Fair Value Measurements

12 Months Ended

Dec. 31, 2012

Fair Value Measurements

5. FAIR VALUE MEASUREMENTS

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.

Cash Equivalents

As of December 31, 2012 and 2011, our cash equivalents consisted of money market funds. The fair value of cash equivalents approximates their book value due to their short maturity, which was $6.4 million and $5.9 million as of December 31, 2012 and 2011, respectively.

Investments in debt securities                                                                                       

As of December 31, 2012 and 2011, we had no investment in debt securities. Auction rate securities with a recorded value of $1.7 million as of December 31, 2010 were liquidated during the first quarter of 2011 at their face amount of $2.0 million. IPL's investment in variable rate demand notes at December 31, 2010 consisted of the $40 Million aggregate principal amount of the City of Petersburg, Indiana, Pollution Control Refunding Revenue Bonds Adjustable Rate Tender Securities 1995B Series, Indianapolis Power & Light Company Project ("1995B Bonds"), which were redeemed in November 2011.

Customer Deposits

Our customer deposits do not have defined maturity dates and therefore, fair value is estimated to be the amount payable on demand, which equaled book value. Customer deposits totaled $24.8 million and $23.1 million as of December 31, 2012 and 2011, respectively.

Pension Assets

As of December 31, 2012, IPL's pension assets are recognized at fair value in the determination of our net accrued pension obligation in accordance with the guidelines established in ASC 715 and ASC 820, which is described below. For a complete discussion of the impact of recognizing pension assets at fair value, please refer to Note 11, "Pension and Other Postretirement Benefits."

Indebtedness

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 for the periods ending:

	December 31, 2012				December 31, 2011
	Face Value		Fair Value		Face Value			Fair Value
	(In Millions)
Fixed-rate	$	1,765.3	$	2,012.3	$	1,765.3	$	1,944.9
Variable-rate		50.0		50.0		64.0		64.0
Total indebtedness	$	1,815.3	$	2,062.3	$	1,829.3	$	2,008.9

The difference between the face value and the carrying value of this indebtedness represents unamortized discounts of $4.2 million and $5.0 million at December 31, 2012 and December 31, 2011, respectively.

Fair Value Hierarchy

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.

Level 3 - unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

IPALCO had one financial asset measured at fair value on a nonrecurring basis, which has been adjusted to fair value during the periods coved by this report due to impairment losses. In 2012, 2011 and 2010, we recorded impairments on this nonutility investment of $0.0 million, $1.6 million and 1.2 million, respectively, as the investment was deemed to be other than temporarily impaired. In making this determination, we considered, among other things, the amount and length of time of impairment of the individual investments held by the fund as well as the future outlook of such investments. Because the investment is not publicly traded and therefore does not have a quoted market price, the impairment loss was based on our best available estimate of the fair value of the investment, which included primarily unobservable estimates (Level 3). The recorded value for this asset was $1.9 million at both December 31, 2012 and December 31, 2011, respectively.

As of December 31, 2012 and 2011, all (excluding pension assets - see Note 11, "Pension and Other Postretirement Benefits") of IPALCO's financial assets or liabilities measured at fair value on a recurring basis were considered Level 3, based on the fair value hierarchy. The following table presents those financial assets and liabilities:           

	Fair Value Measurements Using Level 3 at:
	December 31, 2012		December 31, 2011
	(In Thousands)
Financial assets:
Financial transmission rights	$	2,419	$	2,779
Total financial assets measured at fair value	$	2,419	$	2,779
Financial liabilities:
Other derivative liabilities	$	170	$	181
Total financial liabilities measured at fair value	$	170	$	181

The following table sets forth a reconciliation of financial instruments classified as Level 3 in the fair value hierarchy (note, amounts in this table indicate carrying values, which approximate fair values):

	Derivative Financial Instruments, net Liability			Investments in Debt Securities		Total
	(In Thousands)
Balance at January 1, 2011	$	(7,461)	$	41,669	$	34,208
Unrealized gain recognized in OCI		-		331		331
Unrealized losses recognized in earnings		(15)		-		(15)
Unrealized loss recognized as a regulatory liability		(5,095)		-		(5,095)
Issuances		8,085		-		8,085
Settlements		7,084		(42,000)		(34,916)
Balance at December 31, 2011	$	2,598	$	-	$	2,598
Unrealized gain recognized in earnings		11		-		11
Issuances		8,832		-		8,832
Settlements		(9,192)		-		(9,192)
Balance at December 31, 2012	$	2,249	$	-	$	2,249

Valuation Techniques

Financial Transmission Rights

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 Financial Transmission Rights ("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 converts all of these financial instruments into FTRs. IPL's FTRs are valued at the cleared auction prices for FTRs in the 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 Comprehensive Income.

