Q2 2014 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 June 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 August 3, 2014 was 723,269,141
 




THE AES CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 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)
 
 
June 30,
2014
 
December 31,
2013
 
 
(in millions, except share
and per share data)
ASSETS
 
 
 
 
CURRENT ASSETS
 
 
 
 
Cash and cash equivalents
 
$
1,515

 
$
1,642

Restricted cash
 
482

 
597

Short-term investments
 
424

 
668

Accounts receivable, net of allowance for doubtful accounts of $126 and $134, respectively
 
2,689

 
2,363

Inventory
 
710

 
684

Deferred income taxes
 
190

 
166

Prepaid expenses
 
177

 
179

Other current assets
 
1,220

 
976

Current assets of discontinued operations and held-for-sale businesses
 
—

 
464

Total current assets
 
7,407

 
7,739

NONCURRENT ASSETS
 
 
 
 
Property, Plant and Equipment:
 
 
 
 
Land
 
958

 
922

Electric generation, distribution assets and other
 
31,321

 
30,596

Accumulated depreciation
 
(10,095
)
 
(9,604
)
Construction in progress
 
3,444

 
3,198

Property, plant and equipment, net
 
25,628

 
25,112

Other Assets:
 
 
 
 
Investments in and advances to affiliates
 
1,000

 
1,010

Debt service reserves and other deposits
 
549

 
541

Goodwill
 
1,468

 
1,622

Other intangible assets, net of accumulated amortization of $156 and $153, respectively
 
299

 
297

Deferred income taxes
 
656

 
666

Other noncurrent assets
 
2,426

 
2,170

Noncurrent assets of discontinued operations and held-for-sale businesses
 
—

 
1,254

Total other assets
 
6,398

 
7,560

TOTAL ASSETS
 
$
39,433

 
$
40,411

LIABILITIES AND EQUITY
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
Accounts payable
 
$
2,130

 
$
2,259

Accrued interest
 
272

 
263

Accrued and other liabilities
 
2,170

 
2,114

Non-recourse debt, including $255 and $267, respectively, related to variable interest entities
 
2,095

 
2,062

Recourse debt
 
—

 
118

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

 
837

Total current liabilities
 
6,667

 
7,653

NONCURRENT LIABILITIES
 
 
 
 
Non-recourse debt, including $1,026 and $979, respectively, related to variable interest entities
 
13,845

 
13,318

Recourse debt
 
5,783

 
5,551

Deferred income taxes
 
1,114

 
1,119

Pension and other post-retirement liabilities
 
1,332

 
1,310

Other noncurrent liabilities
 
3,106

 
3,299

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

 
432

Total noncurrent liabilities
 
25,180

 
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; 814,347,602 issued and 723,221,508 outstanding at June 30, 2014 and 813,316,510 issued and 722,508,342 outstanding at December 31, 2013)
 
8

 
8

Additional paid-in capital
 
8,396

 
8,443

Accumulated deficit
 
(75
)
 
(150
)
Accumulated other comprehensive loss
 
(3,023
)
 
(2,882
)
Treasury stock, at cost (91,126,094 shares at June 30, 2014 and 90,808,168 shares at December 31, 2013)
 
(1,095
)
 
(1,089
)
Total AES Corporation stockholders’ equity
 
4,211

 
4,330

NONCONTROLLING INTERESTS
 
3,297

 
3,321

Total equity
 
7,508

 
7,651

TOTAL LIABILITIES AND EQUITY
 
$
39,433

 
$
40,411

See Notes to Condensed Consolidated Financial Statements.

1



THE AES CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions, except per share amounts)
Revenue:
 
 
 
 
 
 
 
 
Regulated
 
$
2,116

 
$
1,974

 
$
4,258

 
$
4,113

Non-Regulated
 
2,195

 
1,971

 
4,315

 
3,982

Total revenue
 
4,311

 
3,945

 
8,573

 
8,095

Cost of Sales:
 
 
 
 
 
 
 
 
Regulated
 
(1,844
)
 
(1,632
)
 
(3,776
)
 
(3,419
)
Non-Regulated
 
(1,648
)
 
(1,412
)
 
(3,184
)
 
(3,026
)
Total cost of sales
 
(3,492
)
 
(3,044
)
 
(6,960
)
 
(6,445
)
Operating margin
 
819

 
901

 
1,613

 
1,650

General and administrative expenses
 
(52
)
 
