10-Q 1 d531783d10q.htm FORM 10-Q FORM 10-Q
Table of Contents

 

 

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 March 31, 2013

or

 

  ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12291

 

LOGO

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 May 3, 2013 was 746,540,903.

 

 

 


Table of Contents

THE AES CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2013

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

     1   

ITEM 1.

  FINANCIAL STATEMENTS      1   
  Condensed Consolidated Balance Sheets      1   
  Condensed Consolidated Statements of Operations      2   
  Condensed Consolidated Statements of Comprehensive Income      3   
  Condensed Consolidated Statements of Cash Flows      4   
  Notes to Condensed Consolidated Financial Statements      5   

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      29   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      59   

ITEM 4.

  CONTROLS AND PROCEDURES      62   

PART II: OTHER INFORMATION

     63   

ITEM 1.

  LEGAL PROCEEDINGS      63   

ITEM 1A.

  RISK FACTORS      71   

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      71   

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      71   

ITEM 4.

  MINE SAFETY DISCLOSURES      71   

ITEM 5.

  OTHER INFORMATION      71   

ITEM 6.

  EXHIBITS      71   

SIGNATURES

     72   


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE AES CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

 

     March 31,
2013
    December 31,
2012
 
     (in millions, except share
and per share data)
 

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 2,301     $ 1,966  

Restricted cash

     760       748  

Short-term investments

     851       696  

Accounts receivable, net of allowance for doubtful accounts of $314 and $306, respectively

     2,633       2,671  

Inventory

     755       766  

Deferred income taxes

     231       222  

Prepaid expenses

     256       230  

Other current assets

     1,403       1,103  

Current assets of discontinued operations and held for sale assets

     68       63  
  

 

 

   

 

 

 

Total current assets

     9,258       8,465  
  

 

 

   

 

 

 

NONCURRENT ASSETS

    

Property, Plant and Equipment:

    

Land

     1,019       1,007  

Electric generation, distribution assets and other

     32,210       31,656  

Accumulated depreciation

     (9,745     (9,645

Construction in progress

     2,528       2,783  
  

 

 

   

 

 

 

Property, plant and equipment, net

     26,012       25,801  
  

 

 

   

 

 

 

Other Assets:

    

Investments in and advances to affiliates

     1,195       1,196  

Debt service reserves and other deposits

     593       565  

Goodwill

     1,999       1,999  

Other intangible assets, net of accumulated amortization of $193 and $276, respectively

     417       429  

Deferred income taxes

     986       996  

Other noncurrent assets

     2,153       2,240  

Noncurrent assets of discontinued operations and held for sale assets

     105       139  
  

 

 

   

 

 

 

Total other assets

     7,448       7,564  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 42,718     $ 41,830  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 2,951     $ 2,631  

Accrued interest

     415       295  

Accrued and other liabilities

     2,251       2,505  

Non-recourse debt, including $424 and $282, respectively, related to variable interest entities

     3,108       2,829  

Recourse debt

     507       11  

Current liabilities of discontinued operations and held for sale businesses

     54       48  
  

 

 

   

 

 

 

Total current liabilities

     9,286       8,319  
  

 

 

   

 

 

 

NONCURRENT LIABILITIES

    

Non-recourse debt, including $1,118 and $1,076, respectively, related to variable interest entities

     12,815       12,554  

Recourse debt

     5,454       5,951  

Deferred income taxes

     1,239       1,237  

Pension and other post-retirement liabilities

     2,389       2,455  

Other noncurrent liabilities

     3,713       3,705  

Noncurrent liabilities of discontinued operations and held for sale businesses

     3       17  
  

 

 

   

 

 

 

Total noncurrent liabilities

     25,613       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; 812,021,363 issued and 746,474,449 outstanding at March 31, 2013 and 810,679,839 issued and 744,263,855 outstanding at December 31, 2012)

     8       8  

Additional paid-in capital

     8,527       8,525  

Accumulated deficit

     (182     (264

Accumulated other comprehensive loss

     (2,952     (2,920

Treasury stock, at cost (65,546,914 shares at March 31, 2013 and 66,415,984 shares at December 31, 2012)

     (768     (780
  

 

 

   

 

 

 

Total AES Corporation stockholders’ equity

     4,633       4,569  

NONCONTROLLING INTERESTS

     3,108       2,945  
  

 

 

   

 

 

 

Total equity

     7,741       7,514  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $     42,718     $     41,830  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

THE AES CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months
Ended March 31,
 
