10-Q 1 ipalco10q20160630q2.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8644 
IPALCO ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Indiana
 
35-1575582
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
One Monument Circle
Indianapolis, Indiana
 
46204
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code: 317-261-8261

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ
(The registrant is a voluntary filer. The registrant has filed all applicable reports under Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ 
Accelerated filer ¨   
Non-accelerated filer (Do not check if a smaller reporting company) þ
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
At August 4, 2016, 108,907,318 shares of IPALCO Enterprises, Inc. common stock were outstanding, of which 89,685,177 shares were owned by AES U.S. Investments, Inc. and 19,222,141 shares were owned by CDP Infrastructure Fund GP, a wholly-owned subsidiary of La Caisse de dépôt et placement du Québec.

DOCUMENTS INCORPORATED BY REFERENCE

None.



IPALCO ENTERPRISES, INC.
QUARTERLY REPORT ON FORM 10-Q 
For Quarter Ended June 30, 2016
 
TABLE OF CONTENTS
 
Item No.
 
Page No.
 
 
 
 
DEFINED TERMS
 
 
 
 
FORWARD-LOOKING STATEMENTS
 
 
 
 
PART I - FINANCIAL INFORMATION
 
1.
Financial Statements
 
 
Unaudited Condensed Consolidated Statements of Operations for the Three Months and Six Months
 
 
     ended June 30, 2016 and 2015
 
Unaudited Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months ended
 
 
     June 30, 2016 and 2015
 
Notes to Unaudited Condensed Consolidated Financial Statements
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3.
Quantitative and Qualitative Disclosure About Market Risk
4.
Controls and Procedures
 
 
 
 
PART II - OTHER INFORMATION
 
1.
Legal Proceedings
1A.
Risk Factors
2.
Unregistered Sales of Equity Securities and Use of Proceeds
3.
Defaults Upon Senior Securities
4.
Mine Safety Disclosures
5.
Other Information
6.
Exhibits
 
 
 
 
SIGNATURES

2


DEFINED TERMS
The following is a list of frequently used abbreviations or acronyms that are found in this Form 10-Q:
 
 
2015 Form 10-K
IPALCO’s Annual Report on Form 10-K for the year ended December 31, 2015, as amended
2016 IPALCO Notes
$400 million of 7.25% Senior Secured Notes due April 1, 2016
2018 IPALCO Notes
$400 million of 5.00% Senior Secured Notes due May 1, 2018
2020 IPALCO Notes
$405 million of 3.45% Senior Secured Notes due July 15, 2020
AES
The AES Corporation
AES U.S. Investments
AES U.S. Investments, Inc.
ARO
Asset Retirement Obligations
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
CAA
U.S. Clean Air Act
CCGT
Combined Cycle Gas Turbine
CCR
Coal Combustion Residuals
CDPQ
CDP Infrastructure Fund GP, a wholly-owned subsidiary of La Caisse de dépôt et placement du Québec
Credit Agreement
$250 million Revolving Credit Facilities Amended and Restated Credit Agreement, by and among Indianapolis Power & Light Company, the Lenders Party thereto, PNC Bank, National Association, as Administrative Agent, PNC Capital Markets LLC, as Sole Bookrunner and Sole Lead Arranger, Fifth Third Bank, as Syndication Agent and BMO Harris Bank N.A., as Documentation Agent, Dated as of May 6, 2014, and as Amended under the First Amendment to Credit Agreement, Dated as of October 16, 2015.
CPCN
Certificate of Public Convenience and Necessity
CWA
U.S. Clean Water Act
Defined Benefit Pension Plan
Employees’ Retirement Plan of Indianapolis Power & Light Company
DSM
Demand Side Management
EPA
U.S. Environmental Protection Agency
ERISA
Employee Retirement Income Security Act of 1974
FAC
Fuel Adjustment Clause
FERC
Federal Energy Regulatory Commission
FGD
Flue-Gas Desulfurization
Financial Statements
Unaudited Condensed Consolidated Financial Statements of IPALCO in “Item 1. Financial Statements” included in Part I – Financial Information of this Form 10-Q
FTRs
Financial Transmission Rights
GAAP
Generally accepted accounting principles in the United States
IDEM
Indiana Department of Environmental Management
IPALCO
IPALCO Enterprises, Inc.
IPL
Indianapolis Power & Light Company
IURC
Indiana Utility Regulatory Commission
kWh
Kilowatt hours
MATS
Mercury and Air Toxics Standards
MISO
Midcontinent Independent System Operator, Inc.
MW
Megawatts
NAAQS
National Ambient Air Quality Standards
NOV
Notice of Violation
NPDES
National Pollutant Discharge Elimination System
Pension Plans
Employees’ Retirement Plan of Indianapolis Power & Light Company and Supplemental Retirement Plan of Indianapolis Power & Light Company
PSD
Prevention of Significant Deterioration
SEC
Securities and Exchange Commission
Service Company
AES U.S. Services, LLC

3


SO2
Sulfur Dioxides
Subscription Agreement
Subscription Agreement dated as of December 14, 2014, by and between IPALCO and CDPQ
U.S.
United States of America
U.S. SBU
AES U.S. Strategic Business Unit
VIE
Variable Interest Entity
 

4


Throughout this document, the terms the Company, we, us, and our refer to IPALCO and its consolidated subsidiaries.

FORWARD‑LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 including, in particular, the statements about our plans, strategies and prospects under the heading “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I – Financial Information of this Form 10-Q. Forward-looking statements involve many risks and uncertainties and express an expectation or belief and contain a projection, plan or assumption with regard to, among other things, our future revenues, income, expenses or capital structure. Such statements of future events or performance are not guarantees of future performance and involve estimates, assumptions and uncertainties. The words “could,” “may,” “predict,” “anticipate,” “would,” “believe,” “estimate,” “expect,” “forecast,” “project,” “objective,” “intend,” “continue,” “should,” “plan,” and similar expressions, or the negatives thereof, are intended to identify forward-looking statements unless the context requires otherwise.
 
Some important factors that could cause our actual results or outcomes to differ materially from those discussed in the forward-looking statements include, but are not limited to:
 
fluctuations in customer growth and demand;
impacts of weather on retail sales and wholesale prices;
impacts of renewable energy generation, natural gas prices and other market factors on wholesale prices;
weather-related damage to our electrical system;
fuel, commodity and other input costs;
performance of our suppliers;
generating unit availability and capacity;
transmission and distribution system reliability and capacity, including natural gas pipeline system and supply constraints;
purchased power costs and availability;
availability and price of capacity;
regulatory action, including, but not limited to, the review of our basic rates and charges by the IURC;
federal and state legislation and regulations;
changes in our credit ratings or the credit ratings of AES;  
fluctuations in the value of pension plan assets, fluctuations in pension plan expenses and our ability to fund defined benefit pension plans;
changes in financial or regulatory accounting policies;
environmental matters, including costs of compliance with current and future environmental laws and requirements;
interest rates, inflation rates and other costs of capital;
the availability of capital;
the ability of subsidiaries to pay dividends or distributions to IPALCO;
level of creditworthiness of counterparties to contracts and transactions;
labor strikes or other workforce factors, including the ability to attract and retain key personnel;
facility or equipment maintenance, repairs and capital expenditures;
significant delays or unanticipated cost increases associated with large construction projects;
the availability and cost of funds to finance working capital and capital needs, particularly during periods when the time lag between incurring costs and recovery is long and the costs are material;
local economic conditions;
catastrophic events such as fires, explosions, cyber-attacks, terrorist acts, acts of war, pandemic events, or natural disasters such as floods, earthquakes, tornadoes, severe winds, ice or snow storms, droughts, or other similar occurrences;
costs and effects of legal and administrative proceedings, audits, settlements, investigations and claims and the ultimate disposition of litigation;
industry restructuring, deregulation and competition;
issues related to our participation in MISO, including the cost associated with membership, allocation of costs, costs associated with transmission expansion, the recovery of costs incurred, and the risk of default of other MISO participants;
changes in tax laws and the effects of our strategies to reduce tax payments;
the use of derivative contracts; and
product development, technology changes, and changes in prices of products and technologies.


5



All such factors are difficult to predict, contain uncertainties that may materially affect actual results, and many are beyond our control. See “Item 1A. Risk Factors” and “Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations” as described in IPALCO’s 2015 Form 10-K and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I – Financial Information of this Form 10-Q for a more detailed discussion of the foregoing and certain other factors that could cause actual results to differ materially from those reflected in such forward-looking statements.