(53
)
 
(103
)
 
(107
)
Interest expense
 
(323
)
 
(337
)
 
(696
)
 
(707
)
Interest income
 
73

 
63

 
136

 
128

Loss on extinguishment of debt
 
(15
)
 
(165
)
 
(149
)
 
(212
)
Other expense
 
(17
)
 
(17
)
 
(25
)
 
(43
)
Other income
 
33

 
13

 
44

 
81

Gain on sale of investments
 
—

 
20

 
1

 
23

Goodwill impairment expense
 
—

 
—

 
(154
)
 
—

Asset impairment expense
 
(63
)
 
—

 
(75
)
 
(48
)
Foreign currency transaction gains (losses)
 
7

 
(18
)
 
(12
)
 
(48
)
Other non-operating expense
 
(44
)
 
—

 
(44
)
 
—

INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES
 
418

 
407

 
536

 
717

Income tax expense
 
(157
)
 
(76
)
 
(211
)
 
(159
)
Net equity in earnings of affiliates
 
20

 
2

 
45

 
6

INCOME FROM CONTINUING OPERATIONS
 
281

 
333

 
370

 
564

Income (loss) from operations of discontinued businesses, net of income tax expense of $8, $7, $22, and $5, respectively
 
7

 
(3
)
 
27

 
1

Net (loss) gain from disposal and impairments of discontinued businesses, net of income tax (benefit) expense of $5, $0, $4, and $(1), respectively
 
(13
)
 
3

 
(56
)
 
(33
)
NET INCOME
 
275

 
333

 
341

 
532

Noncontrolling interests:
 
 
 
 
 
 
 
 
Less: Income from continuing operations attributable to noncontrolling interests
 
(139
)
 
(166
)
 
(275
)
 
(285
)
Less: (Income) loss from discontinued operations attributable to noncontrolling interests
 
(3
)
 
—

 
9

 
2

Total net income attributable to noncontrolling interests
 
(142
)
 
(166
)
 
(266
)
 
(283
)
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION
 
$
133

 
$
167

 
$
75

 
$
249

AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
 
 
 
 
 
 
 
 
Income from continuing operations, net of tax
 
$
142

 
$
167

 
$
95

 
$
279

Loss from discontinued operations, net of tax
 
(9
)
 
—

 
(20
)
 
(30
)
Net income
 
$
133

 
$
167

 
$
75

 
$
249

BASIC EARNINGS PER SHARE:
 
 
 
 
 
 
 
 
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax
 
$
0.20

 
$
0.22

 
$
0.13

 
$
0.37

Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax
 
(0.02
)
 
—

 
(0.03
)
 
(0.04
)
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
 
$
0.18

 
$
0.22

 
$
0.10

 
$
0.33

DILUTED EARNINGS PER SHARE:
 
 
 
 
 
 
 
 
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax
 
$
0.20

 
$
0.22

 
$
0.13

 
$
0.37

Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax
 
(0.02
)
 
—

 
(0.03
)
 
(0.04
)
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
 
$
0.18

 
$
0.22

 
$
0.10

 
$
0.33

DILUTED SHARES OUTSTANDING
 
728

 
751

 
728

 
750

DIVIDENDS DECLARED PER COMMON SHARE
 
$
0.05

 
$
0.08

 
$
0.05

 
$
0.08

See Notes to Condensed Consolidated Financial Statements.

2



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

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
NET INCOME
 
$
275

 
$
333

 
$
341

 
$
532

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 $1, 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 $(7), $2, $(8) and $2, respectively
 
24

 
(226
)
 
29

 
(258
)
Reclassification to earnings, net of income tax (expense) benefit of $0, $0, $0 and $0, respectively
 
(53
)
 
44

 
(47
)
 
41

Total foreign currency translation adjustments
 
(29
)
 
(182
)
 
(18
)
 
(217
)
Derivative activity:
 
 
 
 
 
 
 
 
Change in derivative fair value, net of income tax (expense) benefit of $22, $(28), $46 and $(28), respectively
 
(105
)
 
102

 
(225
)
 
86

Reclassification to earnings, net of income tax (expense) of $(10), $(15), $(13) and $(22), respectively
 
13

 
61

 
32

 
85

Total change in fair value of derivatives
 
(92
)
 
163

 
(193
)
 
171

Pension activity:
 
 
 
