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, 2014
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 3, 2014 was 713,046,356
THE AES CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014
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)
See Notes to Condensed Consolidated Financial Statements.
September 30, 2014 | December 31, 2013 | |||||||
(in millions, except share and per share data) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,670 | $ | 1,642 | ||||
Restricted cash | 487 | 597 | ||||||
Short-term investments | 686 | 668 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $104 and $134, respectively | 2,755 | 2,363 | ||||||
Inventory | 741 | 684 | ||||||
Deferred income taxes | 148 | 166 | ||||||
Prepaid expenses | 208 | 179 | ||||||
Other current assets | 1,192 | 976 | ||||||
Current assets of discontinued operations and held-for-sale businesses | — | 464 | ||||||
Total current assets | 7,887 | 7,739 | ||||||
NONCURRENT ASSETS | ||||||||
Property, Plant and Equipment: | ||||||||
Land | 903 | 922 | ||||||
Electric generation, distribution assets and other | 30,670 | 30,596 | ||||||
Accumulated depreciation | (9,981 | ) | (9,604 | ) | ||||
Construction in progress | 3,475 | 3,198 | ||||||
Property, plant and equipment, net | 25,067 | 25,112 | ||||||
Other Assets: | ||||||||
Investments in and advances to affiliates | 704 | 1,010 | ||||||
Debt service reserves and other deposits | 480 | 541 | ||||||
Goodwill | 1,468 | 1,622 | ||||||
Other intangible assets, net of accumulated amortization of $156 and $153, respectively | 283 | 297 | ||||||
Deferred income taxes | 693 | 666 | ||||||
Other noncurrent assets | 2,401 | 2,170 | ||||||
Noncurrent assets of discontinued operations and held-for-sale businesses | — | 1,254 | ||||||
Total other assets | 6,029 | 7,560 | ||||||
TOTAL ASSETS | $ | 38,983 | $ | 40,411 | ||||
LIABILITIES AND EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable | $ | 2,203 | $ | 2,259 | ||||
Accrued interest | 402 | 263 | ||||||
Accrued and other liabilities | 2,121 | 2,114 | ||||||
Non-recourse debt, including $242 and $267, respectively, related to variable interest entities | 2,347 | 2,062 | ||||||
Recourse debt | — | 118 | ||||||
Current liabilities of discontinued operations and held-for-sale businesses | — | 837 | ||||||
Total current liabilities | 7,073 | 7,653 | ||||||
NONCURRENT LIABILITIES | ||||||||
Non-recourse debt, including $1,036 and $979, respectively, related to variable interest entities | 13,372 | 13,318 | ||||||
Recourse debt | 5,347 | 5,551 | ||||||
Deferred income taxes | 1,165 | 1,119 | ||||||
Pension and other post-retirement liabilities | 1,224 | 1,310 | ||||||
Other noncurrent liabilities | 3,158 | 3,299 | ||||||
Noncurrent liabilities of discontinued operations and held-for-sale businesses | — | 432 | ||||||
Total noncurrent liabilities | 24,266 | 25,029 | ||||||
Contingencies and Commitments (see Note 9) | ||||||||
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; 814,456,569 issued and 715,960,427 outstanding at September 30, 2014 and 813,316,510 issued and 722,508,342 outstanding at December 31, 2013) | 8 | 8 | ||||||
Additional paid-in capital | 8,355 | 8,443 | ||||||
Retained earnings (accumulated deficit) | 413 | (150 | ) | |||||
Accumulated other comprehensive loss | (3,176 | ) | (2,882 | ) | ||||
Treasury stock, at cost (98,496,142 shares at September 30, 2014 and 90,808,168 shares at December 31, 2013) | (1,203 | ) | (1,089 | ) | ||||
Total AES Corporation stockholders’ equity | 4,397 | 4,330 | ||||||
NONCONTROLLING INTERESTS | 3,169 | 3,321 | ||||||
Total equity | 7,566 | 7,651 | ||||||
TOTAL LIABILITIES AND EQUITY | $ | 38,983 | $ | 40,411 | ||||
1
THE AES CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in millions, except per share amounts) | ||||||||||||||||
Revenue: | ||||||||||||||||
Regulated | $ | 2,378 | $ | 2,062 | $ | 6,636 | $ | 6,175 | ||||||||