6


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS 

IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In Thousands)
 
Three Months Ended,
 
Six Months Ended,
 
June 30,
 
June 30,
 
2016
2015
 
2016
2015
 
 
 
 
 
 
UTILITY OPERATING REVENUES
$
323,289

$
292,477

 
$
651,034

$
624,678

 
 
 
 
 
 
UTILITY OPERATING EXPENSES:
 
 
 
 
 
Fuel
53,167

77,084

 
119,664

162,516

Other operating expenses
62,209

54,832

 
119,443

109,808

Power purchased
40,421

31,409

 
92,869

73,985

Maintenance
36,480

40,755

 
67,001

72,037

Depreciation and amortization
57,916

42,931

 
111,151

89,376

Taxes other than income taxes
11,404

10,559

 
22,538

23,492

Income taxes - net
17,429

8,781

 
33,833

26,982

Total utility operating expenses
279,026

266,351

 
566,499

558,196

UTILITY OPERATING INCOME
44,263

26,126

 
84,535

66,482

 
 
 
 
 
 
OTHER INCOME AND (DEDUCTIONS):
 
 
 
 
 
Allowance for equity funds used during construction
6,596

3,079

 
13,377

6,297

Loss on early extinguishment of debt

(19,323
)
 

(19,323
)
Miscellaneous income and (deductions) - net
(58
)
(742
)
 
(1,134
)
(1,368
)
Income tax benefit applicable to nonoperating income
2,800

12,557

 
6,263

18,581

Total other income and (deductions) - net
9,338

(4,429
)
 
18,506

4,187

 
 
 
 
 
 
INTEREST AND OTHER CHARGES:
 
 
 
 
 
Interest on long-term debt
27,452

27,695

 
53,553

55,341

Other interest
621

499

 
1,363

948

Allowance for borrowed funds used during construction
(5,624
)
(2,567
)
 
(11,458
)
(5,233
)
Amortization of redemption premiums and expense on debt
1,080

1,335

 
2,106

2,669

Total interest and other charges - net
23,529

26,962

 
45,564

53,725

NET INCOME (LOSS) 
30,072

(5,265
)
 
57,477

16,944

 
 
 
 
 
 
LESS: PREFERRED DIVIDENDS OF SUBSIDIARY
804

804

 
1,607

1,607

NET INCOME (LOSS) APPLICABLE TO COMMON STOCK
$
29,268

$
(6,069
)
 
$
55,870

$
15,337

 
 
 
 
 
 
See notes to unaudited condensed consolidated financial statements.
 

7


IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In Thousands)
 
June 30,
December 31,
 
2016
2015
ASSETS
 
 
UTILITY PLANT:
 
 
Utility plant in service
$
4,983,921

$
4,992,594

Less accumulated depreciation
2,049,303

2,320,955

Utility plant in service - net
2,934,618

2,671,639

Construction work in progress
821,456

766,406

Spare parts inventory
15,214

12,336

Property held for future use
1,002

1,002

Utility plant - net
3,772,290

3,451,383

OTHER ASSETS:
 

 

Nonutility property - at cost, less accumulated depreciation
514

517

Other long-term assets
5,619

5,664

Other assets - net
6,133

6,181

CURRENT ASSETS:
 

 

Cash and cash equivalents
44,470

21,521

Accounts receivable and unbilled revenue (less allowance
 
 

   for doubtful accounts of $2,555 and $2,498, respectively)
145,449

124,167

Fuel inventories - at average cost
49,887

66,834

Materials and supplies - at average cost
57,437

57,997

Regulatory assets
22,585

8,002

Prepayments and other current assets
42,842

26,063

Total current assets
362,670

304,584

DEFERRED DEBITS:
 

 

Regulatory assets
445,641

448,200

Miscellaneous
4,781

6,821

Total deferred debits
450,422

455,021

TOTAL
$
4,591,515

$
4,217,169

CAPITALIZATION AND LIABILITIES
 
 
CAPITALIZATION:
 
 
Common shareholders equity:
 
 
Paid in capital
$
596,714

$
383,448

Accumulated deficit
(26,923
)
(30,515
)
Total common shareholders equity
569,791

352,933

Cumulative preferred stock of subsidiary
59,784

59,784

Long-term debt (Note 5)
2,498,200

2,153,276

Total capitalization
3,127,775

2,565,993

CURRENT LIABILITIES:
 
 
Short-term debt (Note 5)

166,655

Accounts payable
117,374

155,428

Accrued expenses
19,563

19,482

Accrued real estate and personal property taxes
17,585

17,712

Regulatory liabilities
21,294

28,169

Accrued interest
33,356

31,690

Customer deposits
33,168

30,719

Other current liabilities
13,807

12,623

Total current liabilities
256,147

462,478

DEFERRED CREDITS AND OTHER LONG-TERM LIABILITIES:
 
 
Regulatory liabilities
653,998

639,516

Deferred income taxes - net
423,102

397,394

Non-current income tax liability
7,254

7,147

Unamortized investment tax credit
3,295

3,910

Accrued pension and other postretirement benefits
59,715

80,734

Asset retirement obligations
58,513

58,986

Miscellaneous
1,716

1,011

Total deferred credits and other long-term liabilities
1,207,593

1,188,698

COMMITMENTS AND CONTINGENCIES (Note 8)


TOTAL
$
4,591,515

$
4,217,169

 
 
 
See notes to unaudited condensed consolidated financial statements.

8


IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In Thousands)
 
Six Months Ended,
 
June 30,
 
2016
2015
CASH FLOWS FROM OPERATIONS:
 
 
Net income
$
57,477

$
16,944

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
109,225

98,667

Amortization (deferral) of regulatory assets
3,957

(7,147
)
Amortization of debt premium
78

528

Deferred income taxes and investment tax credit adjustments - net
18,575

8,401

Loss on early extinguishment of debt

19,323

Allowance for equity funds used during construction
(13,166
)
(6,160
)
Change in certain assets and liabilities:
 

 

Accounts receivable
(21,283
)
6,798

Fuel, materials and supplies
17,508

(20,817
)
Income taxes receivable
(6,005
)

Financial transmission rights
(5,885
)
(8,174
)
Accounts payable and accrued expenses
2,925

6,660

Accrued real estate and personal property taxes
(127
)
(6
)
Accrued interest
1,665

(6,154
)
Pension and other postretirement benefit expenses
(21,019
)
(28,159
)
Short-term and long-term regulatory assets and liabilities
(16,407
)
10,340

Prepaids and other current assets
(4,889
)
(7,889
)
Other - net
6,995

192

Net cash provided by operating activities
129,624

83,347

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
Capital expenditures - utility
(425,587
)
(286,261
)
Project development costs
(493
)
(6,503
)
Cost of removal, net of salvage
(8,417
)
(6,205
)
Other
(1,463
)
29

Net cash used in investing activities
(435,960
)
(298,940
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 

Short-term debt borrowings
223,000

132,000

Short-term debt repayments
(389,850
)
(77,000
)
Long-term borrowings, net of discount
347,662

404,712

Retirement of long-term debt, including make-whole provision

(384,324
)
Dividends on common stock
(52,278
)
(37,564
)
Issuance of common stock
134,276

214,366

Equity contributions from shareholders
78,738


Preferred dividends of subsidiary
(1,607
)
(1,607
)
Deferred financing costs paid
(3,809
)
(4,111
)
Retention payments on capital expenditures
(6,693
)
(718
)
Other
(154
)
(368
)
Net cash provided by financing activities
329,285

245,386

Net change in cash and cash equivalents
22,949

29,793

Cash and cash equivalents at beginning of period
21,521

26,933

Cash and cash equivalents at end of period
$
44,470

$
56,726

 
 
 
Supplemental disclosures of cash flow information:
 
 
Cash paid during the period for:
 
 
Interest (net of amount capitalized)
$
41,773

$
57,191

Income taxes
$
15,000

$

 
As of June 30,
 
2016
2015
Non-cash investing activities:
 
 
Accruals for capital expenditures
$
42,382

$
57,829

 
 
 
See notes to unaudited condensed consolidated financial statements.

9


IPALCO ENTERPRISES, INC. and SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements

1. OVERVIEW AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
IPALCO is a holding company incorporated under the laws of the state of Indiana. IPALCO, acquired by AES in March 2001, is owned by AES U.S. Investments (82.35%) and CDPQ (17.65%). AES U.S. Investments is owned by AES U.S. Holdings, LLC (85%) and CDPQ (15%). IPALCO owns all of the outstanding common stock of IPL. Substantially all of IPALCO’s business consists of generating, transmitting, distributing and selling of electric energy conducted through its principal subsidiary, IPL. IPL was incorporated under the laws of the state of Indiana in 1926. IPL has more than 480,000 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 forty miles from Indianapolis. IPL has an exclusive right to provide electric service to those customers. IPL owns and operates four generating stations all within the state of Indiana. Our largest generating station, Petersburg, is coal-fired. The second largest station, Harding Street, has converted its coal-fired units to natural gas and uses natural gas and fuel oil to power combustion turbines. The third station, Eagle Valley, retired its coal-fired units in April 2016 and the CCGT at Eagle Valley is expected to be placed into service in April 2017. The fourth station, Georgetown, is a small peaking station that uses natural gas to power combustion turbines. As of June 30, 2016, IPL’s net electric generation capacity for winter is 2,993 MW and net summer capacity is 2,878 MW.

Principles of Consolidation
 
The accompanying Financial Statements include the accounts of IPALCO, IPL and Mid-America Capital Resources, Inc., a non-regulated wholly-owned subsidiary of IPALCO. All significant intercompany amounts have been eliminated. The accompanying Financial Statements are unaudited; however, they have been prepared in accordance with GAAP for interim financial information and in conjunction with the rules and regulations of the SEC. Accordingly, they do not include all of the disclosures required by GAAP for annual fiscal reporting periods. In the opinion of management, all adjustments of a normal recurring nature necessary for fair presentation have been included. The electric utility business is affected by seasonal weather patterns throughout the year and, therefore, the operating revenues and associated operating expenses are not generated evenly by month during the year. These unaudited Financial Statements have been prepared in accordance with the accounting policies described in the audited financial statements filed as Exhibit 99.1 to IPALCO’s current report on Form 8-K filed with the SEC on May 12, 2016, and should be read in conjunction therewith.
 
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 that management is required to make. Actual results may differ from those estimates.
 
