Q3 2013 Form 10-Q



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2013
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12291
THE AES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
54 1163725
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
4300 Wilson Boulevard Arlington, Virginia
 
22203
(Address of principal executive offices)
 
(Zip Code)
(703) 522-1315
Registrant’s telephone number, including area code:
______________________________________________________________________________________________
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  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    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 x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
 
 
 
 
 
 
 
 
(Do not check if a 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  x
______________________________________________________________________________________________
The number of shares outstanding of Registrant’s Common Stock, par value $0.01 per share, on November 1, 2013 was 742,327,115
 




THE AES CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2013
TABLE OF CONTENTS
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 




PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
THE AES CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)

 
September 30,
2013
 
December 31,
2012
 
 
(in millions, except share
and per share data)
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
2,031

 
$
1,909

Restricted cash
 
620

 
738

Short-term investments
 
898

 
693

Accounts receivable, net of allowance for doubtful accounts of $140 and $195, respectively
 
2,326

 
2,542

Inventory
 
711

 
722

Deferred income taxes
 
172

 
199

Prepaid expenses
 
199

 
223

Other current assets
 
836

 
1,074

Current assets of discontinued operations and held-for-sale assets
 
458

 
365

Total current assets
 
8,251

 
8,465

NONCURRENT ASSETS
 
 
 
 
Property, Plant and Equipment:
 
 
 
 
Land
 
952

 
1,005

Electric generation, distribution assets and other
 
30,835

 
30,451

Accumulated depreciation
 
(9,531
)
 
(9,195
)
Construction in progress
 
2,826

 
2,511

Property, plant and equipment, net
 
25,082

 
24,772

Other Assets:
 
 
 
 
Investments in and advances to affiliates
 
1,025

 
1,196

Debt service reserves and other deposits
 
485

 
511

Goodwill
 
1,941

 
1,999

Other intangible assets, net of accumulated amortization of $151 and $222, respectively
 
325

 
395

Deferred income taxes
 
821

 
940

Other noncurrent assets
 
2,169

 
2,190

Noncurrent assets of discontinued operations and held-for-sale assets
 
1,151

 
1,362

Total other assets
 
7,917

 
8,593

TOTAL ASSETS
 
$
41,250

 
$
41,830

LIABILITIES AND EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
2,156

 
$
2,547

Accrued interest
 
396

 
288

Accrued and other liabilities
 
2,116

 
2,350

Non-recourse debt, including $267 and $275, respectively, related to variable interest entities
 
2,385

 
2,495

Recourse debt
 
118

 
11

Current liabilities of discontinued operations and held-for-sale businesses
 
838

 
628

Total current liabilities
 
8,009

 
8,319

NONCURRENT LIABILITIES
 
 
 
 
Non-recourse debt, including $939 and $858, respectively, related to variable interest entities
 
12,981

 
12,286

Recourse debt
 
5,552

 
5,951

Deferred income taxes
 
1,116

 
1,192

Pension and other post-retirement liabilities
 
2,138

 
2,418

Other noncurrent liabilities
 
3,042

 
3,562

Noncurrent liabilities of discontinued operations and held-for-sale businesses
 
368

 
510

Total noncurrent liabilities
 
25,197

 
25,919

Contingencies and Commitments (see Note 8)
 

 

Cumulative preferred stock of subsidiaries
 
78

 
78

EQUITY
 
 
 
 
THE AES CORPORATION STOCKHOLDERS’ EQUITY
 
 
 
 
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 813,077,875 issued and 742,245,268 outstanding at September 30, 2013 and 810,679,839 issued and 744,263,855 outstanding at December 31, 2012)
 
8

 
8

Additional paid-in capital
 
8,497

 
8,525

Retained earnings (accumulated deficit)
 
56

 
(264
)
Accumulated other comprehensive loss
 
(2,918
)
 
(2,920
)
Treasury stock, at cost (70,832,607 shares at September 30, 2013 and 66,415,984 shares at December 31, 2012)
 
(830
)
 
(780
)
Total AES Corporation stockholders’ equity
 
4,813

 
4,569

NONCONTROLLING INTERESTS
 
3,153

 
2,945

Total equity
 
7,966

 
7,514

TOTAL LIABILITIES AND EQUITY
 
$
41,250

 
$
41,830

See Notes to Condensed Consolidated Financial Statements.