Non-Regulated | 2,063 | 1,934 | 6,378 | 5,916 | ||||||||||||
Total revenue | 4,441 | 3,996 | 13,014 | 12,091 | ||||||||||||
Cost of Sales: | ||||||||||||||||
Regulated | (1,956 | ) | (1,663 | ) | (5,732 | ) | (5,082 | ) | ||||||||
Non-Regulated | (1,718 | ) | (1,406 | ) | (4,902 | ) | (4,432 | ) | ||||||||
Total cost of sales | (3,674 | ) | (3,069 | ) | (10,634 | ) | (9,514 | ) | ||||||||
Operating margin | 767 | 927 | 2,380 | 2,577 | ||||||||||||
General and administrative expenses | (45 | ) | (53 | ) | (148 | ) | (160 | ) | ||||||||
Interest expense | (390 | ) | (358 | ) | (1,086 | ) | (1,065 | ) | ||||||||
Interest income | 69 | 85 | 205 | 213 | ||||||||||||
Loss on extinguishment of debt | (47 | ) | — | (196 | ) | (212 | ) | |||||||||
Other expense | (12 | ) | (15 | ) | (37 | ) | (58 | ) | ||||||||
Other income | 12 | 25 | 56 | 106 | ||||||||||||
Gain on disposals and sale of investments | 362 | 3 | 363 | 26 | ||||||||||||
Goodwill impairment expense | — | (58 | ) | (154 | ) | (58 | ) | |||||||||
Asset impairment expense | (15 | ) | (16 | ) | (90 | ) | (64 | ) | ||||||||
Foreign currency transaction gains (losses) | (79 | ) | 32 | (91 | ) | (16 | ) | |||||||||
Other non-operating expense | (16 | ) | (122 | ) | (60 | ) | (122 | ) | ||||||||
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES | 606 | 450 | 1,142 | 1,167 | ||||||||||||
Income tax expense | (92 | ) | (126 | ) | (303 | ) | (285 | ) | ||||||||
Net equity in earnings of affiliates | (6 | ) | 15 | 39 | 21 | |||||||||||
INCOME FROM CONTINUING OPERATIONS | 508 | 339 | 878 | 903 | ||||||||||||
Income (loss) from operations of discontinued businesses, net of income tax expense (benefit) of $0, $(3), $22, and $2, respectively | — | (38 | ) | 27 | (37 | ) | ||||||||||
Net loss from disposal and impairments of discontinued businesses, net of income tax expense (benefit) of $0, $(1), $4, and $(2), respectively | — | (78 | ) | (56 | ) | (111 | ) | |||||||||
NET INCOME | 508 | 223 | 849 | 755 | ||||||||||||
Noncontrolling interests: | ||||||||||||||||
Less: Income from continuing operations attributable to noncontrolling interests | (20 | ) | (164 | ) | (295 | ) | (449 | ) | ||||||||
Less: Loss from discontinued operations attributable to noncontrolling interests | — | 12 | 9 | 14 | ||||||||||||
Total net income attributable to noncontrolling interests | (20 | ) | (152 | ) | (286 | ) | (435 | ) | ||||||||
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION | $ | 488 | $ | 71 | $ | 563 | $ | 320 | ||||||||
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS: | ||||||||||||||||
Income from continuing operations, net of tax | $ | 488 | $ | 175 | $ | 583 | $ | 454 | ||||||||
Loss from discontinued operations, net of tax | — | (104 | ) | (20 | ) | (134 | ) | |||||||||
Net income | $ | 488 | $ | 71 | $ | 563 | $ | 320 | ||||||||
BASIC EARNINGS PER SHARE: | ||||||||||||||||
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax | $ | 0.68 | $ | 0.23 | $ | 0.81 | $ | 0.61 | ||||||||
Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax | — | (0.14 | ) | (0.03 | ) | (0.18 | ) | |||||||||
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS | $ | 0.68 | $ | 0.09 | $ | 0.78 | $ | 0.43 | ||||||||
DILUTED EARNINGS PER SHARE: | ||||||||||||||||
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax | $ | 0.67 | $ | 0.23 | $ | 0.81 | $ | 0.61 | ||||||||
Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax | — | (0.14 | ) | (0.03 | ) | (0.18 | ) | |||||||||
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS | $ | 0.67 | $ | 0.09 | $ | 0.78 | $ | 0.43 | ||||||||
DILUTED SHARES OUTSTANDING | 740 | 747 | 727 | 749 | ||||||||||||
DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.05 | $ | — | $ | 0.10 | $ | 0.08 | ||||||||
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, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in millions) | ||||||||||||||||
NET INCOME | $ | 508 | $ | 223 | $ | 849 | $ | 755 | ||||||||