 
 
 
 
 
Change in pension adjustments due to prior service cost, net of income tax (expense) benefit of $(1), $0, $(1), $0, respectively
 
1

 
—

 
1

 
—

Change in pension adjustments due to disposal of discontinued operations for the period, net of income tax (expense) benefit of $(9), $0, $(9), $0, respectively
 
14

 
—

 
14

 
—

Reclassification to earnings due to amortization of net actuarial loss, net of income tax (expense) benefit of $2, $(7), $(1) and $(14), respectively
 
10

 
13

 
16

 
27

Total pension adjustments
 
25

 
13

 
31

 
27

OTHER COMPREHENSIVE (LOSS)
 
(96
)
 
(6
)
 
(180
)
 
(19
)
COMPREHENSIVE INCOME
 
179

 
327

 
161

 
513

Less: Comprehensive (income) attributable to noncontrolling interests
 
(102
)
 
(147
)
 
(227
)
 
(283
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
 
$
77

 
$
180

 
$
(66
)
 
$
230



See Notes to Condensed Consolidated Financial Statements.

3



THE AES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Six Months Ended June 30,
 
 
2014
 
2013
 
 
(in millions)
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
341

 
$
532

Adjustments to net income:
 
 
 
 
Depreciation and amortization
 
625

 
661

Loss (gain) on sale of assets and investments
 
7

 
(2
)
Impairment expenses
 
273

 
48

Deferred income taxes
 
52

 
(46
)
Provisions for contingencies
 
(48
)
 
36

Loss on the extinguishment of debt
 
149

 
212

Loss on disposals and impairments - discontinued operations
 
51

 
31

Other
 
46

 
23

Changes in operating assets and liabilities
 
 
 
 
(Increase) decrease in accounts receivable
 
(312
)
 
191

(Increase) decrease in inventory
 
(39
)
 
(12
)
(Increase) decrease in prepaid expenses and other current assets
 
(72
)
 
55

(Increase) decrease in other assets
 
(316
)
 
(147
)
Increase (decrease) in accounts payable and other current liabilities
 
(194
)
 
(252
)
Increase (decrease) in income tax payables, net and other tax payables
 
(176
)
 
(134
)
Increase (decrease) in other liabilities
 
66

 
(11
)
Net cash provided by operating activities
 
453

 
1,185

INVESTING ACTIVITIES:
 
 
 
 
Capital expenditures
 
(908
)
 
(866
)
Acquisitions - net of cash acquired
 
(728
)
 
(3
)
Proceeds from the sale of businesses, net of cash sold
 
890

 
135

Proceeds from the sale of assets
 
16

 
43

Sale of short-term investments
 
2,198

 
2,311

Purchase of short-term investments
 
(1,925
)
 
(2,381
)
Decrease in restricted cash, debt service reserves and other assets
 
127

 
32

Other investing
 
(61
)
 
23

Net cash used in investing activities
 
(391
)
 
(706
)
FINANCING ACTIVITIES:
 
 
 
 
Borrowings under the revolving credit facilities, net
 
130

 
33

Issuance of recourse debt
 
1,525

 
750

Issuance of non-recourse debt
 
1,710

 
2,383

Repayments of recourse debt
 
(1,663
)
 
(1,206
)
Repayments of non-recourse debt
 
(1,349
)
 
(2,169
)
Payments for financing fees
 
(105
)
 
(127
)
Distributions to noncontrolling interests
 
(197
)
 
(211
)
Contributions from noncontrolling interests
 
110

 
76

Dividends paid on AES common stock
 
(72
)
 
(60
)
Payments for financed capital expenditures
 
(312
)
 
(257
)
Purchase of treasury stock
 
(32
)
 
(18
)
Other financing
 
5

 
7

Net cash used in financing activities
 
(250
)
 
(799
)
Effect of exchange rate changes on cash
 
(14
)
 
(39
)
Decrease in cash of discontinued and held-for-sale businesses
 
75

 
8

Total decrease in cash and cash equivalents
 
(127
)
 
(351
)
Cash and cash equivalents, beginning
 
1,642

 
1,900

Cash and cash equivalents, ending
 
$
1,515

 
$
1,549

SUPPLEMENTAL DISCLOSURES:
 
 
 
 
Cash payments for interest, net of amounts capitalized
 
$
676

 
$
700

Cash payments for income taxes, net of refunds
 
$
332

 
$
432

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Assets received upon sale of subsidiaries
 
$
44

 
$
—

   Assets acquired through capital lease
 
$
13

 
$
10

   Dividends declared but not yet paid
 
$
—

 
$
30

See Notes to Condensed Consolidated Financial Statements.