1



THE AES CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions, except per share amounts)
Revenue:
 
 
 
 
 
 
 
 
Regulated
 
$
2,063

 
$
2,318

 
$
6,175

 
$
6,685

Non-Regulated
 
1,940

 
2,037

 
5,933

 
6,122

Total revenue
 
4,003

 
4,355

 
12,108

 
12,807

Cost of Sales:
 
 
 
 
 
 
 
 
Regulated
 
(1,663
)
 
(1,927
)
 
(5,082
)
 
(5,642
)
Non-Regulated
 
(1,403
)
 
(1,461
)
 
(4,423
)
 
(4,445
)
Total cost of sales
 
(3,066
)
 
(3,388
)
 
(9,505
)
 
(10,087
)
Gross margin
 
937

 
967

 
2,603

 
2,720

General and administrative expenses
 
(63
)
 
(64
)
 
(183
)
 
(225
)
Interest expense
 
(357
)
 
(396
)
 
(1,065
)
 
(1,182
)
Interest income
 
85

 
88

 
213

 
261

Loss on extinguishment of debt
 
—

 
—

 
(212
)
 
—

Other expense
 
(15
)
 
(15
)
 
(58
)
 
(56
)
Other income
 
25

 
7

 
106

 
39

Gain on sale of investments
 
3

 
30

 
26

 
214

Goodwill impairment expense
 
(58
)
 
(1,850
)
 
(58
)
 
(1,850
)
Asset impairment expense
 
(81
)
 
(43
)
 
(129
)
 
(71
)
Foreign currency transaction gains (losses)
 
32

 
(7
)
 
(16
)
 
(108
)
Other non-operating expense
 
(122
)
 
—

 
(122
)
 
(50
)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES
 
386

 
(1,283
)
 
1,105

 
(308
)
Income tax expense
 
(126
)
 
(172
)
 
(285
)
 
(514
)
Net equity in earnings of affiliates
 
15

 
25

 
21

 
49

INCOME (LOSS) FROM CONTINUING OPERATIONS
 
275

 
(1,430
)
 
841

 
(773
)
Income from operations of discontinued businesses, net of income tax (benefit) expense of $(2), $2, $2, and $8, respectively
 
26

 
30

 
25

 
25

Net gain (loss) from disposal and impairments of discontinued businesses, net of income tax (benefit) expense of $0, $(1), $(2), and $60, respectively
 
(78
)
 
(2
)
 
(111
)
 
68

NET INCOME (LOSS)
 
223

 
(1,402
)
 
755

 
(680
)
Noncontrolling interests:
 
 
 
 
 
 
 
 
Less: Income from continuing operations attributable to noncontrolling interests
 
(146
)
 
(155
)
 
(431
)
 
(398
)
Less: Income from discontinued operations attributable to noncontrolling interests
 
(6
)
 
(11
)
 
(4
)
 
(9
)
Total net income attributable to noncontrolling interests
 
(152
)
 
(166
)
 
(435
)
 
(407
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
 
$
71

 
$
(1,568
)
 
$
320

 
$
(1,087
)
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, net of tax
 
$
129

 
$
(1,585
)
 
$
410

 
$
(1,171
)
Income (loss) from discontinued operations, net of tax
 
(58
)
 
17

 
(90
)
 
84

Net income (loss)
 
$
71

 
$
(1,568
)
 
$
320

 
$
(1,087
)
BASIC EARNINGS PER SHARE:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax
 
$
0.17

 
$
(2.12
)
 
$
0.55

 
$
(1.54
)
Income (loss) from discontinued operations attributable to The AES Corporation common stockholders, net of tax
 
(0.08
)
 
0.02

 
(0.12
)
 
0.11

NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
 
$
0.09

 
$
(2.10
)
 
$
0.43

 
$
(1.43
)
DILUTED EARNINGS PER SHARE:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to The AES Corporation common stockholders, net of tax
 
$
0.17

 
$
(2.12
)
 
$
0.55

 
$
(1.54
)
Income (loss) from discontinued operations attributable to The AES Corporation common stockholders, net of tax
 
(0.08
)
 
0.02

 
(0.12
)
 
0.11

NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
 
$
0.09

 
$
(2.10
)
 
$
0.43

 
$
(1.43
)
DIVIDENDS DECLARED PER COMMON SHARE
 
$
—

 
$
0.04

 
$
0.08

 
$
0.04


See Notes to Condensed Consolidated Financial Statements.

