such, contract terms end as the energy for each day is delivered to the market in the case of the day-ahead market and for each hour in the case of the real-time market.
Miscellaneous revenues - Miscellaneous revenues are mainly comprised of MISO transmission revenues. MISO transmission revenues are earned when IPL’s power lines are used in transmission of energy by power producers other than IPL. As IPL owns and operates transmission lines in central and southern Indiana, demand charges collected from network customers by MISO are allocated to the appropriate transmission owners (including IPL) and recognized as transmission revenues. Capacity revenues are also included in miscellaneous revenues, but these were not material for the period presented.
Transmission revenues have a single performance obligation, as transmission services represent a distinct service. Additionally, as the performance obligation is satisfied over time and the same method is used to measure progress, the performance obligation meets the criteria to be considered a series. The price that the transmission operator has the right to bill corresponds directly with the value to the customer of IPL’s performance completed in each period as the price paid is the transmission operator's allocation of the tariff rate (as approved by the regulator) charged to network participants.
IPL’s revenue from contracts with customers was $1,455.3 million and $1,428.9 million for the years ended December 31, 2019 and 2018, respectively. The following table presents our revenue from contracts with customers and other revenue (in thousands):
|
| | | | | | |
| | For the Year Ended, | For the Year Ended, |
| | December 31, 2019 | December 31, 2018 |
| Retail Revenues | | |
| Retail revenue from contracts with customers | $ | 1,375,533 |
| $ | 1,380,042 |
|
Other retail revenues (1) | 23,841 |
| 16,423 |
|
| Wholesale Revenues | 68,474 |
| 38,789 |
|
| Miscellaneous Revenues | | |
| Transmission and other revenue from contracts with customers | 11,335 |
| 10,057 |
|
Other miscellaneous revenues (2) | 2,460 |
| 5,194 |
|
| Total Revenues | $ | 1,481,643 |
| $ | 1,450,505 |
|
(1) Other retail revenue represents alternative revenue programs not accounted for under ASC 606
(2) Other miscellaneous revenue includes lease and other miscellaneous revenues not accounted for under ASC 606
The balances of receivables from contracts with customers are $155.0 million and $160.8 million as of December 31, 2019 and December 31, 2018, respectively. Payment terms for all receivables from contracts with customers typically do not extend beyond 30 days.
The Company has elected to apply the optional disclosure exemptions under ASC 606. Therefore, the Company has not included disclosure pertaining to revenue expected to be recognized in any future year related to remaining performance obligations, as we exclude contracts with an original length of one year or less, contracts for which we
recognize revenue based on the amount we have the right to invoice for services performed, and contracts with variable consideration allocated entirely to a wholly unsatisfied performance obligation when the consideration relates specifically to our efforts to satisfy the performance obligation and depicts the amount to which we expect to be entitled.
14. LEASES
LESSEE
The Company enters into long-term non-cancelable lease arrangements which are classified as either operating or finance leases; however, lease balances were not material to the Financial Statements in the periods covered by this report.
LESSOR
The Company is the lessor under operating leases for land, office space and operating equipment. Minimum lease payments from such contracts are recognized as operating lease revenue on a straight-line basis over the lease term whereas contingent rentals are recognized when earned. Lease revenue included in the Consolidated Statements of Operations was $1.0 million for the year ended December 31, 2019. Underlying gross assets and accumulated depreciation of operating leases included in Total net property, plant and equipment on the Consolidated Balance Sheet were $4.3 million and $0.7 million, respectively, as of December 31, 2019.
The option to extend or terminate a lease is based on customary early termination provisions in the contract. The Company has not recognized any early terminations as of December 31, 2019.
The following table shows the future minimum lease receipts through 2024 and thereafter (in thousands):
|
| | | |
| | Operating Leases |
| 2020 | $ | 941 |
|
| 2021 | 994 |
|
| 2022 | 906 |
|
| 2023 | 906 |
|
| 2024 | 786 |
|
| Thereafter | 2,628 |
|
| Total | $ | 7,161 |
|
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Indianapolis Power & Light Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Indianapolis Power & Light Company and subsidiary (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, common shareholder’s equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and schedules (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Indianapolis, Indiana
February 27, 2020
|
| | | | | | | | | | | | |
| INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY |
| Consolidated Statements of Operations |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| | | 2019 | | 2018 | | 2017 |
| REVENUES | | $ | 1,481,643 |
| | $ | 1,450,505 |
| | $ | 1,349,588 |
|
| | | | | | | |
| OPERATING COSTS AND EXPENSES: | | | | | | |
| Fuel | | 340,466 |
| | 331,701 |
| | 281,542 |
|
| Power purchased | | 133,674 |
| | 164,542 |
| | 189,847 |
|
| Operations and maintenance | | 427,803 |
| | 431,125 |
| | 385,338 |
|
| Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
|
| Taxes other than income taxes | | 42,229 |
| | 53,941 |
| | 44,628 |
|
| Total operating expenses | | 1,184,486 |
| | 1,213,641 |
| | 1,109,806 |
|
| | | | | | | |
| OPERATING INCOME | | 297,157 |
| | 236,864 |
| | 239,782 |
|
| | | | | | | |
| OTHER INCOME/(EXPENSE), NET: | | | | | | |
| Allowance for equity funds used during construction | | 3,486 |
| | 8,477 |
| | 25,798 |
|
| Interest expense | | (89,014 | ) | | (64,472 | ) | | (65,340 | ) |
| Other income/(expense), net | | (10,922 | ) | | (1,916 | ) | | 1,866 |
|
| Total other income/(expense), net | | (96,450 | ) | | (57,911 | ) | | (37,676 | ) |
| | | | | | | |
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 200,707 |
| | 178,953 |
| | 202,106 |
|
| | | | | | | |
| Less: income tax expense | | 43,430 |
| | 21,590 |
| | 65,591 |
|
| NET INCOME | | 157,277 |
| | 157,363 |
| | 136,515 |
|
| | | | | | | |
| LESS: PREFERRED DIVIDEND REQUIREMENTS | | 3,213 |
| | 3,213 |
| | 3,213 |
|
| NET INCOME APPLICABLE TO COMMON STOCK | | $ | 154,064 |
| | $ | 154,150 |
| | $ | 133,302 |
|
| | | | | | | |
See notes to consolidated financial statements.
|
| | | | | | | | |
| INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY |
| Consolidated Balance Sheets |
| (In Thousands) |
| | | December 31, 2019 | | December 31, 2018 |
| ASSETS | | | | |
| CURRENT ASSETS: | | |
| | |
|
| Cash and cash equivalents | | $ | 42,189 |
| | $ | 26,834 |
|
| Restricted cash | | 400 |
| | 400 |
|
| Accounts receivable, net | | 161,365 |
| | 167,869 |
|
| Inventories | | 83,569 |
| | 99,669 |
|
| Regulatory assets, current | | 37,398 |
| | 28,399 |
|
| Taxes receivable | | 23,134 |
| | 13,498 |
|
| Prepayments and other current assets | | 17,264 |
| | 15,573 |
|
| Total current assets | | 365,319 |
| | 352,242 |
|
| NON-CURRENT ASSETS: | | | | |
| Property, plant and equipment | | 6,398,612 |
| | 6,201,078 |
|
| Less: Accumulated depreciation | | 2,414,652 |
| | 2,256,215 |
|
| | 3,983,960 |
| | 3,944,863 |
|
| Construction work in progress | | 130,609 |
| | 111,723 |
|
| Total net property, plant and equipment | | 4,114,569 |
| | 4,056,586 |
|
| OTHER NON-CURRENT ASSETS: | | |
| | |
|
| Intangible assets - net | | 64,861 |
| | 40,848 |
|
| Regulatory assets, non-current | | 355,614 |
| | 395,077 |
|
| Other non-current assets | | 18,045 |
| | 6,959 |
|
| Total other non-current assets | | 438,520 |
| | 442,884 |
|
| TOTAL ASSETS | | $ | 4,918,408 |
| | $ | 4,851,712 |
|
| LIABILITIES AND SHAREHOLDER'S EQUITY | | | | |
| CURRENT LIABILITIES: | | | | |
| Short-term and current portion of long-term debt (Note 7) | | $ | 89,886 |
| | $ | — |
|
| Accounts payable | | 128,504 |
| | 135,144 |
|
| Accrued taxes | | 22,012 |
| | 21,325 |
|
| Accrued interest | | 23,857 |
| | 23,312 |
|
| Customer deposits | | 34,635 |
| | 32,700 |
|
| Regulatory liabilities, current | | 52,654 |
| | 51,024 |
|
| Accrued and other current liabilities | | 37,500 |
| | 41,984 |
|
| Total current liabilities | | 389,048 |
| | 305,489 |
|
| NON-CURRENT LIABILITIES: | | | | |
| Long-term debt (Note 7) | | 1,691,015 |
| | 1,780,184 |
|
| Deferred income tax liabilities | | 279,159 |
| | 252,729 |
|
| Taxes payable | | 4,658 |
| | 4,658 |
|
| Regulatory liabilities, non-current | | 846,430 |
| | 870,255 |
|
| Accrued pension and other postretirement benefits | | 19,344 |
| | 19,329 |
|
| Asset retirement obligations | | 204,219 |
| | 129,451 |
|
| Other non-current liabilities | | 252 |
| | 604 |
|
| Total non-current liabilities | | 3,045,077 |
| | 3,057,210 |
|
| Total liabilities | | 3,434,125 |
| | 3,362,699 |
|
| COMMITMENTS AND CONTINGENCIES (Note 10) | | | | |
| SHAREHOLDER'S EQUITY: | | | | |
| Common stock | | 324,537 |
| | 324,537 |
|
| Paid in capital | | 664,719 |
| | 664,513 |
|
| Retained earnings | | 435,243 |
| | 440,179 |
|
| Total shareholder's equity | | 1,424,499 |
| | 1,429,229 |
|
| Cumulative preferred stock | | 59,784 |
| | 59,784 |
|
| Total shareholder's equity | | 1,484,283 |
| | 1,489,013 |
|
| TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY | | $ | 4,918,408 |
| | $ | 4,851,712 |
|
| | | | | |
See notes to consolidated financial statements.
|
| | | | | | | | | | | | |
| INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY |
| Consolidated Statements of Cash Flows |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| | | 2019 | | 2018 | | 2017 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income | | $ | 157,277 |
| | $ | 157,363 |
| | $ | 136,515 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
| Depreciation and amortization | | 240,314 |
| | 232,332 |
| | 208,451 |
|
| Amortization of deferred financing costs and debt premium | | 2,262 |
| | 2,011 |
| | 2,199 |
|
| Deferred income taxes and investment tax credit adjustments - net | | 15,120 |
| | (15,646 | ) | | (3,441 | ) |
| Allowance for equity funds used during construction | | (3,486 | ) | | (8,477 | ) | | (25,798 | ) |
| Change in certain assets and liabilities: | | |
| | |
| | |
|
| Accounts receivable | | 6,504 |
| | (10,167 | ) | | (3,031 | ) |
| Inventories | | 13,574 |
| | (3,652 | ) | | (5,342 | ) |
| Accounts payable | | 2,816 |
| | 4,080 |
| | (5,048 | ) |
| Accrued and other current liabilities | | 4,416 |
| | (9,655 | ) | | (7,771 | ) |
| Accrued taxes payable/receivable | | (15,437 | ) | | 3,180 |
| | (785 | ) |
| Accrued interest | | 546 |
| | 826 |
| | (245 | ) |
| Pension and other postretirement benefit expenses | | 5,414 |
| | (30,740 | ) | | (14,069 | ) |
| Short-term and long-term regulatory assets and liabilities | | 921 |
| | 76,647 |
| | 17,011 |
|
| Prepayments and other current assets | | (2,119 | ) | | 7,279 |
| | (4,938 | ) |
| Other - net | | (7,053 | ) | | 582 |
| | 2,257 |
|
| Net cash provided by operating activities | | 421,069 |
| | 405,963 |
| | 295,965 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
| Capital expenditures | | (213,619 | ) | | (224,335 | ) | | (218,224 | ) |
| Project development costs | | (2,269 | ) | | (1,127 | ) | | (1,729 | ) |
| Cost of removal and regulatory recoverable ARO payments | | (21,838 | ) | | (29,543 | ) | | (16,802 | ) |
| Other | | — |
| | — |
| | (123 | ) |
| Net cash used in investing activities | | (237,726 | ) | | (255,005 | ) | | (236,878 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
| | |
|
| Short-term debt borrowings | | 10,000 |
| | 100,000 |
| | 202,500 |
|
| Short-term debt repayments | | (10,000 | ) | | (248,000 | ) | | (129,150 | ) |
| Long-term borrowings, net of discount | | — |
| | 104,936 |
| | — |
|
| Dividends on common stock | | (159,000 | ) | | (142,250 | ) | | (132,516 | ) |
| Dividends on preferred stock | | (3,213 | ) | | (3,213 | ) | | (3,213 | ) |
| Equity contributions from IPALCO | | — |
| | 65,000 |
| | — |
|
| Payments for financed capital expenditures | | (5,623 | ) | | (11,429 | ) | | (10,637 | ) |
| Other | | (152 | ) | | (1,110 | ) | | (336 | ) |
| Net cash used in financing activities | | (167,988 | ) | | (136,066 | ) | | (73,352 | ) |
| Net change in cash, cash equivalents and restricted cash | | 15,355 |
| | 14,892 |
| | (14,265 | ) |
| Cash, cash equivalents and restricted cash at beginning of period | | 27,234 |
| | 12,342 |
| | 26,607 |
|
| Cash, cash equivalents and restricted cash at end of period | | $ | 42,589 |
| | $ | 27,234 |
| | $ | 12,342 |
|
| | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest (net of amount capitalized) | | $ | 88,546 |
| | $ | 61,310 |
| | $ | 63,031 |
|
| Income taxes | | 37,400 |
| | 33,750 |
| | 87,000 |
|
| Non-cash investing activities: | | | | | | |
|
| Accruals for capital expenditures | | $ | 35,471 |
| | $ | 47,553 |
| | $ | 45,322 |
|
| | | | | | | |
See notes to consolidated financial statements.
|
| | | | | | | | | | | | | | | | |
| INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY |
| Consolidated Statements of Common Shareholder's Equity |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| | | Common Stock | | Paid in Capital | | Retained Earnings | | Total |
| Balance at January 1, 2017 | | $ | 324,537 |
| | $ | 598,500 |
| | $ | 434,993 |
| | $ | 1,358,030 |
|
| Net income | | — |
| | — |
| | 136,515 |
| | 136,515 |
|
| Preferred stock dividends | | — |
| | — |
| | (3,213 | ) | | (3,213 | ) |
| Cash dividends declared on common stock | | — |
| | — |
| | (125,516 | ) | | (125,516 | ) |
| Other | | | | 657 |
| | | | 657 |
|
| Balance at December 31, 2017 | | 324,537 |
| | 599,157 |
| | 442,779 |
| | 1,366,473 |
|
| Net income | | — |
| | — |
| | 157,363 |
| | 157,363 |
|
| Preferred stock dividends | | — |
| | — |
| | (3,213 | ) | | (3,213 | ) |
| Cash dividends declared on common stock | | — |
| | — |
| | (156,750 | ) | | (156,750 | ) |
| Contributions from IPALCO | | — |
| | 65,000 |
| | — |
| | 65,000 |
|
| Other | | |
| | 356 |
| | |
| | 356 |
|
| Balance at December 31, 2018 | | 324,537 |
| | 664,513 |
| | 440,179 |
| | 1,429,229 |
|
| Net income | | — |
| | — |
| | 157,277 |
| | 157,277 |
|
| Preferred stock dividends | | — |
| | — |
| | (3,213 | ) | | (3,213 | ) |
| Cash dividends declared on common stock | | — |
| | — |
| | (159,000 | ) | | (159,000 | ) |
| Other | | — |
| | 206 |
| | — |
| | 206 |
|
| Balance at December 31, 2019 | | $ | 324,537 |
| | $ | 664,719 |
| | $ | 435,243 |
| | $ | 1,424,499 |
|
| | | | | | | | | |
See notes to consolidated financial statements.
INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY
Notes to Consolidated Financial Statements
For the Years Ended December 31, 2019, 2018 and 2017
1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IPL was incorporated under the laws of the state of Indiana in 1926. All of the outstanding common stock of IPL is owned by IPALCO. IPALCO, acquired by AES in March 2001, is owned by AES U.S. Investments and CDPQ. AES U.S. Investments is owned by AES (85%) and CDPQ (15%). IPL is engaged primarily in generating, transmitting, distributing and selling of electric energy to more than 500,000 retail customers in the city of Indianapolis and neighboring cities, towns and communities, and adjacent rural areas all within the state of Indiana, with the most distant point being approximately 40 miles from Indianapolis. IPL has an exclusive right to provide electric service to those customers. IPL owns and operates 4 generating stations all within the state of Indiana. Our largest generating station, Petersburg, is coal-fired. The second largest station, Harding Street, uses natural gas and fuel oil to power combustion turbines. In addition, IPL operates a 20 MW battery energy storage unit at this location, which provides frequency response. The third station, Eagle Valley, is a CCGT natural gas plant. IPL took operational control and commenced commercial operations of this CCGT plant in April 2018. The fourth station, Georgetown, is a small peaking station that uses natural gas to power combustion turbines. As of December 31, 2019, IPL’s net electric generation capacity for winter is 3,705 MW and net summer capacity is 3,560 MW.