4



THE AES CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2014 and 2013
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 17 — 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 six months ended June 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 June 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.
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. 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
In April 2014, the FASB issued ASU No. 2014-08, which significantly changes the existing accounting guidance on discontinued operations. 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 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 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. ASU No. 2014-08 is effective for annual reporting periods beginning after December 15, 2014 and interim periods therein.

5



ASU No. 2014-08 should be applied to components classified as held for sale after its effective date. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued. The Company is currently evaluating the impact of adopting ASU No. 2014-08 on its financial position and results of operations. The adoption is expected to reduce the number of disposals that meet the definition of a discontinued operations.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU No. 2014-09, which brings to a conclusion its project to clarify principles for recognizing revenue, while resulting 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, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. 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.
2. INVENTORY
The following table summarizes the Company’s inventory balances as of the periods indicated:
 
 
June 30, 2014
 
December 31, 2013
 
 
(in millions)
Coal, fuel oil and other raw materials
 
$
346

 
$
334

Spare parts and supplies
 
364

 
350

Total
 
$
710

 
$
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:
 
 
June 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
 
$
—

 
$
260

 
$
—

 
$
260

 
$
—

 
$
435

 
$
—

 
$
435

Certificates of deposit
 
—

 
72

 
—

 
72

 
—

 
151

 
—

 
151

Government debt securities
 
—

 
44

 
—

 
44

 
—

 
25

 
—

 
25

Subtotal
 
—

 
376

 
—

 
376

 
—

 
611

 
—

 
611

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
 
—

 
47

 
—

 
47

 
—

 
44

 
—

 
44

Subtotal
 
—

 
47

 
—

 
47

 
—

 
44

 
—

 
44

Total available-for-sale
 
—

 
423

 
—

 
423

 
—

 
655

 
—

 
655

TRADING:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
 
15

 
—

 
—

 
15

 
13

 
—

 
—

 
13

Total trading
 
15

 
—

 
—

 
15

 
13

 
—

 
—

 
13

DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
 
—

 
22

 
—

 
22

 
—

 
98

 
—

 
98

Cross currency derivatives
 
—

 
—

 
—

 
—

 
—

 
5

 
—

 
5

Foreign currency derivatives
 
—

 
15

 
111

 
126

 
—

 
15

 
98

 
113

Commodity derivatives
 
—

 
47

 
17

 
64

 
—

 
18

 
6

 
24

Total derivatives
 
—

 
84

 
128

 
212

 
—

 
136

 
104

 
240

TOTAL ASSETS
 
$
15

 
$
507

 
$
128

 
$
650

 
$
13

 
$
791

 
$
104

 
$
908

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
 
$
—

 
$
226

 
$
183

 
$
409

 
$
—

 
$
221

 
$
101

 
$
322

Cross currency derivatives
 
—

 
11

 
—

 
11

 
—

 
11

 
—

 
11

Foreign currency derivatives
 
—

 
35

 
4

 
39

 
—

 
16

 
5

 
21

Commodity derivatives
 
—

 
42

 
1

 
43

 
—

 
15

 
2

 
17

Total derivatives
 
—

 
314

 
188

 
502

 
—

 
263

 
108

 
371

TOTAL LIABILITIES
 
$
—

 
$
314

 
$
188

 
$
502

 
$
—

 
$
263

 
$
108

 
$
371

 _____________________________
(1) 
Amortized cost approximated fair value at June 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 six months ended June 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 June 30, 2014
 
 
Interest
Rate
 
Foreign
Currency
 
Commodity
 
Total
 
 
(in millions)
Balance at the beginning of the period
 
$
(87
)
 
$
101

 
$
—

 
$
14

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

 
10

 
3

 
13

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

 
—

 
(30
)
Included in other comprehensive income - foreign currency translation activity
 
—

 
(2
)
 
—

 
(2
)
Included in regulatory (assets) liabilities
 
—

 
—

 
15

 
15

Settlements
 
3

 
(2
)
 
(2
)
 
(1
)
Transfers of assets (liabilities) into Level 3
 
(69
)
 