New Accounting Pronouncements
 
The following table provides a brief description of recent accounting pronouncements that had and/or could have a material impact on the Company’s consolidated financial statements:
New Accounting Standards Adopted
ASU Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
Given the absence of authoritative guidance within ASU 2015-03, this standard clarifies that the SEC Staff would not object to an entity presenting debt issuance costs related to line-of-credit arrangements as an asset that is subsequently amortized ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. Transition method: retrospective.
January 1, 2016
Deferred financing costs related to lines-of-credit of approximately $0.3 million recorded within Deferred Debits were not reclassified as of December 31, 2015.
2015-03, Interest - Imputation of Interest (Subtopic 835-30)
The standard simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the standard. Transition method: retrospective.
January 1, 2016
Deferred financing costs of approximately $20.8 million previously classified within Deferred Debits were reclassified to reduce the related debt liabilities as of December 31, 2015.

10



2015-02, Consolidation —
Amendments to the
Consolidation Analysis
(Topic 810)
The standard makes targeted amendments to the current
consolidation guidance and ends the deferral granted to
investment companies from applying the VIE guidance. The
standard amends the evaluation of whether (1) fees paid to a
decision-maker or service providers represent a variable
interest, (2) a limited partnership or similar entity has the
characteristics of a VIE and (3) a reporting entity is the primary
beneficiary of a VIE. Transition method: retrospective.

January 1, 2016
There were no changes to the consolidation conclusions.
New Accounting Standards Issued But Not Yet Effective
ASU Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

This standard updates the impairment model for financial assets measured at amortized cost to an expected loss model rather than an incurred loss model. It also allows for the presentation of credit losses on available-for-sale debt securities as an allowance rather than a write down. Transition method: various.


January 1, 2020 Early adoption is permitted only as of January 1, 2019.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
The standard simplifies the following aspects of accounting for share-based payment awards: accounting for income taxes, classification of excess tax benefits on the statement of cash flows, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities and classification of employee taxes paid on statement of cash flows when an employer withholds shares for tax-withholding purposes. Transition method: Various.
January 1, 2017. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2016-06, Derivatives and Hedging (Topic 815) - Contingent Put and Call Options in Debt Instruments
This standard clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. When a call (put) option is contingently exercisable, an entity will no longer assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. Transition method: a modified retrospective basis to existing debt instruments as of the effective date.
January 1, 2017. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard, but does not anticipate a material impact on its consolidated financial statements.
2016-05, Derivatives and Hedging (Topic 815) - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships
The standard clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not require de-designation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. Transition method: prospective or a modified retrospective basis.
January 1, 2017. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard, but does not anticipate a material impact on its consolidated financial statements.
2016-02, Leases (Topic 842)
The standard creates Topic 842, Leases, which supersedes Topic 840, Leases, and introduces a lessee model that brings substantially all leases onto the balance sheet while retaining most of the principles of the existing lessor model in U.S. GAAP and aligning many of those principles with ASC 606, Revenue from Contracts with Customers. Transition method: modified retrospective approach with certain practical expedients.
January 1, 2019. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2016-01, Financial Instruments - Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. Also, it amends certain disclosure requirements associated with the fair value of financial instruments. Transition: cumulative effect in Retained Earnings as of adoption or prospectively for equity investments without readily determinable fair value.
January 1, 2018. Limited early adoption permitted.
The Company is currently evaluating the impact of adopting the standard, but does not anticipate a material impact on its consolidated financial statements.
2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
The standard replaces the current lower of cost or market test with a lower of cost or net realizable value test. Transition method: prospectively.
January 1, 2017. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2014-09, 2016-08,
2016-10, 2016-12
Revenue from Contracts
with Customers (Topic
606),


The Revenue from Contracts with Customers standard provides
a single and comprehensive revenue recognition model for all
contracts with customers to improve comparability. The
standard contains principles to determine the measurement and
timing of revenue recognition. The standard requires an entity
to recognize revenue to depict the transfer of goods or services
to customers at an amount that the entity expects to be entitled
to in exchange for those goods or services. The amendments to
the standard provide further clarification on contract revenue
recognition specifically related to the implementation of the
principal versus agent evaluation, the identification of
performance obligations, clarification on accounting for licenses
of intellectual property, and allows for the election to account for
shipping and handling activities performed after control of a
good has been transferred to the customer as a fulfillment cost.
Transition method: a full retrospective or modified retrospective
approach.



January 1, 2018 (deferred by ASU No. 2015-14). Early application is permitted only as of January 1, 2017.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.


11



2. REGULATORY MATTERS
 
In March 2016, the IURC issued an order authorizing IPL to increase its basic rates and charges by $30.8 million annually. The order also authorized IPL to collect, over a ten year period, $117.7 million of previously deferred regulatory assets related to IPL’s participation in the regional transmission organization known as MISO. Such deferred costs will be amortized to expense over ten years. Accordingly, $11.8 million of IPL’s long-term MISO regulatory asset as of December 31, 2015 has been reclassified to current regulatory assets as of June 30, 2016 on the accompanying Unaudited Condensed Consolidated Balance Sheets. The rate order also authorized an increase in IPL’s depreciation rates of $24.3 million annually compared to the twelve months ended June 30, 2014, which is the period upon which the rate increase was calculated. IPL also received approval to implement three new rate riders for current recovery from customers of ongoing MISO costs, capacity costs and sharing at 50% of wholesale sales margins with customers. The order approved recovery of IPL’s pension expenses and a return on IPL’s discretionary pension fundings. While the IURC noted in the order that they found IPL’s Service Company cost allocations to be reasonable, IPL was directed to request the FERC to review its Service Company allocations. Such review is currently underway. The IURC also closed their investigation into IPL’s underground network.

Some of the intervening parties in the IURC rate case filed petitions for reconsideration of the IURC’s March 2016 order with respect to certain issues. These petitions were subsequently denied by the IURC. In addition, certain intervening parties have filed notices of appeal of the order.


12



The amounts of regulatory assets and regulatory liabilities are as follows:
 
 
June 30, 2016
 
December 31, 2015
 
Recovery Period
 
 
(In Thousands)
 
 
Regulatory Assets
 
 
 
 
 
 
Current:
 
 
 
 
 
 
Undercollections of rate riders
 
$
8,632

 
$

 
Approximately 1 year(1)
Amounts being recovered through base rates
 
13,953

 
8,002

 
Approximately 1 year(1)
Total current regulatory assets
 
$
22,585

 
$
8,002

 
 
Long-term:
 
 
 
 
 
 
Unrecognized pension and other
 
 
 
 
 
 
postretirement benefit plan costs
 
$
217,698

 
$
226,889

 
Various(2)
Income taxes recoverable through rates
 
42,004

 
35,765

 
Various
Deferred MISO costs
 
120,243

 
128,610

 
Through 2026(3)
Unamortized Petersburg Unit 4 carrying
 
 
 
 
 
 
charges and certain other costs
 
10,720

 
11,248

 
Through 2026(1) (4)
Unamortized reacquisition premium on debt
 
22,616

 
23,268

 
Over remaining life of debt
Environmental projects
 
29,392

 
16,876

 
Through 2034(1)(4)
Other miscellaneous
 
2,968

 
5,544

 
To be determined(1)(5)
Total long-term regulatory assets
 
$
445,641

 
$
448,200

 
 
Total regulatory assets
 
$
468,226

 
$
456,202

 
 
Regulatory Liabilities
 
 
 
 
 
 
Current:
 
 
 
 
 
 
Deferred fuel over-collection
 
$
11,259

 
$
19,746

 
Approximately 1 year(1)
FTRs
 
10,035

 
4,150

 
Approximately 1 year(1)
DSM program costs
 

 
4,273

 
Approximately 1 year(1)
Total current regulatory liabilities
 
$
21,294

 
$
28,169

 
 
Long-term:
 
 
 
 
 
 
ARO and accrued asset removal costs
 
$
651,725

 
$
637,065

 
Not Applicable
Unamortized investment tax credit
 
2,065

 
2,451

 
Through 2021
Other miscellaneous
 
208

 

 
 
Total long-term regulatory liabilities
 
$
653,998

 
$
639,516

 
 
Total regulatory liabilities
 
$
675,292

 
$
667,685

 
 
 
(1)
Recovered (credited) per specific rate orders
(2)
IPL receives a return on its discretionary funding
(3)
The majority of these costs are being recovered per specific rate order; for the remaining costs recovery is probable but timing not yet determined
(4)
Recovered with a current return
(5)
A portion of this amount will be recovered over the next two years



13


3. FAIR VALUE
 
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; and 
 
Level 3 - unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
 
As of June 30, 2016 and December 31, 2015, all of IPALCO’s financial assets or liabilities adjusted to fair value on a recurring basis (excluding pension assets – see Note 7, “Benefit Plans”) were considered Level 3, based on the above fair value hierarchy. These primarily consisted of FTRs, which are used to offset MISO congestion charges. Because the benefit associated with FTRs is a flow-through to IPL’s jurisdictional customers, IPL records a regulatory liability matching the value of the FTRs. In addition, IPALCO had one financial asset, a nonutility investment accounted for using the cost method of accounting, which is measured at fair value on a nonrecurring basis, again using Level 3 measurements. No adjustments were made to this asset during the periods covered by this report. All of these financial assets and liabilities were not material to the Financial Statements in the periods covered by this report, individually or in the aggregate.
 
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.