Principles of Consolidation
IPL’s consolidated financial statements are prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The consolidated financial statements include the accounts of IPL and its unregulated subsidiary, IPL Funding Corporation, which was dissolved in 2018 and was immaterial to the consolidated financial statements in the periods covered by this report. All intercompany items have been eliminated in consolidation. Certain costs for shared resources amongst IPL and IPALCO, such as labor and benefits, are allocated to each entity based on allocation methodologies that management believes to be reasonable. We have evaluated subsequent events through the date this report is issued.
Financial Statement Presentation
During 2018, IPL adopted a change in presentation on its Consolidated Balance Sheets and Consolidated Statements of Operations from a utility format to a traditional format. These changes revised the order of certain balance sheet line items and resulted in the movement of certain balances within the Consolidated Statements of Operations and Consolidated Balance Sheets, but did not result in any material changes to the classification of any such amounts between line items or have any impact on net assets or net income.
Certain amounts from prior periods have been reclassified to conform to the current period presentation.
Use of Management Estimates
The preparation of financial statements in conformity with GAAP requires that management make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may also be affected by the estimates and assumptions management is required to make. Actual results may differ from those estimates.
Regulatory Accounting
The retail utility operations of IPL are subject to the jurisdiction of the IURC. IPL’s wholesale power transactions are subject to the jurisdiction of the FERC. These agencies regulate IPL’s utility business operations, tariffs, accounting, depreciation allowances, services, issuances of securities and the sale and acquisition of utility properties. The financial statements of IPL are based on GAAP, including the provisions of FASB ASC 980 “Regulated Operations,” which gives recognition to the ratemaking and accounting practices of these agencies. See also Note 2, “Regulatory Matters - Regulatory Assets and Liabilities” for a discussion of specific regulatory assets and liabilities.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents are stated at cost, which approximates fair value. All highly liquid short-term investments with original maturities of three months or less are considered cash equivalents. Restricted cash includes cash which is restricted as to withdrawal or usage. The nature of the restrictions includes restrictions imposed by agreements related to deposits held as collateral. The following table provides a summary of cash, cash equivalents and restricted cash amounts as shown on the Consolidated Statements of Cash Flows:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Cash, cash equivalents and restricted cash | | | | |
| Cash and cash equivalents | | $ | 42,189 |
| | $ | 26,834 |
|
| Restricted cash | | 400 |
| | 400 |
|
| Total cash, cash equivalents and restricted cash | | $ | 42,589 |
| | $ | 27,234 |
|
| | | | | |
Revenues and Accounts Receivable
Revenues related to the sale of energy are generally recognized when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to certain customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is accrued. In making its estimates of unbilled revenue, IPL uses complex models that consider various factors including daily generation volumes; known amounts of energy usage by nearly all residential, small commercial and industrial customers; estimated line losses; and estimated customer rates based on prior period billings. Given the use of these models, and that customers are billed on a monthly cycle, we believe it is unlikely that materially different results will occur in future periods when revenue is billed. An allowance for potential credit losses is maintained and amounts are written off when normal collection efforts have been exhausted. IPL’s provision for doubtful accounts included in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations was $5.5 million, $6.0 million and $5.9 million for the years ended December 31, 2019, 2018 and 2017, respectively.
IPL’s basic rates include a provision for fuel costs as established in IPL’s most recent rate proceeding, which last adjusted IPL’s rates in December 2018. IPL is permitted to recover actual costs of purchased power and fuel consumed, subject to certain restrictions. This is accomplished through quarterly FAC proceedings, in which IPL estimates the amount of fuel and purchased power costs in future periods. Through these proceedings, IPL is also permitted to recover, in future rates, underestimated fuel and purchased power costs from prior periods, subject to certain restrictions, and therefore the over or underestimated costs are deferred or accrued and amortized into fuel expense in the same period that IPL’s rates are adjusted. See also Note 2, “RegulatoryMatters” for a discussion of other costs that IPL is permitted to recover through periodic rate adjustment proceedings and the status of current rate adjustment proceedings.
In addition, IPL is one of many transmission system owner members of MISO, a regional transmission organization which maintains functional control over the combined transmission systems of its members and manages one of the largest energy markets in the U.S. See Note 13, "Revenue" for additional information of MISO sales and other revenue streams.
The following table summarizes our accounts receivable balances at December 31:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Accounts receivable, net | | | | |
| Customer receivables | | $ | 90,747 |
| | $ | 91,426 |
|
| Unbilled revenue | | 65,822 |
| | 68,893 |
|
| Amounts due from related parties | | 2,992 |
| | 6,030 |
|
| Other | | 3,857 |
| | 4,341 |
|
| Provision for uncollectible accounts | | (2,053 | ) | | (2,821 | ) |
| Total accounts receivable, net | | $ | 161,365 |
| | $ | 167,869 |
|
| | | | | |
Inventories
IPL maintains coal, fuel oil, materials and supplies inventories for use in the production of electricity. These inventories are accounted for at the lower of cost or net realizable value, using the average cost. The following table summarizes our inventories balances at December 31:
|
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Inventories | | | | |
| Fuel | | $ | 26,907 |
| | $ | 32,457 |
|
| Materials and supplies | | 56,662 |
| | 67,212 |
|
| Total inventories | | $ | 83,569 |
| | $ | 99,669 |
|
| | | | | |
Property, Plant and Equipment
Property, plant and equipment is stated at original cost as defined for regulatory purposes. The cost of additions to property, plant and equipment and replacements of retirement units of property are charged to plant accounts. Units of property replaced or abandoned in the ordinary course of business are retired from the plant accounts at cost; such amounts, less salvage, are charged to accumulated depreciation. Depreciation is computed by the straight-line method based on functional rates approved by the IURC and averaged 3.7%, 4.2%, and 4.1% during 2019, 2018 and 2017, respectively. Depreciation expense was $228.2 million, $235.2 million, and $209.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. "Depreciation and amortization" expense on the accompanying Consolidated Statements of Operations is presented net of regulatory deferrals of depreciation expense and also includes amortization of intangible assets and amortization of previously deferred regulatory costs.
Allowance For Funds Used During Construction
In accordance with the Uniform System of Accounts prescribed by FERC, IPL capitalizes an allowance for the net cost of funds (interest on borrowed funds and a reasonable rate of return on equity funds) used for construction purposes during the period of construction with a corresponding credit to income. IPL capitalized amounts using pretax composite rates of 6.9%, 6.4% and 6.6% during 2019, 2018 and 2017, respectively.
Impairment of Long-lived Assets
GAAP requires that IPL test long-lived assets for impairment when indicators of impairment exist. If an asset is deemed to be impaired, IPL is required to write down the asset to its fair value with a charge to current earnings. The net book value of IPL’s property, plant, and equipment was $4.1 billion as of December 31, 2019 and 2018. IPL does not believe any of these assets are currently impaired. In making this assessment, IPL considers such factors as: the overall condition and generating and distribution capacity of the assets; the expected ability to recover
additional expenditures in the assets; the anticipated demand and relative pricing of retail electricity in its service territory and wholesale electricity in the region; and the cost of fuel.
Intangible Assets
Intangible assets primarily include capitalized software of $139.6 million and $129.7 million and its corresponding accumulated amortization of $74.7 million and $88.8 million, as of December 31, 2019 and 2018, respectively. Amortization expense was $7.5 million, $5.5 million and $4.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. The estimated amortization expense of this capitalized software is approximately $50.0 million over the next 5 years ($10.0 million in 2020, $10.0 million in 2021, $10.0 million in 2022, $10.0 million in 2023 and $10.0 million in 2024).
Contingencies
IPL accrues for loss contingencies when the amount of the loss is probable and estimable. IPL is subject to various environmental regulations and is involved in certain legal proceedings. If IPL’s actual environmental and/or legal obligations are different from our estimates, the recognition of the actual amounts may have a material impact on our results of operations, financial condition and cash flows; although that has not been the case during the periods covered by this report. As of December 31, 2019 and 2018, total loss contingencies accrued were $4.5 million and $4.6 million, respectively, which were included in “Accrued and Other Current Liabilities” on the accompanying Consolidated Balance Sheets.
Concentrations of Risk
Substantially all of IPL’s customers are located within the Indianapolis area. Approximately 69% of IPL’s employees are covered by collective bargaining agreements in two bargaining units: a physical unit and a clerical-technical unit. IPL’s contract with the physical unit expires on December 6, 2021, and the contract with the clerical-technical unit expires February 13, 2023. Additionally, IPL has long-term coal contracts with 4 suppliers, with about 33% of our existing coal under contract for the three-year period ending December 31, 2022 coming from one supplier. Substantially all of the coal is currently mined in the state of Indiana.
Financial Derivatives
All derivatives are recognized as either assets or liabilities in the balance sheets and are measured at fair value. Changes in the fair value are recorded in earnings unless the derivative is designated as a cash flow hedge of a forecasted transaction or it qualifies for the normal purchases and sales exception.
IPL has contracts involving the physical delivery of energy and fuel. Because these contracts qualify for the normal purchases and normal sales scope exception in ASC 815, IPL has elected to account for them as accrual contracts, which are not adjusted for changes in fair value.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of the existing assets and liabilities, and their respective income tax bases. IPL establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset will not be realized. IPL’s tax positions are evaluated under a more likely than not recognition threshold and measurement analysis before they are recognized for financial statement reporting.
Uncertain tax positions have been classified as noncurrent income tax liabilities unless expected to be paid within one year. IPL’s policy for interest and penalties is to recognize interest and penalties as a component of the provision for income taxes in the Consolidated Statements of Operations.
Income tax assets or liabilities which are included in allowable costs for ratemaking purposes in future years are recorded as regulatory assets or liabilities with a corresponding deferred tax liability or asset. Investment tax credits that reduced federal income taxes in the years they arose have been deferred and are being amortized to income over the useful lives of the properties in accordance with regulatory treatment. See Note 2, "Regulatory Matters" for additional information.
IPL and its subsidiary file U.S. federal income tax returns as part of the consolidated U.S. income tax return filed by AES. The consolidated tax liability is allocated to each subsidiary based on the separate return method which is specified in our tax allocation agreement and which provides a consistent, systematic and rational approach. See Note 8, "Income Taxes" for additional information.
Pension and Postretirement Benefits
IPL recognizes in its Consolidated Balance Sheets an asset or liability reflecting the funded status of pension and other postretirement plans with current-year changes in the funded status, that would otherwise be recognized in AOCI, recorded as a regulatory asset as this can be recovered through future rates. All plan assets are recorded at fair value. IPL follows the measurement date provisions of the accounting guidance, which require a year-end measurement date of plan assets and obligations for all defined benefit plans.
IPL accounts for and discloses pension and postretirement benefits in accordance with the provisions of GAAP relating to the accounting for pension and other postretirement plans. These GAAP provisions require the use of assumptions, such as the discount rate for liabilities and long-term rate of return on assets, in determining the obligations, annual cost and funding requirements of the plans. Consistent with the requirements of ASC 715, IPL applies a disaggregated discount rate approach for determining service cost and interest cost for its defined benefit pension plans and postretirement plans.
See Note 9, "Benefit Plans" for more information.
Repair and Maintenance Costs
Repair and maintenance costs are expensed as incurred.
Per Share Data
IPALCO owns all of the outstanding common stock of IPL. IPL does not report earnings on a per-share basis.
New Accounting Pronouncements Adopted in 2019
The following table provides a brief description of recent accounting pronouncements that had an impact on IPL's consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on IPL's consolidated financial statements.
|
| | | |
| New Accounting Standards Adopted |
| ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption |
| 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities | The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity, and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that the entire change in the fair value of a hedging instrument will be recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item.
Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date. Prospective for presentation and disclosures.
| January 1, 2019 | The adoption of this standard did not have a material impact on IPL's consolidated financial statements. |
| 2016-02, 2018-01, 2018-10, 2018-11, 2018-20, 2019-01, Leases (Topic 842) | See discussion of the ASUs below.
| January 1, 2019 | See impact upon adoption of the standard below.
|
On January 1, 2019, IPL adopted ASC 842 Leases and its subsequent corresponding updates (“ASC 842”). Under this standard, lessees are required to recognize assets and liabilities for most leases on the balance sheet, and recognize expenses in a manner similar to the current accounting method. For lessors, the guidance modifies the
lease classification criteria and the accounting for sales-type and direct financing leases. The guidance eliminates previous real estate-specific provisions.
Under ASC 842, fewer of IPL's contracts contain a lease. However, due to the elimination of the real estate-specific guidance and changes to certain lessor classification criteria, more leases qualify as sales-type leases and direct financing leases. Under these two models, a lessor derecognizes the asset and recognizes a lease receivable. According to ASC 842, the net investment in the lease includes the fair value of residual interest in the asset after the contract period as well as the present value of the fixed lease payments, but does not include any variable payments under the lease. Therefore, the net investment in the lease could be significantly different than the carrying amount of the underlying asset at lease commencement. In such circumstances, the difference between the initially recognized net investment in the lease and the carrying amount of the underlying asset is recognized as a gain/loss at lease commencement.
During the course of adopting ASC 842, IPL applied various practical expedients including:
The package of practical expedients (applied to all leases) that allowed lessees and lessors not to reassess:
a. whether any expired or existing contracts are or contain leases,
b. lease classification for any expired or existing leases, and
c. whether initial direct costs for any expired or existing leases qualify for capitalization under ASC 842.
The transition practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements, and
The transition practical expedient for lessees that allowed businesses to not separate lease and non-lease components. IPL applied the practical expedient to all classes of underlying assets when valuing right-of-use assets and lease liabilities. Contracts where IPL is the lessor were separated between the lease and non-lease components.
IPL applied the modified retrospective method of adoption and elected to continue to apply the guidance in ASC 840 Leases to the comparative periods presented in the year of adoption. Under this transition method, IPL applied the transition provisions starting at the date of adoption. The adoption of ASC 842 did not have a material impact on IPL's consolidated financial statements.
New Accounting Pronouncements Issued But Not Yet Effective
The following table provides a brief description of recent accounting pronouncements that could have a material impact on IPL's consolidated financial statements once adopted. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on IPL's consolidated financial statements.
|
| | | |
| New Accounting Standards Issued But Not Yet Effective |
| ASU Number and Name | Description | Date of Adoption | Effect on the Financial Statements upon adoption |
| 2019-12, Income Taxes (Topic 740): Simplifying the Accounting For Income Taxes | The standard removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. It also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.
Transition Method: various | January 1, 2021. Early adoption is permitted. | IPL is currently evaluating the impact of adopting the standard on IPL's consolidated financial statements. |
2016-13, 2018-19, 2019-04, 2019-05, 2019-10, 2019-11, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
| See discussion of the ASU below.
| January 1, 2020. Early adoption is permitted only as of January 1, 2019. | IPL will adopt the standard on January 1, 2020; see below for the evaluation of the impact of the adoption on the standard on IPL's consolidated financial statements. |
ASU 2016-13 and its subsequent corresponding updates will update the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss ("CECL") model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new
forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, there will be no change to the measurement of credit losses, except that unrealized losses due to credit-related factors will be recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement. There are various transition methods available upon adoption.
IPL is currently evaluating the impact of adopting the standard on its financial statements; however, it is expected that the new current expected credit loss model will primarily impact the calculation of IPL's expected credit losses on $163.4 million in gross trade accounts receivable. IPL does not expect a material impact to result from the application of CECL on our trade accounts receivable.
2. REGULATORY MATTERS
General
IPL is subject to regulation by the IURC as to its services and facilities, the valuation of property, the construction, purchase, or lease of electric generating facilities, the classification of accounts, rates of depreciation, retail rates and charges, the issuance of securities (other than evidences of indebtedness payable less than twelve months after the date of issue), the acquisition and sale of some public utility properties or securities and certain other matters.
In addition, IPL is subject to the jurisdiction of the FERC with respect to, among other things, short-term borrowings not regulated by the IURC, the sale of electricity at wholesale, the transmission of electric energy in interstate commerce, the classification of accounts, reliability standards, and the acquisition and sale of utility property in certain circumstances as provided by the Federal Power Act. As a regulated entity, IPL is required to use certain accounting methods prescribed by regulatory bodies which may differ from those accounting methods required to be used by unregulated entities.
IPL is also affected by the regulatory jurisdiction of the EPA at the federal level, and the IDEM at the state level. Other significant regulatory agencies affecting IPL include, but are not limited to, the NERC, the U.S. Department of Labor and the IOSHA.
Basic Rates and Charges
IPL’s basic rates and charges represent the largest component of its annual revenues. IPL’s basic rates and charges are determined after giving consideration, on a pro-forma basis, to all allowable costs for ratemaking purposes including a fair return on the fair value of the utility property used and useful in providing service to customers. These basic rates and charges are set and approved by the IURC after public hearings. Such proceedings, which have occurred at irregular intervals, involve IPL, the IURC, the Indiana Office of Utility Consumer Counselor, and other interested stakeholders. Pursuant to statute, the IURC is to conduct a periodic review of the basic rates and charges of all Indiana utilities at least once every four years, but the IURC has the authority to review the rates of any Indiana utility at any time. Once set, the basic rates and charges authorized do not assure the realization of a fair return on the fair value of property.
IPL’s declining block rate structure generally provides for residential and commercial customers to be charged a lower per kWh rate at higher consumption levels. Therefore, as volumes increase, the weighted average price per kWh decreases. Numerous factors including, but not limited to, weather, inflation, customer growth and usage, the level of actual operating and maintenance expenditures, fuel costs, generating unit availability, and capital expenditures including those required by environmental regulations can affect the return realized.