2



THE AES CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
NET INCOME (LOSS)
 
$
223

 
$
(1,402
)
 
$
755

 
$
(680
)
Available-for-sale securities activity:
 
 
 
 
 
 
 
 
Change in fair value of available-for-sale securities, net of income tax (expense) benefit of $0, $0, $0 and $0, respectively
 
—

 
—

 
(1
)
 
1

Reclassification to earnings, net of income tax (expense) benefit of $0, $0, $0 and $0, respectively
 
—

 
—

 
1

 
(1
)
Total change in fair value of available-for-sale securities
 
—

 
—

 
—

 
—

Foreign currency translation activity:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of income tax (expense) benefit of $1, $(2), $3 and $(1), respectively
 
(6
)
 
14

 
(264
)
 
(227
)
Reclassification to earnings, net of income tax (expense) benefit of $0, $0, $0 and $0, respectively
 
—

 
(39
)
 
41

 
(42
)
Total foreign currency translation adjustments
 
(6
)
 
(25
)
 
(223
)
 
(269
)
Derivative activity:
 
 
 
 
 
 
 
 
Change in derivative fair value, net of income tax (expense) benefit of $(0), $7, $(28) and $27, respectively
 
7

 
(55
)
 
93

 
(167
)
Reclassification to earnings, net of income tax (expense) benefit of $(8), $(5), $(30) and $(38), respectively
 
27

 
27

 
112

 
153

Total change in fair value of derivatives
 
34

 
(28
)
 
205

 
(14
)
Pension activity:
 
 
 
 
 
 
 
 
Reclassification to earnings due to amortization of net actuarial loss, net of income tax (expense) benefit of $(6), $(4), $(20) and $(10), respectively
 
12

 
6

 
39

 
19

Total pension adjustments
 
12

 
6

 
39

 
19

OTHER COMPREHENSIVE INCOME (LOSS)
 
40

 
(47
)
 
21

 
(264
)
COMPREHENSIVE INCOME (LOSS)
 
263

 
(1,449
)
 
776

 
(944
)
Less: Comprehensive (income) attributable to noncontrolling interests
 
(171
)
 
(159
)
 
(454
)
 
(290
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
 
$
92

 
$
(1,608
)
 
$
322

 
$
(1,234
)



See Notes to Condensed Consolidated Financial Statements.

3



THE AES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
 
2013
 
2012
 
 
(in millions)
OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
755

 
$
(680
)
Adjustments to net income (loss):
 
 
 
 
Depreciation and amortization
 
982

 
1,038

Gain from sale of investments and impairment expense
 
313

 
1,802

Deferred income taxes
 
(82
)
 
101

Provisions for contingencies
 
33

 
51

Loss on the extinguishment of debt
 
212

 
—

Loss (gain) on disposals and impairments - discontinued operations
 
108

 
(130
)
Other
 
(26
)
 
10

Changes in operating assets and liabilities
 
 
 
 
(Increase) decrease in accounts receivable
 
135

 
(191
)
(Increase) decrease in inventory
 
(6
)
 
(10
)
(Increase) decrease in prepaid expenses and other current assets
 
403

 
90

(Increase) decrease in other assets
 
(149
)
 
(379
)
Increase (decrease) in accounts payable and other current liabilities
 
(578
)
 
303

Increase (decrease) in income tax payables, net and other tax payables
 
(66
)
 
(151
)
Increase (decrease) in other liabilities
 
6

 
275

Net cash provided by operating activities
 
2,040

 
2,129

INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
(1,330
)
 
(1,581
)
Acquisitions - net of cash acquired
 
(3
)
 
(18
)
Proceeds from the sale of businesses, net of cash sold
 
167

 
432

Proceeds from the sale of assets
 
52

 
4

Sale of short-term investments
 
3,375

 
5,116

Purchase of short-term investments
 
(3,638
)
 
(4,764
)
Decrease in restricted cash, debt service reserves and other assets
 
75

 
35

Proceeds from government grants for asset construction
 
1

 
120

Other investing
 
34

 
(20
)
Net cash used in investing activities
 
(1,267
)
 
(676
)
FINANCING ACTIVITIES:
 
 
 
 
Repayments under the revolving credit facilities, net
 
(22
)
 
(322
)
Issuance of recourse debt
 
750

 
—

Issuance of non-recourse debt
 
3,082

 
822

Repayments of recourse debt
 
(1,208
)
 
(8
)
Repayments of non-recourse debt
 
(2,288
)
 