Non-Recurring Fair Value Measurements
 
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 liabilities relate primarily to environmental issues involving asbestos-containing materials, ash ponds, landfills and miscellaneous contaminants associated with its generating plants, transmission system and distribution system. We use the cost approach to determine the fair value of IPL’s ARO liabilities, which is estimated by discounting expected cash outflows to their present value at the initial recording of the liabilities. Cash outflows are based on the approximate future disposal costs as determined by market information, historical information or other management estimates. These inputs to the fair value of the ARO liabilities would be considered Level 3 inputs under the fair value hierarchy. As of June 30, 2016 and December 31, 2015, ARO liabilities were $58.5 million and $59.0 million, respectively. 

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.


14


The following table shows the face value and the fair value of fixed-rate and variable-rate indebtedness (Level 2) for the periods ending:  
 
June 30, 2016
December 31, 2015
 
Face Value
Fair Value
Face Value
Fair Value
 
(In Millions)
Fixed-rate
$
2,438.5

$
2,716.8

$
2,088.4

$
2,225.3

Variable-rate
90.0

90.0

256.9

256.9

Total indebtedness
$
2,528.5

$
2,806.8

$
2,345.3

$
2,482.2

 
The difference between the face value and the carrying value of this indebtedness represents the following:

unamortized deferred financing costs of $23.4 million and $20.8 million at June 30, 2016 and December 31, 2015, respectively; and

unamortized discounts of $6.9 million and $4.6 million at June 30, 2016 and December 31, 2015, respectively.

4. EQUITY
 
On February 11, 2015, IPALCO issued and sold 100 shares of IPALCO’s common stock to CDPQ under the Subscription Agreement. On April 1, 2015, IPALCO issued and sold 11,818,828 shares of IPALCO’s common stock to CDPQ for $214.4 million under the Subscription Agreement. On March 1, 2016, IPALCO issued and sold 7,403,213 shares of IPALCO’s common stock to CDPQ for $134.3 million under the Subscription Agreement. After completion of these transactions, CDPQ’s direct and indirect interest in IPALCO is 30%. On June 1, 2016, IPALCO received equity capital contributions of (i) $64.8 million from AES U.S. Investments and (ii) $13.9 million from CDPQ. IPALCO then made the same investments in IPL. The proceeds were primarily used for funding needs related to IPL’s environmental and replacement generation projects. The capital contributions on June 1, 2016 were made on a proportional share basis and, therefore, did not change CDPQ’s or AES’ ownership interests in IPALCO.

15


5. DEBT
 
Long-Term Debt
 
The following table presents our long-term debt:
 
 
June 30,
December 31,
Series
Due
2016
2015
 
 
(In Thousands)
IPL first mortgage bonds:
 
 
5.40% (1)
August 2017
$
24,650

$
24,650

3.875% (2)
August 2021
55,000

55,000

3.875% (2)
August 2021
40,000

40,000

4.55% (2)
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


Unamortized discount – net
 
(6,537
)
(4,242
)
Deferred financing costs (3)
 
(17,429
)
(13,703
)
Total IPL first mortgage bonds
1,609,484

1,265,505

IPL unsecured debt:
 
 
Variable (4)
December 2020
30,000

30,000

Variable (4)
December 2020
60,000

60,000

Total IPL unsecured debt
 
90,000

90,000

Total Long-term Debt – IPL
1,699,484

1,355,505

Long-term Debt – IPALCO:
 

 

5.00% Senior Secured Notes
May 2018
400,000

400,000

3.45% Senior Secured Notes
July 2020
405,000

405,000

Unamortized discount – net
 
(335
)
(371
)
Deferred financing costs (3)
 
(5,949
)
(6,858
)
Total Long-term Debt – IPALCO
798,716

797,771

Total Consolidated IPALCO Long-term Debt
$
2,498,200

$
2,153,276


(1)
First mortgage bonds are issued to the city of Petersburg, Indiana, to secure the loan of proceeds from tax-exempt bonds issued by the city.
(2)
First mortgage bonds are issued to the Indiana Finance Authority, to secure the loan of proceeds from tax-exempt bonds issued by the Indiana Finance Authority.
(3)
The Company adopted ASU No. 2015-03 on January 1, 2016, which requires the use of the full retrospective approach with respect to the presentation of debt issuance costs, including deferred charges.
(4)
Unsecured notes are 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.


16


Significant Transactions

IPL First Mortgage Bonds

In May 2016, IPL issued $350 million aggregate principal amount of first mortgage bonds, 4.05% Series, due May 2046, pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from this offering were approximately $343.6 million, after deducting the initial purchasers’ discounts and fees and expenses for the offering payable by IPL. The net proceeds from this offering were used to finance a portion of IPL’s construction program and capital costs related to environmental and replacement generation projects, to repay outstanding borrowings under IPL’s 364-day delayed-draw term loan and other short-term debt, and for other general corporate purposes.

IPL Unsecured Notes

In May 2016, IPL repaid $91.85 million in outstanding borrowings under its 364-day delayed-draw term loan with a portion of the proceeds from its $350 million aggregate principal amount of first mortgage bonds as described above in IPL First Mortgage Bonds.

IPALCOs Senior Secured Notes

In June 2015, IPALCO completed the sale of the 2020 IPALCO Notes pursuant to Rule 144A and Regulation S under the Securities Act. The 2020 IPALCO Notes were issued pursuant to an Indenture dated June 25, 2015, by and between IPALCO and U.S. Bank, National Association, as trustee. The 2020 IPALCO Notes were priced to the public at 99.929% of the principal amount. Net proceeds to IPALCO were approximately $399.5 million after deducting underwriting costs and estimated offering expenses. These costs are being amortized to the maturity date using the effective interest method. We used the net proceeds from this offering to fund the purchase of the 2016 IPALCO Notes validly tendered and to pay for a related consent solicitation, to redeem any 2016 IPALCO Notes that remained outstanding after the completion of the tender, and to pay certain related fees, expenses and make-whole premiums. Of the 2016 IPALCO Notes outstanding, $366.5 million were tendered in June 2015. The remainder, $33.5 million, was redeemed in July 2015. An early tender premium was paid related to the tender offer and a redemption premium was paid related to the redemption of the 2016 IPALCO Notes. A loss on early extinguishment of debt of $19.3 million for the 2016 IPALCO Notes tendered in June 2015 is included as a separate line item within “Other Income and (Deductions)” in the accompanying Unaudited Condensed Consolidated Statements of Operations.

The 2020 IPALCO Notes are secured by IPALCO’s pledge of all of the outstanding common stock of IPL. The lien on the pledged shares is shared equally and ratably with IPALCO’s existing senior secured notes. IPALCO has entered into a Pledge Agreement Supplement with the Bank of New York Mellon Trust Company, N.A., as Collateral Agent, dated June 25, 2015, to the Pledge Agreement between IPALCO and The Bank of New York Mellon Trust Company, N.A., dated November 14, 2001, as supplemented by a Pledge Agreement Supplement dated April 15, 2008 and a Pledge Agreement Supplement dated May 18, 2011, each by IPALCO in favor of the Collateral Agent. IPALCO also agreed to register the 2020 IPALCO Notes under the Securities Act by filing an exchange offer registration statement or, under specified circumstances, a shelf registration statement with the SEC pursuant to a Registration Rights Agreement that IPALCO entered into with J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of the initial purchasers of the 2020 IPALCO Notes. IPALCO filed its registration statement on Form S-4 with respect to the 2020 IPALCO Notes with the SEC on September 28, 2015, and this registration statement was declared effective on October 15, 2015. The exchange offer was completed on November 16, 2015.

Line of Credit

IPL entered into an amendment and restatement of its 5-year $250 million revolving credit facility in May 2014, and a further amendment and extension of the credit facility on October 16, 2015 (the “Credit Agreement”) with a syndication of banks. This Credit Agreement is an unsecured committed line of credit to be used: (i) to finance capital expenditures; (ii) to refinance indebtedness under the existing credit agreement; (iii) to support working capital; and (iv) for general corporate purposes. This agreement matures on October 16, 2020, 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 October 16, 2019, subject to approval by the lenders. Prior to execution, IPL and IPALCO had existing general banking relationships with the parties in this agreement. As of June 30, 2016 and December 31, 2015, IPL had $0.0 million and $75.0 million in outstanding borrowings on the committed line of credit, respectively. 


17


6. INCOME TAXES
 
IPALCO’s effective combined state and federal income tax rates were 33.3% and 33.0% for the three and six months ended June 30, 2016, respectively, as compared to 38.4% and 35.4% for the three and six months ended June 30, 2015, respectively. The decrease in the effective tax rates versus the comparable periods was primarily the result of an increase in the allowance for equity funds used during construction in 2016 and the manufacturer’s production deduction (Internal Revenue Code Section 199) that had been previously disallowed due to a Net Operating Loss carryover.
 