Base Rate Orders
On October 31, 2018, the IURC issued an order approving an uncontested settlement agreement previously filed with the IURC by IPL for a $43.9 million, or 3.2%, increase to annual revenues (the "2018 Base Rate Order"). The 2018 Base Rate Order includes recovery through rates of the CCGT at Eagle Valley completed in the first half of 2018, as well as other construction projects and changes to operating income since the 2016 Base Rate Order (See below). New basic rates and charges became effective on December 5, 2018. The 2018 Base Rate Order also provides customers approximately $50 million in benefits, which are flowing to customers over the two-year period that began March 2019, via the ECCRA rate adjustment mechanism. This liability, less amounts returned to IPL's
customers during 2019, is recorded primarily in "Regulatory liabilities, current" with approximately $4.7 million in "Regulatory liabilities, non-current" as ofDecember 31, 2019 on the accompanying Consolidated Balance Sheets. In addition, the 2018 Base Rate Order provides that annual wholesale margins earned above (or below) the benchmark of $16.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. Similarly, the 2018 Base Rate Order provides that all capacity sales above (or below) a benchmark of $11.3 million shall be passed back (or charged) to customer rates through a rate adjustment mechanism. The 2018 Base Rate Order also approved changes to IPL's depreciation and amortization rates (including no longer deferring depreciation on the CCGT at Eagle Valley) which altogether represent a net expense increase of approximately $28.7 million annually.
In March 2016, the IURC issued the 2016 Base Rate Order authorizing IPL to increase its basic rates and charges by $30.8 million annually. IPL also received approval to implement three new rate riders for current recovery from customers ofongoing MISO costs and capacity costs, and for sharing with customers 50% of wholesale sales margins above and below the established benchmark of $6.3 million.
CCR
On April 26, 2017, the IURC approved IPL’s CCR compliance request to install a bottom ash dewatering system at its Petersburg generating station and to recover 80% of qualifying costs through a rate adjustment mechanism with the remainder recorded as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the CCR compliance plan was approximately $47 million. IPL’s bottom ash dewatering system at its Petersburg generating station went into service in September 2017.
NAAQS
On April 26, 2017, the IURC approved IPL’s request for NAAQS SO2 compliance at its Petersburg generation station with 80% of qualifying costs recovered through a rate adjustment mechanism and the remainder recorded as a regulatory asset for recovery in a subsequent rate case. The approved capital cost of the NAAQS SO2 compliance plan was approximately $29 million. This project went into service between August 2018 and August 2019.
Other
The DOE issued a Notice of Proposed Rule Making on September 29, 2017, which directed the FERC to exercise its authority to set just and reasonable rates that recognize the “resiliency” value provided by generation plants with certain characteristics, including having 90-days or more of on-site fuel and operating in markets where they do not receive rate base treatment through state ratemaking. Nuclear and coal-fired generation plants would have been most likely to be able to meet the requirements. As proposed, the DOE would value resiliency through rates that recover “compensable costs” that were defined to include the recovery of operating and fuel expenses, debt service and a fair return on equity. On January 8, 2018, the FERC issued an order terminating this docket stating that it failed to satisfy the legal requirements of Section 206 of the Federal Power Act of 1935. The FERC initiated a new docket to take additional steps to explore resilience issues in RTOs/ISOs. The goal of this new proceeding is to: (1) develop a common understanding among the FERC, State Commissions, RTOs/ISOs, transmission owners, and others as to what resilience of the bulk power system means and requires; (2) understand how each RTO and ISO assesses resilience in its geographic footprint; and (3) use this information to evaluate whether additional action regarding resilience is appropriate at this time. It is not possible to predict the impact of this proceeding on our business, financial condition and results of operations.
FACand Authorized Annual Jurisdictional Net Operating Income
IPL may apply to the IURC for a change in IPL’s fuel charge every three months to recover IPL’s estimated fuel costs, including the energy portion of purchased power costs, which may be above or below the levels included in IPL’s basic rates and charges. IPL must present evidence in each FAC proceeding that it has made every reasonable effort to acquire fuel and generate or purchase power or both so as to provide electricity to its retail customers at the lowest fuel cost reasonably possible.
Independent of the IURC’s ability to review basic rates and charges, Indiana law requires electric utilities under the jurisdiction of the IURC to meet operating expense and income test requirements as a condition for approval of requested changes in the FAC. A utility may be unable to recover all of its fuel costs if its rolling twelve-month
operating income, determined at quarterly measurement dates, exceeds its authorized annual jurisdictional net operating income and there are not sufficient applicable cumulative net operating income deficiencies (“Cumulative Deficiencies”) to offset it. The Cumulative Deficiencies calculation provides that only five years’ worth of historical earnings deficiencies or surpluses are included, unless it has been greater than five years since the most recent rate case.
In each of the last three calendar years, IPL has reported earnings in excess of the authorized level for each of the four quarterly reporting periods in those years. IPL was not required to reduce its fuel cost recovery, because of its Cumulative Deficiencies. The historical periods when IPL earned less than the authorized level, which put IPL in a Cumulative Deficiency position, all relate to earnings prior to IPL’s 2018 Base Rate Order and therefore each quarter one of those underearning periods drops out of the Cumulative Deficiency calculation. Consequently, it is likely that IPL’s Cumulative Deficiencies will drop to zero in 2020 and IPL may then be required to decrease its fuel factor if it continues to earn above the authorized level.
ECCRA
IPL may apply to the IURC for approval of a rate adjustment known as the ECCRA periodically to recover costs (including a return) to comply with certain environmental regulations applicable to IPL’s generating stations. The total amount of IPL’s equipment approved for ECCRA recovery as of December 31, 2019 was $17.4 million. The jurisdictional revenue requirement approved by the IURC to be included in IPL’s rates for the twelve-month period ending February 2020 was a net credit to customers of $28.4 million. This amount is significantly lower than prior ECCRA periods as a result of (i) having the vast majority of the ECCRA projects rolled into IPL’s basic rates and charges effective December 5, 2018 as a result of the 2018 Base Rate Order and (ii) the approximately $50 million
of customer benefits being flowed through the ECCRA as a result of the 2018 Base Rate Order, as described above. The only equipment still remaining in the ECCRA as of December 31, 2019 are certain projects associated with NAAQS compliance.
DSM
Through various rate orders from the IURC, IPL has been able to recover its costs of implementing various DSM programs throughout the periods covered by this report. In 2019 and 2018, IPL also had the ability to receive performance incentives, dependent upon the level of success of the programs. Performance incentives included in revenues for the years ended December 31, 2019, 2018 and 2017 were $7.5 million, $3.8 million and $0.0 million, respectively.
On February 7, 2018, the IURC approved a settlement agreement establishing a new three year DSM plan for IPL through 2020. The approval included cost recovery of programs as well as performance incentives, depending on the level of success of the programs. The order also approved recovery of lost revenues, consistent with the provisions of the settlement agreement.
Wind and Solar Power Purchase Agreements
IPL is committed under a power purchase agreement to purchase all wind-generated electricity through 2029 from a wind project in Indiana. IPL is also committed under another agreement to purchase all wind-generated electricity through 2031 from a project in Minnesota. The Indiana project has a maximum output capacity of approximately 100 MW and the Minnesota project has a maximum output capacity of approximately 200 MW. In addition, IPL has 96.4 MW of solar-generated electricity in its service territory under long-term contracts (these long-term contracts have expiration dates ranging from 2021 to 2033), of which 95.9 MW was in operation as of December 31, 2019. IPL has authority from the IURC to recover the costs for all of these agreements through an adjustment mechanism administered within the FAC. If and when IPL sells the renewable energy attributes (in the form of renewable energy credits) generated from these facilities, the proceeds would pass back to benefit IPL’s retail customers through the FAC.
Taxes
On January 3, 2018, the IURC opened a generic investigation to review and consider the impacts from the TCJA and how any resulting benefits should be realized by customers. The IURC’s order opening this investigation directed Indiana utilities to apply regulatory accounting treatment, such as the use of regulatory assets and regulatory liabilities, for all estimated impacts resulting from the TCJA. On February 16, 2018, the IURC issued an
order establishing two phases of the investigation. The first phase (“Phase I”) directed respondent utilities (including IPL) to make a filing to remove from respondents’ rates and charges for service, the impact of a lower federal income tax rate. The second phase (“Phase II”) was established to address remaining issues from the TCJA, including treatment of deferred taxes and how these benefits will be realized by customers. On August 29, 2018, the IURC approved a settlement agreement filed by IPL and various other parties to resolve the Phase I issues of the TCJA tax expense via a credit through the ECCRA rate adjustment mechanism of $9.5 million. The 2018 Base Rate Order described above resolved the Phase II and all other issues regarding the TCJA impact on IPL's rates and includes an additional credit of $14.3 million to be paid by IPL to its customers through the ECCRA rate adjustment mechanism over two years beginning in March 2019. See also Note 8, “Income Taxes - U.S. Tax Reform” for further information.
TDSIC Filing
In 2013, Senate Enrolled Act 560, the Transmission, Distribution, and Storage System Improvement Charge ("TDSIC") statute, was signed into law. The TDSIC statute was revised in 2019. Among other provisions, this legislation provides for cost recovery outside of a base rate proceeding for new or replacement electric and gas transmission, distribution, and storage projects that a public utility undertakes for the purposes of safety, reliability, system modernization, or economic development. Provisions of the TDSIC statute require that, among other things, requests for recovery include a plan of at least five years and not more than seven for eligible investments. Once the plan is approved by the IURC, 80 percent of eligible costs can be recovered using a periodic rate adjustment mechanism. The cost recovery mechanism is referred to as a TDSIC mechanism. Recoverable costs include a return on, and of, the investment, including AFUDC, post-in-service carrying charges, operation and maintenance expenses, depreciation and property taxes. The remaining 20 percent of recoverable costs are to be deferred for future recovery in the public utility’s next base rate case. The periodic rate adjustment mechanism is capped at an annual increase of no more than 2 percent of total retail revenues.
On July 24, 2019, IPL filed a petition with the IURC seeking approval of a seven-year TDSIC Plan for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027. An IURC order is expected in the first quarter of 2020. There will be no revenues and/or cost recovery until approval of the TDSIC rider, which is not expected to occur until later in 2020.
IRP Filing
In December 2019, IPL filed its IRP, which describes IPL's Preferred Resource Portfolio for meeting generation capacity needs for serving IPL's retail customers over the next several years. IPL's Preferred Resource Portfolio is its reasonable least cost option and provides a cleaner and more diverse generation mix for customers. IPL's Preferred Resource Portfolio includes the retirement of 630 MW of coal-fired generation by 2023. Based on extensive modeling, IPL has determined that the cost of operating Petersburg Units 1 and 2 exceeds the value customers receive compared to alternative resources. Retirement of these units allows the company to cost-effectively diversify the portfolio and transition to lower cost and cleaner resources while maintaining a reliable system.
IPL issued an all-source Request for Proposal on December 20, 2019, in order to competitively procure replacement capacity by June 1, 2023, which is the first year IPL is expected to have a capacity shortfall. Current modeling indicates that a combination of wind, solar, storage, and energy efficiency would be the lowest reasonable cost option for the replacement capacity, but IPL will assess the type, size, and location of resources after bids are received. As a result of the decision to retire Petersburg Units 1 and 2, IPL recorded a $6.2 million obsolescence loss in December 2019 for materials and supplies inventory IPL does not believe will be utilized by the planned retirement dates, which is recorded in "Operating expenses - Operation and maintenance" on the accompanying Consolidated Statements of Operations.
Regulatory Assets and Liabilities
Regulatory assets represent deferred costs or credits that have been included as allowable costs or credits for ratemaking purposes. IPL has recorded regulatory assets or liabilities relating to certain costs or credits as authorized by the IURC or established regulatory practices in accordance with ASC 980. IPL is amortizing non tax-related regulatory assets to expense over periods ranging from 1 to 45 years. Tax-related regulatory assets represent the net income tax costs to be considered in future regulatory proceedings generally as the tax-related amounts are paid.
The amounts of regulatory assets and regulatory liabilities at December 31 are as follows: |
| | | | | | | | | | |
| | | 2019 | | 2018 | | Recovery Period |
| | | (In Thousands) | | |
| Regulatory Assets | | | | | | |
| Current: | | | | | | |
| Undercollections of rate riders | | $ | 22,216 |
| | $ | 13,217 |
| | Approximately 1 year(1) |
| Costs being recovered through basic rates and charges | | 15,182 |
| | 15,182 |
| | Approximately 1 year(1) |
| Total current regulatory assets | | 37,398 |
| | 28,399 |
| | |
| Long-term: | | | | | | |
| Unrecognized pension and other | | | | | | |
| postretirement benefit plan costs | | 176,646 |
| | 195,559 |
| | Various(2) |
| Deferred MISO costs | | 74,660 |
| | 88,052 |
| | Through 2026(1) |
| Unamortized Petersburg Unit 4 carrying | | | | | | |
| charges and certain other costs | | 7,030 |
| | 8,084 |
| | Through 2026(1)(3) |
| Unamortized reacquisition premium on debt | | 18,330 |
| | 19,714 |
| | Over remaining life of debt |
| Environmental projects | | 78,021 |
| | 81,204 |
| | Through 2046(1)(3) |
| Other miscellaneous | | 927 |
| | 2,464 |
| | Various(4) |
| Total long-term regulatory assets | | 355,614 |
| | 395,077 |
| | |
| Total regulatory assets | | $ | 393,012 |
| | $ | 423,476 |
| | |
| Regulatory Liabilities | | | | | | |
| Current: | | | | | | |
| Overcollection or rate riders and other credits being passed | | | | | | |
| to customers through rate riders | | $ | 51,790 |
| | $ | 47,925 |
| | Approximately 1 year(1) |
| FTRs | | 864 |
| | 3,099 |
| | Approximately 1 year(1) |
| Total current regulatory liabilities | | 52,654 |
| | 51,024 |
| | |
| Long-term: | | | | | | |
| ARO and accrued asset removal costs | | 719,680 |
| | 707,662 |
| | Not applicable |
| Deferred income taxes payable through rates | | 122,156 |
| | 141,058 |
| | Various |
| Long-term portion or credits being passed to customers | | | | | | |
| through rate riders | | 3,337 |
| | 21,341 |
| | Through 2021 |
| Other miscellaneous | | 1,257 |
| | 194 |
| | To be determined |
| Total long-term regulatory liabilities | | 846,430 |
| | 870,255 |
| | |
| Total regulatory liabilities | | $ | 899,084 |
| | $ | 921,279 |
| | |
| |
| |
| (1) | Recovered (credited) per specific rate orders |
| |
| (2) | IPL receives a return on its discretionary funding |
| |
| (3) | Recovered with a current return |
(4) The majority of these costs are being recovered in basic rates and charges through 2026. For the remainder, recovery is probable, but the
timing is not yet determined.
Deferred Fuel
Deferred fuel costs are a component of current regulatory assets or liabilities (which is a result of IPL charging either more or less for fuel than our actual costs to our jurisdictional customers) and are expected to be recovered through future FAC proceedings. IPL records deferred fuel in accordance with standards prescribed by the FERC. The deferred fuel adjustment is the result of variances between estimated fuel and purchased power costs in IPL’s FAC and actual fuel and purchased power costs. IPL is generally permitted to recover underestimated fuel and purchased power costs in future rates through the FAC proceedings and therefore the costs are deferred when incurred and amortized into fuel expense in the same period that IPL’s rates are adjusted to reflect these costs.
Unrecognized Pension and Postretirement Benefit Plan Costs
In accordance with ASC 715 “Compensation – Retirement Benefits” and ASC 980, IPL recognizes a regulatory asset equal to the unrecognized actuarial gains and losses and prior service costs. Pension expenses are recorded based on the benefit plan’s actuarially determined pension liability and associated level of annual expenses to be recognized. The other postretirement benefit plan’s deferred benefit cost is the excess of the other postretirement benefit liability over the amount previously recognized.
Deferred Income Taxes Recoverable/Payable Through Rates
A deferred income tax asset or liability is created from a difference in timing of income recognition between tax laws and accounting methods. As a regulated utility, IPL includes in ratemaking the impacts of current income taxes and changes in deferred income tax liabilities or assets.
On December 22, 2017, the U.S. federal government enacted the TCJA, which includes a provision to, among other things, reduce the federal corporate income tax rate from 35% to 21%, beginning January 1, 2018. As required by GAAP, on December 31, 2017, IPL remeasured their deferred income tax assets and liabilities using the new tax rate. The impact of the reduction of the income tax rate on deferred income taxes will be used in future ratemaking to reduce jurisdictional retail rates. Accordingly, IPL has a net regulatory deferred income tax liability of $122.2 million and $141.1 million as of December 31, 2019 and 2018, respectively.
Deferred MISO Costs
These consist of administrative costs for transmission services, transmission expansion cost sharing, and certain other operational and administrative costs from the MISO market. These costs are being recovered per specific rate order.
Environmental Costs
These consist of various costs incurred to comply with environmental regulations. These costs were approved for recovery either through IPL's ECCRA proceedings or in the 2018 Base Rate Order. Amortization periods vary, but all costs should be recovered by 2064.