(759
)
Payments for financing fees
 
(148
)
 
(24
)
Distributions to noncontrolling interests
 
(385
)
 
(741
)
Contributions from noncontrolling interests
 
157

 
12

Dividends paid on AES common stock
 
(89
)
 
—

Payments for financed capital expenditures
 
(436
)
 
(30
)
Purchase of treasury stock
 
(63
)
 
(301
)
Other financing
 
15

 
8

Net cash used in financing activities
 
(635
)
 
(1,343
)
Effect of exchange rate changes on cash
 
(37
)
 
9

Decrease in cash of discontinued and held-for-sale businesses
 
21

 
140

Total increase in cash and cash equivalents
 
122

 
259

Cash and cash equivalents, beginning
 
1,909

 
1,632

Cash and cash equivalents, ending
 
$
2,031

 
$
1,891

SUPPLEMENTAL DISCLOSURES:
 
 
 
 
Cash payments for interest, net of amounts capitalized
 
$
923

 
$
1,024

Cash payments for income taxes, net of refunds
 
$
506

 
$
580


See Notes to Condensed Consolidated Financial Statements.

4



THE AES CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2013 and 2012
1. FINANCIAL STATEMENT PRESENTATION
The prior-period condensed consolidated financial statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) have been reclassified to reflect the businesses held-for-sale and discontinued operations as discussed in Note 16 — Discontinued Operations and Held-for-Sale Businesses.
Consolidation
In this Quarterly Report the terms “AES,” “the Company,” “us” or “we” refer to the consolidated entity including its subsidiaries and affiliates. The terms “The AES Corporation,” “the Parent” or “the Parent Company” refer only to the publicly held holding company, The AES Corporation, excluding its subsidiaries and affiliates. Furthermore, variable interest entities (“VIEs”) in which the Company has a variable interest have been consolidated where the Company is the primary beneficiary. Investments in which the Company has the ability to exercise significant influence, but not control, are accounted for using the equity method of accounting. All intercompany transactions and balances have been eliminated in consolidation.
Interim Financial Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”), as contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification, for interim financial information and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, comprehensive income and cash flows. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of results that may be expected for the year ending December 31, 2013. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the 2012 audited consolidated financial statements and notes thereto, which are included in the 2012 Form 10-K filed with the SEC on February 26, 2013 (the “2012 Form 10-K”).
Accounting Pronouncements Issued But Not Yet Effective
The following accounting standards have been issued, but are not yet effective for, and have not been adopted by AES.
ASU No. 2013-11, Income Taxes (Topic 740), "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force)."
In July 2013, the FASB issued ASU No. 2013-11, which requires the netting of unrecognized tax benefits (“UTBs”) against a deferred tax asset for a loss or other carryforward that would apply in settlement of uncertain tax positions. Under the new standard, UTBs will be netted against all available same-jurisdiction loss or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. ASU No. 2013-11 is effective for annual reporting periods beginning after December 15, 2013 and interim periods therein. The new standard requires prospective adoption, but allows optional retrospective adoption. Early adoption is permitted. The Company is currently evaluating the method of adoption and the impact of adopting ASU No. 2013-11 on the Company's financial position. It will have no impact on the results of operations and cash flows.
ASU No. 2013-7, Presentation of Financial Statements (Topic 205), "Liquidation Basis of Accounting"
In April 2013, the FASB issued ASU No. 2013-7, which requires an entity to prepare financial statements on a liquidation basis when liquidation is imminent, unless the liquidation is the same as the plan specified in an entity's governing documents created at its inception. Under the liquidation basis of accounting, an entity will measure and present assets at the estimated amount of cash proceeds or other consideration that it expects to collect in settling or disposing of those assets in carrying out its plan for liquidation. This includes assets the entity previously had not recognized under U.S. GAAP, but expects to either sell in liquidation or use in settling liabilities (for example, trademarks). An entity will recognize and measure its liabilities in accordance with U.S. GAAP that otherwise applies to those liabilities. An entity should not anticipate it will be legally released from being the primary obligor under those liabilities, either judicially or by creditors. An entity will also accrue and separately present the costs it expects to incur and the income it expects to earn during the course of the liquidation, including any costs

