Fitch Ratings has affirmed IPALCO Enterprises, Inc.'s (IPALCO) Long-Term Issuer Default Rating (IDR) at 'BBB-'.
In addition, Fitch has affirmed Indianapolis Power & Light Company's (IPL aka AES Indiana) IDR at BBB+' The Rating Outlook for both entities is Stable.
Fitch has also affirmed its rating on IPALCO's senior secured debt at 'BBB' and on AES Indiana's senior secured debt at 'A'.
AES Indiana and IPALCO's ratings continue to be driven by the stable and predictable regulated utility operations in Indiana under the Indiana Utility Regulatory Commission (IURC). The high forecasted capex focuses on complete coal phase-out by 2025 which modestly pressures near-term credit metrics. However, FFO leverage is expected to return within Fitch's thresholds through 2025 with the expectation of a constructive rate case outcome in 2024, equity support by the parent and gradual recovery of capital costs. Fitch also views the proposed coal phase-out at AES Indiana as a credit positive over the longer term.
Key Rating Drivers
Fully Regulated Business: IPALCO's rating reflects its low business risk profile as a utility holding company of a regulated electric utility- AES Indiana. AES Indiana is a fully regulated, vertically-integrated electric utility operating in Indianapolis and other communities of Central Indiana. AES Indiana's revenue represents 100% of IPALCO's consolidated revenue.
Constructive Regulatory Environment: AES Indiana and IPALCO's ratings continue to benefit from the favorable regulatory environment in Indiana under the IURC. AES Indiana's authorized ROE is 9.99% is slightly above the national average while equity capitalization of 41.5% is below the national average. Regulatory pass-through of fuel and purchased power costs on a timely basis mitigates commodity risk. Additionally, recovery riders are in place for environmental upgrades, energy-efficiency programs, transmission and other costs.
AES Indiana filed a base rate case in June 2023. A decision is expected in 2Q24 and Fitch expects a constructive outcome in line with other recent rate cases in the state.
Accelerated Coal Retirement Plans: AES Indiana's generation capacity continues to be coal-intensive, albeit improving. In 2022, 53.8% of the retailed energy was generated from coal-fired steam generation, 34.4% from natural gas-fired units, and 11.8% from power purchase agreements (primarily from renewables) and from the wholesale power market. Post the retirement of one of its coal plants in June 2023, AES Indiana has two remaining coal units. Under the updated Integrated Resource Plan (IRP) that was filed in December 2022, the remaining plants would convert from coal to gas by 2025. AES Indiana is also proposing addition of 1.3 GW of renewable capacity including 200 MW of battery storage by 2027. The IRP is expected to be approved by the end of 2023.
Elevated Capex: AES Indiana plans to execute a sizeable $2 billion capex in the next three years, which is approximately 8% up from the 2022-2024 plan. The upward revision primarily pertains to investments in system reliability and improvements. Approximately $811 million capex will be spent on power generation projects including the solar and battery storage projects. About $594 million will be spent on the Transmission, Distribution and Storage System Improvement Charge (TDSIC) investments, and nearly $489 million will be spent on transmission and distribution related additions, improvements and extensions. 80% of TDSIC charges costs can be recovered using a periodic rate adjustment mechanism, minimizing regulatory lag.
Fitch believes that the IRP, if approved, will likely increase capex levels further in the medium term. However, Fitch would expect any additional capex to be prudently funded through a mix of internal cash flows, debt issuance and equity support from the corporate parent to maintain AES Indiana's regulatory capital structure and maintain IPALCO's credit metrics within its sensitivity thresholds.
Leverage Metrics Temporarily Higher but Supportive: AES Indiana and IPALCO's FFO leverage is forecasted to average 4.6x and 6.0x, respectively, over 2023-2025 which is in line with their respective credit ratings. However, this is higher than Fitch's previous estimates owing to increase in planned capex and delays in completion of the new renewable projects. Fitch projects the sizeable capex would also push credit metrics modestly over the respective sensitivity thresholds in 2024. However, with the expected rate case resolution in mid-2024 for AES Indiana, equity infusion by the parent and gradual recovery of capital costs, credit metrics are expected to return within their respective rating thresholds in 2025.
Parent and Subsidiary Linkage: Fitch doesn't apply parent subsidiary linkage between AES and its investments, including IPALCO. Fitch considers AES a financial investor as it views its investments as non-recourse. However, there is a parent subsidiary linkage between AES Indiana and IPALCO. Fitch determines IPALCO's standalone credit profile based upon consolidated metrics. Fitch considers AES Indiana's standalone credit profile to be stronger. As such, Fitch has followed the weaker parent-stronger subsidiary path. Legal ring fencing for AES Indiana is considered porous given the general protections afforded by regulatory capital structure and other restrictions. Access and control are porous.
AES Indiana is wholly owned by IPALCO, but it issues its own short-term and long-term debt, and does not guarantee the debt obligations at IPALCO. Due to aforementioned considerations, Fitch generally limits the IDR notching difference to two.
Derivation Summary
IPALCO Enterprises, Inc.
IPALCO's ratings are appropriately placed to other HoldCo's; Cleco Corp. (BBB-/Stable) and Puget Energy (Puget, BBB-/Stable), that operate a single-state regulated and integrated utility. IPALCO benefits from the constructive regulatory and business environment in Indiana for its utility which is better as compared to Washington for Puget but comparable to Louisiana for Cleco.