ARO and Accrued Asset Removal Costs
In accordance with ASC 410 and ASC 980, IPL recognizes the amount collected in customer rates for costs of removal that do not have an associated legal retirement obligation as a deferred regulatory liability. This amount is net of the portion of legal ARO costs that is also currently being recovered in rates.
3. PROPERTY, PLANT AND EQUIPMENT
The original cost of property, plant and equipment segregated by functional classifications follows: |
| | | | | | | | |
| | | As of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Production | | $ | 4,154,919 |
| | $ | 3,927,847 |
|
| Transmission | | 398,903 |
| | 394,621 |
|
| Distribution | | 1,594,208 |
| | 1,533,828 |
|
| General plant | | 250,582 |
| | 344,782 |
|
| Total property, plant and equipment | | $ | 6,398,612 |
| | $ | 6,201,078 |
|
| | | | | |
Substantially all of IPL’s property is subject to a $1,713.8 million direct first mortgage lien, as of December 31, 2019, securing IPL’s first mortgage bonds. Total non-contractually or legally required removal costs of utility plant in service at December 31, 2019 and 2018 were $788.3 million and $761.1 million, respectively; and total contractually or legally required removal costs of property, plant and equipment at December 31, 2019 and 2018 were $204.2 million and $129.5 million, respectively. Please see “ARO” below for further information.
ARO
ASC 410 “Asset Retirement and Environmental Obligations” addresses financial accounting and reporting for legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation. A legal obligation for purposes of ASC 410 is an obligation that a party is required to settle as a result of an existing law, statute, ordinance, written or oral contract or the doctrine of promissory estoppel.
IPL’s ARO relates primarily to environmental issues involving asbestos-containing materials, ash ponds, landfills and miscellaneous contaminants associated with its generating plants, transmission system and distribution system. The following is a roll forward of the ARO legal liability year end balances:
|
| | | | | | | | |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Balance as of January 1 | | $ | 129,451 |
| | $ | 79,535 |
|
| Liabilities settled | | (9,891 | ) | | (8,932 | ) |
| Revisions to cash flow and timing estimates | | 78,153 |
| | 54,811 |
|
| Accretion expense | | 6,506 |
| | 4,037 |
|
| Balance as of December 31 | | $ | 204,219 |
| | $ | 129,451 |
|
| | | | | |
In 2019, IPL recorded adjustments to its ARO liabilities of $78.2 million primarily to reflect an increase to estimated ash pond closure costs, including groundwater remediation. In 2018, IPL recorded additional ARO liabilities of $54.8 million to reflect revisions to cash flow and timing estimates due to accelerated ash pond closure dates, revised estimated closure costs after review of updates to the CCR rule and revised estimated costs associated with our coal storage areas, landfills, and asbestos remediation. As of December 31, 2019 and 2018, IPL did not have any assets that are legally restricted for settling its ARO liability.
4. FAIR VALUE
The fair value of financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of IPL’s assets and liabilities have been determined using available market information. As these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Fair Value Hierarchy and Valuation Techniques
ASC 820 defined and established a framework for measuring fair value and expands disclosures about fair value measurements for financial assets and liabilities that are adjusted to fair value on a recurring basis and/or financial assets and liabilities that are measured at fair value on a nonrecurring basis, which have been adjusted to fair value during the period. In accordance with ASC 820, IPL has categorized its financial assets and liabilities that are adjusted to fair value, based on the priority of the inputs to the valuation technique, following the three-level fair value hierarchy prescribed by ASC 820 as follows:
Level 1 - unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2 - inputs from quoted prices in markets where trading occurs infrequently or quoted prices of instruments with similar attributes in active markets; and
Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
Whenever possible, quoted prices in active markets are used to determine the fair value of IPL’s financial instruments. IPL’s financial instruments are not held for trading or other speculative purposes. The estimated fair value of financial instruments has been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that IPL could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Financial Assets
VEBA Assets
IPL has VEBA investments that are to be used to fund certain employee postretirement health care benefit plans. These assets are primarily comprised of open-ended mutual funds, which are valued using the net assets value per unit. These investments are recorded at fair value within "Other non-current assets" on the accompanying Consolidated Balance Sheets and classified as equity securities. ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” was effective as of January 1, 2018. This ASU requires the change in the fair value of equity instruments to be recorded in income. Equity Instruments were defined to include all mutual funds, regardless of the underlying investments. Therefore, all changes to fair value on the VEBA investments will be included in income in the period that the changes occur. These changes to fair value were not material for the years ended December 31, 2019, 2018, or 2017. Any unrealized gains or losses are recorded in "Other income / (expense), net" on the accompanying Consolidated Statements of Operations.
FTRs
In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. FTRs are used in the MISO market to hedge IPL’s exposure to congestion charges, which result from constraints on the transmission system. IPL’s FTRs are valued at the cleared auction prices for FTRs in MISO’s annual auction. Because of the infrequent nature of this valuation, the fair value assigned to the FTRs is considered a Level 3 input under the fair value hierarchy required by ASC 820. An offsetting regulatory liability has been recorded as these revenues or costs will be flowed through to customers through the FAC. As such, there is no impact on IPL’s Consolidated Statements of Operations.
Financial Liabilities
Other Financial Liabilities
As of December 31, 2018, IPL's other financial liabilities measured at fair value on a recurring basis were considered Level 3, based on the fair value hierarchy.
Summary
The fair value of assets and liabilities at December 31, 2019 measured on a recurring basis and the respective category within the fair value hierarchy for IPL was determined as follows:
|
| | | | | | | | | | | | |
| Assets and Liabilities at Fair Value |
| | | Level 1 | Level 2 | Level 3 |
| | Fair value at December 31, 2019 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs |
| | (In Thousands) |
| Financial assets: | | | | |
| VEBA investments: | | | | |
| Money market funds | $ | 25 |
| $ | 25 |
| $ | — |
| $ | — |
|
| Mutual funds | 2,854 |
| — |
| 2,854 |
| — |
|
| Total VEBA investments | 2,879 |
| 25 |
| 2,854 |
| — |
|
| Financial transmission rights | 864 |
| — |
| — |
| 864 |
|
| Total financial assets measured at fair value | $ | 3,743 |
| $ | 25 |
| $ | 2,854 |
| $ | 864 |
|
The fair value of assets and liabilities at December 31, 2018 measured on a recurring basis and the respective category within the fair value hierarchy for IPL was determined as follows:
|
| | | | | | | | | | | | |
| Assets and Liabilities at Fair Value |
| | | Level 1 | Level 2 | Level 3 |
| | Fair value at December 31, 2018 | Based on quoted market prices in active markets | Other observable inputs | Unobservable inputs |
| | (In Thousands) |
| Financial assets: | | | | |
| VEBA investments: | | | | |
| Money market funds | $ | 21 |
| $ | 21 |
| $ | — |
| $ | — |
|
| Mutual funds | 2,565 |
| — |
| 2,565 |
| — |
|
| Total VEBA investments | 2,586 |
| 21 |
| 2,565 |
| — |
|
| Financial transmission rights | 3,099 |
| — |
| — |
| 3,099 |
|
| Total financial assets measured at fair value | $ | 5,685 |
| $ | 21 |
| $ | 2,565 |
| $ | 3,099 |
|
| Financial liabilities: | | | | |
| Other derivative liabilities | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
|
| Total financial liabilities measured at fair value | $ | 53 |
| $ | — |
| $ | — |
| $ | 53 |
|
The following table sets forth a roll forward of financial instruments, measured at fair value on a recurring basis, classified as Level 3 in the fair value hierarchy (note, amounts in this table indicate carrying values, which approximate fair values):
|
| | | |
| | Reconciliation of Financial Instruments Classified as Level 3 |
| | (In Thousands) |
| Balance at January 1, 2018 | $ | 2,454 |
|
| Unrealized gain recognized in earnings | 24 |
|
| Issuances | 9,295 |
|
| Settlements | (8,727 | ) |
| Balance at December 31, 2018 | 3,046 |
|
| Unrealized gain recognized in earnings | 53 |
|
| Issuances | 2,846 |
|
| Settlements | (5,081 | ) |
| Balance at December 31, 2019 | $ | 864 |
|
| | |
Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets
Debt
The fair value of IPL’s outstanding fixed-rate debt has been determined on the basis of the quoted market prices of the specific securities issued and outstanding. In certain circumstances, the market for such securities was inactive and therefore the valuation was adjusted to consider changes in market spreads for similar securities. Accordingly, the purpose of this disclosure is not to approximate the value on the basis of how the debt might be refinanced.
The following table shows the face value and the fair value of fixed-rate and variable-rate indebtedness (Level 2) for the periods ending:
|
| | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 |
| | | Face Value | | Fair Value | | Face Value | | Fair Value |
| | | (In Thousands) |
| Fixed-rate | | $ | 1,713,800 |
| | $ | 2,049,758 |
| | $ | 1,713,800 |
| | $ | 1,846,916 |
|
| Variable-rate | | 90,000 |
| | 90,000 |
| | 90,000 |
| | 90,000 |
|
| Total indebtedness | | $ | 1,803,800 |
| | $ | 2,139,758 |
| | $ | 1,803,800 |
| | $ | 1,936,916 |
|
| | | | | | | | | |
The difference between the face value and the carrying value of this indebtedness represents the following:
unamortized deferred financing costs of $16.7 million and $17.3 million at December 31, 2019 and 2018, respectively; and
unamortized discounts of $6.2 million and $6.3 million at December 31, 2019 and 2018, respectively.
5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.
At December 31, 2019, IPL's outstanding derivative instruments were as follows:
|
| | | | | | | | | | | | | |
| Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) |
| FTRs | | Not Designated | | MWh | | 5,707 |
| | — |
| | 5,707 |
|
| |
| (a) | Refers to whether the derivative instruments have been designated as a cash flow hedge. |
Derivatives Not Designated as Hedge
FTRs do not qualify for hedge accounting or the normal purchases and sales exceptions under ASC 815. Accordingly, such contracts are recorded at fair value when acquired and subsequently amortized over the annual period as they are used. FTRs are initially recorded at fair value using the income approach.
Certain qualifying derivative instruments have been designated as normal purchases or normal sales contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to hedge or mark to market accounting and are recognized in the consolidated statements of operations on an accrual basis.
When applicable, IPL has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. As of December 31, 2019, IPL did not have any offsetting positions.
The following table summarizes the fair value, balance sheet classification and hedging designation of IPL's derivative instruments:
|
| | | | | | | | | | | |
| | | | | | December 31, |
| Commodity | Hedging Designation | | Balance sheet classification | | 2019 | | 2018 |
| Financial transmission rights | Not a Cash Flow Hedge | | Prepayments and other current assets | | $ | 864 |
| | $ | 3,099 |
|
6. EQUITY
Paid In Capital and Capital Stock
On October 31, 2018, IPALCO closed on a new Term Loan consisting of a $65 million credit facility maturing July 1, 2020. The Term Loan is variable rate and is secured by IPALCO’s pledge of all the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’ existing senior secured notes. The Term Loan proceeds were used to repay amounts under IPL's Credit Agreement and for general corporate purposes.
IPL had capital contributions from IPALCO of $0.0 million, $65.0 million and $0.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
All of the outstanding common stock of IPL is owned by IPALCO. IPL’s common stock is pledged under the Term Loan, 2020 IPALCO Notes and 2024 IPALCO Notes. There have been no changes in the capital stock of IPL during the three years ended December 31, 2019.
Dividend Restrictions
IPL’s mortgage and deed of trust and its amended articles of incorporation contain restrictions on IPL’s ability to issue certain securities or pay cash dividends. So long as any of the several series of bonds of IPL issued under its mortgage remains outstanding, and subject to certain exceptions, IPL is restricted in the declaration and payment of dividends, or other distribution on shares of its capital stock of any class, or in the purchase or redemption of such shares, to the aggregate of its net income, as defined in the mortgage, after December 31, 1939. In addition, pursuant to IPL’s articles, no dividends may be paid or accrued, and no other distribution may be made on IPL’s common stock unless dividends on all outstanding shares of IPL preferred stock have been paid or declared and
set apart for payment. As of December 31, 2019, and as of the filing of this report, IPL was in compliance with these restrictions.
IPL is also restricted in its ability to pay dividends if it is in default under the terms of its Credit Agreement and its unsecured notes, which could happen if IPL fails to comply with certain covenants. These covenants, among other things, require IPL to maintain a ratio of total debt to total capitalization not in excess of 0.65 to 1. As of December 31, 2019, and as of the filing of this report, IPL was in compliance with all covenants and no event of default existed.
During the years ended December 31, 2019, 2018 and 2017, IPL declared dividends to its shareholder totaling $159.0 million, $156.8 million, and $125.5 million, respectively.
Cumulative Preferred Stock
IPL has 5 separate series of cumulative preferred stock. Holders of preferred stock are entitled to receive dividends at rates per annum ranging from 4.0% to 5.65%. During each year ended December 31, 2019, 2018 and 2017, total preferred stock dividends declared were $3.2 million. Holders of preferred stock are entitled to 2 votes per share for IPL matters, and if four full quarterly dividends are in default on all shares of the preferred stock then outstanding, they are entitled to elect the smallest number of IPL directors to constitute a majority of IPL’s Board of Directors. Based on the preferred stockholders’ ability to elect a majority of IPL’s Board of Directors in this circumstance, the redemption of the preferred shares is considered to be not solely within the control of the issuer and the preferred stock was considered temporary equity and presented in the mezzanine level of the audited consolidated balance sheets in accordance with the relevant accounting guidance for non-controlling interests and redeemable securities. IPL has issued and outstanding 500,000 shares of 5.65% preferred stock, which are now redeemable at par value, subject to certain restrictions, in whole or in part. Additionally, IPL has 91,353 shares of preferred stock which are redeemable solely at the option of IPL and can be redeemed in whole or in part at any time at specific call prices.
At December 31, 2019, 2018 and 2017, preferred stock consisted of the following:
|
| | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, |
| | | Shares
Outstanding | | Call Price | | 2019 | | 2018 | | 2017 |
| | | | | Par Value, plus premium, if applicable |
| | | | | (In Thousands) |
| Cumulative $100 par value, | | | | | | | | | | |
| authorized 2,000,000 shares | | | | | | | | | | |
| 4% Series | | 47,611 |
| | $ | 118.00 |
| | $ | 5,410 |
| | $ | 5,410 |
| | $ | 5,410 |
|
| 4.2% Series | | 19,331 |
| | $ | 103.00 |
| | 1,933 |
| | 1,933 |
| | 1,933 |
|
| 4.6% Series | | 2,481 |
| | $ | 103.00 |
| | 248 |
| | 248 |
| | 248 |
|
| 4.8% Series | | 21,930 |
| | $ | 101.00 |
| | 2,193 |
| | 2,193 |
| | 2,193 |
|
| 5.65% Series | | 500,000 |
| | $ | 100.00 |
| | 50,000 |
| | 50,000 |
| | 50,000 |
|
| Total cumulative preferred stock | | 591,353 |
| | |
| | $ | 59,784 |
| | $ | 59,784 |
| | $ | 59,784 |
|
| | | | | | | | | | | |
7. DEBT
Long-Term Debt
The following table presents IPL’s long-term debt:
|
| | | | | | | | | | |
| | | | | December 31, |
| Series | | Due | | 2019 | | 2018 |
| | | | | (In Thousands) |
| IPL first mortgage bonds: | | | | |
3.875% (1) | | August 2021 | | 55,000 |
| | 55,000 |
|
3.875% (1) | | August 2021 | | 40,000 |
| | 40,000 |
|
3.125% (1) | | December 2024 | | 40,000 |
| | 40,000 |
|
| 6.60% | | January 2034 | | 100,000 |
| | 100,000 |
|
| 6.05% | | October 2036 | | 158,800 |
| | 158,800 |
|
| 6.60% | | June 2037 | | 165,000 |
| | 165,000 |
|
| 4.875% | | November 2041 | | 140,000 |
| | 140,000 |
|
| 4.65% | | June 2043 | | 170,000 |
| | 170,000 |
|
| 4.50% | | June 2044 | | 130,000 |
| | 130,000 |
|
| 4.70% | | September 2045 | | 260,000 |
| | 260,000 |
|
| 4.05% | | May 2046 | | 350,000 |
| | 350,000 |
|
| 4.875% | | November 2048 | | 105,000 |
| | 105,000 |
|
| Unamortized discount – net | | | | (6,156 | ) | | (6,272 | ) |
| Deferred financing costs | | | | (16,629 | ) | | (17,115 | ) |
| Total IPL first mortgage bonds | | 1,691,015 |
| | 1,690,413 |
|
| IPL unsecured debt: | | | | |
Variable (2) | | December 2020 | | 30,000 |
| | 30,000 |
|
Variable (2) | | December 2020 | | 60,000 |
| | 60,000 |
|
| Deferred financing costs | | | | (114 | ) | | (229 | ) |
| Total IPL unsecured debt | | 89,886 |
| | 89,771 |
|
| Total consolidated IPL long-term debt | | 1,780,901 |
| | 1,780,184 |
|
| Less: current portion of long-term debt | | 89,886 |
| | — |
|
| Net consolidated IPL long-term debt | | $ | 1,691,015 |
| | $ | 1,780,184 |
|
| |
| |
| (1) | First mortgage bonds issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority. |
| |
| (2) | Unsecured notes issued to the Indiana Finance Authority by IPL to facilitate the loan of proceeds from various tax-exempt notes issued by the Indiana Finance Authority. The notes have a final maturity date of December 2038, but are subject to a mandatory put in December 2020. |
Debt Maturities
Maturities on long-term indebtedness subsequent to December 31, 2019, are as follows:
|
| | | |
| Year | Amount |
| | (In Thousands) |
| 2020 | $ | 90,000 |
|
| 2021 | 95,000 |
|
| 2022 | — |
|
| 2023 | — |
|
| 2024 | 40,000 |
|
| Thereafter | 1,578,800 |
|
| Total | $ | 1,803,800 |
|
| | |
Significant Transactions
IPL First Mortgage Bonds and Recent Indiana Finance Authority Bond Issuances
The mortgage and deed of trust of IPL, together with the supplemental indentures thereto, secure the first mortgage bonds issued by IPL. Pursuant to the terms of the mortgage, substantially all property owned by IPL is subject to a first mortgage lien securing indebtedness of $1,713.8 million as of December 31, 2019. The IPL first mortgage bonds require net earnings as calculated thereunder be at least two and one-half times the annual interest requirements before additional bonds can be authenticated on the basis of property additions. IPL was in compliance with such requirements as of December 31, 2019.