5



associated with the disposal or settlement of its assets and liabilities. ASU No. 2013-7 also requires additional disclosures. ASU No. 2013-7 is effective for annual reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU No, 2013-7 is not expected to have a significant impact on the Company's consolidated financial position, results of operations and cash flows.
ASU No. 2013-5, Foreign Currency Matters (Topic 830), “Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.”
In March 2013, the FASB issued ASU No. 2013-5, which requires an entity to release any related cumulative translation adjustment into net income when it ceases to have a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in-substance real estate) within a foreign entity. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. For an equity method investment that is a foreign entity, the partial sale guidance still applies. As such, a pro rata portion of the cumulative translation adjustment should be released into net income upon a partial sale of such an equity method investment. In those instances, the cumulative adjustment is released into net income only if the partial sale represents a complete or substantially complete liquidation of the foreign entity that contains the equity method investment. The amendments are effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. Any impact of adopting ASU No. 2013-5 on the Company’s financial position and results of operations will depend on the nature and extent of future sales or dispositions of any entities that had created a cumulative translation adjustment.
2. INVENTORY
The following table summarizes the Company’s inventory balances as of September 30, 2013 and December 31, 2012:
 
 
September 30, 2013
 
December 31, 2012
 
 
(in millions)
Coal, fuel oil and other raw materials
 
$
345

 
$
371

Spare parts and supplies
 
366

 
351

Total
 
$
711

 
$
722

3. FAIR VALUE
The fair value of current financial assets and liabilities, debt service reserves and other deposits approximate their reported carrying amounts. The estimated fair value of the Company’s assets and liabilities have been determined using available market information. By virtue of these amounts being 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. There were no changes in fair valuation techniques during the period and the Company continues to follow the valuation techniques described in Note 4. — Fair Value in Item 8. — Financial Statements and Supplementary Data of its 2012 Form 10-K.

6




Recurring Measurements
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:
 
 
September 30, 2013
 
December 31, 2012
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AVAILABLE-FOR-SALE:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured debentures
 
$
—

 
$
665

 
$
—

 
$
665

 
$
—

 
$
448

 
$
—

 
$
448

Certificates of deposit
 
—

 
148

 
—

 
148

 
—

 
143

 
—

 
143

Government debt securities
 
—

 
26

 
—

 
26

 
—

 
34

 
—

 
34

Subtotal
 
—

 
839

 
—

 
839

 
—

 
625

 
—

 
625

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
 
—

 
46

 
—

 
46

 
—

 
56

 
—

 
56

Subtotal
 
—

 
46

 
—

 
46

 
—

 
56

 
—

 
56

Total available-for-sale
 
—

 
885

 
—

 
885

 
—

 
681

 
—

 
681

TRADING:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
 
13

 
—

 
—

 
13

 
12

 
—

 
—

 
12

Total trading
 
13

 
—

 
—

 
13

 
12

 
—

 
—

 
12

DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
 
—

 
44

 
—

 
44

 
—

 
2

 
—

 
2

Cross currency derivatives
 
—

 
6

 
—

 
6

 
—

 
6

 
—

 
6

Foreign currency derivatives
 
—

 
17

 
97

 
114

 
—

 
2

 
79

 
81

Commodity derivatives
 
—

 
26

 
8

 
34

 
—

 
8

 
3

 
11

Total derivatives
 
—

 
93

 
105

 
198

 
—

 
18

 
82

 
100

TOTAL ASSETS
 
$
13

 
$
978

 
$
105

 
$
1,096

 
$
12

 
$
699

 
$
82

 
$
793

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$
—

 
$
249

 
$
103

 
$
352

 
$
—

 
$
153

 
$
412

 
$
565

Cross currency derivatives
 
—

 
3

 
—

 
3

 
—

 
6

 
—

 
6

Foreign currency derivatives
 
—

 
15

 
6

 
21

 
—

 
7

 
7

 
14

Commodity derivatives
 
—

 
16

 
4

 
20

 
—

 
13

 
4

 
17

Total derivatives
 
—

 
283

 
113

 
396

 
—

 
179

 
423

 
602

TOTAL LIABILITIES
 
$
—

 
$
283

 
$
113

 
$
396

 
$
—

 
$
179

 
$
423

 
$
602

 _____________________________
(1) 
Amortized cost approximated fair value at September 30, 2013 and December 31, 2012.

7



The following tables present a reconciliation of net derivative assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 and 2012 (presented net by type of derivative where any foreign currency impacts are presented as part of gains (losses) in earnings or other comprehensive income as appropriate). Transfers between Level 3 and Level 2 are determined as of the end of the reporting period and principally result from changes in the significance of unobservable inputs used to calculate the credit valuation adjustment.
 