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 | ) | (1 | ) | |||||||||
Reclassification to earnings, net of income tax (expense) benefit of $0, $0, $0 and $0, respectively | — | — | — | 1 | ||||||||||||
Total change in fair value of available-for-sale securities | (1 | ) | — | (1 | ) | — | ||||||||||
Foreign currency translation activity: | ||||||||||||||||
Foreign currency translation adjustments, net of income tax (expense) benefit of $1, $1, $(7) and $3, respectively | (329 | ) | (6 | ) | (300 | ) | (264 | ) | ||||||||
Reclassification to earnings, net of income tax (expense) benefit of $0, $0, $0 and $0, respectively | (4 | ) | — | (51 | ) | 41 | ||||||||||
Total foreign currency translation adjustments | (333 | ) | (6 | ) | (351 | ) | (223 | ) | ||||||||
Derivative activity: | ||||||||||||||||
Change in derivative fair value, net of income tax (expense) benefit of $6, $0, $52 and $(28), respectively | (36 | ) | 7 | (261 | ) | 93 | ||||||||||
Reclassification to earnings, net of income tax (expense) of $(10), $(8), $(23) and $(30), respectively | 44 | 27 | 76 | 112 | ||||||||||||
Total change in fair value of derivatives | 8 | 34 | (185 | ) | 205 | |||||||||||
Pension activity: | ||||||||||||||||
Change in pension adjustments due to prior service cost, net of income tax (expense) benefit of $0, $0, $(1) $0, respectively | — | — | 1 | — | ||||||||||||
Change in pension adjustments due to disposal of discontinued operations for the period, net of income tax (expense) benefit of $0, $0, $(9), $0, respectively | — | — | 14 | — | ||||||||||||
Reclassification to earnings due to amortization of net actuarial loss, net of income tax (expense) benefit of $(3), $(6), $(4) and $(20), respectively | 5 | 12 | 21 | 39 | ||||||||||||
Total pension adjustments | 5 | 12 | 36 | 39 | ||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS) | (321 | ) | 40 | (501 | ) | 21 | ||||||||||
COMPREHENSIVE INCOME | 187 | 263 | 348 | 776 | ||||||||||||
Less: Comprehensive (income) loss attributable to noncontrolling interests | 108 | (171 | ) | (119 | ) | (454 | ) | |||||||||
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE AES CORPORATION | $ | 295 | $ | 92 | $ | 229 | $ | 322 | ||||||||
See Notes to Condensed Consolidated Financial Statements.
3
THE AES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
2014 | 2013 | |||||||
(in millions) | ||||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 849 | $ | 755 | ||||
Adjustments to net income: | ||||||||
Depreciation and amortization | 937 | 982 | ||||||
(Gain) loss on sale of assets and investments | (344 | ) | 4 | |||||
Impairment expenses | 304 | 309 | ||||||
Deferred income taxes | 83 | (82 | ) | |||||
Provisions for (releases of) contingencies | (41 | ) | 33 | |||||
Loss on the extinguishment of debt | 196 | 212 | ||||||
Loss on disposals and impairments - discontinued operations | 51 | 108 | ||||||
Other | 135 | (26 | ) | |||||
Changes in operating assets and liabilities | ||||||||
(Increase) decrease in accounts receivable | (494 | ) | 135 | |||||
(Increase) decrease in inventory | (75 | ) | (6 | ) | ||||
(Increase) decrease in prepaid expenses and other current assets | (12 | ) | 403 | |||||
(Increase) decrease in other assets | (439 | ) | (149 | ) | ||||
Increase (decrease) in accounts payable and other current liabilities | (14 | ) | (578 | ) | ||||
Increase (decrease) in income tax payables, net and other tax payables | (239 | ) | (66 | ) | ||||
Increase (decrease) in other liabilities | 319 | 6 | ||||||
Net cash provided by operating activities | 1,216 | 2,040 | ||||||
INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (1,389 | ) | (1,330 | ) | ||||
Acquisitions, net of cash acquired | (728 | ) | (3 | ) | ||||
Proceeds from the sale of businesses, net of cash sold | 1,668 | 167 | ||||||
Proceeds from the sale of assets | 29 | 52 | ||||||
Sale of short-term investments | 3,335 | 3,375 | ||||||