In November 2018, IPL issued $105 million aggregate principal amount of first mortgage bonds, 4.875% Series, due November 2048, pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from this offering were approximately $103.5 million, after deducting the initial purchasers’ discounts and fees and expenses for the offering. The net proceeds from this offering were used to repay amounts due under IPL's Credit Agreement and for general corporate purposes.
In August 2017, IPL repaid $24.7 million in outstanding borrowings of 5.40% IPL first mortgage bonds that were due in August 2017.
IPL Unsecured Notes
In December 2015, the Indiana Finance Authority issued on behalf of IPL an aggregate principal amount of $90 million of Environmental Facilities Refunding Revenue Notes due December 2038 (Indianapolis Power & Light Company Project). These unsecured notes were issued in two series: $30 million Series 2015A notes and $60 million 2015B notes. These notes were initially purchased by a syndication of banks who will hold the notes until the mandatory put date of December 22, 2020.
IPL has classified its outstanding $90 million aggregate principal amount of these unsecured notes as short-term indebtedness as they are due December 2020. Management plans to refinance these unsecured notes with new debt. In the event that we are unable to refinance these unsecured notes on acceptable terms, IPL has available borrowing capacity on its revolving credit facility that could be used to satisfy the obligation.
Line of Credit
IPL entered into an amendment and restatement of its 5-year $250 million revolving credit facility on June 19, 2019 with a syndication of bank lenders. This Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance certain existing indebtedness, (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on June 19, 2024, and bears interest at variable rates as described in the Credit Agreement. It includes an uncommitted $150 million accordion feature to provide IPL with an option to request an increase in the size of the facility at any time prior to June 19, 2023, subject to approval by the lenders. The Credit Agreement also includes two one-year extension options, allowing IPL to extend the maturity
dates subject to approval by the lenders. Prior to execution, IPL had existing general banking relationships with the parties to the Credit Agreement. IPL had no outstanding borrowings on the committed line of credit as of December 31, 2019 and 2018, respectively.
Restrictions on Issuance of Debt
All of IPL’s long-term borrowings must first be approved by the IURC and the aggregate amount of IPL’s short-term indebtedness must be approved by the FERC. IPL has approval from FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 26, 2020. In December 2018, IPL received an order from the IURC granting IPL authority through December 31, 2021 to, among other things, issue up to $350 million in aggregate principal amount of long-term debt and refinance up to $185.0 million in existing indebtedness, all of which authority remains available under the order as of December 31, 2019. This order also grants IPL authority to have up to $500 million of long-term credit agreements and liquidity facilities outstanding at any one time, of which $250.0 million remains available under the order as of December 31, 2019. As an alternative to the sale of all or a portion of $65 million in principal of the long-term debt mentioned above, we have the authority to issue up to $65 million of new preferred stock, all of which authority remains available under the order as of December 31, 2019. IPL also has restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under our existing debt obligations. Under such restrictions, IPL is generally allowed to fully draw the amounts available on its Credit Agreement, refinance existing debt and issue new debt approved by the IURC and issue certain other indebtedness.
Credit Ratings
IPL’s ability to borrow money or to refinance existing indebtedness and the interest rates at which IPL can borrow money or refinance existing indebtedness are affected by IPL’s credit ratings. In addition, the applicable interest rates on IPL’s Credit Agreement and other unsecured notes are dependent upon the credit ratings of IPL. Downgrades in the credit ratings of AES and/or IPALCO could result in IPL’s credit ratings being downgraded.
8.INCOME TAXES
IPL follows a policy of comprehensive interperiod income tax allocation. Investment tax credits related to utility property have been deferred and are being amortized over the estimated useful lives of the related property.
AES files federal and state income tax returns which consolidate IPALCO and IPL. Under a tax sharing agreement with IPALCO, IPL is responsible for the income taxes associated with its own taxable income and records the provision for income taxes as if IPL filed separate income tax returns. IPL is no longer subject to U.S. or state income tax examinations for tax years through March 27, 2001, but is open for all subsequent periods. IPL made tax sharing payments to IPALCO of $37.4 million, $33.8 million and $87.0 million in 2019, 2018 and 2017 respectively.
On March 25, 2014, the state of Indiana amended Indiana Code 6-3-2-1 through Senate Bill 001, which phases in an additional 1.6% reduction to the state corporate income tax rate that was initially being reduced by 2%. While the statutory state income tax rate decreased to 5.625% for the calendar year 2019, the deferred tax balances were adjusted according to the anticipated reversal of temporary differences. The change in required deferred taxes on plant and plant-related temporary differences resulted in a reduction to the associated regulatory asset of $1.3 million. The change in required deferred taxes on non-property related temporary differences which are not probable to cause a reduction in future base customer rates resulted in a tax benefit of $0.1 million. The statutory state corporate income tax rate will be 5.375% for 2020.
In tax years prior to 2018, Internal Revenue Code Section 199 permitted taxpayers to claim a deduction from taxable income attributable to certain domestic production activities. IPL’s electric production activities qualify for this deduction. Beginning in 2010 and through the 2017 tax year, the deduction is equal to 9% of the taxable income attributable to qualifying production activity. The tax benefit associated with the Internal Revenue Code Section 199 domestic production deduction for 2017 was $4.8 million. Due to the enactment of TCJA (as described below), the 2017 tax year was the final year for this deduction.
U.S. Tax Reform
On December 22, 2017, the U.S. federal government enacted the TCJA. The TCJA significantly changes U.S. corporate income tax law. Notable items impacting the effective tax rate for the 2018 tax year related to the TCJA include a rate reduction in the corporate tax rate to 21% from 35% and an increase in the estimated flow-through depreciation partially offset by the repeal of the manufacturer’s production deduction.
In 2017, IPL recognized the income tax effects of the TCJA in accordance with Staff Accounting Bulletin No. 118 (“SAB 118”) which provides SEC guidance on the application of ASC 740, Income Taxes, in the reporting period in which the TCJA was signed into law. Accordingly, IPL’s financial statements reflected the income tax effects of U.S. tax reform for which the accounting was complete and provisional amounts for those impacts for which the accounting under ASC 740 was incomplete, but a reasonable estimate could be determined.
IPL completed its calculation of the impact of the TCJA in its income tax provision during the year ended December 31, 2018in accordance with its understanding of the TCJA and guidance available as of that date, and as a result recognized $0.0 million and $0.2 million of discrete tax expense in the fourth quarters of 2018 and 2017, respectively. This total results from the remeasurement of certain deferred tax assets and liabilities from 35% to 21%. The most material deferred taxes to be remeasured related to property, plant and equipment. The remeasurement of deferred tax assets and liabilities related to regulated utility property of $7.7 million and $215.5 million in 2018 and 2017, respectively, was recorded as a regulatory liability, which was a non-cash adjustment.
Income Tax Provision
Federal and state income taxes charged to income are as follows:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | (In Thousands) |
| Components of income tax expense: | | | | | | |
| Current income taxes: | | | | | | |
| Federal | | $ | 23,941 |
| | $ | 26,021 |
| | $ | 56,377 |
|
| State | | 4,370 |
| | 11,215 |
| | 12,656 |
|
| Total current income taxes | | 28,311 |
| | 37,236 |
| | 69,033 |
|
| Deferred income taxes: | | |
| | |
| | |
|
| Federal | | 7,578 |
| | (15,080 | ) | | (1,634 | ) |
| State | | 7,556 |
| | 345 |
| | (353 | ) |
| Total deferred income taxes | | 15,134 |
| | (14,735 | ) | | (1,987 | ) |
| Net amortization of investment credit | | (15 | ) | | (911 | ) | | (1,455 | ) |
| Total income tax expense | | $ | 43,430 |
| | $ | 21,590 |
| | $ | 65,591 |
|
| | | | | | | |
Effective and Statutory Rate Reconciliation
The provision for income taxes (including net investment tax credit adjustments) is different than the amount computed by applying the statutory tax rate to pretax income. The reasons for the difference, stated as a percentage of pretax income, are as follows:
|
| | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Federal statutory tax rate | | 21.0 | % | | 21.0 | % | | 35.0 | % |
| State income tax, net of federal tax benefit | | 4.4 | % | | 5.6 | % | | 4.0 | % |
| Amortization of investment tax credits | | — | % | | (0.5 | )% | | (0.7 | )% |
| Research and development credit | | — | % | | (1.6 | )% | | — | % |
| Depreciation flow through and amortization | | (4.7 | )% | | (12.6 | )% | | (0.1 | )% |
| Additional funds used during construction - equity | | 0.2 | % | | 0.3 | % | | (3.1 | )% |
| Manufacturers’ Production Deduction (Sec. 199) | | — | % | | — | % | | (2.4 | )% |
| Other – net | | 0.8 | % | | (0.1 | )% | | (0.2 | )% |
| Effective tax rate | | 21.7 | % | | 12.1 | % | | 32.5 | % |
| | | | | | | |
Deferred Income Taxes
The significant items comprising IPL’s net accumulated deferred tax liability recognized on the audited Consolidated Balance Sheets as of December 31, 2019 and 2018, are as follows:
|
| | | | | | | | |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Deferred tax liabilities: | | | | |
| Relating to utility property, net | | $ | 406,538 |
| | $ | 378,527 |
|
| Regulatory assets recoverable through future rates | | 62,051 |
| | 67,653 |
|
| Other | | 17,547 |
| | 11,812 |
|
| Total deferred tax liabilities | | 486,136 |
| | 457,992 |
|
| Deferred tax assets: | | |
| | |
|
| Investment tax credit | | 7 |
| | 11 |
|
| Regulatory liabilities including ARO | | 191,676 |
| | 184,413 |
|
| Employee benefit plans | | 8,556 |
| | 8,335 |
|
| Other | | 6,738 |
| | 12,504 |
|
| Total deferred tax assets | | 206,977 |
| | 205,263 |
|
| Deferred income tax liability – net | | $ | 279,159 |
| | $ | 252,729 |
|
| | | | | |
Uncertain Tax Positions
The following is a reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2019, 2018 and 2017:
|
| | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| | | (In Thousands) |
| Unrecognized tax benefits at January 1 | | $ | 7,056 |
| | $ | 7,049 |
| | $ | 6,634 |
|
| Gross increases – current period tax positions | | — |
| | — |
| | 470 |
|
| Gross decreases – prior period tax positions | | — |
| | 7 |
| | (55 | ) |
| Unrecognized tax benefits at December 31 | | $ | 7,056 |
| | $ | 7,056 |
| | $ | 7,049 |
|
| | | | | | | |
The unrecognized tax benefits at December 31, 2019 represent tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of
deferred tax accounting, other than interest and penalties, the timing of the deductions will not affect the annual effective tax rate but would accelerate the tax payments to an earlier period.
Tax-related interest expense and income is reported as part of the provision for federal and state income taxes. Penalties, if incurred, would also be recognized as a component of tax expense. There are no interest or penalties applicable to the periods contained in this report.
9. BENEFIT PLANS
Defined Contribution Plans
All of IPL’s employees are covered by one of two defined contribution plans, the Thrift Plan or the RSP:
The Thrift Plan
Approximately 82% of IPL’s active employees are covered by the Thrift Plan, a qualified defined contribution plan. All union new hires are covered under the Thrift Plan. Participants elect to make contributions to the Thrift Plan based on a percentage of their base compensation. Each participant’s contribution is matched up to certain thresholds of base compensation. The IBEW clerical-technical union new hires receive an annual lump sum company contribution into the Thrift Plan in addition to the company match. Employer contributions to the Thrift Plan were $3.3 million, $3.3 million and $3.4 million for 2019, 2018 and 2017, respectively.
The RSP
Approximately 18% of IPL’s active employees are covered by the RSP, a qualified defined contribution plan containing a match, nondiscretionary and profit sharing component. All non-union new hires are covered under the RSP. Participants elect to make contributions to the RSP based on a percentage of their eligible compensation. Each participant’s contribution is matched in amounts up to, but not exceeding, 5% of the participant’s eligible compensation. Starting in 2018, the RSP also includes a 4% nondiscretionary contribution based as a percentage of each participant's eligible compensation. Finally, the RSP included a profit sharing component through 2017 whereby IPL contributed a percentage of each employee’s annual salary into the plan on a pre-tax basis. The profit sharing percentage was determined by the AES Board of Directors on an annual basis. Employer contributions (by IPL) relating to the RSP were $1.6 million, $1.7 million and $1.8 million for 2019, 2018 and 2017, respectively.
Defined Benefit Plans
Approximately 76% of IPL’s active employees are covered by the qualified Defined Benefit Pension Plan; while approximately 6% of active employees are IBEW clerical-technical unit employees who are only eligible for the Thrift Plan. The remaining 18% of active employees are covered by the RSP. All non-union new hires are covered under the RSP, while IBEW physical unit union new hires are covered under the Defined Benefit Pension Plan and Thrift Plan. The IBEW clerical-technical unit new hires are no longer covered under the Defined Benefit Pension Plan but do receive an annual lump sum company contribution into the Thrift Plan, in addition to the company match. The Defined Benefit Pension Plan is noncontributory and is funded by IPL through a trust. Benefits for non-union participants in the Defined Benefit Pension Plan are based on salary, years of service and accrued benefits at April 1, 2015. Benefits for eligible union participants are based on each individual employee's pension band and years of service as opposed to their compensation. Pension bands are based primarily on job duties and responsibilities.
Additionally, a small group of former officers and their surviving spouses are covered under a funded non-qualified Supplemental Retirement Plan. The total number of participants in the plan as of December 31, 2019 was 22. The plan is closed to new participants.
IPL also provides postretirement health care benefits to certain active or retired employees and the spouses of certain active or retired employees. Approximately 147 active employees and 17 retirees (including spouses) were receiving such benefits or entitled to future benefits as of January 1, 2019. The plan is unfunded. These postretirement health care benefits and the related unfunded obligation of $6.4 million and $6.7 million at December 31, 2019 and 2018, respectively, were not material to the consolidated financial statements in the periods covered by this report.
The following table presents information relating to the Pension Plans:
|
| | | | | | | | |
| | | Pension benefits
as of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Change in benefit obligation: | | | | |
| Projected benefit obligation at January 1 | | $ | 697,228 |
| | $ | 782,108 |
|
| Service cost | | 7,412 |
| | 8,450 |
|
| Interest cost | | 27,343 |
| | 25,220 |
|
| Actuarial loss/(gain) | | 88,311 |
| | (62,303 | ) |
| Amendments (primarily increases in pension bands) | | — |
| | 5,446 |
|
Curtailments(1) | | — |
| | 450 |
|
| Benefits paid | | (37,499 | ) | | (62,143 | ) |
| Projected benefit obligation at December 31 | | 782,795 |
| | 697,228 |
|
| Change in plan assets: | | |
| | |
|
| Fair value of plan assets at January 1 | | 684,485 |
| | 738,947 |
|
| Actual return on plan assets | | 122,690 |
| | (22,404 | ) |
| Employer contributions | | 28 |
| | 30,085 |
|
| Benefits paid | | (37,499 | ) | | (62,143 | ) |
| Fair value of plan assets at December 31 | | 769,704 |
| | 684,485 |
|
| Unfunded status | | $ | (13,091 | ) | | $ | (12,743 | ) |
| Amounts recognized in the statement of financial position: | | |
| | |
|
| Noncurrent liabilities | | $ | (13,091 | ) | | $ | (12,743 | ) |
| Net amount recognized at end of year | | $ | (13,091 | ) | | $ | (12,743 | ) |
Sources of change in regulatory assets(2): | | |
| | |
|
| Prior service cost arising during period | | $ | — |
| | $ | 5,446 |
|
| Net (gain)/loss arising during period | | (4,472 | ) | | 902 |
|
| Amortization of prior service cost | | (3,823 | ) | | (4,618 | ) |
| Amortization of loss | | (11,084 | ) | | (11,403 | ) |
| Total recognized in regulatory assets | | $ | (19,379 | ) | | $ | (9,673 | ) |
| Amounts included in regulatory assets: | | |
| | |
|
| Net loss | | $ | 167,750 |
| | $ | 183,306 |
|
| Prior service cost | | 14,323 |
| | 18,146 |
|
| Total amounts included in regulatory assets | | $ | 182,073 |
| | $ | 201,452 |
|
| | | | | |
| |
| (1) | As a result of the announced AES restructuring in the first quarter of 2018, we recognized a plan curtailment of $1.2 million in the first quarter of 2018. |
| |
| (2) | Amounts that would otherwise be charged/credited to Accumulated Other Comprehensive Income or Loss upon application of ASC 715, “Compensation – Retirement Benefits,” are recorded as a regulatory asset or liability because IPL has historically recovered and currently recovers pension and other postretirement benefit expenses in rates. These are unrecognized amounts not yet recognized as components of net periodic benefit costs. |
Information for Pension Plans with aprojectedbenefit obligation in excess of plan assets
|
| | | | | | | | |
| | | Pension benefits
as of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Benefit obligation | | $ | 782,795 |
| | $ | 697,228 |
|
| Plan assets | | 769,704 |
| | 684,485 |
|
| Benefit obligation in excess of plan assets | | $ | 13,091 |
| | $ | 12,743 |
|
| | | | | |
IPL’s total benefit obligation in excess of plan assets was $13.1 million as of December 31, 2019 ($12.0 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan).