Fitch projects that IPALCO's FFO leverage in the next two years will average an elevated 6.0x owing to a sizeable capex program but will improve to 5.7x through 2025. This is weaker than Puget Energy, which is expected to average 5.5x through 2025, as well as Cleco, which is expected to range 4.8x-5.2x in 2023-2025. However, Cleco derived 30% of its 2022 EBITDA from non-regulated power generation operations while IPALCO derives its cash flows from the purely regulated utility operations at AES Indiana. Cleco's business profile is expected to improve post the expected sale of its generation assets in Cajun.
IPALCO is also comparable to NiSource (BBB/Stable) which also operates an integrated electric utility in Indiana and has similar leverage metrics. However, while IPALCO operates a pure electric utility in a single state, NiSource operates both gas and electric regulated utilities in six states providing for lower operational risk.
Indianapolis Power & Light Company
AES Indiana's closest peers are Indiana Michigan Power (IMP, A-/Stable) and Northern Indiana Public Service Corp (NIPSCO, BBB/Stable) Similar to IMP and NIPSCO, AES Indiana benefits from a supportive regulatory and business environment in Indiana. However, Fitch considers NIPSCO's gas and electric assets superior to AES Indiana's and IMP's integrated electric-only operations. With the decarbonization trends in the state, NIPSCO and IMP plan to exit coal generation by 2028 whereas, pending approval of the next IRP, AES Indiana could exit coal by 2025.
NIPSCO's rating is based on the consolidated credit profile of its corporate parent NiSource Inc. (BBB/Stable) which is expected to have an average mid 5x leverage in the next few years. On the other hand, AES Indiana is constrained on the upside by its parent IPALCO's rating. AES Indiana's forecasted leverage is expected to average at 4.6x through 2025, higher than in the previous years due to elevated capex, though appropriate for its current ratings. IMP's ratings are supported by lower FFO leverage projected to remain in the range of 3.5x-4.0x.
Key Assumptions
AES Indiana and IPALCO:
Implementation of the seven-year TDSIC plan approved in March 2020;
Approximately $2 billion capex in total from 2023 to 2025;
AES Indiana's current rate case approved with effect from 2Q24 and outcome consistent with prior rate cases in the state;
Interest rates remain elevated in 2023 and moderate slightly in 2024 and then remain stable in 2025;
Equity support in 2024 and 2025 from the corporate parents to IPALCO flowing further to AES Indiana;
Dividends paid in line with maintenance of the regulatory capital structure at AES Indiana;
Dividends paid in line with the net income for IPALCO.
RATING SENSITIVITIES
IPALCO Enterprises, Inc.
Factors that could, individually or collectively, lead to positive rating action/upgrade
IPALCO could be upgraded if FFO leverage is below 5.0x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Negative regulatory treatment and/or aggressive upstream dividend causing FFO leverage to rise above 6.0x on a sustained basis.
Indianapolis Power & Light Company
Factors that could, individually or collectively, lead to positive rating action/upgrade
Due to the two-notch differential between AES Indiana and its parent holding company IPALCO, AES Indiana is unlikely to be upgraded absent an upgrade at IPALCO.
Factors that could, individually or collectively, lead to negative rating action/downgrade
Negative regulatory development resulting in FFO leverage rising above 4.7x on a sustained basis.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
IPALCO and AES Indiana continue to have sufficient liquidity.
As at March 31, 2023, AES Indiana had $167 million of unrestricted cash and a fully undrawn unsecured revolving credit facility of $350 million due in December 2027. The RCF includes an uncommitted $150 million accordion feature to provide AES Indiana with an option to request an increase in the size of the facility at any time prior to Oct. 16, 2023, subject to approval by the lenders. The revolver also has two one-year extension options. AES Indiana is required to maintain total debt to total capitalization not in excess of 0.67 to 1 under the credit facility. AES Indiana's upcoming maturities are $40 million first mortgage bonds (FMBs) due in 2024 and 2025 each and $90 million FMBs due in 2026.
As of March 31, 2023, IPALCO had $2.5 million unrestricted cash. IPALCO's next maturity will be $405 million senior secured notes due in 2024. Fitch expects IPALCO and AES Indiana to continue to have good access to capital markets thereby managing any refinancing risks.
Issuer Profile
IPL a.k.a. AES Indiana is an integrated electric utility that provides retails to around 520,000 customers in Indianapolis and other central Indiana communities. IPALCO is an intermediary holding company with The AES Corporation (70%; rated BBB-/Stable) and Caisse de depot et placement du Quebec (CDPQ; 30%) as the ultimate investors.
Sources of Information
The principal sources of information used in the analysis are described in the Applicable Criteria.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
RATING ACTIONS
Entity / Debt
Rating
Prior
IPALCO Enterprises, Inc.
LT IDR
BBB-
Affirmed
BBB-
senior secured
LT
BBB
Affirmed
BBB
Indianapolis Power & Light Company
LT IDR
BBB+
Affirmed
BBB+
senior secured
LT
A
Affirmed
A
senior secured
ULT
A
Affirmed
A
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Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
AES INDIANA 