7. BENEFIT PLANS
 
The following table (in thousands) presents information for the six months ended June 30, 2016, relating to the Pension Plans:
Net unfunded status of plans:
 

Net unfunded status at December 31, 2015, before tax adjustments
$
(76,314
)
Net benefit cost components reflected in net unfunded status during first quarter:
 

   Service cost
(1,754
)
   Interest cost
(6,454
)
   Expected return on assets
10,873

   Employer contributions
15,900

Net unfunded status at March 31, 2016, before tax adjustments
$
(57,749
)
Net benefit cost components reflected in net unfunded status during second quarter:
 

   Service cost
$
(1,755
)
   Interest cost
(6,454
)
   Expected return on assets
10,874

Net unfunded status at June 30, 2016, before tax adjustments
$
(55,084
)
 
 
Regulatory assets related to pensions(1):
 
Regulatory assets at December 31, 2015, before tax adjustments
$
235,094

Amount reclassified through net benefit cost: 
 

Amortization of prior service cost
(1,296
)
Amortization of net actuarial loss
(3,474
)
Regulatory assets at March 31, 2016, before tax adjustments
$
230,324

Amount reclassified through net benefit cost: 
 

Amortization of prior service cost
$
(1,296
)
Amortization of net actuarial loss
(3,474
)
Regulatory assets at June 30, 2016, before tax adjustments
$
225,554

 
 
(1)
Amounts that would otherwise be charged/credited to Accumulated Other Comprehensive Income or Loss upon application of ASC 715, “Compensation – Retirement Benefits,” are recorded as a regulatory asset or liability because IPL has historically recovered and currently recovers pension and other postretirement benefit expenses in rates. These are unrecognized amounts yet to be recognized as components of net periodic benefit costs.

 

18


Pension Expense
 
The following table presents net periodic benefit cost information relating to the Pension Plans combined:

 
For the Three Months Ended,
For the Six Months Ended,
 
June 30,
June 30,
 
2016
2015
2016
2015
 
(In Thousands)
(In Thousands)
Components of net periodic benefit cost:
 
 
 
 
Service cost
$
1,755

$
2,078

$
3,509

$
4,157

Interest cost
6,454

7,408

12,908

14,816

Expected return on plan assets
(10,874
)
(11,206
)
(21,747
)
(22,412
)
Amortization of prior service cost
1,296

1,217

2,592

2,433

Amortization of actuarial loss
3,474

3,475

6,948

6,950

Net periodic benefit cost
$
2,105

$
2,972

$
4,210

$
5,944


In addition, IPL provides postretirement health care benefits to certain active or retired employees and the spouses of certain active or retired employees. These postretirement health care benefits and the related unfunded obligation were $4.7 million and $4.5 million at June 30, 2016 and December 31, 2015, respectively. The related expense was not material to the Financial Statements in the periods covered by this report.

8. 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 of IPALCO.
 
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 hazardous materials; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, permit revocation and/or facility shutdowns. We cannot assure that we have been or will be at all times in full compliance with such laws, regulations and permits.
 
New Source Review
 
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 three 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. Since receiving the letter, IPL management has met with the EPA staff regarding possible resolutions of the NOV. At this time, we cannot predict the ultimate resolution of this matter. However, settlements and litigated outcomes of similar 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 this case could have a material impact on our business. 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 this regard. IPL has recorded a contingent liability related to this matter.
 

19




9. RELATED PARTY TRANSACTIONS
 
Service Company

Effective January 1, 2014, the Service Company began providing services including operations, accounting, legal, human resources, information technology and other corporate services on behalf of companies that are part of the U.S. SBU, including among other companies, IPALCO and IPL. The Service Company allocates the costs for these services based on cost drivers designed to result in fair and equitable allocations. This includes ensuring that the regulated utilities served, including IPL, are not subsidizing costs incurred for the benefit of non-regulated businesses. Total costs incurred by the Service Company on behalf of IPALCO were $13.5 million and $12.2 million during the six-month periods ended June 30, 2016 and 2015, respectively, and were included in “Other operating expenses” on our Unaudited Condensed Consolidated Statements of Operations. Total costs incurred by IPALCO on behalf of the Service Company were $4.1 million and $3.7 million during the six-month periods ended June 30, 2016 and 2015, respectively. IPALCO had a prepaid balance with the Service Company of $3.2 million and $1.2 million as of June 30, 2016 and December 31, 2015, respectively.

CDPQ

Please refer to Note 4, “Equity” for further details.

Other

In 2014, IPL engaged a third party vendor as part of its replacement generation construction projects. A member of the AES Board of Directors is also currently a member of the Supervisory Board of this vendor. IPL had billings from this vendor of $169.9 million and $91.1 million during the six-month periods ended June 30, 2016 and 2015, respectively. IPL had a payable balance to this vendor of $11.1 million and $34.0 million as of June 30, 2016 and December 31, 2015, respectively.

10. 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 non-utility category primarily includes the 2018 IPALCO Notes and the 2020 IPALCO Notes; approximately $15.2 million and $1.7 million of cash and cash equivalents, as of June 30, 2016 and December 31, 2015, respectively; long-term investments of $5.1 million and $5.2 million at June 30, 2016 and December 31, 2015, respectively; and income taxes, deferred taxes, and interest related to those items. All other non-utility assets represented less than 1% of IPALCO’s total assets as of June 30, 2016 and December 31, 2015. Net income for the utility segment was $70.1 million and $45.0 million for the six-month periods ended June 30, 2016 and 2015, respectively, and $36.4 million and $15.3 million for the three-month periods ended June 30, 2016 and 2015, respectively. The accounting policies of the identified segment are consistent with those policies and procedures described in the summary of significant accounting policies. Intersegment sales, if any, are generally based on prices that reflect the current market conditions.
 




20


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the Financial Statements and the notes thereto included in “Item 1. Financial Statements” included in Part I – Financial Information of this Form 10-Q. The following discussion contains forward-looking statements. Our actual results may differ materially from the results suggested by these forward-looking statements. Please see “Forward–Looking Statements” at the beginning of this Form 10-Q.
 
RESULTS OF OPERATIONS
 
The electric utility business is affected by seasonal weather patterns throughout the year and, therefore, the operating revenues and associated expenses are not generated evenly by month during the year. 
 
Comparison of three months ended June 30, 2016 and three months ended June 30, 2015
 
Utility Operating Revenues
 
Utility operating revenues during the three months ended June 30, 2016 increased by $30.8 million compared to the same period in 2015, which resulted from the following changes (dollars in thousands):
 
 
Three Months Ended
 
 
 
June 30,
 
Percentage
 
2016
2015
Change
Change
Utility operating revenues:
 
 
 
 
Retail revenues
$
314,105

$
280,952

$
33,153

11.8%
Wholesale revenues
3,012

6,624

(3,612
)
(54.5)%
Miscellaneous revenues
6,172

4,901

1,271

25.9%
Total utility operating revenues
$
323,289

$
292,477

$
30,812

10.5%
 
 
 
 
 
Heating degree days:
 
 
 
 
Actual
508

408

100

24.5%
30-year average
499

499

 
 
 
 
 
 
 
Cooling degree days:
 
 
 
 
Actual
401

399

2

0.5%
30-year average
343

339

 
 
 
 
 
 
 
 
The increase in retail revenues of $33.2 million was primarily due to (i) a net increase in the weighted average price per kWh sold ($29.8 million) and (ii) the one-time impact of recognizing in IPL’s unbilled revenue calculation the increase in IPL’s base rates relating to revenues that were previously charged through IPL’s environmental cost recovery rate adjustment mechanism, or rider ($3.8 million). While billed through a rider, such revenues relating to environmental cost recovery were not includable in our unbilled calculation. The $29.8 million increase in the weighted average price of retail kWh sold was primarily due to a $20.4 million increase in revenues related to environmental projects, primarily MATS; a $4.6 million increase in DSM program rate adjustment mechanism revenues; and the impacts of implementing the 2016 rate order along with other retail rate variances, partially offset by a $12.3 million decrease in fuel revenues. The change in the volume of kWh sold was immaterial.

The decrease in wholesale revenues of $3.6 million was primarily due to a 55% decrease in the quantity of kWh sold ($4.2 million) as IPL’s generation units were not called upon by MISO to produce electricity as often during the second quarter of 2016 compared to the second quarter of 2015 largely due to unit availability, partially offset by a 22% increase in the weighted average price per kWh sold ($0.6 million). Our ability to be dispatched in the MISO market is primarily driven by the

21


locational marginal price of electricity and variable generation costs. The amount of electricity available for wholesale sales is impacted by our retail load requirements, generation capacity and unit availability.

Utility Operating Expenses
 
The following table illustrates our primary operating expense changes from the three months ended June 30, 2015 to the three months ended June 30, 2016 (dollars in millions):
 
 
Operating expenses for the three months ended June 30, 2015
$
266.4

Decrease in fuel costs
(23.9
)
Increase in depreciation and amortization costs
15.0

Increase in power purchased
9.0

Increase in income taxes - net
8.6

Decrease in maintenance expenses
(4.3
)
Increase in MISO non-purchased power costs
4.3

Increase in DSM program costs
3.3

Other miscellaneous variances
0.6

Operating expenses for the three months ended June 30, 2016
$
279.0

 
 
 
The $23.9 million decrease in fuel costs was primarily due to a $13.4 million decrease in deferred fuel costs, which was primarily the result of the one-time impact of recognizing in IPL’s deferred fuel calculation the increase in base rates relating to fuel revenues that were previously charged through a rate adjustment mechanism or rider ($14.2 million). While part of the fuel rider, IPL’s unbilled fuel revenues were offset in the financial statements by an increase to fuel expense, which is no longer necessary now that these fuel revenues are included in base rates. In addition, the decrease in fuel costs includes a $4.2 million decrease in the price of coal we consumed versus the comparable period, a $3.8 million decrease in the quantity of fuel consumed as the result of a decrease in total kWh sales volume versus the comparable period, and a $2.2 million decrease in the price of natural gas we consumed versus the comparable period. We are generally permitted to recover underestimated fuel and purchased power costs to serve our retail customers in future rates through quarterly FAC proceedings. These variances are deferred when incurred and amortized into expense in the same period that our rates are adjusted to reflect these variances.
 