Purchase of short-term investments | (3,386 | ) | (3,638 | ) | ||||
Decrease in restricted cash, debt service reserves and other assets | 162 | 75 | ||||||
Other investing | (55 | ) | 35 | |||||
Net cash used in investing activities | (364 | ) | (1,267 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Borrowings (repayments) under the revolving credit facilities, net | 14 | (22 | ) | |||||
Issuance of recourse debt | 1,525 | 750 | ||||||
Issuance of non-recourse debt | 2,253 | 3,082 | ||||||
Repayments of recourse debt | (2,019 | ) | (1,208 | ) | ||||
Repayments of non-recourse debt | (1,639 | ) | (2,288 | ) | ||||
Payments for financing fees | (111 | ) | (148 | ) | ||||
Distributions to noncontrolling interests | (377 | ) | (385 | ) | ||||
Contributions from noncontrolling interests | 114 | 157 | ||||||
Dividends paid on AES common stock | (108 | ) | (89 | ) | ||||
Payments for financed capital expenditures | (360 | ) | (436 | ) | ||||
Purchase of treasury stock | (140 | ) | (63 | ) | ||||
Other financing | 4 | 15 | ||||||
Net cash used in financing activities | (844 | ) | (635 | ) | ||||
Effect of exchange rate changes on cash | (55 | ) | (37 | ) | ||||
Decrease in cash of discontinued and held-for-sale businesses | 75 | 23 | ||||||
Total increase in cash and cash equivalents | 28 | 124 | ||||||
Cash and cash equivalents, beginning | 1,642 | 1,900 | ||||||
Cash and cash equivalents, ending | $ | 1,670 | $ | 2,024 | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash payments for interest, net of amounts capitalized | $ | 902 | $ | 923 | ||||
Cash payments for income taxes, net of refunds | $ | 401 | $ | 506 | ||||
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Assets received upon sale of subsidiaries | $ | 44 | $ | — | ||||
Assets acquired through capital lease | $ | 13 | $ | 12 | ||||
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, 2014 and 2013
1. FINANCIAL STATEMENT PRESENTATION
Discontinued Operations and Reclassifications
Effective July 1, 2014, the Company prospectively adopted Accounting Standards Update ("ASU") No. 2014-08, which significantly changed the previous accounting guidance for discontinued operations as discussed further below. 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 which met the criteria to be reported as held-for-sale and discontinued operations under the previous accounting guidance as discussed in Note 18 — Discontinued Operations and Held-for-Sale Businesses. There were no disposals during the third quarter of 2014 which met the criteria to be reported as discontinued operations under ASU No. 2014-08. However, the disposal of the U.K. Wind business during the third quarter of 2014 would have met the criteria to be reported as a discontinued operation prior to the adoption of ASU 2014-08.
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 ("ASC"), 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, 2014 are not necessarily indicative of results that may be expected for the year ending December 31, 2014. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the 2013 audited consolidated financial statements and notes thereto, which are included in the 2013 Form 10-K filed with the SEC on February 25, 2014 (the “2013 Form 10-K”).
New Accounting Pronouncements Adopted
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).
Effective January 1, 2014, the Company prospectively adopted 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 ASU No. 2013-11, UTBs are netted against all available same-jurisdiction losses or other tax carryforwards that would be utilized, rather than only against carryforwards that are created by the UTBs. The impact to the Company’s Condensed Consolidated Balance Sheet as of September 30, 2014 was a reduction of $66 million to “Other noncurrent liabilities” and an offsetting increase to “Deferred income taxes” under “Noncurrent liabilities.” There were no impacts on the results of operations and cash flows.
ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
Effective July 1, 2014, the Company prospectively adopted ASU No. 2014-08, which significantly changes the existing accounting guidance on discontinued operations. Early adoption is permitted for disposals (or classifications as held-for-sale) that have not been reported in financial statements previously issued. Under ASU No. 2014-08, only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations. Amongst other changes: equity method investments that were previously scoped-out of the discontinued operations accounting guidance are now included in the scope; a business can meet the criteria to be classified as held-for-sale upon acquisition and can be reported in discontinued operations; and components where an entity retains significant continuing involvement or where operations and cash flows will not be eliminated from
5
ongoing operations as a result of a disposal transaction can meet the definition of discontinued operations. Additionally, where summarized amounts are presented on the face of the financial statements, reconciliations of those amounts to major classes of line items are also required. ASU No. 2014-08 requires additional disclosures for individually material components that do not meet the definition of discontinued operations. The Company's adoption of ASU No. 2014-08 effective July 1, 2014 did not have any net impact on its financial position or results of operations other than changing the classification of the UK Wind disposal which occurred during the third quarter of 2014. Under the previous accounting guidance, the UK Wind disposal would have met the discontinued operations criteria and would have been reclassified accordingly. See Note 18 — Discontinued Operations and Held-for-Sale Businesses for further information.
Accounting Pronouncements Issued But Not Yet Effective
The following accounting standards have been issued but are not yet effective for nor have been adopted by AES.
ASU No. 2014-05, Service Concession Arrangements (Topic 853)
In January 2014, the FASB issued ASU No. 2014-5 which states that certain service concession arrangements with public-sector entity grantors are not in scope of ASC 840, Leases ("ASC 840"). Operating entities with these types of arrangements with public-sector entities should not account for these arrangements under ASC 840 and should not recognize the related infrastructure as property, plant and equipment. Entities should apply other GAAP to the arrangement. The standard is effective for annual reporting periods beginning after December 15, 2014 and interim periods therein. Early adoption is permitted. The guidance will be applied on a modified retrospective basis to service concession arrangements in existence at the beginning of the fiscal year of adoption, which is expected to be 2015 for AES. The Company has preliminarily identified certain concession arrangements that will likely be affected by this standard and is currently evaluating the impact of adopting the standard on its financial position and results of operations.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU No. 2014-09 which clarifies principles for recognizing revenue and will result in a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The objective of the new standard is to provide a single and comprehensive revenue recognition model for all contracts with customers to improve comparability. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The standard requires an entity to recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016 and interim periods therein. Early adoption is not permitted. The standard permits the use of either a full retrospective or modified retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the standard on its financial position and results of operations.
ASU No. 2014-12, Compensation — Stock Compensation (Topic 718)
In June 2014, the FASB issued ASU No. 2014-12 which is intended to resolve the diverse accounting treatment in practice with compensation awards. The objective of the new standard is to clarify the treatment of accounting for performance targets which affect award vesting. The standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods therein. Early adoption is permitted. The standard permits the use of either a prospective or modified retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of the standard on its financial position and results of operations, but does not expect to be materially impacted.