Indianapolis Power And Light Company [Member]

Fair Value Measurements

5. FAIR VALUE MEASUREMENTS

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.

Cash Equivalents

As of December 31, 2012 and 2011, our cash equivalents consisted of money market funds. The fair value of cash equivalents approximates their book value due to their short maturity, which was $0.4 million and $0.5 million as of December 31, 2012 and 2011, respectively.

Investments in debt securities                                                                                       

As of December 31, 2012 and 2011, we had no investment in debt securities. Auction rate securities with a recorded value of $1.7 million as of December 31, 2010 were liquidated during the first quarter of 2011 at their face amount of $2.0 million. IPL's investment in variable rate demand notes at December 31, 2010 consisted of the $40 Million aggregate principal amount of the City of Petersburg, Indiana, Pollution Control Refunding Revenue Bonds Adjustable Rate Tender Securities 1995B Series, Indianapolis Power & Light Company Project ("1995B Bonds"), which were redeemed in November 2011.

Customer Deposits

Our customer deposits do not have defined maturity dates and therefore, fair value is estimated to be the amount payable on demand, which equaled book value. Customer deposits totaled $24.8 million and $23.1 million as of December 31, 2012 and 2011, respectively.

Pension Assets

As of December 31, 2012, IPL's pension assets are recognized at fair value in the determination of our net accrued pension obligation in accordance with the guidelines established in ASC 715 and ASC 820, which is described below. For a complete discussion of the impact of recognizing pension assets at fair value, please refer to Note 11, "Pension and Other Postretirement Benefits."

Indebtedness

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 for the periods ending:

	December 31, 2012				December 31, 2011
	Face Value		Fair Value		Face Value			Fair Value
	(In Millions)
Fixed-rate	$	965.3	$	1,144.3	$	965.3	$	1,117.9
Variable-rate		50.0		50.0		64.0		64.0
Total indebtedness	$	1,015.3	$	1,194.3	$	1,029.3	$	1,181.9

The difference between the face value and the carrying value of this indebtedness represents unamortized discounts of $1.1 million and $1.1 million at December 31, 2012 and December 31, 2011, respectively.

Fair Value Hierarchy

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.

Level 3 - unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.

IPL did not have any financial assets or liabilities measured at fair value on a nonrecurring basis, which have been adjusted to fair value during the periods covered by this report. As of December 31, 2012 and 2011, all (excluding pension assets - see Note 11, "Pension and Other Postretirement Benefits") of IPL's financial assets or liabilities measured at fair value on a recurring basis were considered Level 3, based on the fair value hierarchy. The following table presents those financial assets and liabilities:                      

	Fair Value Measurements Using Level 3 at:
	December 31, 2012		December 31, 2011
	(In Thousands)
Financial assets:
Financial transmission rights	$	2,419	$	2,779
Total financial assets measured at fair value	$	2,419	$	2,779
Financial liabilities:
Other derivative liabilities	$	170	$	181
Total financial liabilities measured at fair value	$	170	$	181

The following table sets forth a reconciliation of financial instruments classified as Level 3 in the fair value hierarchy (note, amounts in this table indicate carrying values, which approximate fair values):

	Derivative Financial Instruments, net Liability			Investments in Debt Securities		Total
	(In Thousands)
Balance at January 1, 2011	$	(7,461)	$	41,669	$	34,208
Unrealized gain recognized in OCI		-		331		331
Unrealized losses recognized in earnings		(15)		-		(15)
Unrealized loss recognized as a regulatory liability		(5,095)		-		(5,095)
Issuances		8,085		-		8,085
Settlements		7,084		(42,000)		(34,916)
Balance at December 31, 2011	$	2,598	$	-	$	2,598
Unrealized gain recognized in earnings		11		-		11
Issuances		8,832		-		8,832
Settlements		(9,192)		-		(9,192)
Balance at December 31, 2012	$	2,249	$	-	$	2,249

Valuation Techniques

Financial Transmission Rights

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 Financial Transmission Rights ("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 converts all of these financial instruments into FTRs. IPL's FTRs are valued at the cleared auction prices for FTRs in the 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 Comprehensive Income.