The increase in depreciation and amortization costs of $15.0 million was primarily due to an $8.8 million impact from the amortization of previously deferred environmental costs, as well as the deferral for less of these costs in the current year. The remaining $6.2 million increase was primarily due to additional assets placed in service and new depreciation and ARO rates implemented beginning in April 2016, partially offset by the impact of the retirements of coal assets at our Eagle Valley and Harding Street stations.

The $9.0 million increase in purchased power costs was primarily due to a 32% increase in the volume of power purchased during the period ($8.9 million), partially offset by an 8% decrease in the market price of purchased power ($2.6 million). The volume of power we purchase each period is primarily influenced by our retail demand, our generating unit capacity and outages, and the fact that at times it is less expensive for us to buy power in the market than to produce it ourselves. The market price of purchased power is influenced primarily by changes in the market price of delivered fuel (primarily natural gas), the price of environmental emissions allowances, the supply of and demand for electricity, and the time of day in which power is purchased. Additionally, MISO non-fuel purchased power costs increased $2.6 million, which includes both the current period costs and the amortization of previously deferred costs, which were included in customer billing rates beginning April 1, 2016. Such costs were deferred as a regulatory asset prior to April 1, 2016 and are now being amortized to expense over a ten-year period.

The $8.6 million increase in income taxes - net was primarily due to the tax effect of the increase in pretax net operating income, for the reasons previously described.

Maintenance expenses decreased $4.3 million versus the comparable period primarily due to decreased outages and the retirement of our Eagle Valley station’s coal-fired units in April 2016.

MISO non-purchased power costs increased $4.3 million, which includes both the current period costs and the amortization of previously deferred costs, which were included in IPL's customer billing rates beginning April 1, 2016. Such costs were deferred as a regulatory asset prior to April 1, 2016 and are now being amortized to expense over a ten-year period.

22



The increase in DSM program costs of $3.3 million, which are included in “Other operating expenses” on our Unaudited Condensed Consolidated Statements of Operations and are recoverable through customer rates, is correlated to an increase in DSM rate adjustment mechanism revenues as a result of timing differences in spending patterns.

Other Income and Deductions
 
Other income and deductions increased $13.7 million, from a loss of $4.4 million for the three months ended June 30, 2015, to income of $9.3 million for the same period in 2016. The increase was primarily due to (i) a $19.3 million loss on early extinguishment of debt for $366.5 million of 2016 IPALCO Notes that were tendered in June 2015 and (ii) a $3.5 million increase in the allowance for equity funds used during construction as a result of increased construction activity during 2016. These increases were partially offset by a decrease in the income tax benefit of $9.8 million, which was primarily due to the change in pretax nonoperating income during the comparable periods.

Interest and Other Charges
 
Interest and other charges decreased $3.4 million, or 13%, for the three months ended June 30, 2016, primarily due to a $3.1 million change in the allowance for borrowed funds used during construction as a result of increased construction activity.   

Comparison of six months ended June 30, 2016 and six months ended June 30, 2015
 
Utility Operating Revenues
 
Utility operating revenues during the six months ended June 30, 2016 increased by $26.4 million compared to the same period in 2015, which resulted from the following changes (dollars in thousands):
 
 
Six Months Ended
 
 
 
June 30,
 
Percentage
 
2016
2015
Change
Change
Utility operating revenues:
 
 
 
 
Retail revenues
$
635,873

$
602,113

$
33,760

5.6%
Wholesale revenues
3,788

12,306

(8,518
)
(69.2)%
Miscellaneous revenues
11,373

10,259

1,114

10.9%
Total utility operating revenues
$
651,034

$
624,678

$
26,356

4.2%
 
 
 
 
 
Heating degree days:
 
 
 
 
Actual
2,971

3,644

(673
)
(18.5)%
30-year average
3,250

3,222

 
 
 
 
 
 
 
Cooling degree days:
 
 
 
 
Actual
401

399

2

0.5%
30-year average
343

343

 
 
 
 
 
 
 
 
The increase in retail revenues of $33.8 million was primarily due to a net increase in the weighted average price per kWh sold ($45.8 million), partially offset by a 5% decrease in the volume of kWh sold ($15.8 million). The $45.8 million increase in the weighted average price of retail kWh sold was primarily due to a $35.1 million increase in revenues related to environmental projects, primarily MATS; DSM program rate adjustment mechanism revenues of $7.0 million; and the impact of implementing the 2016 rate order and favorable block rate variances, which generally provides for residential and commercial customers to be charged a higher per kWh rate at lower consumption levels. Therefore, as volumes decrease, the weighted average price per kWh increases. The increase in the weighted average price of retail kWh sold was partially offset by a $19.3 million decrease in fuel revenues. The majority of the increases in environmental and DSM revenues are offset by increased operating expenses,

23


including depreciation and amortization. The $15.8 million decrease in the volume of kWh sold was primarily due to warmer temperatures in our service territory during the first half of 2016 versus the comparable period (as demonstrated by the 18% decrease in heating degree days, as shown above). The increase in retail revenues also includes the one-time impact of recognizing in IPL’s unbilled revenue calculation the increase in IPL’s base rates relating to revenues that were previously charged through IPL’s environmental cost recovery rate adjustment mechanism, or rider ($3.8 million). While billed through a rider, such revenues relating to environmental cost recovery were not includable in our unbilled calculation.

The decrease in wholesale revenues of $8.5 million was primarily due to a 69% decrease in the quantity of kWh sold ($8.7 million) as IPL’s generation units were not called upon by MISO to produce electricity as often during the first half of 2016 compared to the first half of 2015 largely due to unit availability; partially offset by a 6% increase in the weighted average price per kWh sold ($0.2 million). Our ability to be dispatched in the MISO market is primarily driven by the locational marginal price of electricity and variable generation costs. The amount of electricity available for wholesale sales is impacted by our retail load requirements, generation capacity and unit availability.

Utility Operating Expenses
 
The following table illustrates our primary operating expense changes from the six months ended June 30, 2015 to the six months ended June 30, 2016 (dollars in millions):
 
 
Operating expenses for the six months ended June 30, 2015
$
558.2

Decrease in fuel costs
(42.9
)
Increase in depreciation and amortization costs
21.8

Increase in power purchased
18.9

Increase in income taxes - net
6.9

Increase in DSM program costs
5.4

Decrease in maintenance expenses
(5.0
)
Increase in non-purchased power MISO costs
4.3

Other miscellaneous variances
(1.1
)
Operating expenses for the six months ended June 30, 2016
$
566.5

 
 
 
The $42.9 million decrease in fuel costs was primarily due to (i) a $29.3 million decrease in the quantity of fuel consumed as the result of a decrease in total kWh sales volume versus the comparable period, (ii) an $8.2 million decrease in the price of natural gas we consumed versus the comparable period, (iii) a $4.7 million decrease in the price of coal we consumed versus the comparable period, (iv) a $0.9 million decrease in the price of oil we consumed versus the comparable period; partially offset by (v) a $0.6 million increase in deferred fuel costs, which includes the one-time impact of recognizing in IPL’s deferred fuel calculation the increase in base rates relating to fuel revenues that were previously charged through a rate adjustment mechanism or rider ($14.2 million). While part of the fuel rider, IPL’s unbilled fuel revenues were offset in the financial statements by an increase to fuel expense, which is no longer necessary now that these fuel revenues are included in base rates. We are generally permitted to recover underestimated fuel and purchased power costs to serve our retail customers in future rates through quarterly FAC proceedings. These variances are deferred when incurred and amortized into expense in the same period that our rates are adjusted to reflect these variances.
 
The increase in depreciation and amortization costs of $21.8 million was primarily due to an $11.2 million impact from the amortization of previously deferred environmental costs, as well as the deferral for less of these costs in the current year. The remaining $10.6 million increase was due to additional assets placed in service and new depreciation and ARO rates implemented beginning in April 2016, partially offset by the impact of the retirements of coal assets at our Eagle Valley and Harding Street stations.

The $18.9 million increase in purchased power costs was primarily due to a 98% increase in the volume of power purchased during the period ($62.3 million), partially offset by a 32% decrease in the market price of purchased power ($46.4 million). The volume of power we purchase each period is primarily influenced by our retail demand, our generating unit capacity and outages, and the fact that at times it is less expensive for us to buy power in the market than to produce it ourselves. The market price of purchased power is influenced primarily by changes in the market price of delivered fuel (primarily natural gas), the price of environmental emissions allowances, the supply of and demand for electricity, and the time of day in which power is purchased. Additionally, MISO non-fuel purchased power costs increased $2.6 million, which includes both the current period costs and the amortization of previously deferred costs, which were included in customer billing rates beginning April 1, 2016.

24


Such costs were deferred as a regulatory asset prior to April 1, 2016 and are now being amortized to expense over a ten-year period.

The $6.9 million increase in income taxes - net was primarily due to the tax effect of the increase in pretax net operating income, for the reasons previously described.

The increase in DSM program costs of $5.4 million, which are included in “Other operating expenses” on our Unaudited Condensed Consolidated Statements of Operations and are recoverable through customer rates, is correlated to an increase in DSM rate adjustment mechanism revenues as a result of timing differences in spending patterns.

Maintenance expenses decreased $5.0 million versus the comparable period primarily due to decreased outages and the retirement of our Eagle Valley station’s coal-fired units in April 2016.

MISO non-purchased power costs increased $4.3 million, which includes both the current period costs and the amortization of previously deferred costs, which were included in IPL's customer billing rates beginning April 1, 2016. Such costs were deferred as a regulatory asset prior to April 1, 2016 and are now being amortized to expense over a ten-year period.