 
Three Months Ended September 30, 2013
 
 
Interest
Rate
 
Foreign
Currency
 
Commodity
 
Total
 
 
(in millions)
Balance at July 1
 
$
(63
)
 
$
70

 
$
9

 
$
16

Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
Included in earnings
 
(1
)
 
28

 
(1
)
 
26

Included in other comprehensive income - derivative activity
 
7

 
—

 
—

 
7

Included in other comprehensive income - foreign currency translation activity
 
(1
)
 
(6
)
 
—

 
(7
)
Included in regulatory (assets) liabilities
 
—

 
—

 
(4
)
 
(4
)
Settlements
 
9

 
(1
)
 
—

 
8

Transfers of assets (liabilities) into Level 3
 
(84
)
 
—

 
—

 
(84
)
Transfers of (assets) liabilities out of Level 3
 
30

 
—

 
—

 
30

Balance at September 30
 
$
(103
)
 
$
91

 
$
4

 
$
(8
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
 
$
—

 
$
27

 
$
(1
)
 
$
26

 
 
Three Months Ended September 30, 2012
 
 
Interest
Rate
 
Foreign
Currency
 
Commodity
 
Total
 
 
(in millions)
Balance at July 1
 
$
(281
)
 
$
47

 
$
13

 
$
(221
)
Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
Included in earnings
 
(1
)
 
16

 
2

 
17

Included in other comprehensive income - derivative activity
 
(29
)
 
—

 
—

 
(29
)
Included in other comprehensive income - foreign currency translation activity
 
—

 
(2
)
 
—

 
(2
)
Included in regulatory (assets) liabilities
 
—

 
—

 
2

 
2

Settlements
 
12

 
(1
)
 
(5
)
 
6

Transfers of (assets) liabilities out of Level 3
 
2

 
—

 
—

 
2

Balance at September 30
 
$
(297
)
 
$
60

 
$
12

 
$
(225
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
 
$
(1
)
 
$
15

 
$
2

 
$
16

 
 
Nine Months Ended September 30, 2013
 
 
Interest
Rate
 
Foreign
Currency
 
Commodity
 
Total
 
 
(in millions)
Balance at January 1
 
$
(412
)
 
$
72

 
$
(1
)
 
$
(341
)
Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
Included in earnings
 
(2
)
 
40

 
—

 
38

Included in other comprehensive income - derivative activity
 
84

 
—

 
—

 
84

Included in other comprehensive income - foreign currency translation activity
 
(3
)
 
(12
)
 
—

 
(15
)
Included in regulatory (assets) liabilities
 
—

 
—

 
5

 
5

Settlements
 
73

 
(3
)
 
—

 
70

Transfers of assets (liabilities) into Level 3
 
—

 
—

 
—

 
—

Transfers of (assets) liabilities out of Level 3
 
157

 
(6
)
 
—

 
151

Balance at September 30
 
$
(103
)
 
$
91

 
$
4

 
$
(8
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
 
$
—

 
$
40

 
$
—

 
$
40



8



 
 
Nine Months Ended September 30, 2012
 
 
Interest
Rate
 
Cross
Currency
 
Foreign
Currency
 
Commodity
 
Total
 
 
(in millions)
Balance at January 1
 
$
(128
)
 
$
(18
)
 
$
51

 
$
2

 
$
(93
)
Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
 
 
Included in earnings
 
(1
)
 
—

 
16

 
8

 
23

Included in other comprehensive income - derivative activity
 
(30
)
 
8

 
—

 
—

 
(22
)
Included in other comprehensive income - foreign currency translation activity
 
—

 
—

 
(4
)
 
—

 
(4
)
Included in regulatory (assets) liabilities
 
—

 
—

 
—

 
9

 
9

Settlements
 
19

 
11

 
(3
)
 
(7
)
 
20

Transfers of assets (liabilities) into Level 3
 
(159
)
 
—

 
—

 
—

 
(159
)
Transfers of (assets) liabilities out of Level 3
 
2

 
(1
)
 
—

 
—

 
1

Balance at September 30
 
$
(297
)
 
$
—

 
$
60

 
$
12

 
$
(225
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
 
$
(1
)
 
$
—

 
$
14

 
$
9

 
$
22


The following table summarizes the significant unobservable inputs used for the Level 3 derivative assets (liabilities) as of September 30, 2013:
Type of Derivative
 