     2013     2012  
     (in millions, except
per share amounts)
 

Revenue:

    

Regulated

   $ 2,246     $ 2,484  

Non-Regulated

     2,019       2,102  
  

 

 

   

 

 

 

Total revenue

     4,265       4,586  
  

 

 

   

 

 

 

Cost of Sales:

    

Regulated

     (1,894     (2,056

Non-Regulated

     (1,616     (1,458
  

 

 

   

 

 

 

Total cost of sales

     (3,510     (3,514
  

 

 

   

 

 

 

Gross margin

     755       1,072  
  

 

 

   

 

 

 

General and administrative expenses

     (61     (87

Interest expense

     (377     (416

Interest income

     66       91  

Other expense

     (75     (28

Other income

     68       18  

Gain on sale of investments

     3       179  

Asset impairment expense

     (48     (10

Foreign currency transaction losses

     (32     (1

Other non-operating expense

     -       (49
  

 

 

   

 

 

 

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

     299       769  

Income tax expense

     (82     (268

Net equity in earnings of affiliates

     4       13  
  

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS

     221       514  

Income from operations of discontinued businesses, net of income tax (benefit) expense of $(1) and $2, respectively

     14       6  

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

     (36     (5
  

 

 

   

 

 

 

NET INCOME

     199       515  

Noncontrolling interests:

    

Less: Income from continuing operations attributable to noncontrolling interests

     (115     (173

Less: Income from discontinued operations attributable to noncontrolling interests

     (2     (1
  

 

 

   

 

 

 

Total net income attributable to noncontrolling interests

     (117     (174
  

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO THE AES CORPORATION

   $ 82     $ 341  
  

 

 

   

 

 

 

AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:

    

Income from continuing operations, net of tax

   $ 106     $ 341  

Loss from discontinued operations, net of tax

     (24     -  
  

 

 

   

 

 

 

Net income

   $ 82     $ 341  
  

 

 

   

 

 

 

BASIC EARNINGS PER SHARE:

    

Income from continuing operations attributable to The AES Corporation
common stockholders, net of tax

   $ 0.14     $ 0.45  

Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax

     (0.03     -  
  

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS

   $ 0.11     $ 0.45  
  

 

 

   

 

 

 

DILUTED EARNINGS PER SHARE:

    

Income from continuing operations attributable to The AES Corporation
common stockholders, net of tax

   $ 0.14     $ 0.44  

Loss from discontinued operations attributable to The AES Corporation common stockholders, net of tax

     (0.03     -  
  

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS

   $ 0.11     $ 0.44  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

THE AES CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended
March 31,
 
         2013             2012      
     (in millions)  

NET INCOME

   $ 199     $ 515  

Foreign currency translation activity:

    

Foreign currency translation adjustments, net of income tax (expense) benefit of $0 and $(1), respectively

     (32     142  

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

     (3     (1
  

 

 

   

 

 

 

Total foreign currency translation adjustments

     (35     141  

Derivative activity:

    

Change in derivative fair value, net of income tax (expense) benefit of $0 and $(4), respectively

     (16     21  

Reclassification to earnings, net of income tax (expense) benefit of $(7) and $(28), respectively

     24       86  
  

 

 

   

 

 

 

Total change in fair value of derivatives

     8       107  

Pension activity:

    

Reclassification to earnings due to amortization of net actuarial loss, net of income tax (expense) benefit of $(7) and $(3), respectively

     14       6  
  

 

 

   

 

 

 

Total pension adjustments

     14       6  
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

     (13     254  
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

     186       769  

Less: Comprehensive income attributable to noncontrolling interests

     (136     (245
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO THE AES CORPORATION

   $ 50     $ 524  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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THE AES CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Three Months Ended
March 31,
 
         2013             2012      
     (in millions)  

OPERATING ACTIVITIES:

    

Net income

   $ 199     $ 515  

Adjustments to net income:

    

Depreciation and amortization

     329       360  

Gain from sale of investments and impairment expense

     59       (92

Deferred income taxes

     13       101  

Provisions for contingencies

     26       17  

Loss on the extinguishment of debt

     47       -  

Loss on disposals and impairments - discontinued operations

     38       -  

Other

     56       (40

Changes in operating assets and liabilities

    

(Increase) decrease in accounts receivable

     42       (189

(Increase) decrease in inventory

     (4     (11

(Increase) decrease in prepaid expenses and other current assets

     (192     (117

(Increase) decrease in other assets

     (45     (156

Increase (decrease) in accounts payable and other current liabilities

     174       266  

Increase (decrease) in income tax payables, net

     (123     (161

Increase (decrease) in other liabilities

     (1     41  
  

 

