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Fair Value

6 Months Ended

Jun. 30, 2021

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 2020 Form 10-K.

Financial Assets

VEBA Assets

IPALCO 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. All changes to fair value on the VEBA investments are 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 "Other income / (expense), net" on the accompanying Unaudited Condensed Consolidated Statements of Operations.

FTRs

In connection with AES Indiana’s participation in MISO, in the second quarter of each year AES Indiana is granted financial instruments that can be converted into cash or FTRs based on AES Indiana’s forecasted peak load for the period. FTRs are used in the MISO market to hedge AES Indiana’s exposure to congestion charges, which result from constraints on the transmission system. AES Indiana’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.

Forward Power Contracts

In the second quarter of 2021, we entered into forward purchase power contracts. The forward power contracts have a combined notional amount outstanding of 398,960 MWhs. All changes in the market value of the forward power contracts are recorded in the Consolidated Statements of Operations in the period in which the change occurred. See also Note 4, "Derivative Instruments and Hedging Activities - Derivatives Not Designated as Hedge" for further information.

Financial Liabilities

Interest Rate Hedges

In March 2019, we entered into forward interest rate hedges, which were amended in April 2020. The interest rate hedges have a combined notional amount of $400.0 million. All changes in the market value of the interest rate hedges are recorded in AOCL. See also Note 4, "Derivative Instruments and Hedging Activities - Cash Flow Hedges" for further information.

Recurring Fair Value Measurements

The fair value of assets and liabilities at June 30, 2021 and December 31, 2020 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, 2021		Based on quoted market prices in active markets		Other observable inputs		Unobservable inputs
	(In Thousands)
Financial assets:
VEBA investments:
Money market funds	$	16	$	16	$	—	$	—
Mutual funds	3,515		—		3,515		—
Total VEBA investments	3,531		16		3,515		—
Financial transmission rights	2,658		—		—		2,658
Forward power contracts	2,651		—		2,651		—
Total financial assets measured at fair value	$	8,840	$	16	$	6,166	$	2,658
Financial liabilities:
Interest rate hedges	$	46,015	$	—	$	46,015	$	—

Total financial liabilities measured at fair value	$	46,015	$	—	$	46,015	$	—


Assets and Liabilities at Fair Value
			Level 1		Level 2		Level 3
	Fair value at December 31, 2020		Based on quoted market prices in active markets		Other observable inputs		Unobservable inputs
	(In Thousands)
Financial assets:
VEBA investments:
Money market funds	$	16	$	16	$	—	$	—
Mutual funds	3,209		—		3,209		—
Total VEBA investments	3,225		16		3,209		—
Financial transmission rights	543		—		—		543
Total financial assets measured at fair value	$	3,768	$	16	$	3,209	$	543
Financial liabilities:
Interest rate hedges	$	63,215	$	—	$	63,215	$	—
Total financial liabilities measured at fair value	$	63,215	$	—	$	63,215	$	—

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, 2021				December 31, 2020
	Face Value		Fair Value		Face Value		Fair Value
	(In Thousands)
Fixed-rate	$	2,683,800	$	3,179,608	$	2,683,800	$	3,295,588
Variable-rate	100,000		100,000		75,000		75,000
Total indebtedness	$	2,783,800	$	3,279,608	$	2,758,800	$	3,370,588

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

•unamortized deferred financing costs of $24.9 million and $26.0 million at June 30, 2021 and December 31, 2020, respectively; and

•unamortized discounts of $6.5 million and $6.6 million at June 30, 2021 and December 31, 2020, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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