Information for Pension Plans with an accumulated benefit obligation in excess of plan assets
|
| | | | | | | | |
| | | Pension benefits
as of December 31, |
| | | 2019 | | 2018 |
| | | (In Thousands) |
| Accumulated benefit obligation | | $ | 771,592 |
| | $ | 687,136 |
|
| Plan assets | | 769,704 |
| | 684,485 |
|
| Accumulated benefit obligation in excess of plan assets | | $ | 1,888 |
| | $ | 2,651 |
|
| | | | | |
IPL’s total accumulated benefit obligation in excess of plan assets was $1.9 million as of December 31, 2019 ($0.8 million Defined Benefit Pension Plan and $1.1 million Supplemental Retirement Plan).
Significant Gains and Losses Related to Changes in the Benefit Obligation for the Period
As shown in the table above, an actuarial loss of $88.3 million increased the benefit obligation for the year ended December 31, 2019 and an actuarial gain of $62.3 million reduced the benefit obligation for the year ended December 31, 2018. The actuarial loss in 2019 was primarily due to a decrease in the discount rate, while the actuarial gain in 2018 was primarily due to an increase in the discount rate.
Pension Benefits and Expense
Reported expenses relevant to the Defined Benefit Pension Plan are dependent upon numerous factors resulting from actual plan experience and assumptions of future experience, including the performance of plan assets and actual benefits paid out in future years. Pension costs associated with the Defined Benefit Pension Plan are impacted by the level of contributions made to the plan, earnings on plan assets, the adoption of new mortality tables, and employee demographics, including age, job responsibilities, salary and employment periods. Changes made to the provisions of the Defined Benefit Pension Plan may impact current and future pension costs. Pension costs may also be significantly affected by changes in key actuarial assumptions, including anticipated rates of return on plan assets and the corporate bond discount rates, as well as, the adoption of a new mortality table used in determining the projected benefit obligation and pension costs.
The 2019 net actuarial gain of $4.5 million recognized in regulatory assets is comprised of two parts: (1) a $92.8 million pension asset actuarial gain primarily due to higher than expected return on assets; partially offset by (2) an $88.3 million pension liability actuarial loss primarily due to a decrease in the discount rate used to value pension liabilities. The unrecognized net loss of $167.8 million in the Pension Plans has accumulated over time primarily due to the long-term declining trend in corporate bond rates and the adoption of new mortality tables which increased the expected benefit obligation due to the longer expected lives of plan participants. During 2019, the accumulated net gain increased due to lower discount rates used to value pension liabilities, which was partially offset by a combination of higher than expected return on pension assets, as well as the year 2019 amortization of accumulated loss. The unrecognized net loss, to the extent that it exceeds 10% of the greater of the benefit obligation or the assets, will be amortized and included as a component of net periodic benefit cost in future years. The amortization period is approximately 10.96 years based on estimated demographic data as of December 31,
2019. The projected benefit obligation of $782.8 million less the fair value of assets of $769.7 million results in an unfunded status of $13.1 million at December 31, 2019.
|
| | | | | | | | | | | | |
| | | Pension benefits for
years ended December 31, |
| | | 2019 | | 2018 | | 2017 |
| | | (In Thousands) |
| Components of net periodic benefit cost: | | | | | | |
| Service cost | | $ | 7,412 |
| | $ | 8,450 |
| | $ | 7,344 |
|
| Interest cost | | 27,343 |
| | 25,220 |
| | 25,305 |
|
| Expected return on plan assets | | (29,907 | ) | | (40,801 | ) | | (44,672 | ) |
| Amortization of prior service cost | | 3,823 |
| | 3,837 |
| | 4,240 |
|
| Recognized actuarial loss | | 11,084 |
| | 11,403 |
| | 13,195 |
|
| Recognized settlement loss | | — |
| | 1,230 |
| | 146 |
|
| Total pension cost | | 19,755 |
| | 9,339 |
| | 5,558 |
|
| Less: amounts capitalized | | 1,237 |
| | 1,223 |
| | 845 |
|
| Amount charged to expense | | $ | 18,518 |
| | $ | 8,116 |
| | $ | 4,713 |
|
| Rates relevant to each year’s expense calculations: | | | | | | |
| Discount rate – defined benefit pension plan | | 4.36 | % | | 3.67 | % | | 4.29 | % |
| Discount rate – supplemental retirement plan | | 4.24 | % | | 3.60 | % | | 4.00 | % |
| Expected return on defined benefit pension plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % |
| Expected return on supplemental retirement plan assets | | 4.50 | % | | 5.45 | % | | 6.75 | % |
| | | | | | | |
Pension expense for the following year is determined as of the December 31measurement date based on the fair value of the Pension Plans’ assets, the expected long-term rate of return on plan assets, a mortality table assumption that reflects the life expectancy of plan participants, and a discount rate used to determine the projected benefit obligation. For 2019, pension expense was determined using an assumed long-term rate of return on plan assets of 4.50%. As of the December 31, 2019 measurement date, IPL decreased the discount rate from 4.36% to 3.33% for the Defined Benefit Pension Plan and decreased the discount rate from 4.24% to 3.05% for the Supplemental Retirement Plan. The discount rate assumptions affect the pension expense determined for 2020. In addition, IPL increased the expected long-term rate of return on plan assets from 4.50% to 5.05% effective January 1, 2020. The expected long-term rate of return assumption affects the pension expense determined for 2020. The effect on 2020 total pension expense of a 25 basis point increase and decrease in the assumed discount rate is $(1.2) million and $1.1 million, respectively.
In determining the discount rate to use for valuing liabilities we use the market yield curve on high-quality fixed income investments as of December 31, 2019. We project the expected benefit payments under the plan based on participant data and based on certain assumptions concerning mortality, retirement rates, termination rates, etc. The expected benefit payments for each year are discounted back to the measurement date using the appropriate spot rate for each half-year from the yield curve, thereby obtaining a present value of all expected future benefit payments using the yield curve. Finally, an equivalent single discount rate is determined which produces a present value equal to the present value determined using the full yield curve.
Pension Plan Assets and Fair Value Measurements
Pension plan assets consist of investments in cash and cash equivalents, government debt securities, and mutual funds (equity and debt). Differences between actual portfolio returns and expected returns may result in increased or reduced pension costs in future periods. Pension costs are determined as of the plans' measurement date of December 31, 2019. Pension costs are determined for the following year based on the market value of pension plan assets, expected employer contributions, a discount rate used to determine the projected benefit obligation and the expected long-term rate of return on plan assets.
Fair value is defined under ASC 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). The fair value
hierarchy prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned. Dividends are recorded on the ex-dividend date. Net appreciation includes the Pension Plans’ gains and losses on investments bought and sold, as well as held, during the year.
A description of the valuation methodologies used for each major class of assets and liabilities measured at fair value follows:
For 2019, the non-qualified Supplemental Retirement Plan investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy.
For 2019, the qualified Defined Benefit Pension Plan investments in common collective trusts are valued based on the daily net asset value and are categorized as Level 2 in the fair value hierarchy except for cash and cash equivalents which are categorized as level 1.
For 2018, all the Pension Plans’ investments have quoted market prices and are categorized as Level 1 in the fair value hierarchy. The investments in U.S. government agency fixed income securities are valued from third-party pricing sources, but they generally do not represent transaction prices for the identical security in an active market nor does it represent data obtained from an exchange.
The primary objective of the Pension Plans’ is to provide a source of retirement income for its participants and beneficiaries, while the primary financial objective is to improve the unfunded status of the Pension Plans. A secondary financial objective is, where possible, to minimize pension expense volatility. The objective is based on a long-term investment horizon, so that interim fluctuations should be viewed with appropriate perspective. There can be no assurance that these objectives will be met.
In establishing IPL’s expected long-term rate of return assumption, we utilize a methodology developed by the plan’s investment consultant who maintains a capital market assumption model that takes into consideration risk, return and correlation assumptions across asset classes. A combination of quantitative analysis of historical data and qualitative judgment is used to capture trends, structural changes and potential scenarios not reflected in historical data.
The result of the analyses is a series of inputs that produce a picture of how the plan consultant believes portfolios are likely to behave through time. Capital market assumptions are intended to reflect the behavior of asset classes observed over several market cycles. Stress assumptions are also examined, since the characteristics of asset classes are constantly changing. A dynamic model is employed to manage the numerous assumptions required to estimate portfolio characteristics under different base currencies, time horizons and inflation expectations.
The Pension Plans’ consultant develops forward-looking, long-term capital market assumptions for risk, return and correlations for a variety of global asset classes, interest rates and inflation. These assumptions are created using a combination of historical analysis, current market environment assessment and by applying the consultant’s own judgment. The consultant then determines an equilibrium long-term rate of return. IPL then takes into consideration the investment manager/consultant expenses, as well as any other expenses expected to be paid out of the Pension Plans’ trust. Finally, IPL has the Pension Plans’ actuary perform a tolerance test of the consultant’s equilibrium expected long-term rate of return. IPL uses an expected long-term rate of return compatible with the actuary’s tolerance level.
The following table summarizes IPL’s target pension plan allocation for 2019:
|
| |
| Asset Category: | Target Allocations |
| Equity Securities | 27% |
| Debt Securities | 73% |
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at |
| | | December 31, 2019 |
| | | (in thousands) |
| | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | |
| Asset Category | | Total | | (Level 1) | | (Level 2) | | % |
| Cash and cash equivalents | | $ | 2,599 |
| | $ | 2,599 |
| | $ | — |
| | — | % |
| Government debt securities | | 154,798 |
| | 39 |
| | 154,759 |
| | 20 | % |
| Mutual fund - equities | | 214,369 |
| | 2,744 |
| | 211,625 |
| | 28 | % |
| Mutual fund - debt | | 397,938 |
| | 1,664 |
| | 396,274 |
| | 52 | % |
Total(1) | | $ | 769,704 |
| | $ | 7,046 |
| | $ | 762,658 |
| | 100 | % |
| | | | | | | | | |
| |
| (1) | In 2019, the qualified Defined Benefit Pension Plan moved all investments except for cash and cash equivalents into collective trusts; therefore, the 2019 balances under the Government debt securities, Mutual fund - equities, and Mutual fund - debt categories shown above as level 2 represent investments through collective trusts. The Defined Benefit Pension Plan has chosen collective trusts for which the underlying investments are mutual funds, mutual funds categories for which debt securities are the primary underlying investment, or real estate in alignment with the target asset allocation. |
|
| | | | | | | | | | | | | | | |
| | | Fair Value Measurements at |
| | | December 31, 2018 |
| | | (in thousands) |
| | | | | Quoted Prices in Active Markets for Identical Assets | | Significant Observable Inputs | | |
| Asset Category | | Total | | (Level 1) | | (Level 2) | | % |
| Short-term investments | | $ | 3,597 |
| | $ | 3,597 |
| | $ | — |
| | 1 | % |
| Mutual funds: | | | | | | | | |
|
| U.S. equities | | 1,906 |
| | 1,906 |
| | — |
| | — | % |
| International equities | | 52,354 |
| | 52,354 |
| | — |
| | 8 | % |
| Fixed income | | 497,323 |
| | 497,323 |
| | — |
| | 72 | % |
| Fixed income securities: | | | | | | | | |
|
| U.S. Treasury securities | | 129,305 |
| | 129,305 |
| | — |
| | 19 | % |
| Total | | $ | 684,485 |
| | $ | 684,485 |
| | $ | — |
| | 100 | % |
| | | | | | | | | |
Pension Funding
IPL contributed $0.0 million, $30.1 million, and $7.2 million to the Pension Plans in 2019, 2018 and 2017, respectively. Funding for the qualified Defined Benefit Pension Plan is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under ERISA, as amended by the Pension Protection Act of 2006, as well as targeted funding levels necessary to meet certain thresholds.
From an ERISA funding perspective, IPL’s funded target liability percentage was estimated to be 101%. In general, IPL must contribute the normal service cost earned by active participants during the plan year; however, this amount can be offset by any surplus or credit balance carried by the Pension Plan. The normal cost is expected to be approximately $7.6 million in 2020 (including $2.3 million for plan expenses), which is expected to be fully offset by the surplus amount. Each year thereafter, if the Pension Plans' underfunding increases to more than the present value of the remaining annual installments, the excess is separately amortized over a seven-year period. IPL does not expect to make an employer contribution for the calendar year 2020. IPL’s funding policy for the Pension Plans is to contribute annually no less than the minimum required by applicable law, and no more than the maximum amount that can be deducted for federal income tax purposes.
Benefit payments made from the Pension Plans for the years ended December 31, 2019, 2018 and 2017 were $37.5 million, $62.1 million and $35.5 million, respectively. Expected benefit payments are expected to be paid out of the Pension Plans as follows:
|
| | | |
| Year | Pension Benefits |
| | (In Thousands) |
| 2020 | $ | 42,215 |
|
| 2021 | 43,552 |
|
| 2022 | 44,606 |
|
| 2023 | 45,095 |
|
| 2024 | 45,362 |
|
| 2024 through 2028 | 231,475 |
|
| | |
10. COMMITMENTS AND CONTINGENCIES
Legal Loss Contingencies
IPL is involved in litigation arising in the normal course of business. While the results of such litigation cannot be predicted with certainty, management believes that the final outcome will not have a material adverse effect on IPL’s results of operations, financial condition and cash flows. Amounts accrued or expensed for legal or environmental contingencies collectively during the periods covered by this report have not been material to IPL’s audited consolidated financial statements.
Environmental Loss Contingencies
IPL is subject to various federal, state, regional and local environmental protection and health and safety laws and regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of regulated materials, including ash; the use and discharge of water used in generation boilers and for cooling purposes; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. IPL cannot assure that it has been or will be at all times in full compliance with such laws, regulations and permits.
New Source Review and other CAA NOVs
In October 2009, IPL received a NOV and Finding of Violation from the EPA pursuant to the CAA Section 113(a). The NOV alleges violations of the CAA at IPL’s 3 primarily coal-fired electric generating facilities at the time, dating back to 1986. The alleged violations primarily pertain to the PSD and nonattainment New Source Review requirements under the CAA. In addition, on October 1, 2015, IPL received a NOV from the EPA pursuant to CAA Section 113(a) alleging violations of the CAA, the Indiana SIP, and the Title V operating permit related to alleged particulate matter and opacity violations at IPL Petersburg Unit 3. Also, on February 5, 2016, the EPA issued a NOV pursuant to CAA Section 113(a) alleging violations of New Source Review and other CAA regulations, the Indiana SIP, and the Title V operating permit at Petersburg Generating Station. Since receiving the letters, IPL management has been working with the EPA staff regarding possible resolutions of the NOVs. Settlements and litigated outcomes of similar New Source Review cases have required companies to pay civil penalties, install additional pollution control technology on coal-fired electric generating units, retire existing generating units, and invest in additional environmental projects. A similar outcome in these cases could have a material impact on our business. At this time, IPL cannot determine whether these NOVs could have a material impact on its business, financial condition and results of operations. IPL would seek recovery of any operating or capital expenditures, but not fines or penalties, related to air pollution control technology to reduce regulated air emissions; however, there can be no assurances that IPL would be successful in recovering any operating or capital expenditures. IPL has recorded a contingent liability related to these New Source Review cases and other CAA NOV matters.
11. RELATED PARTY TRANSACTIONS
IPL participates in a property insurance program in which IPL buys insurance from AES Global Insurance Company, a wholly-owned subsidiary of AES. IPL is not self-insured on property insurance, but does take a $5 million per occurrence deductible. Except for IPL’s large substations, IPL does not carry insurance on transmission and distribution assets, which are considered to be outside the scope of property insurance. AES and other AES subsidiaries, including 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 this program with AES Global Insurance Company was approximately $4.3 million, $3.1 million, and $3.1 million in 2019, 2018 and 2017, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. As of December 31, 2019 and 2018, IPL had prepaid approximately $2.0 million and $1.6 million, respectively, which is recorded in “Prepayments and other current assets” on the accompanying Consolidated Balance Sheets.
IPL participates in an agreement with Health and Welfare Benefit Plans LLC, an affiliate of AES, to participate in a group benefits program, including but not limited to, health, dental, vision and life benefits. Health and Welfare Benefit Plans LLC administers the financial aspects of the group insurance program, receives all premium payments from the participating affiliates, and makes all vendor payments. The cost of coverage under this program was approximately $20.2 million, $21.5 million, and $24.9 million in 2019, 2018 and 2017, respectively, and is recorded in “Operating expenses - Operation and maintenance” on the accompanying Consolidated Statements of Operations. IPL had no prepaids for coverage under this plan as of December 31, 2019 and 2018, respectively.
