FAIR VALUE

The fair value of financial assets and liabilities approximate their reported carrying amounts. The estimated fair values of the Company’s assets and liabilities have been determined using available market information. As these amounts are estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. For further information on our valuation techniques and policies, see Note 4, "Fair Value" to IPALCO’s 2018 Form 10-K.

VEBA Assets

IPL has VEBA investments that are to be used to fund certain employee postretirement health care benefit plans. These assets are primarily comprised of open-ended mutual funds, which are valued using the net assets value per unit. These investments are recorded at fair value within "Other non-current assets" on the accompanying Unaudited Condensed Consolidated Balance Sheets and classified as equity securities. ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities” was effective as of January 1, 2018. This ASU requires the change in the fair value of equity instruments to be recorded in income. Equity Instruments were defined to include all mutual funds, regardless of the underlying investments. Therefore, all changes to fair value on the VEBA investments will be included in income in the period that the changes occur. These changes to fair value were not material for the periods covered by this report. Any unrealized gains or losses are recorded in our Unaudited Condensed Consolidated Statements of Operations.

FTRs

In connection with IPL’s participation in MISO, in the second quarter of each year IPL is granted financial instruments that can be converted into cash or FTRs based on IPL’s forecasted peak load for the period. FTRs are used in the MISO market to hedge IPL’s exposure to congestion charges, which result from constraints on the transmission system. IPL converts all of these financial instruments into FTRs. IPL’s FTRs are valued at the cleared auction prices for FTRs in MISO’s annual auction. Because of the infrequent nature of this valuation, the fair value assigned to the FTRs is considered a Level 3 input under the fair value hierarchy required by ASC 820. An offsetting regulatory liability has been recorded as these revenues or costs will be flowed through to customers through the FAC. As such, there is no impact on our Unaudited Condensed Consolidated Statements of Operations.

Interest Rate Hedges

In March 2019, we entered into forward interest rate hedges related to the 2020 IPALCO Notes and Term Loan that have maturities in July 2020. The interest rate hedges have a combined notional amount of $400.0 million, which will settle when we refinance the debt. All changes in the market value of the interest rate hedges will be recorded in AOCI. The AOCI associated with the final settlement will be amortized out of AOCI into interest expense over the remaining life of the underlying debt.

We use the income approach to value the interest rate hedges, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The most common market data inputs used in the income approach include volatilities, spot and forward benchmark interest rates (LIBOR). Forward rates with the same tenor as the derivative instrument being valued are generally obtained from published sources, with these forward rates being assessed quarterly at a portfolio-level for reasonableness versus comparable published rates. We reclassify gains and losses on the swaps out of AOCI and into earnings in those periods in which hedged interest payments occur.

Recurring Fair Value Measurements

The fair value of assets and liabilities at June 30, 2019 and December 31, 2018 measured on a recurring basis and the respective category within the fair value hierarchy for IPALCO was determined as follows:



Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
	Fair value at June 30, 2019		Based on quoted market prices in active markets		Other observable inputs		Unobservable inputs
	(In Thousands)
Financial assets:
VEBA investments:
Money market funds	$	19	$	19	$	—	$	—
Mutual funds	2,628		—		2,628		—
Total VEBA investments	2,647		19		2,628		—
Financial transmission rights	2,657		—		—		2,657
Total financial assets measured at fair value	$	5,304	$	19	$	2,628	$	2,657
Financial liabilities:
Interest rate hedges	$	23,054	$	—	$	23,054	$	—
Total financial liabilities measured at fair value	$	23,054	$	—	$	23,054	$	—



Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
	Fair value at December 31, 2018		Based on quoted market prices in active markets		Other observable inputs		Unobservable inputs
	(In Thousands)
Financial assets:
VEBA investments:
Money market funds	$	21	$	21	$	—	$	—
Mutual funds	2,565		—		2,565		—
Total VEBA investments	2,586		21		2,565		—
Financial transmission rights	3,099		—		—		3,099
Total financial assets measured at fair value	$	5,685	$	21	$	2,565	$	3,099
Financial liabilities:
Other derivative liabilities	$	53	$	—	$	—	$	53
Total financial liabilities measured at fair value	$	53	$	—	$	—	$	53

Financial Instruments not Measured at Fair Value in the Consolidated Balance Sheets

Debt

The fair value of our outstanding fixed-rate debt has been determined on the basis of the quoted market prices of the specific securities issued and outstanding. In certain circumstances, the market for such securities was inactive and therefore the valuation was adjusted to consider changes in market spreads for similar securities. Accordingly, the purpose of this disclosure is not to approximate the value on the basis of how the debt might be refinanced.

The following table shows the face value and the fair value of fixed-rate and variable-rate indebtedness (Level 2) for the periods ending:



	June 30, 2019				December 31, 2018
	Face Value		Fair Value		Face Value		Fair Value
	(In Thousands)
Fixed-rate	$	2,523,800	$	2,815,495	$	2,523,800	$	2,649,265
Variable-rate	165,000		165,000		155,000		155,000
Total indebtedness	$	2,688,800	$	2,980,495	$	2,678,800	$	2,804,265

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


•	unamortized deferred financing costs of $21.9 million and $23.0 million at June 30, 2019 and December 31, 2018, respectively; and


•	unamortized discounts of $6.6 million and $6.7 million at June 30, 2019 and December 31, 2018, respectively.