2. INVENTORY
The following table summarizes the Company’s inventory balances as of the periods indicated:
September 30, 2014 | December 31, 2013 | |||||||
(in millions) | ||||||||
Coal, fuel oil and other raw materials | $ | 375 | $ | 334 | ||||
Spare parts and supplies | 366 | 350 | ||||||
Total | $ | 741 | $ | 684 | ||||
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 2013 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 the periods indicated:
September 30, 2014 | December 31, 2013 | |||||||||||||||||||||||||||||||
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 | $ | — | $ | 484 | $ | — | $ | 484 | $ | — | $ | 435 | $ | — | $ | 435 | ||||||||||||||||
Certificates of deposit | — | 119 | — | 119 | — | 151 | — | 151 | ||||||||||||||||||||||||
Government debt securities | — | 56 | — | 56 | — | 25 | — | 25 | ||||||||||||||||||||||||
Subtotal | — | 659 | — | 659 | — | 611 | — | 611 | ||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Mutual funds | — | 38 | — | 38 | — | 44 | — | 44 | ||||||||||||||||||||||||
Subtotal | — | 38 | — | 38 | — | 44 | — | 44 | ||||||||||||||||||||||||
Total available-for-sale | — | 697 | — | 697 | — | 655 | — | 655 | ||||||||||||||||||||||||
TRADING: | ||||||||||||||||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||||||||||
Mutual funds | 15 | — | — | 15 | 13 | — | — | 13 | ||||||||||||||||||||||||
Total trading | 15 | — | — | 15 | 13 | — | — | 13 | ||||||||||||||||||||||||
DERIVATIVES: | ||||||||||||||||||||||||||||||||
Interest rate derivatives | — | 20 | — | 20 | — | 98 | — | 98 | ||||||||||||||||||||||||
Cross-currency derivatives | — | — | — | — | — | 5 | — | 5 | ||||||||||||||||||||||||
Foreign currency derivatives | — | 29 | 102 | 131 | — | 15 | 98 | 113 | ||||||||||||||||||||||||
Commodity derivatives | — | 28 | 13 | 41 | — | 18 | 6 | 24 | ||||||||||||||||||||||||
Total derivatives | — | 77 | 115 | 192 | — | 136 | 104 | 240 | ||||||||||||||||||||||||
TOTAL ASSETS | $ | 15 | $ | 774 | $ | 115 | $ | 904 | $ | 13 | $ | 791 | $ | 104 | $ | 908 | ||||||||||||||||
Liabilities | ||||||||||||||||||||||||||||||||
DERIVATIVES: | ||||||||||||||||||||||||||||||||
Interest rate derivatives | $ | — | $ | 199 | $ | 180 | $ | 379 | $ | — | $ | 221 | $ | 101 | $ | 322 | ||||||||||||||||
Cross-currency derivatives | — | 25 | — | 25 | — | 11 | — | 11 | ||||||||||||||||||||||||
Foreign currency derivatives | — | 46 | 7 | 53 | — | 16 | 5 | 21 | ||||||||||||||||||||||||
Commodity derivatives | — | 33 | 1 | 34 | — | 15 | 2 | 17 | ||||||||||||||||||||||||
Total derivatives | — | 303 | 188 | 491 | — | 263 | 108 | 371 | ||||||||||||||||||||||||
TOTAL LIABILITIES | $ | — | $ | 303 | $ | 188 | $ | 491 | $ | — | $ | 263 | $ | 108 | $ | 371 | ||||||||||||||||
_____________________________
(1) | Amortized cost approximated fair value at September 30, 2014 and December 31, 2013. |
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, 2014 and 2013 (presented net by type of derivative). 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, 2014 | ||||||||||||||||
Interest Rate | Foreign Currency | Commodity | Total | |||||||||||||
(in millions) | ||||||||||||||||
Balance at the beginning of the period | $ | (183 | ) | $ | 107 | $ | 16 | $ | (60 | ) | ||||||
Total gains (losses) (realized and unrealized): | ||||||||||||||||
Included in earnings | — | (7 | ) | — | (7 | ) | ||||||||||
Included in other comprehensive income - derivative activity | (13 | ) | — | — | (13 | ) | ||||||||||
Included in other comprehensive income - foreign currency translation activity | 9 | (4 | ) | — | 5 | |||||||||||
Included in regulatory (assets) liabilities | — | — | (4 | ) | (4 | ) | ||||||||||
Settlements | 7 | (1 | ) | — | 6 | |||||||||||
Balance at the end of the period | $ | (180 | ) | $ | 95 | $ | 12 | $ | (73 | ) | ||||||
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 | $ | — | $ | (8 | ) | $ | — | $ | (8 | ) | ||||||
7
Three Months Ended September 30, 2013 | ||||||||||||||||
Interest Rate | Foreign Currency | Commodity | Total | |||||||||||||
(in millions) | ||||||||||||||||
Balance at the beginning of the period | $ | (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 the end of the period | $ | (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 | |||||||