AES files federal and state income tax returns which consolidate IPALCO and its subsidiaries, 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 under this agreement of $23.1 million and $13.5 million as of December 31, 2019 and 2018, respectively, which is recorded in “Prepayments and other current assets” on the accompanying Consolidated Balance Sheets.
Long-term Compensation Plan
During 2019, 2018 and 2017, many of IPL’s non-union employees received benefits under the AES Long-term Compensation Plan, a deferred compensation program. This type of plan is a common employee retention tool used in our industry. Benefits under this plan are granted in the form of performance units payable in cash and AES restricted stock units. Restricted stock units vest ratably over a three-year period. The performance units payable in cash vest at the end of the three-year performance period and are subject to certain AES performance criteria. Total deferred compensation expense recorded during 2019, 2018 and 2017 was $0.3 million, $0.5 million and $0.8 million, respectively, and was included in “Operating expenses - Operation and maintenance” on 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
Effective January 1, 2014, the ServiceCompany began providing certain services including operations, accounting, legal, human resources, information technology and other corporate services on behalf of companies that are part of the US Operations. 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 non-regulated businesses.
Total costs incurred by the Service Company on behalf of IPALCOIPL were $34.4$41.8 million, $27.4$44.1 million and $23.2$34.1 million during 2017, 20162019, 2018 and 2015,2017, respectively. Total costs incurred by IPALCOIPL on behalf of the Service Company during 2017,
20162019, 2018 and 20152017 were $9.7 million, $10.1 million and $10.7 million, $9.2 millionrespectively, which are included as a reduction to charges from the Service Company. These costs were included in “Operating expenses - Operation and $7.5 million, respectively. IPALCOmaintenance” on IPL’s Consolidated Statements of Operations. IPL had a prepaidpayable balance with the Service Company of $3.1$8.4 million and $3.4$3.8 million as of December 31, 2019 and December 31, 2018, respectively, which is recorded in “Accounts payable” on the accompanying Consolidated Balance Sheets.
Other
A member of the AES Board of Directors is also a member of the Supervisory Board of a third party vendor that IPL engaged in 2014 for certain construction projects. As the transactions with this vendor related to capital projects, there was no direct impact on the Consolidated Statements of Operations for the periods presented. Over the life of the project, IPL had total net charges from this vendor of $474.9 million. This vendor completed its service in 2018.
Additionally, transactions with various other related parties were $3.0 million, $5.7 million and $2.4 million during 2019, 2018 and 2017, respectively. These expenses were primarily recorded in “Operating expenses - Operation and 2016, respectively. maintenance” on the accompanying Consolidated Statements of Operations.
Shareholders’ Agreement
AES U.S. Investments, IPALCO12. BUSINESS SEGMENT INFORMATION
Operating segments are components of an enterprise for which separate financial information is available and CDPQ,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 partiesremitted 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 Shareholders’ Agreement dated February 11, 2015. The Shareholders’ Agreement establishedsystematic basis throughout the generalmonth. 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 governingfor the relationship between CDPQ and AES U.S. Investments and their respective successors and transferees, as shareholders of IPALCO. The Shareholders’ Agreement provides AES U.S. Investmentsprices (“tariffs”) that IPLis allowed to charge customers for electric services. Since tariffs are approved by the regulator, the price that IPL has the right to nominate nine directorsbill corresponds directly with the value to the customer of IPL’s performance completed in each period. Therefore, revenue under these contracts is recognized using an output method measured by the MWhs delivered each month at the approved tariff. Customer payments are typically due on a monthly basis.
Wholesale revenues - Power produced at the generation stations in excess of our retail load is sold into the MISO market. Such sales are made at either the day-ahead or real-time hourly market price, and these sales are classified as wholesale revenues. We sell to and purchase power from MISO, and such sales and purchases are settled and accounted for on a net hourly basis.
In the MISO market, wholesale revenue is recorded at the spot price based on the quantities of MWh delivered in each hour during each month. As a member of MISO, we are obligated to declare the availability of our energy production into the wholesale energy market, but we are not obligated to commit our previously declared availability. As such, contract terms end as the energy for each day is delivered to the market in the case of the IPALCO Boardday-ahead market and CDPQfor 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 nominate two directorsbill 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 IPALCO Board. Iftariff rate (as approved by the regulator) charged to network participants.
IPL’s revenue from contracts with customers was $1,455.3 million and $1,428.9 million for the years ended December 31, 2019 and 2018, respectively. The following table presents IPL's revenue from contracts with customers and other revenue (in thousands):
|
| | | | | | |
| | For the Year Ended, | For the Year Ended, |
| | December 31, 2019 | December 31, 2018 |
| Retail Revenues | | |
| Retail revenue from contracts with customers | $ | 1,375,533 |
| $ | 1,380,042 |
|
Other retail revenues (1) | 23,841 |
| 16,423 |
|
| Wholesale Revenues | 68,474 |
| 38,789 |
|
| Miscellaneous Revenues | | |
| Transmission and other revenue from contracts with customers | 11,335 |
| 10,057 |
|
Other miscellaneous revenues (2) | 2,460 |
| 5,194 |
|
| Total Revenues | $ | 1,481,643 |
| $ | 1,450,505 |
|
(1) Other retail revenue represents alternative revenue programs not accounted for under ASC 606
(2) Other miscellaneous revenue includes lease and other miscellaneous revenues not accounted for under ASC 606
The balances of receivables from contracts with customers are $155.0 million and $160.8 million as of December 31, 2019 and December 31, 2018, respectively. Payment terms for all receivables from contracts with customers typically do not extend beyond 30 days.
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.
14. LEASES
LESSEE
The Company enters into long-term non-cancelable lease arrangements which are classified as either operating or finance leases; however, lease balances were not material to the Financial Statements in the periods covered by this report.
LESSOR
The Company is the lessor under operating leases for land, office space and operating equipment. Minimum lease payments from such contracts are recognized as operating lease revenue on a straight-line basis over the lease term whereas contingent rentals are recognized when earned. Lease revenue included in the Consolidated Statements of outstanding IPALCO shares beneficially ownedOperations was $1.0 million for the year ended December 31, 2019. Underlying gross assets and accumulated depreciation of operating leases included in Total net property, plant and equipment on the Consolidated Balance Sheet were $4.3 million and $0.7 million, respectively, as of December 31, 2019.
The option to extend or terminate a lease is based on customary early termination provisions in the contract. The Company has not recognized any early terminations as of December 31, 2019.
The following table shows the future minimum lease receipts through 2024 and thereafter (in thousands):
|
| | | |
| | Operating Leases |
| 2020 | $ | 941 |
|
| 2021 | 994 |
|
| 2022 | 906 |
|
| 2023 | 906 |
|
| 2024 | 786 |
|
| Thereafter | 2,628 |
|
| Total | $ | 7,161 |
|
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 CDPQ is equal to or less thanRules 13a-15(b) and 15d-15(b), under the lessersupervision and with the participation of (A) 8.825%our management, including the CEO and (B) one-halfCFO, of the Maximum Subscription Percentageeffectiveness of our “disclosure controls and procedures” (as defined in the Shareholders’ Agreement) but remains greater thanExchange Act Rules 13a-15(e) and 15d-15(e)). Based upon this evaluation, the lesserCEO and CFO concluded that as of (x) one-third of 17.65%December 31, 2019, our disclosure controls and (y) one-thirdprocedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management of the Maximum Subscription Percentage, then CDPQ shall haveCompany is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the rightExchange Act. The Company’s internal control over financial reporting is a process designed to nominate one director. Additionally, if at any timeprovide reasonable assurance regarding the amountreliability of outstanding IPALCO shares beneficially owned by CDPQ decreases to less than or equalfinancial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
pertain to the lessermaintenance of (A) one-third of 17.65%records that in reasonable detail, accurately and (B) one-thirdfairly reflect the transactions and dispositions of the Maximum Subscription Percentage, then CDPQ shall ceaseassets 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 any rights to nominate any directors. The Shareholders’ Agreement contains restrictionsa material effect on IPALCO making certain major decisions without the prior affirmative votefinancial 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 majoritycontrol system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, or that the degree of compliance with the policies or procedures deteriorates.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019. In
making this assessment, management used the criteria established in Internal Control – Integrated Framework issued by the COSO in 2013. Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2019.
Changes in Internal Control Over Financial Reporting:
During the second quarter of 2019, we implemented a new core enterprise resource planning (ERP) system, which we expect to enhance our system of internal controls over financial reporting. As a result of this implementation, we modified certain existing internal controls as well as implemented new controls and procedures related to the new ERP. We continued to evaluate the design and operating effectiveness of these internal controls during the fourth quarter of 2019.
Except with respect to the implementation of the ERP, there were no changes in our internal controls over financial reporting that occurred in the quarter ending December 31, 2019 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. In addition,Directors has established a pre-approval policy for so long as CDPQ beneficially ownsaudit, 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 5%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 total number of IPALCO shares outstanding, CDPQ will have review and consultation rights with respectExchange Act.
Audit fees are fees billed or expected to certain actions of IPALCO. Certain transfer restrictions and other transfer rights also apply to CDPQ and AES U.S. Investments underbe billed by our principal accountant for professional services for the Shareholders’ Agreement, including certain rights of first offer, drag along rights, tag along rights, put rights and rights of first refusal.
Related Person Policies and Procedures
IPALCO is owned by two shareholders, one of which is wholly-owned by AES. As such, IPALCO does not maintain the type of separate related person transaction policy that is customarily maintained by more widely-held public companies. The US Operations has a designated compliance officer who ensures that the core values of AES and its subsidiaries are communicated to, and followed by, employees throughout the organization as set forth in the Code of Conduct and other policies adopted by IPALCO and its affiliated companies. The Code of Conduct expressly requires that employees avoid conflicts of interests and engage in fair dealing, among other requirements, to ensure that transactions entered into by IPALCO and other affiliated companies are in the best interestsaudit of the organization.
IPLFinancial Statements, included in IPALCO’s annual report on Form 10-K and IPALCO also utilize a due diligence questionnaire with certain business partners, vendors and suppliers as partreview of the corporate compliance program to ensure that the highest ethical and legal standards are upheldfinancial statements included in all business transactions. The corporate compliance program includes a “know your business partner” program, which requires us to conduct due diligenceIPALCO’s quarterly reports on prospective business partners prior to entering into certain business agreements with an estimated value in excess of $100,000 orForm 10-Q, services that are otherwise identified as high risk. Our compliance program requires that the due diligence questionnaires for all such business partners be updated prior to execution of any new agreementnormally provided by our principal accountants in connection with IPL or IPALCO if the questionnaire on file is more than two years old.
A due diligence questionnaire is also completed annually by directors and executive officers in order to determine if a related person transactionstatutory, regulatory or other conflict of interestfilings or potential conflict of interest may exist that should be broughtengagements or any other service performed to the attention of the designated compliance officer of the US Operations and/or the Office of the General Counsel for further investigationcomply with generally accepted auditing standards and analysis. include comfort and consent letters in connection with SEC filings and financing transactions.
The designated compliance officer of the US Operations and/or the Office of the General Counsel may take action to approve or recommend the approval of a related person transaction, or determine to take other appropriate actions, based on the facts and circumstances.
Employees of IPALCO and CDPQ Affiliated Companies
None of our Board members are directly employed by IPALCO. All of our Board members are employees of our two shareholders and/or their affiliated companies, and only receive compensation in their capacities as employees of these affiliated entities. The compensation paidfollowing table lists fees billed to IPALCO directors that are also NEOs for services performed as employees of our affiliates for 2017 is set forth in “Item 11. Executive Compensation” of this Amendment. None of our Board members are compensated for their service on our Board.
The compensation received by each of our executive officersproducts and directors who are employees of companies affiliated with AES was in excess of $120,000 in 2017 for services performed on behalf of AES or the US Operations, including for services provided to IPALCO and IPL. The components of the compensation paid to all of our executive officers in 2017 was consistent with the compensation elements for our NEOs as disclosed in “Item 11. Executive Compensation” of this Amendment.
For information regarding the board memberships and officer and employee positions held by our executive officers and directors with AES and other companies affiliated with IPALCO, see the biographies of our executive officers and directors included under “Item 10. Directors, Executive Officers and Corporate Governance” set forth in this Amendment and incorporated by reference herein as to this information.
Director Independence
IPALCO does not have securities listed on a national securities exchange and is not required to have independent Directors. See “Corporate Governance” in Item 10 of this Amendment.
principal accountants:
|
| | | | | | | | |
| | | Years Ended December 31, |
| | | 2019 | | 2018 |
| Audit Fees | | $ | 1,021,700 |
| | $ | 929,600 |
|
| Audit Related Fees: | | | | |
| Fees for the audit of IPL’s employee benefit plans | | 61,200 |
| | 60,000 |
|
| Assurance services for debt offering documents | | — |
| | 68,000 |
|
| Fees for tax services | | — |
| | — |
|
| Other | | 8,500 |
| | 17,000 |
|
| Total Principal Accounting Fees and Services | | $ | 1,091,400 |
| | $ | 1,074,600 |
|
| | | | | |
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
| |
(a) | All financial statement schedules are omitted because of the absence of conditions under which they are required or because the required information is included in our consolidated financial statements or notes thereto, included in Part II, Item 8, of our Annual Report on Form 10-K. |
(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 – 2019, 2018 and 2017 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017 | |
Consolidated Statements of Comprehensive Income/(Loss) for the Years Ended December 31, 2019, 2018 and 2017
| |
| Consolidated Balance Sheets as of December 31, 2019 and 2018 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 | |
| Consolidated Statements of Common Shareholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017 | |
| 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 – 2019, 2018 and 2017 | |
| Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017 | |
| Consolidated Balance Sheets as of December 31, 2019 and 2018 | |
| Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017 | |
| Consolidated Statements of Common Shareholder’s Equity for the Years Ended December 31, 2019, 2018 and 2017 | |
| 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 | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
| |
| | |
4.4 | |
| 4.5 | |
4.54.6 | |
4.64.7 | |
4.74.8 | |
| 10.1 | |
| 10.2 | |
|
| |
| 10.3 | |
| 10.4 | |
| 10.5 | $250,000,000 Revolving Credit FacilitiesFacility Amended and Restated Credit Agreement, by anddated June 19, 2019, among Indianapolis Power & Light Company, The Lenders Party Hereto,each lender from time to time party thereto, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets LLC, as SoleJoint Bookrunner and SoleJoint 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 Syndication Agent and BMO Harris Bank N.A., as Documentation Agent, dated as of May 6, 2014Co-Documentation Agents (Incorporated by reference to Exhibit 10.1 to IPALCO’s March 31, 2014IPALCO's Current Report on Form 10-Q).8-K filed on June 21, 2019)
|
| 10.6 | |
| 10.7 | |
| 10.8 | First Amendment to Credit Agreement by and among IPL, the Lenders party thereto, Fifth Third Bank, as syndication agent, BMO Harris Bank N.A., as documentation agent and PNC Bank, National Association, as administrative agent, dated as of October 16, 2015 (Incorporated by reference to Exhibit No. 10.1 to IPALCO’s September 30, 2015 10-Q)
|
| 10.9 |
|
|
| |
| 10.10 | Note Purchase and Covenants Agreement by and among Indianapolis Power & Light Company the Lenders Party Hereto and PNC Bank, National Association, as administrative agent relating to $30,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015A (Indianapolis Power & Light Company Project) and $60,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015B (Indianapolis Power & Light Company Project) dated as of December 22, 2015 (Incorporated by reference to Exhibit 10.11 to IPALCO’s December 31, 2015 10-K)
|
| 10.11 | Second Amendment dated as of April 22, 2016 to Credit Agreement by and among IPL, the Lenders party thereto, Fifth Third Bank, as syndication agent, BMO Harris Bank N.A., as document agent and PNC Bank, National Association, as administrative agent, dated as of May 6, 2014, as amended by First Amendment thereto dated as of October 16, 2015 (Incorporated by reference to Exhibit No. 10.1 to IPALCO’s June 30, 2016 10-Q)
|
| 10.12 | First Amendment dated as of April 29, 2016 to Note Purchase and Covenants Agreement by and among IPL, the Lenders party thereto and PNC Bank, National Association, as administrative agent relating to $30,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015A (Indianapolis Power & Light Company Project) and $60,000,000 Indiana Finance Authority Environmental Facilities Refunding Revenue Notes, Series 2015B (Indianapolis Power & Light Company Project) dated as of December 22, 2015 (Incorporated by reference to Exhibit No. 10.3 to IPALCO’s June 30, 2016 10-Q) |
| 10.13 | |
| 10.14 | |
| 10.15 | |
| 10.16 |
|
| 10.17 |
|
10.18 | |
10.1910.18 | |
10.2010.19 | |
10.2110.20 | |
10.2210.21 | |
| 21 | |
| 31.1 | |
| 31.2 | |
31.3 | |
31.4 | |
|
| |
| 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, |
| | | 2019 | | 2018 |
| ASSETS | | |
| CURRENT ASSETS: | | | | |
| Cash and cash equivalents | | $ | 3,709 |
| | $ | 4,409 |
|
| Prepayments and other current assets | | 15,041 |
| | 15,246 |
|
| Total current assets | | 18,750 |
| | 19,655 |
|
| OTHER NON-CURRENT ASSETS: | | |
| | |
|
| Investment in subsidiaries | | 1,427,141 |
| | 1,431,856 |
|
| Deferred tax asset – long term | | 6,764 |
| | 112 |
|
| Other non-current assets | | 2,843 |
| | 2,539 |
|
| Total other non-current assets | | 1,436,748 |
| | 1,434,507 |
|
TOTAL ASSETS | | $ | 1,455,498 |
| | $ | 1,454,162 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY |
| CURRENT LIABILITIES: | | |
| | |
|
| Short-term and current portion of long-term debt | | $ | 469,313 |
| | $ | — |
|
| Accounts payable | | 292 |
| | 326 |
|
| Accrued taxes | | — |
| | 243 |
|
| Accrued interest | | 11,442 |
| | 11,444 |
|
| Accrued and other current liabilities | | 26,560 |
| | 3 |
|
| Total current liabilities | | 507,607 |
| | 12,016 |
|
| NON-CURRENT LIABILITIES: | | | | |
| Long-term debt | | 401,415 |
| | 868,880 |
|
| Other non-current liabilities | | — |
| | — |
|
| Total non-current liabilities | | 401,415 |
| | 868,880 |
|
| Total liabilities | | 909,022 |
| | 880,896 |
|
| SHAREHOLDERS' EQUITY | | |
| | |
|
| Paid in capital | | 590,784 |
| | 597,824 |
|
| Accumulated other comprehensive loss | | (19,750 | ) | | — |
|
| Accumulated deficit | | (24,558 | ) | | (24,558 | ) |
| Total shareholders' equity | | 546,476 |
| | 573,266 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | $ | 1,455,498 |
| | $ | 1,454,162 |
|
| | | | | |
See notes to Schedule I.