 

   

 

 

 

Net cash provided by operating activities

     618       534  
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Capital expenditures

     (546     (579

Proceeds from the sale of businesses, net of cash sold

     1       63  

Proceeds from the sale of assets

     6       4  

Sale of short-term investments

     1,335       1,505  

Purchase of short-term investments

     (1,492     (1,855

(Increase) decrease in restricted cash

     (35     28  

(Increase) decrease in debt service reserves and other assets

     (10     20  

Proceeds from government grants for asset construction

     1       85  

Other investing

     14       4  
  

 

 

   

 

 

 

Net cash used in investing activities

     (726     (725
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Borrowings (repayments) under the revolving credit facilities, net

     15       (281

Issuance of non-recourse debt

     1,491       503  

Repayments of recourse debt

     (2     (3

Repayments of non-recourse debt

     (1,007     (151

Payments for financing fees

     (33     (12

Distributions to noncontrolling interests

     (31     (19

Contributions from noncontrolling interests

     55       5  

Dividends paid on AES common stock

     (30     -  

Financed capital expenditures

     (7     (6

Other financing

     4       1  
  

 

 

   

 

 

 

Net cash provided by financing activities

     455       37  

Effect of exchange rate changes on cash

     (8     25  

(Increase) decrease in cash of discontinued and held for sale businesses

     (4     99  
  

 

 

   

 

 

 

Total increase (decrease) in cash and cash equivalents

     335       (30

Cash and cash equivalents, beginning

     1,966       1,688  
  

 

 

   

 

 

 

Cash and cash equivalents, ending

   $ 2,301     $ 1,658  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES:

    

Cash payments for interest, net of amounts capitalized

   $ 234     $ 291  

Cash payments for income taxes, net of refunds

   $ 295     $ 325  

See Notes to Condensed Consolidated Financial Statements

 

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THE AES CORPORATION

Notes to Condensed Consolidated Financial Statements

For the Three Months Ended March 31, 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 15 — 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 months ended March 31, 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 standard has been issued, but is not yet effective for, and has not been adopted by AES.

ASU No. 2013-05, 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. 2013-05, 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 translation

 

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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. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU No. 2013-05 on the Company’s financial position, results of operations, and cash flows.

2. INVENTORY

The following table summarizes the Company’s inventory balances as of March 31, 2013 and December 31, 2012:

 

     March 31,
2013
     December 31,
2012
 
     (in millions)  

Coal, fuel oil and other raw materials

   $ 363      $ 373  

Spare parts and supplies

     392        393  
  

 

 

    

 

 

 

Total

   $     755      $     766  
  

 

 

    

 

 

 

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 values 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


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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 March 31, 2013 and December 31, 2012:

 

     March 31, 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

   $ -      $ 615      $ -      $ 615      $ -      $ 448      $ -      $ 448  

Certificates of deposit

     -        137        -        137        -        143        -        143  

Government debt securities

     -        28        -        28        -        34        -        34  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     -        780        -        780        -        625        -        625  

Equity securities:

                       

Mutual funds

     -        57        -        57        -        56        -        56  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     -        57        -        57        -        56        -        56  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

     -        837        -        837        -        681        -        681  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TRADING:

                       

Equity securities:

                       

Mutual funds

     12        -        -        12        12        -        -        12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total trading

     12        -        -        12        12        -        -        12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

DERIVATIVES:

                       

Interest rate derivatives

     -        2        -        2        -      $ 2      $ -        2  

Cross currency derivatives

     -        8        -        8        -        6        -        6  

Foreign currency derivatives

     -        6        82        88        -        2        79        81  

Commodity derivatives

     -        6        1        7        -        8        3        11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

     -        22        83        105        -        18        82        100  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL ASSETS

   $     12      $     859      $ 83      $ 954      $     12      $     699      $ 82      $     793  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                       

DERIVATIVES:

                       

Interest rate derivatives

   $ -      $ 469      $ 72      $ 541      $ -      $ 153      $     412      $ 565  

Cross currency derivatives

     -        3        -        3        -        6        -        6  

Foreign currency derivatives

     -        7        11        18        -        7        7        14  

Commodity derivatives

     -        24        69        93        -        13        59        72  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

     -        503        152        655        -        179        478        657  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

TOTAL LIABILITIES

   $ -      $ 503      $     152      $     655      $ -      $ 179      $ 478      $ 657  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amortized cost approximated fair value at March 31, 2013 and December 31, 2012. As of March 31, 2013, all available-for-sale debt securities had stated maturities within one year.