Other Income and Deductions
 
Other income and deductions increased $14.3 million, from income of $4.2 million for the six months ended June 30, 2015, to income of $18.5 million for the same period in 2016. The increase was primarily due to (i) a $19.3 million loss on early extinguishment of debt for $366.5 million of 2016 IPALCO Notes that were tendered in June 2015 and (ii) a $7.1 million increase in the allowance for equity funds used during construction as a result of increased construction activity. These increases were partially offset by a decrease in the income tax benefit of $12.3 million, which was primarily due to the change in pretax nonoperating income during the comparable periods.

Interest and Other Charges
 
Interest and other charges decreased $8.2 million, or 15%, for the six months ended June 30, 2016, primarily due to a $6.2 million change in the allowance for borrowed funds used during construction as a result of increased construction activity and
lower interest of $1.8 million on long-term debt.   


25



CAPITAL RESOURCES AND LIQUIDITY
 
Overview
 
As of June 30, 2016, we had unrestricted cash and cash equivalents of $44.5 million and available borrowing capacity of $250.0 million under our $250.0 million unsecured revolving credit facility after outstanding borrowings and existing letters of credit. All of IPL’s long-term borrowings must first be approved by the IURC and the aggregate amount of IPL’s short-term indebtedness must be approved by the FERC. We have approval from FERC to borrow up to $500 million of short-term indebtedness outstanding at any time through July 27, 2018. In December 2015, we received an order from the IURC granting us authority through December 31, 2018 to, among other things, issue up to $650 million in aggregate principal amount of long-term debt and refinance up to $196.5 million in existing indebtedness. As of June 30, 2016, we have a total of $146.5 million of remaining debt issuance authority available under this order. This order also grants us authority to have up to $500 million of long-term credit agreements and liquidity facilities outstanding at any one time, of which $250.0 million remains available, and, as an alternative to the sale of all or a portion of $65 million in principal of the long-term debt mentioned above, issue up to $65 million of new preferred stock, all of which remains available under the order as of June 30, 2016. We also have restrictions on the amount of new debt that may be issued due to contractual obligations of AES and by financial covenant restrictions under our existing debt obligations. We do not believe such restrictions will be a limiting factor in our ability to issue debt in the ordinary course of prudent business operations.

We believe that existing cash balances, cash generated from operating activities and borrowing capacity on our committed credit facility will be adequate for the foreseeable future to meet anticipated operating expenses, interest expense on outstanding indebtedness, recurring capital expenditures and to pay dividends to AES U.S. Investments and CDPQ. Sources for principal payments on outstanding indebtedness and nonrecurring capital expenditures are expected to be obtained from: (i) existing cash balances; (ii) cash generated from operating activities; (iii) borrowing capacity on our committed credit facility; and (iv) additional debt financing. In addition, due to current and expected future environmental regulations and replacement generation projects, equity capital from AES and CDPQ has been used as a significant funding source during the first half of 2016 and in recent years. In March 2016 and April 2015, IPALCO received equity capital contributions of $134.3 million and $214.4 million, respectively, from the issuance of 7,403,213 and 11,818,828 shares of common stock, respectively, to CDPQ for funding needs primarily related to existing environmental and replacement generation projects at IPL, which IPALCO then made the same investments in IPL. On June 1, 2016, IPALCO received equity capital contributions of (i) $64.8 million from AES U.S. Investments and (ii) $13.9 million from CDPQ. IPALCO then made the same investments in IPL. The proceeds were primarily used for funding needs related to IPL’s environmental and replacement generation projects.

Capital Requirements
 
Capital Expenditures
 
Our construction program is composed of capital expenditures necessary for prudent utility operations and compliance with environmental laws and regulations, along with discretionary investments designed to replace aging equipment or improve overall performance. Our capital expenditures totaled $432.3 million (which includes $6.7 million of payments for financed capital expenditures) and $287.0 million (which includes $0.7 million for financed capital expenditures) for the six-month periods ended June 30, 2016 and 2015, respectively. The increase in capital expenditures of $145.3 million in 2016 versus 2015 was primarily driven by construction costs related to replacement generation and our environmental construction program. Construction expenditures during the first six months of 2016 and 2015 were financed primarily with internally generated cash provided by operations, borrowings on our credit facility, long-term borrowings, and equity capital contributions.

Our capital expenditure program, including development and permitting costs, for the three-year period from 2016 to 2018 is currently estimated to cost approximately $541 million (excluding environmental compliance and replacement generation costs). It includes approximately $294 million for additions, improvements and extensions to transmission and distribution lines, substations, power factor and voltage regulating equipment, distribution transformers and street lighting facilities. The capital expenditure program also includes approximately $178 million for power plant-related projects and $69 million for other miscellaneous equipment.

IPL also plans to spend a total of $632 million (of which $535 million has been expended through June 30, 2016) on replacement generation costs through 2018 as a result of the retirement of existing facilities not equipped with advanced environmental control technologies required to comply with existing and expected regulations. The balance of $97 million is projected to be expended in the three-year period from 2016 to 2018.  Please see “Item 1. Business - Environmental Matters - Unit Retirements and Replacement Generation” as described in IPALCO’s 2015 Form 10-K for more details.

26



In addition to the amounts listed above, IPL plans to spend additional amounts related to environmental compliance, including $53 million for the three-year period from 2016 to 2018 to comply with the MATS rule (the majority of the $53 million is expected to be spent in 2016). IPL plans to spend a total of $454 million for this project (of which $425 million has been expended for this project through June 30, 2016). Please see “Item 1. Business - Environmental Matters - MATS” as described in IPALCO’s 2015 Form 10-K for more details.

Other environmental expenditures include costs for compliance with the NPDES permit program under the CWA. The costs for NPDES at our Petersburg station for 2016 to 2018 are expected to be $97 million. IPL plans to spend a total of $224 million for this project (of which $180 million has been expended through June 30, 2016). Also, as a result of environmental regulations, IPL completed the refueling of Unit 7 at our Harding Street station in the second quarter of 2016, converting from coal-fired to natural gas-fired. The 2016 to 2018 cost of the projects necessary to complete this conversion, including costs for NPDES, MATS compliance and dry ash handling, are expected to be $57 million (IPL plans to spend a total of $101 million on this project, including amounts already expended through June 30, 2016). IPL has also included in the 2016 to 2018 forecast $149 million related to environmental compliance for CCR and NAAQS regulations and studies related to cooling water intake requirements in sections 316(a) and 316(b) of the CWA. Please see “Item 1. Business - Environmental Matters - Environmental Wastewater Requirements” as described in IPALCO’s 2015 Form 10-K for more details.

IPL also plans on spending $17 million for the three-year period from 2016 to 2018 for an energy storage facility at its Harding Street station (the majority of the $17 million is expected to be spent in 2016). The total cost of this project is expected to be $26 million (of which $24 million has been expended through June 30, 2016).

Capital Resources

Indebtedness

IPL First Mortgage Bonds

In May 2016, IPL issued $350 million aggregate principal amount of first mortgage bonds, 4.05% Series, due May 2046, pursuant to Rule 144A and Regulation S under the Securities Act. For further discussion, please see Note 5, “Debt - IPL First Mortgage Bonds” to the Financial Statements.

IPALCO’s Senior Secured Notes

In June 2015, IPALCO completed the sale of the 2020 IPALCO Notes pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from this offering were used to fund the purchase of the 2016 IPALCO Notes. For further discussion, please see Note 5, “Debt - IPALCOs Senior Secured Notes” to the Financial Statements.

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 can be affected by our credit ratings. Any reduction in our debt or credit ratings may adversely affect the trading price of our outstanding debt securities. On April 13, 2016, S&P upgraded the Corporate Credit Rating of IPALCO and IPL to ‘BBB-’ from ‘BB+’ based on S&P’s one-notch upgrade of AES. At the same time, S&P affirmed the issue-level ratings at IPALCO and IPL.


27


The following table presents the debt ratings and credit ratings (issuer/corporate rating) and outlook for IPALCO and IPL, along with the dates each rating was effective or affirmed.
Debt rating
 
IPALCO
 
IPL
 
Outlook
 
Effective or Affirmed
Fitch Ratings
 
BB+ (a)
 
BBB+ (b)
 
Stable
 
December 2015
Moody's Investors Service, Inc.
 
Baa3 (a)
 
A2 (b)
 
Stable
 
October 2015
Standard & Poor's Financial Services LLC
 
BB+ (a)
 
BBB+ (b)
 
Stable
 
April 2016
 
 
 
 
 
 
 
 
 
Credit rating
 
IPALCO
 
IPL
 
Outlook
 
Effective or Affirmed
Fitch Ratings
 
BB+
 
BBB-
 
Stable
 
December 2015
Moody's Investors Service, Inc.
 
 
Baa1
 
Stable
 
October 2015
Standard & Poor's Financial Services LLC
 
BBB-
 
BBB-
 
Stable
 
April 2016
(a)
Rating relates to IPALCO's Senior Secured Notes.
(b)
Rating relates to IPL's Senior Secured Notes.

Dividend Distributions
 
All of IPALCO’s outstanding common stock is held by AES U.S. Investments and CDPQ. During the first six months of 2016 and 2015, we paid $52.3 million and $37.6 million, respectively, in dividends to our shareholders. Future distributions to our shareholders will be determined at the discretion of our board of directors and will depend primarily on dividends received from IPL. Dividends from IPL are affected by IPL’s actual results of operations, financial condition, cash flows, capital requirements, regulatory considerations, and other such factors as IPL’s board of directors deems relevant.