Nine Months Ended September 30, 2014 | ||||||||||||||||
Interest Rate | Foreign Currency | Commodity | Total | |||||||||||||
(in millions) | ||||||||||||||||
Balance at the beginning of the period | $ | (101 | ) | $ | 93 | $ | 4 | $ | (4 | ) | ||||||
Total gains (losses) (realized and unrealized): | ||||||||||||||||
Included in earnings | 1 | 29 | 2 | 32 | ||||||||||||
Included in other comprehensive income - derivative activity | (112 | ) | (2 | ) | — | (114 | ) | |||||||||
Included in other comprehensive income - foreign currency translation activity | 9 | (24 | ) | — | (15 | ) | ||||||||||
Included in regulatory (assets) liabilities | — | — | 7 | 7 | ||||||||||||
Settlements | 23 | (4 | ) | (1 | ) | 18 | ||||||||||
Transfers of (assets) liabilities out of Level 3 | — | 3 | — | 3 | ||||||||||||
Balance at the end of the period | $ | (180 | ) | $ | 95 | 12 | $ | (73 | ) | |||||||
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 | $ | 26 | $ | 1 | $ | 28 | ||||||||
Nine Months Ended September 30, 2013 | |||||||||||||||
Interest Rate | Foreign Currency | Commodity | Total | ||||||||||||
(in millions) | |||||||||||||||
Balance at the beginning of the period | $ | (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 out of Level 3 | 157 | (6 | ) | — | 151 | ||||||||||
Balance at the end of the period | $ | (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 | |||||||
The following table summarizes the significant unobservable inputs used for the Level 3 derivative assets (liabilities) as of September 30, 2014:
Type of Derivative | Fair Value | Unobservable Input | Amount or Range (Weighted Average) | ||||||
(in millions) | |||||||||
Interest rate | $ | (180 | ) | Subsidiaries’ credit spreads | 3.75% - 6.98% (5.51%) | ||||
Foreign currency: | |||||||||
Embedded derivative — Argentine Peso | 102 | Argentine Peso to USD currency exchange rate after 1 year | 8.84 - 36.40 (22.12) | ||||||
Embedded derivative — Euro | (7 | ) | Subsidiaries’ credit spreads | 6.98 | % | ||||
Commodity: | |||||||||
Other | 12 | ||||||||
Total | $ | (73 | ) | ||||||
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, 2014 | ||||||||||||||||||||
Carrying Amount (1) | Fair Value | Pretax Loss | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
(in millions) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Long-lived assets held and used:(2) | ||||||||||||||||||||
DPL (East Bend) | $ | 14 | $ | — | $ | 2 | $ | — | $ | 12 | ||||||||||
Ebute (measured at June 30, 2014) | 99 | — | — | 47 | 52 | |||||||||||||||
Ebute (measured at September 30, 2014) | 51 | — | — | 36 | 15 | |||||||||||||||
UK Wind (Newfield) | 11 | — | — | — | 11 | |||||||||||||||
Discontinued operations and held-for-sale businesses:(3) | ||||||||||||||||||||
Cameroon | 378 | — | 340 | — | 38 | |||||||||||||||
Equity method investments (5) | ||||||||||||||||||||
Silver Ridge Power | 315 | — | — | 273 | 42 | |||||||||||||||
Entek | 143 | — | 125 | — | 18 | |||||||||||||||
Goodwill:(4) | ||||||||||||||||||||
DPLER | 136 | — | — | — | 136 | |||||||||||||||
Buffalo Gap | 28 | — | — | 10 | 18 | |||||||||||||||
Nine Months Ended September 30, 2013 | ||||||||||||||||||||
Carrying Amount (1) | Fair Value | Pretax Loss | ||||||||||||||||||
Level 1 | Level 2 | Level 3 | ||||||||||||||||||
(in millions) | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Long-lived assets held and used:(2) | ||||||||||||||||||||
Poland Wind projects | $ | 79 | $ | — | $ | — | $ | 14 | $ | 65 | ||||||||||
Itabo (San Lorenzo) | 22 | — | — | 7 | 15 | |||||||||||||||
Beaver Valley | 61 | — | — | 15 | 46 | |||||||||||||||
Long-lived assets held for sale:(2) | ||||||||||||||||||||
Wind turbines | 25 | — | 25 | — | — | |||||||||||||||
Discontinued operations and held-for-sale businesses:(3) | ||||||||||||||||||||
Cameroon | 264 | — | 199 | — | 65 | |||||||||||||||
Saurashtra | 19 | — | 7 | — | 12 | |||||||||||||||
Ukraine | 147 | — | 113 | — | 34 | |||||||||||||||
Equity method investments:(5) | ||||||||||||||||||||
Elsta | 240 | — | — | 118 | 122 | |||||||||||||||
Goodwill (4) | ||||||||||||||||||||
Ebute | 58 | — | — | — | 58 | |||||||||||||||
_____________________________
(1) | Represents the carrying value (including costs to sell) at the date of measurement, before fair value adjustment. |
(2) | See Note 15 — Asset Impairment Expense for further information. |