 

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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 months ended March 31, 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 significance of unobservable inputs used to calculate the credit valuation adjustment.

 

     Three Months Ended March 31, 2013  
     Interest
Rate
    Foreign
Currency
    Commodity     Total  
     (in millions)  

Balance at January 1

   $ (412   $ 73     $ (57   $ (396

Total gains (losses) (realized and unrealized):

        

Included in earnings

     -       (1     (10     (11

Included in other comprehensive income

     (17     -       -       (17

Included in regulatory (assets) liabilities

     -       -       (1     (1

Settlements

     23       (1     -       22  

Transfers of (assets) liabilities out of Level 3

         334       -       -       334  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31

   $ (72   $     71     $     (68   $     (69
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ -     $ (2   $ (10   $ (12
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Three Months Ended March 31, 2012  
     Interest
Rate
    Cross
Currency
    Foreign
Currency
    Commodity     Total  
     (in millions)  

Balance at January 1

   $ (128   $ (18   $ 51     $ (53   $ (148

Total gains (losses) (realized and unrealized):

          

Included in earnings

     (1     -       (2     8       5  

Included in other comprehensive income

     1       14       -       -       15  

Included in regulatory (assets) liabilities

     -       -       -       -       -  

Settlements

     6       4       (1     (1     8  

Transfers of assets (liabilities) into Level 3

     (28     -       -       -       (28

Transfers of (assets) liabilities out of Level 3

     26       -       -       -       26  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31

   $     (124)      $         -     $     48     $     (46   $     (122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ -     $ -     $ (3   $ 9     $ 6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table summarizes the significant unobservable inputs used for the Level 3 derivative assets (liabilities) at March 31, 2013:

 

Type of Derivative

   Fair Value    

Unobservable Input

   Amount or Range
(Weighted Average)
 
     (in millions)             

Interest rate

   $ (72  

Subsidiaries’ credit spreads

     2.15% - 9.03%(4.35%)   

Foreign currency:

       

Embedded derivative — Argentine Peso

             70    

Argentine Peso to U.S. Dollar currency exchange rate after 3 years

     14.4 - 21.2(17.7)   

Commodity:

       

Embedded derivative —

       

    Aluminum

     (65  

Market price of power for customer in Cameroon (per KWh)

     $0.06 - $0.14($0.12)   

Other

     (2     
  

 

 

      

Total

   $ (69     
  

 

 

      

Nonrecurring Measurements

For purposes of impairment evaluation, the Company measured the fair value of long-lived assets and equity method investments under the fair value measurement accounting guidance. Impairment expense is measured by comparing the fair value of asset groups at the evaluation date to their 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:

 

     Three Months Ended March 31, 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            -            109            -            38  

 

     Three Months Ended March 31, 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        -        -        17        5  

Equity method investments(3)

     204        -        155        -        49  

 

(1)

See Note 13 — Asset Impairment Expense for further information.

(2)

See Note 15 — 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 — Other Non-Operating Expense for further information.

 

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Table of Contents

The following table summarizes the significant unobservable inputs used in the Level 3 measurement of long-lived assets during the three months ended March 31, 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%   

Long-lived assets held for sale:

       

Wind turbines

    25     Market
Approach
 

Indicative offer prices

    $12 to $38 ($25)   
 

 

 

       

Total

  $     40        
 

 

 

       

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 March 31, 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)  

March 31, 2013

              

Assets

              

Accounts receivable — noncurrent(1)

   $ 295      $ 167      $ -      $ -      $ 167  

Liabilities

              

Non-recourse debt

     15,923        16,416        -        14,212        2,204  

Recourse debt

     5,961        6,724        -        6,724        -  

December 31, 2012

              

Assets

              

Accounts receivable — noncurrent(1)

   $ 304      $ 188      $ -      $ -      $ 188  

Liabilities

              

Non-recourse debt

         15,383            16,110            -            13,811            2,299  

Recourse debt

     5,962        6,628        -        6,628        -  

 

(1)

These accounts receivable principally relate to amounts due from the independent system operator 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 $53 million and $55 million at March 31, 2013 and December 31, 2012, respectively.