Fair Value
 
Unobservable Input
 
Amount or Range
(Weighted Average)
 
 
(in millions)
 
 
 
 
Interest rate
 
$
(103
)
 
Subsidiaries’ credit spreads
 
5.21
%
Foreign currency:
 
 
 
 
 
 
Embedded derivative — Argentine Peso
 
97

 
Argentine Peso to U.S. Dollar currency exchange rate after 3 years
 
22.14 - 39.05 (31.72)

Embedded derivative — Euro
 
(5
)
 
Subsidiaries’ credit spreads
 
5.21
%
Other
 
(1
)
 
 
 
 
Commodity:
 
 
 
 
 
 
Other
 
4

 
 
 
 
Total
 
$
(8
)
 
 
 
 
Nonrecurring Measurements
When evaluating impairment of goodwill, long-lived assets, discontinued operations and held-for-sale businesses, and equity method investments, the Company measures fair value using the applicable fair value measurement guidance. Impairment expense is measured by comparing the fair value at the evaluation date to their then-latest available carrying amount. The following table summarizes major categories of assets and liabilities measured at fair value on a nonrecurring basis during the period and their level within the fair value hierarchy:
 
 
Nine Months Ended September 30, 2013
 
 
Carrying
Amount
 
Fair Value
 
Gross
Loss
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used:(1)
 
 
 
 
 
 
 
 
 
 
Poland Wind projects
 
$
79

 
$
—

 
$
—

 
$
14

 
$
65

 Itabo (San Lorenzo)
 
22

 
—

 
—

 
7

 
15

Beaver Valley
 
61

 
—

 
—

 
15

 
46

Long-lived assets held for sale:(1)
 
 
 
 
 
 
 
 
 
 
Wind turbines
 
25

 
—

 
25

 
—

 
—

Discontinued operations and held-for-sale businesses:(2)
 
 
 
 
 
 
 
 
 
 
Cameroon businesses
 
262

 
—

 
199

 
—

 
65

Saurashtra
 
19

 
—

 
7

 
—

 
12

Ukraine utilities
 
143

 
—

 
113

 
—

 
34

Equity method investments (3)
 
 
 
 
 
 
 
 
 
 
Elsta
 
240

 
—

 
—

 
118

 
122

Goodwill
 
 
 
 
 
 
 
 
 
 
Ebute
 
58

 
—

 
—

 
—

 
58


9



 
 
Nine Months Ended September 30, 2012
 
 
Carrying
Amount
 
Fair Value
 
Gross
Loss
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used:(1)
 
 
 
 
 
 
 
 
 
 
Kelanitissa
 
$
22

 
$
—

 
$
—

 
$
10

 
$
12

Wind Projects
 
16

 
—

 
—

 
—

 
16

Long-lived assets held for sale:(1)
 
 
 
 
 
 
 
 
 
 
Wind turbines
 
45

 
—

 
—

 
25

 
20

St. Patrick
 
33

 
—

 
22

 
—

 
11

Equity method investments
 
205

 
—

 
155

 
—

 
50

Goodwill
 
 
 
 
 
 
 
 
 
 
DP&L
 
2,449

 
—

 
—

 
599

 
1,850

_____________________________

(1) 
See Note 14 — Asset Impairment Expense for further information.
(2) 
See Note 16 — Discontinued Operations and Held-For-Sale Businesses for further information. Also, the gross loss equals the carrying amount of the disposal group less its fair value less costs to sell.
(3) 
See Note 15 — Other Non-Operating Expense for further information.

The following table summarizes the significant unobservable inputs used in the Level 3 measurement of long-lived assets during the nine months ended September 30, 2013:
 
 
Fair Value
 
Valuation
Technique
 
Unobservable Input
 
Range
(Weighted Average)
 
 
(in millions)
 
 
 
 
 
($ in millions)
Long-lived assets held and used:
 
 
 
 
 
 
 
 
Beaver Valley
 
$
15

 
Discounted cash flow
 
Annual revenue growth
 
3% to 45% (19%)

 
 
 
 
 
 
Annual pretax operating margin
 
-42% to 41% (25%)

 
 
 
 
 
 
Weighted-average cost of capital
 
7
%
  Poland Wind
 
14

 
Market approach
 
Indicative offer prices
 
14

  Itabo (San Lorenzo)
 
7

 
Market approach
 
Broker quote
 
7

Equity method investment:
 
 
 
 
 
 
Elsta
 
118

 
Discounted cash flow
 
Annual revenue growth
 
-55% to 17% (1%)

 
 
 
 
 
 
Annual pretax operating margin
 
3% to 45% (36%)

 
 
 
 
 
 
Weighted-average cost of capital
 
7
%
Total
 
$
154

 
 
 
 
 
 
Financial Instruments not Measured at Fair Value in the Condensed Consolidated Balance Sheets
The following table sets forth the carrying amount, fair value and fair value hierarchy of the Company’s financial assets and liabilities that are not measured at fair value in the condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012, but for which fair value is disclosed.
 