|
| | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. |
| Schedule I – Condensed Financial Information of Registrant |
| Unconsolidated Statements of Operations |
| (In Thousands) |
| | | 2019 | | 2018 | | 2017 |
| OTHER INCOME / (EXPENSE), NET: | | | | | | |
| Equity in earnings of subsidiaries | | $ | 154,078 |
| | $ | 154,150 |
| | $ | 133,725 |
|
| Interest expense | | (32,761 | ) | | (31,038 | ) | | (35,791 | ) |
| Loss on early extinguishment of debt | | — |
| | — |
| | (8,875 | ) |
| Other income / (expense), net | | (46 | ) | | (443 | ) | | 26 |
|
| Total other income / (expense), net | | 121,271 |
| | 122,669 |
| | 89,085 |
|
| EARNINGS FROM OPERATIONS BEFORE INCOME TAX | | 121,271 |
| | 122,669 |
| | 89,085 |
|
| Less: income tax expense / (benefit) | | (7,909 | ) | | (8,143 | ) | | (16,495 | ) |
| NET INCOME | | $ | 129,180 |
| | $ | 130,812 |
| | $ | 105,580 |
|
| | | | | | | |
See notes to Schedule I.
|
| | | | | | | | | |
| IPALCO ENTERPRISES, INC. |
| Schedule I - Condensed Financial Information of Registrant |
| Unconsolidated Statements of Comprehensive Income/(Loss) |
| (In Thousands) |
| | 2019 | 2018 | 2017 |
| | | | |
| Net income | $ | 129,180 |
| $ | 130,812 |
| $ | 105,580 |
|
| | | | |
| Derivative activity: | | | |
| Change in derivative fair value, net of income tax benefit of $6,810, $0 and $0, for each respective period | (19,750 | ) | — |
| — |
|
| Net change in fair value of derivatives | (19,750 | ) | — |
| — |
|
| | | | |
| Other comprehensive loss | (19,750 | ) | — |
| — |
|
| | | | |
| Net comprehensive income | $ | 109,430 |
| $ | 130,812 |
| $ | 105,580 |
|
| | | | |
See notes to Schedule I.
|
| | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. |
| Schedule I – Condensed Financial Information of Registrant |
| Unconsolidated Statements of Cash Flows |
| (In Thousands) |
| | | 2019 | | 2018 | | 2017 |
| CASH FLOWS FROM OPERATIONS: | | | | | | |
| Net income | | $ | 129,180 |
| | $ | 130,812 |
| | $ | 105,580 |
|
| Adjustments to reconcile net income to net cash | | |
| | |
| | |
|
| provided by operating activities: | | |
| | |
| | |
|
| Equity in earnings of subsidiaries | | (154,078 | ) | | (154,150 | ) | | (133,725 | ) |
| Cash dividends received from subsidiary companies | | 159,000 |
| | 142,250 |
| | 132,516 |
|
| Amortization of deferred financing costs and debt premium | | 1,847 |
| | 1,964 |
| | 2,003 |
|
| Deferred income taxes – net | | 157 |
| | (89 | ) | | 78 |
|
| Charges related to early extinguishment of debt | | — |
| | — |
| | 8,875 |
|
| Change in certain assets and liabilities: | | |
| | |
| | |
|
| Accounts payable | | 231 |
| | (405 | ) | | (1,833 | ) |
| Accrued and other current liabilities | | (3 | ) | | (1,244 | ) | | 7,413 |
|
| Other – net | | (886 | ) | | (1,838 | ) | | 370 |
|
| Net cash provided by operating activities | | 135,448 |
| | 117,300 |
| | 121,277 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | |
| | |
| | |
|
| Investment in subsidiaries | | — |
| | (65,000 | ) | | — |
|
| Other | | 278 |
| | 1,053 |
| | — |
|
| Net cash provided by (used in) investing activities | | 278 |
| | (63,947 | ) | | — |
|
| CASH FLOWS FROM FINANCING ACTIVITIES: | | |
| | |
| | |
|
| Long-term borrowings, net of discount | | — |
| | 65,000 |
| | 404,633 |
|
| Retirement of long-term debt and early tender premium | | — |
| | — |
| | (408,152 | ) |
| Distributions to shareholders | | (136,426 | ) | | (130,179 | ) | | (105,144 | ) |
| Other | | — |
| | (148 | ) | | (3,601 | ) |
| Net cash used in financing activities | | (136,426 | ) | | (65,327 | ) | | (112,264 | ) |
| Net change in cash and cash equivalents | | (700 | ) | | (11,974 | ) | | 9,013 |
|
| Cash and cash equivalents at beginning of period | | 4,409 |
| | 16,383 |
| | 7,370 |
|
| Cash and cash equivalents at end of period | | $ | 3,709 |
| | $ | 4,409 |
| | $ | 16,383 |
|
| | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | |
| Cash paid during the period for: | | | | | | |
| Interest (net of amount capitalized) | | $ | 28,911 |
| | $ | 29,665 |
| | $ | 31,750 |
|
| Income taxes | | 29,600 |
| | 28,275 |
| | 65,050 |
|
| | | | | | | |
See notes to Schedule I.
|
| | | | | | | | | | | | | | | | |
| IPALCO ENTERPRISES, INC. |
| Schedule I - Condensed Financial Information of Registrant |
| Unconsolidated Statements of Common Shareholders' Equity (Deficit) |
| (In Thousands) |
| | | Paid in Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total |
| Balance at January 1, 2017 | | $ | 596,810 |
| | $ | — |
| | $ | (25,627 | ) | | $ | 571,183 |
|
| Net income | | — |
| | — |
| | 105,580 |
| | 105,580 |
|
| Distributions to shareholders | | — |
| | — |
| | (105,144 | ) | | (105,144 | ) |
| Other | | 657 |
| | — |
| | — |
| | 657 |
|
| Balance at December 31, 2017 | | 597,467 |
| | — |
| | (25,191 | ) | | 572,276 |
|
| Net income | | — |
| | — |
| | 130,812 |
| | 130,812 |
|
| Distributions to shareholders | | — |
| | — |
| | (130,179 | ) | | (130,179 | ) |
| Other | | 357 |
| | — |
| | — |
| | 357 |
|
| Balance at December 31, 2018 | | 597,824 |
| | — |
| | (24,558 | ) | | 573,266 |
|
| Net comprehensive income | | — |
| | (19,750 | ) | | 129,180 |
| | 109,430 |
|
| Distributions to shareholders | | (7,246 | ) | | — |
| | (129,180 | ) | | (136,426 | ) |
| Other | | 206 |
| | — |
| | — |
| | 206 |
|
| Balance at December 31, 2019 | | $ | 590,784 |
| | $ | (19,750 | ) | | $ | (24,558 | ) | | $ | 546,476 |
|
| | | | | | | | | |
1) IPALCO made return of capital payments of $7.2 million in 2019 for the portion of current year distributions to shareholders in excess of current year net income.
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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. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.
At December 31, 2019, IPALCO's outstanding derivative instruments were as follows:
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| Commodity | | Accounting Treatment (a) | | Unit | | Purchases (in thousands) | | Sales (in thousands) | | Net Purchases/(Sales) (in thousands) |
| Interest rate hedges | | Designated | | USD | | $ | 400,000 |
| | $ | — |
| | $ | 400,000 |
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| (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 and will be settled when the associated debt is refinanced. The AOCI associated with the interest rate swaps will be amortized out of AOCI into interest expense over the remaining life of the underlying debt.
We use the income approach to value the swaps, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward rates with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. We will reclassify gains and losses on the swaps out of AOCI and into earnings in those periods in which hedged interest payments occur.
*Filed
The following tables provide information on gains or losses recognized in AOCI for the cash flow hedges for the period indicated:
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| | | Interest Rate Hedges for the Year Ended December 31, 2019 |
| $ in thousands (net of tax) | |
| Beginning accumulated derivative gain / (loss) in AOCI | | $ | — |
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| Net losses associated with current period hedging transactions | | (19,750 | ) |
| Ending accumulated derivative loss in AOCI | | $ | (19,750 | ) |
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| Portion expected to be reclassified to earnings in the next twelve months | | $ | — |
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| Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months) | | 7 |
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When applicable, IPALCO has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. As of December 31, 2019, IPALCO did not have any offsetting positions.
The following table summarizes the fair value, balance sheet classification and hedging designation of IPALCO's derivative instruments:
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| | | | | | December 31, |
| Commodity | Hedging Designation | | Balance sheet classification | | 2019 | | 2018 |
| Interest rate hedges | Cash Flow Hedge | | Accrued and other current liabilities | | $ | 26,560 |
| | $ | — |
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3. DEBT
The following table presents IPALCO’s long-term indebtedness:
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| | | | | December 31, |
| Series | | Due | | 2019 | | 2018 |
| | | | | (In Thousands) |
| Long-Term Debt | | | | |
| Term Loan | | July 2020 | | $ | 65,000 |
| | $ | 65,000 |
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| 3.45% Senior Secured Notes | | July 2020 | — |
| 405,000 |
| | 405,000 |
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| 3.70% Senior Secured Notes | | September 2024 | — |
| 405,000 |
| | 405,000 |
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| Unamortized discount – net | | (313 | ) | | (424 | ) |
| Deferred financing costs – net | | (3,959 | ) | | (5,696 | ) |
| Total long-term debt | | 870,728 |
| | 868,880 |
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| Less: current portion of long-term debt | | 469,313 |
| | — |
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| Net long-term debt | | $ | 401,415 |
| | $ | 868,880 |
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IPALCO Term Loan
On October 31, 2018, IPALCO closed on a new Term Loan consisting of a $65 million credit facility maturing July 1, 2020. The term Loan is variable rate and is secured by IPALCO’s pledge of all the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s existing senior secured notes. The Term Loan proceeds were used to repay amounts due under IPL's Credit Agreement and for general corporate purposes.
IPALCO’s Senior Secured Notes
In August 2017, IPALCO completed the sale of the $405 million 2024 IPALCO Notes pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 2024 IPALCO Notes were issued pursuant to an exhibitIndenture dated August 22, 2017, by and between IPALCO and U.S. Bank, National Association, as trustee. The 2024 IPALCO Notes were priced to the Registrant’s Annual Reportpublic at 99.901% of the principal amount. Net proceeds to IPALCO were approximately $399.3 million after deducting underwriting costs and estimated offering expenses. These costs are being amortized to the maturity date using the effective interest method. We used the net proceeds from this offering, together with cash on hand, to redeem the $400 million 2018 IPALCO Notes on September 21, 2017, and to pay certain related fees, expenses and make-whole premiums. A loss on early extinguishment of debt of $8.9 million for the 2018 IPALCO Notes is included as a separate line item in the accompanying Unconsolidated Statements of Operations.
The 2020 IPALCO Notes and 2024 IPALCO Notes are secured by IPALCO’s pledge of all of the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s Term Loan. IPALCO filed its registration statement on Form 10-K filedS-4 with respect to the 2024 IPALCO Notes with the SEC on February 27, 2018,November 13, 2017, and incorporated herein by reference.this registration statement was declared effective on December 5, 2017. The exchange offer was completed on January 12, 2018.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
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| IPALCO ENTERPRISES, INC. and SUBSIDIARIES |
| Valuation and Qualifying Accounts and Reserves |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| Column A – Description | | Column B | | Column C – Additions | | Column D – Deductions | | Column E |
| | | Balance at Beginning
of Period | | Charged to
Income | | Charged to Other
Accounts | | Net
Write-offs | | Balance at
End of Period |
| Year ended December 31, 2019 | | | | | | | | | | |
| Accumulated Provisions Deducted from | | | | | | | | | | |
| Assets – Doubtful Accounts | | $ | 2,821 |
| | $ | 4,760 |
| | $ | — |
| | $ | 5,528 |
| | $ | 2,053 |
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| Year ended December 31, 2018 | | |
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| Accumulated Provisions Deducted from | | | | | | | | | | |
| Assets – Doubtful Accounts | | $ | 2,830 |
| | $ | 6,008 |
| | $ | — |
| | $ | 6,017 |
| | $ | 2,821 |
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| Year ended December 31, 2017 | | |
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| Accumulated Provisions Deducted from | | | | | | | | | | |
| Assets – Doubtful Accounts | | $ | 2,365 |
| | $ | 5,854 |
| | $ | — |
| | $ | 5,389 |
| | $ | 2,830 |
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| INDIANAPOLIS POWER & LIGHT COMPANY and SUBSIDIARY |
| Valuation and Qualifying Accounts and Reserves |
| For the Years Ended December 31, 2019, 2018 and 2017 |
| (In Thousands) |
| Column A – Description | | Column B | | Column C – Additions | | Column D – Deductions | | Column E |
| | | Balance at Beginning
of Period | | Charged to
Income | | Charged to Other
Accounts | | Net
Write-offs | | Balance at
End of Period |
| Year ended December 31, 2019 | | | | | | | | | | |
| Accumulated Provisions Deducted from | | | | | | | | | | |
| Assets – Doubtful Accounts | | $ | 2,821 |
| | $ | 4,760 |
| | $ | — |
| | $ | 5,528 |
| | $ | 2,053 |
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| Year ended December 31, 2018 | | |
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| Accumulated Provisions Deducted from | | | | | | | | | | |
| Assets – Doubtful Accounts | | $ | 2,830 |
| | $ | 6,008 |
| | $ | — |
| | $ | 6,017 |
| | $ | 2,821 |
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| Year ended December 31, 2017 | | |
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| Accumulated Provisions Deducted from | | | | | | | | | | |
| Assets – Doubtful Accounts | | $ | 2,365 |
| | $ | 5,854 |
| | $ | — |
| | $ | 5,389 |
| | $ | 2,830 |
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ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)15 (d) of the Securities Exchange Act of 1934, the Registrantregistrant has duly caused this Amendment No. 1 to annual report on Form 10-K/A for the fiscal year ended December 31, 2017, to be signed on its behalf by the undersigned, thereunto duly authorized.
IPALCO ENTERPRISES, INC.
(Registrant)
Date: February 27, 2020/s/ Barry J. Bentley
Barry J. Bentley
Interim President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, thereunto duly authorized.and on the dates indicated.
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| Signature | | Capacity | | Date |
| /s/ Barry J. Bentley | | Interim President and Chief Executive Officer, and Director (Principal Executive Officer) | | February 27, 2020 |
| Barry J. Bentley | | | IPALCO ENTERPRISES, INC. |
Date: | April 30, 2018/s/ Kenneth J. Zagzebski | | By:Director and Chairman | | February 27, 2020 |
| Kenneth J. Zagzebski | | |
| /s/ Sanjeev Addala | | Director | | February 27, 2020 |
| Sanjeev Addala | | |
| /s/ Paul L. Freedman | | Director | | February 27, 2020 |
| Paul L. Freedman | | |
| /s/ Mark E. Miller | | Director | | February 27, 2020 |
| Mark E. Miller | | |
| /s/ Marc Michael | | Director | | February 27, 2020 |
Marc Michael
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| /s/ Gustavo Pimenta | | Director | | February 27, 2020 |
| Gustavo Pimenta | | |
| /s/ Lisa Krueger | | Director | | February 27, 2020 |
Lisa Krueger
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| /s/ Vincent Parisi | | Director | | February 27, 2020 |
Vincent Parisi
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| /s/ Frédéric Lesage | | Director | | February 27, 2020 |
Frédéric Lesage
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| /s/ Antoine Reze | | Director | | February 27, 2020 |
| Antoine Reze | | |
| /s/ Gustavo Garavaglia | | Chief Financial Officer (Principal Financial Officer) | | February 27, 2020 |
| Gustavo Garavaglia | | |
| /s/ Karin M. Nyhuis | | Controller (Principal Accounting Officer) | | February 27, 2020 |
| Karin M. Nyhuis | | |
| | | | | Name: | Gustavo Pimenta |
| | | | Title: | Chief Financial Officer |
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.