—

 
—

 
(69
)
Transfers of (assets) liabilities out of Level 3
 
—

 
—

 
—

 
—

Balance at the end of the period
 
$
(183
)
 
$
107

 
$
16

 
$
(60
)
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
 
$
—

 
$
9

 
$
—

 
$
9


7



 
 
Three Months Ended June 30, 2013
 
 
Interest
Rate
 
Foreign
Currency
 
Commodity
 
Total
 
 
(in millions)
Balance at the beginning of the period
 
$
(72
)
 
$
71

 
$
(3
)
 
$
(4
)
Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
Included in earnings
 
(4
)
 
12

 
1

 
9

Included in other comprehensive income - derivative activity
 
13

 
—

 
—

 
13

Included in other comprehensive income - foreign currency translation activity
 
—

 
(3
)
 
—

 
(3
)
Included in regulatory (assets) liabilities
 
—

 
—

 
11

 
11

Settlements
 
4

 
(1
)
 
—

 
3

Transfers of assets (liabilities) into Level 3
 
(42
)
 
—

 
—

 
(42
)
        Transfers of (assets) liabilities out of Level 3
 
38

 
(9
)
 
—

 
29

Balance at the end of the period
 
$
(63
)
 
$
70

 
$
9

 
$
16

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
 
$
—

 
$
14

 
$
—

 
$
14

 
 
Six Months Ended June 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

 
37

 
1

 
39

Included in other comprehensive income - derivative activity
 
(99
)
 
(1
)
 
—

 
(100
)
Included in other comprehensive income - foreign currency translation activity
 
—

 
(20
)
 
—

 
(20
)
Included in regulatory (assets) liabilities
 
—

 
—

 
12

 
12

Settlements
 
16

 
(3
)
 
(1
)
 
12

Transfers of (assets) liabilities out of Level 3
 
—

 
1

 
—

 
1

Balance at the end of the period
 
$
(183
)
 
$
107

 
16

 
$
(60
)
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

 
$
34

 
$
—

 
$
35

 
Six Months Ended June 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
(4
)
 
15

 
1

 
12

Included in other comprehensive income - derivative activity
81

 
—

 
—

 
81

Included in other comprehensive income - foreign currency translation activity
2

 
(6
)
 
—

 
(4
)
Included in regulatory (assets) liabilities
—

 
—

 
10

 
10

Settlements
48

 
(2
)
 
(1
)
 
45

Transfers of (assets) liabilities out of Level 3
222

 
(9
)
 
—

 
213

Balance at the end of the period
$
(63
)
 
$
70

 
$
9

 
$
16

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
$
—

 
$
13

 
$
1

 
$
14

The following table summarizes the significant unobservable inputs used for the Level 3 derivative assets (liabilities) as of June 30, 2014:
Type of Derivative
 
Fair Value
 
Unobservable Input
 
Amount or Range
(Weighted Average)
 
 
(in millions)
 
 
 
 
Interest rate
 
$
(183
)
 
Subsidiaries’ credit spreads
 
3.75% - 5.30% (4.67%)

Foreign currency:
 
 
 
 
 
 
Embedded derivative — Argentine Peso
 
111

 
Argentine Peso to U.S. Dollar currency exchange rate after 1 year
 
8.36 - 30.60 (20.06)

Embedded derivative — Euro
 
(4
)
 
Subsidiaries’ credit spreads
 
5.3
%
Commodity:
 
 
 
 
 
 
Other
 
16

 
 
 
 
Total
 
$
(60
)
 
 
 
 

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:
 
 
Six Months Ended June 30, 2014
 
 
Carrying
Amount
 
Fair Value
 
Gross
Loss
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used:(1)
 
 
 
 
 
 
 
 
 
 
DPL (East Bend)
 
$
14

 
$
—

 
$
2

 
$
—

 
$
12

Ebute
 
99

 
—

 
—

 
47

 
52

UK Wind (Newfield)
 
11

 
—

 
—

 
—

 
11

Discontinued operations and held-for-sale businesses:(2)
 
 
 
 
 
 
 
 
 
 
Cameroon
 
372

 
—

 
340

 
—

 
38

Equity method investments
 
 
 
 
 
 
 
 
 
 
Silver Ridge Power
 
317

 
—

 
—

 
273

 
44

Goodwill:(3)
 
 
 
 
 
 
 
 
 