 
Carrying
Amount
 
Fair Value
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
September 30, 2013
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Accounts receivable — noncurrent(1)
 
$
297

 
$
164

 
$
—

 
$
—

 
$
164

Liabilities
 
 
 
 
 
 
 
 
 
 
Non-recourse debt
 
15,366

 
15,533

 
—

 
13,312

 
2,221

Recourse debt
 
5,670

 
6,108

 
—

 
6,108

 
—

December 31, 2012
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Accounts receivable — noncurrent(1)
 
$
304

 
$
188

 
$
—

 
$
—

 
$
188

Liabilities
 
 
 
 
 
 
 
 
 
 
Non-recourse debt
 
14,781

 
15,506

 
—

 
13,266

 
2,240

Recourse debt
 
5,962

 
6,628

 
—

 
6,628

 
—

_____________________________


10



(1) 
These accounts receivable principally relate to amounts due from CAMMESA, the administrator of the wholesale electricity market in Argentina, and are included in “Noncurrent assets — Other” in the accompanying condensed consolidated balance sheets. The fair value of these accounts receivable excludes value-added tax of $47 million and $55 million at September 30, 2013 and December 31, 2012, respectively.
4. INVESTMENTS IN MARKETABLE SECURITIES
The Company’s investments in marketable debt and equity securities as of September 30, 2013 and December 31, 2012 by security class and by level within the fair value hierarchy have been disclosed in Note 3 — Fair Value. The security classes are determined based on the nature and risk of a security and are consistent with how the Company manages, monitors and measures its marketable securities. As of September 30, 2013, all available-for-sale debt securities had stated maturities within one year.
The following table summarizes the pretax gains and losses related to available-for-sale and trading securities for the three and nine months ended September 30, 2013 and 2012. Gains and losses on the sale of investments are determined using the specific-identification method. For the three and nine months ended September 30, 2013 and 2012, there were no realized losses on the sale of available-for-sale securities and no other-than-temporary impairment of marketable securities recognized in earnings or other comprehensive income.
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2013
 
2012
 
2013
 
2012
 
 
(in millions)
Gains included in earnings that relate to trading securities held at the reporting date
 
$
1

 
$
—

 
$
1

 
$
—

Unrealized gains on available-for-sale securities included in other comprehensive income
 
—

 
(1
)
 
1

 
(1
)
Gains reclassified out of other comprehensive income into earnings
 
—

 
—

 
1

 
—

Gross proceeds from sales of available-for-sale securities
 
1,071

 
1,513

 
3,394

 
5,160

Gross realized gains on sales
 
—

 
—

 
—

 
1

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
There have been no changes to the information disclosed under “Derivatives and Hedging Activities” in Note 1 — General and Summary of Significant Accounting Policies included in Item 8. — Financial Statements and Supplementary Data in the 2012 Form 10-K.
Volume of Activity
The following tables set forth, by type of derivative, the Company’s outstanding notional under its derivatives and the weighted-average remaining term as of September 30, 2013 regardless of whether the derivative instruments are in qualifying cash flow hedging relationships:
 
 
Current
 
Maximum
 
 
 
 
Interest Rate and Cross Currency
 
Derivative
Notional
 
Derivative Notional Translated to USD
 
Derivative
Notional
 
Derivative Notional Translated to USD
 
Weighted-Average Remaining Term
 
% of Debt Currently Hedged by Index(2)
 
 
(in millions)
 
(in years)
 
 
Interest Rate Derivatives:(1)
 
 
 
 
 
 
 
 
 
 
 
 
LIBOR (U.S. Dollar)
 
3,581

 
$
3,581

 
4,826

 
$
4,826

 
9
 
72
%
EURIBOR (Euro)
 
590

 
798

 
590

 
798

 
8
 
86
%
LIBOR (British Pound)
 
68

 
110

 
68

 
110

 
12