(3) | See Note 18 — Discontinued Operations and Held-For-Sale Businesses for further information. |
(4) | See Note 14 — Goodwill Impairment for further information. |
(5) | See Note 16 — Other Non-Operating Expense and Note 7 — Investments in and Advances to Affiliates for further information. |
9
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, 2014:
Fair Value | Valuation Technique | Unobservable Input | Range (Weighted Average) | ||||||||
(in millions) | ($ in millions) | ||||||||||
Long-lived assets held and used: | |||||||||||
Ebute (June 30, 2014) | $ | 47 | Discounted cash flow | Annual revenue growth | 0% to 1% (1%) | ||||||
Annual pretax operating margin | 0% to 47% (24%) | ||||||||||
Weighted-average cost of capital | 10.3 | % | |||||||||
Ebute (September 30, 2014) | $ | 36 | Discounted cash flow | Annual revenue growth | 0% to 1% (1%) | ||||||
Annual pretax operating margin | 0% to 56% (25%) | ||||||||||
Equity Method Investment: | |||||||||||
Silver Ridge Power (1) | $ | 273 | Discounted cash flow | Annual revenue growth | -57% to 1% (-4%) | ||||||
Annual pretax operating margin | -115% to 50% (6%) | ||||||||||
Cost of equity | 13% to 16% (14%) | ||||||||||
_____________________________
(1) The fair value for Silver Ridge Power was determined using a combination of the bid price (a level 2 input) obtained for the sale of AES’ interest in solar photovoltaic projects in operation and under development in Bulgaria, France, Greece, India and the United States, and a discounted cash flow model for the solar photovoltaic projects that were retained in Italy, Puerto Rico and Spain.
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, 2014 and December 31, 2013, but for which fair value is disclosed.
Carrying Amount | Fair Value | |||||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||
(in millions) | ||||||||||||||||||||
September 30, 2014 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Accounts receivable — noncurrent(1) | $ | 210 | $ | 170 | $ | — | $ | — | $ | 170 | ||||||||||
Liabilities | ||||||||||||||||||||
Non-recourse debt | 15,719 | 16,117 | — | 13,818 | 2,299 | |||||||||||||||
Recourse debt | 5,347 | 5,598 | — | 5,598 | — | |||||||||||||||
December 31, 2013 | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Accounts receivable — noncurrent(1) | $ | 260 | $ | 194 | $ | — | $ | — | $ | 194 | ||||||||||
Liabilities | ||||||||||||||||||||
Non-recourse debt | 15,380 | 15,620 | — | 13,397 | 2,223 | |||||||||||||||
Recourse debt | 5,669 | 6,164 | — | 6,164 | — | |||||||||||||||
_____________________________
(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 and carrying amount of these accounts receivable exclude value-added tax of $36 million and $46 million at September 30, 2014 and December 31, 2013, respectively. |
4. INVESTMENTS IN MARKETABLE SECURITIES
The Company’s investments in marketable debt and equity securities as of September 30, 2014 and December 31, 2013 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, 2014, $628 million of available-for-sale debt securities had stated maturities within one year and $31 million had stated maturities between one and three years. Gains and losses on the sale of investments are determined using the specific-identification method. Pretax gains and losses related to available-for-sale and trading securities are generally immaterial for disclosure purposes. For the three and nine months ended September 30, 2014 and 2013, there were no realized losses on the sale of available-for-sale securities and no other-than-temporary impairment of marketable securities was recognized in earnings or other comprehensive income. The following table summarizes the gross proceeds from sale of available-for-sale securities for the periods indicated:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in millions) | ||||||||||||||||
Gross proceeds from sales of available-for-sale securities | $ | 1,144 | $ | 1,071 | $ | 3,362 | $ | 3,394 | ||||||||
10
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 2013 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, 2014 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) | 2,943 | $ | 2,943 | 3,604 | $ | 3,604 | 11 | 57 | % | ||||||||||
EURIBOR (Euro) | 551 | 696 | 551 | 696 | 7 | 86 | % | ||||||||||||
Cross-Currency Swaps: | |||||||||||||||||||
Chilean Unidad de Fomento | 4 | 178 | 4 | ||||||||||||||||