 
DPLER
 
136

 
—

 
—

 
—

 
136

Buffalo Gap
 
28

 
—

 
—

 
10

 
18

 
 
Six Months Ended June 30, 2013
 
 
Carrying
Amount
 
Fair Value
 
Gross
Loss
 
 
Level 1
 
Level 2
 
Level 3
 
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
Long-lived assets held and used:(1)
 
 
 
 
 
 
 
 
 
 
Beaver Valley
 
$
61

 
$
—

 
$
—

 
$
15

 
$
46

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

 
—

 
25

 
—

 
—

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


Ukraine utilities
 
143

 
—

 
113

 
—

 
34

_____________________________
(1) 
See Note 15 — Asset Impairment Expense for further information.
(2) 
See Note 17 — 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 14 — Goodwill Impairments for further information.
The following table summarizes the significant unobservable inputs used in the Level 3 measurement of long-lived assets during the six months ended June 30, 2014:
 
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted  Average)
 
 
(in millions)
 
 
 
 
 
($ in millions)
Long-lived assets held and used:
 
 
 
 
 
 
 
 
Ebute
 
$
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
%
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%)

Total
 
$
320

 
 
 
 
 
 
_____________________________
(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 June 30, 2014 and December 31, 2013, but for which fair value is disclosed.

9



 
 
Carrying
Amount
 
Fair Value
 
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
June 30, 2014
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
Accounts receivable — noncurrent(1)
 
$
220

 
$
194

 
$
—

 
$
—

 
$
194

Liabilities
 
 
 
 
 
 
 
 
 
 
Non-recourse debt
 
15,940

 
16,500

 
—

 
14,143

 
2,357

Recourse debt
 
5,783

 
6,147

 
—

 
6,147

 
—

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 $38 million and $46 million at June 30, 2014 and December 31, 2013, respectively.
4. INVESTMENTS IN MARKETABLE SECURITIES
The Company’s investments in marketable debt and equity securities as of June 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 June 30, 2014, $359 million of available-for-sale debt securities had stated maturities within one year, and $17 million of available-for sale debt securities had stated maturities between one and two 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 six months ended June 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 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 June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(in millions)
Gross proceeds from sales of available-for-sale securities
 
$
1,158

 
$
619

 
$
2,218

 
$
2,323

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 June 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)
 
3,154

 
$
3,154

 
4,886

 
$
4,886

 
11
 
60
%
EURIBOR (Euro)
 
552

 
756

 
553

 
757

 
8
 
83
%
LIBOR (British Pound)
 
65

 
111

 
65

 
111

 
12
 
83
%
Cross Currency Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Chilean Unidad de Fomento
 
4

 
191

 
4

 
191

 
14
 
67
%
_____________________________
(1) 
The Company’s interest rate derivative instruments primarily include accreting and amortizing notionals. The maximum derivative notional represents the largest notional at any point between June 30, 2014 and the maturity of the derivative instrument, which includes forward-starting derivative instruments. The interest rate and cross currency derivatives range in maturity through 2033 and 2028, respectively.
(2) 
The percentage of variable-rate debt currently hedged is based on the related index and excludes forecasted issuances of debt and variable-rate debt tied to other indices where the Company has no interest rate derivatives.

10



 
 
June 30, 2014
Foreign Currency Derivatives
 
Notional(1)
 
Notional Translated to USD
 
Weighted-Average Remaining Term (2)
 
 
(in millions)
 
(in years)
Foreign Currency Options and Forwards:
 
 
 
 
 
 
Chilean Unidad de Fomento
 
11

 
$
497

 
1
Chilean Peso
 
65,607

 
119

 
<1
Brazilian Real
 
150

 
68

 
<1
Euro
 
140

 
192

 
<1
Colombian Peso
 
193,684

 
103

 
<1
British Pound
 
61

 
105

 
<1
Embedded Foreign Currency Derivatives:
 
 
 
 
 
 
Argentine Peso
 
809

 
99

 
10
Kazakhstani Tenge
 
4,783

 
26

 
2
Brazilian Real
 
81

 
37

 
<1
_____________________________
(1) 
Represents contractual notionals. The notionals for options have not been probability adjusted, which generally would decrease them.
(2) 
Represents the remaining tenor of our foreign currency derivatives weighted by the corresponding notional. These options and forwards and these embedded derivatives range in maturity through 2017 and 2025, respectively.
 
 
June 30, 2014