Pension Funding
 
We contributed $15.9 million and $25.0 million to the Pension Plans during the first six months of 2016 and 2015, respectively. We currently do not expect to make additional pension funding payments in 2016. 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.

Regulatory Matters
 
In March 2016, the IURC issued an order authorizing IPL to increase its basic rates and charges by $30.8 million annually. For further discussion, please see Note 2, “Regulatory Matters” to the Financial Statements.

Environmental Matters
 
We are subject to various federal, state, regional and local environmental protection and health and safety laws, as well as regulations governing, among other things, the generation, storage, handling, use, disposal and transportation of hazardous materials; the emission and discharge of hazardous and other materials into the environment; and the health and safety of our employees. These laws and regulations often require a lengthy and complex process of obtaining and renewing permits and other governmental authorizations from federal, state and local agencies. Violation of these laws, regulations or permits can result in substantial fines, other sanctions, suspension or revocation of permits 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.

CCR

The EPA’s final CCR rule became effective on October 19, 2015. Generally, the rule regulates CCR as nonhazardous solid waste and establishes national minimum criteria for existing and new CCR landfills and existing and new CCR surface impoundments (ash ponds), including location restrictions, design and operating criteria, groundwater-monitoring and corrective action, and closure requirements and post closure care.

IPL does not reasonably anticipate that the existing ash ponds at Petersburg will be able to successfully demonstrate compliance with certain structural stability requirements set forth in the CCR rule by the October 17, 2016 deadline. As such, IPL would be required to cease use of the ash ponds by April 17, 2017. However, IDEM has granted IPL a variance extending that deadline to April 11, 2018. In order to handle the bottom ash material that would otherwise be sluiced to the ash ponds, IPL plans to install a dry bottom ash handling system at an estimated cost of approximately $47 million. On May 31, 2016, IPL

28


filed its CCR compliance plans with the IURC. IPL is seeking approval for a CPCN to install the bottom ash dewatering system at its Petersburg generating station. We expect to recover through our environmental rate adjustment mechanism any operating or capital expenditures related to the installation of this system. Recovery of these costs is sought through an Indiana statute that allows for 80% recovery of qualifying costs through a rate adjustment mechanism with the remainder recorded as a regulatory asset to be considered for recovery in the next base rate case proceeding. However, there can be no assurances that we will be successful in that regard. In light of the uncertainties at this time, we cannot predict the impact of these requirements on our consolidated results of operations, cash flows, or financial condition, but it is expected to be material.

NAAQS

SO2. On August 23, 2010, a new one-hour SO2 primary NAAQS became effective. On August 5, 2013, EPA published in the Federal Register its final designations, which include portions of Marion, Morgan, and Pike counties as nonattainment with respect to the one-hour SO2 standard. On September 30, 2015, IDEM published its final rule establishing reduced SO2 limits for IPL facilities in accordance with the new one-hour standard, for the areas in which IPL’s Harding Street, Petersburg, and Eagle Valley generating stations operate with compliance required by January 1, 2017. The rule will not impact IPL’s Eagle Valley or Harding Street generating stations as these facilities have ceased coal combustion in advance of the compliance date. However, improvements to the existing FGD systems at Petersburg station will be required by the rule. IPL estimates costs for compliance at Petersburg station at approximately $48 million for measures that enhance the performance and integrity of the FGD systems. On May 31, 2016, IPL filed its SO2 NAAQS compliance plans with the IURC. IPL is seeking approval for a CPCN for these measures at its Petersburg generating station. We expect to recover through our environmental rate adjustment mechanism any operating or capital expenditures related to compliance with the rule. Recovery of these costs is sought through an Indiana statute that allows for 80% recovery of qualifying costs through a rate adjustment mechanism with the remainder recorded as a regulatory asset to be considered for recovery in the next base rate case proceeding. However, there can be no assurances that we will be successful in that regard. In light of the uncertainties at this time, we cannot predict the impact of the rule on our consolidated results of operations, cash flows, or financial condition, but it is expected to be material.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 
 
There have been no material changes to our quantitative and qualitative disclosure about market risk as previously disclosed in the 2015 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES
 
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, 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 principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
 
Evaluation of Disclosure Controls and Procedures
 
We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of our “disclosure controls and procedures” (as defined in the Exchange Act Rules 13a-15(e) and 15-d-15(e)), as required by paragraph (b) of the Exchange Act Rules 13a-15 or 15d-15, as of June 30, 2016. Our management, including the principal executive officer and principal financial officer, is engaged in a comprehensive effort to review, evaluate and improve our controls; however, management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. In addition, any evaluation of the effectiveness of controls is subject to risks that those internal controls may become inadequate in future periods because of changes in business conditions, or that the degree of compliance with the policies or procedures deteriorates. We have interests in certain unconsolidated entities. As we do not
control or manage these entities, our disclosure controls and procedures with respect to such entities is generally more limited than those we maintain with respect to our consolidated subsidiaries. 
 
Based upon the controls evaluation performed, the principal executive officer and principal financial officer have concluded that as of June 30, 2016, our disclosure controls and procedures were effective to provide reasonable assurance that material information relating to us and our consolidated subsidiaries is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
 
Changes in Internal Controls
 
In the course of our evaluation of disclosure controls and procedures, management considered certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. Based upon that evaluation, the principal executive officer and principal financial officer concluded that there were no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of the Exchange Act Rules 13a-15 or 15d-15 that occurred during the six months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.


PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
 
Please see Note 8, “Commitments and Contingencies” to the Financial Statements included in Part I – Financial Information of this Form 10-Q for a summary of certain legal proceedings involving us. We are also subject to routine litigation, claims and administrative proceedings arising in the ordinary course of business, none of which we believe, based on currently available information, will result in a material adverse effect on our results of operations, financial condition, or cash flows. 
 
ITEM 1A.  RISK FACTORS
 
There have been no material changes to the risk factors as previously disclosed in the 2015 Form 10-K. 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None. 
 
ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5.  OTHER INFORMATION

None.
 

29



ITEM 6. EXHIBITS
Exhibit No.
Document
 
 
4.1
Sixty-Fourth Supplemental Indenture, dated as of May 1, 2016, to the Mortgage and Deed of Trust, dated as of May 1, 1940, between IPL and the Bank of New York Mellon Trust Company, NA, as Trustee
 
10.1
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)
10.2
First Amendment dated as of April 22, 2016 to $91,850,000 364-Day Delayed Draw Term Loan Facility Credit Agreement by and among IPL, the Lenders party thereto, U.S. Bank National Association, as administrative agent, dated as of October 16, 2015
10.3
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
31.1
Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a)
31.2
Certification by Principal Financial Officer required by Rule 13a-14(a) or 15d-14(a)
32
Certification required by Rule 13a-14(b) or 15d-14(b)
101.INS
XBRL Instance Document (filed herewith as provided in Rule 406T of Regulation S-T)
101.SCH
XBRL Taxonomy Extension Schema Document (filed herewith as provided in Rule 406T of Regulation S-T)
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith as provided in Rule 406T of Regulation S-T)
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith as provided in Rule 406T of Regulation S-T)
101.LAB
XBRL Taxonomy Extension Label Linkbase Document (filed herewith as provided in Rule 406T of Regulation S-T)
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith as provided in Rule 406T of Regulation S-T)
 
 
 

30


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
IPALCO ENTERPRISES, INC.
 
 
 
 
 
Date:
 
August 4, 2016
 
/s/ Craig L. Jackson
 
 
 
 
Craig L. Jackson
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial Officer) 
 
 
 
 
 
Date:
 
August 4, 2016
 
/s/ Kurt A. Tornquist
 
 
 
 
Kurt A. Tornquist
 
 
 
 
Controller
 
 
 
 
(Principal Accounting Officer)

31


Exhibit 31.1
 
Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
 
 
I, Kenneth J. Zagzebski, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of IPALCO Enterprises, Inc. (the “registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:
 
August 4, 2016
 
/s/ Kenneth J. Zagzebski
 
 
 
 
Kenneth J. Zagzebski
 
 
 
 
Chief Executive Officer

32


Exhibit 31.2
 
Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
 
 
I, Craig L. Jackson, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of IPALCO Enterprises, Inc. (the “registrant”);
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
 
Date:
 
August 4, 2016
 
/s/ Craig L. Jackson
 
 
 
 
Craig L. Jackson
 
 
 
 
Chief Financial Officer

33


Exhibit 32
 
Certification Pursuant to Rule 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934 and Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
The certification set forth below is being submitted in connection with the Quarterly Report on Form 10-Q for the period ended June 30, 2016 (the “Report”) for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
Kenneth J. Zagzebski, Chief Executive Officer and Craig L. Jackson, Chief Financial Officer of IPALCO Enterprises, Inc. (“IPALCO”), each certifies that, to the best of his knowledge:
1.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of IPALCO.
Date:
 
August 4, 2016
 
/s/ Kenneth J. Zagzebski
 
 
 
 
Kenneth J. Zagzebski
 
 
 
 
Chief Executive Officer
 
 
 
 
 
Date:
 
August 4, 2016
 
/s/ Craig L. Jackson
 
 
 
 
Craig L. Jackson
 
 
 
 
Chief Financial Officer
 
A signed original of this written statement required by Section 906 has been provided to IPALCO and will be retained by IPALCO and furnished to the Securities and Exchange Commission or its staff upon request.

34