Derivative Instruments and Hedging Activities (Notes)

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIESWe use derivatives principally to manage the interest rate risk associated with refinancing our long-term debt and the risk of price changes for purchased power. The derivatives that we use to economically hedge these risks are governed by our risk management policies for forward and futures contracts. Our net positions are continually assessed within our structured hedging programs to determine whether new or offsetting transactions are required. We monitor and value derivative positions monthly as part of our risk management processes. We use published sources for pricing, when possible, to mark positions to market. All of our derivative instruments are used for risk management purposes and are designated as cash flow hedges if they qualify under ASC 815 for accounting purposes.

For further information on the Company’s derivative and hedge accounting policies, see Note 1, "Overview and Summary of Significant Accounting Policies - Financial Derivatives" and Note 5, "Derivative Instruments and Hedging Activities" to IPALCO’s 2020 Form 10-K.

At June 30, 2021, AES Indiana's outstanding derivative instruments were as follows:

Commodity	Accounting Treatment (a)	Unit	Purchases (in thousands)		Sales (in thousands)		Net Purchases/(Sales) (in thousands)
Interest rate hedges	Designated	USD	$	400,000	$	—	$	400,000
FTRs	Not Designated	MWh	13,182		—		13,182
Forward power contracts	Not Designated	MWh	399		—		399

(a)    Refers to whether the derivative instruments have been designated as a cash flow hedge.

Cash Flow Hedges

As part of our risk management processes, we identify the relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. The fair values of cash flow hedges determined by current public market prices will continue to fluctuate with changes in market prices up to contract expiration.

The following tables provide information on gains or losses recognized in AOCL for the cash flow hedges for the periods indicated:

	Interest Rate Hedges for the Three Months Ended June 30,
$ in thousands (net of tax)	2021		2020
Beginning accumulated derivative loss in AOCL	$	(13,826)	$	(56,063)
Net gains / (losses) associated with current period hedging transactions	(17,143)		(4,026)
Net (gains) / losses reclassified to interest expense, net of tax	1,376		1,344
Ending accumulated derivative loss in AOCL	$	(29,593)	$	(58,745)

	Interest Rate Hedges for the Six Months Ended June 30,
$ in thousands (net of tax)	2021		2020
Beginning accumulated derivative loss in AOCL	$	(43,420)	$	(19,750)
Net gains / (losses) associated with current period hedging transactions	12,907		(40,339)
Net (gains) / losses reclassified to interest expense, net of tax	920		1,344
Ending accumulated derivative loss in AOCL	$	(29,593)	$	(58,745)
Loss expected to be reclassified to earnings in the next twelve months	$	(5,375)
Maximum length of time that we are hedging our exposure to variability in future cash flows related to forecasted transactions (in months)	39

Derivatives Not Designated as Hedge

FTRs and the forward power contracts do not qualify for hedge accounting or the normal purchases and sales exceptions under ASC 815. Accordingly, FTRs are recorded at fair value when acquired and subsequently amortized over the annual period as they are used. FTRs are initially recorded at fair value using the income approach. The forward power contracts are recorded at fair value with changes in the fair value charged or credited to the Consolidated Statements of Operations in the period in which the change occurred. Forward power contracts are fair valued using the market approach. This is commonly referred to as "MTM accounting". Realized gains and losses on the forward power contracts will be included in future FAC filings, therefore any realized and unrealized gains and losses are deferred as regulatory liabilities or regulatory assets. For the three and six months ended June 30, 2021, there were unrealized gains of $2.7 million and realized gains of $0.8 million related to the forward power contracts that were deferred and included with deferred fuel costs in "Regulatory assets, current" on the accompanying Condensed Consolidated Balance Sheets.

Certain qualifying derivative instruments have been designated as normal purchases or normal sales contracts, as provided under GAAP. Derivative contracts that have been designated as normal purchases or normal sales under GAAP are not subject to hedge or mark to market accounting and are recognized in the consolidated statements of operations on an accrual basis.

When applicable, IPALCO has elected not to offset derivative assets and liabilities and not to offset net derivative positions against the right to reclaim cash collateral pledged (an asset) or the obligation to return cash collateral received (a liability) under derivative agreements. As of June 30, 2021, IPALCO did not have any offsetting positions.

The following table summarizes the fair value, balance sheet classification and hedging designation of IPALCO's derivative instruments (in thousands):

Commodity	Hedging Designation	Balance sheet classification	June 30, 2021		December 31, 2020
Financial transmission rights	Not a Cash Flow Hedge	Prepayments and other current assets	$	2,658	$	543
Forward power contracts	Not a Cash Flow Hedge	Prepayments and other current assets	$	2,651	$	—
Interest rate hedges	Cash Flow Hedge	Derivative liabilities, non-current	$	46,015	$	63,215