4. INVESTMENTS IN MARKETABLE SECURITIES

The Company’s investments in marketable debt and equity securities as of March 31, 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 March 31, 2013, all available-for-sale debt securities had stated maturities within one year.

 

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Table of Contents

The following table summarizes the pre-tax gains and losses related to available-for-sale and trading securities for the three months ended March 31, 2013 and 2012. Gains and losses on the sale of investments are determined using the specific identification method. For the three months ended March 31, 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.

 

     2013      2012  
     (in millions)  

Gains included in earnings that relate to trading securities held at the reporting date

   $ 1      $ -  

Gross proceeds from sales of available-for-sale securities

         1,704            1,523  

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 to 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 March 31, 2013 regardless of whether the derivative instruments are in qualifying cash flow hedging relationships:

 

     March 31, 2013  
     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)

     3,451      $ 3,451        4,226      $ 4,226        9        70

EURIBOR (Euro)

     605        776        605        776        9        67

LIBOR (British Pound)

     69        105        69        105        13        83

Cross Currency Swaps:

                 

Chilean Unidad de Fomento

     6        271        6        271        9        85

 

(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 March 31, 2013 and the maturity of the derivative instrument, which includes forward starting derivative instruments. The interest rate and cross currency derivatives range in maturity through 2030 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.

 

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Table of Contents
     March 31, 2013  

Foreign Currency Derivatives

   Notional(1)      Notional
Translated
to USD
     Weighted
Average
Remaining
Term(2)
 
     (in millions)      (in years)  

Foreign Currency Options and Forwards:

        

Chilean Peso

     80,558      $ 166        <1   

Brazilian Real

     240        118        <1   

Euro

     29        41        <1   

Colombian Peso

     53,208        28        <1   

Argentine Peso

     83        14        <1   

British Pound

     3        5        <1   

Embedded Foreign Currency Derivatives

        

Argentine Peso

     829        169        11  

Kazakhstani Tenge

     1,009        7        5  

Euro

     2        2        10  

 

(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 2014 and 2026, respectively.

 

     March 31, 2013  

Commodity Derivatives

   Notional      Weighted Average
Remaining Term(1)
 
     (in millions)      (in years)  

Aluminum (MWh)(2)

     14        7  

Power (MWh)

     6        3  

 

(1) 

Represents the remaining tenor of our commodity derivatives weighted by the corresponding volume. These derivatives range in maturity through 2019.

(2) 

Our exposure is to fluctuations in the price of aluminum while the notional is based on the amount of power we sell under the PPA.

 

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Table of Contents

Accounting and Reporting

Assets and Liabilities

The following tables set forth the Company’s derivative instruments as of March 31, 2013 and December 31, 2012, first by whether or not they are designated hedging instruments, then by whether they are current or non-current, by the extent to which they are subject to master netting agreements or similar agreements (where the rights to set off relate to settlement of amounts receivable and payable under those derivatives) and by balances no longer accounted for as derivatives.

 

     March 31, 2013      December 31, 2012  
     Designated      Not Designated      Total      Designated      Not Designated      Total  
     (in millions)      (in millions)  

Assets

                 

Interest rate derivatives

   $ -      $ 2      $ 2      $ -      $ 2        2  

Cross currency derivatives

     8        -        8        6        -        6  

Foreign currency derivatives

     1        87        88        -        81        81  

Commodity derivatives

     -        7        7        2        9        11  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 9      $ 96      $ 105      $ 8      $ 92      $ 100  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Interest rate derivatives

   $ 523      $ 18      $ 541      $ 544      $ 21        565  

Cross currency derivatives

     3        -        3        6        -        6  

Foreign currency derivatives

     7        11        18        7        7        14  

Commodity derivatives

     11        82        93        8        64        72  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $     544      $     111      $     655      $     565      $     92      $     657  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     March 31, 2013     December 31, 2012  
     Assets     Liabilities     Assets     Liabilities  
     (in millions)     (in millions)  

Current

   $ 18     $ 175     $ 14     $ 186  

Noncurrent

     87       480       86       471  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 105     $ 655     $ 100     $ 657  
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives subject to master netting agreement or similar agreement:

        

Gross (which equals net) amounts recognized in the balance sheet

   $ 19     $ 520     $ 25     $ 522  

Gross amounts of derivative instruments not offset

     (8     (8     (9     (9

Gross amounts of cash collateral received/pledged not offset

     -       (14     -       (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net amount

   $ 11     $ 498     $ 16     $ 508  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other balances that had been, but no longer need to be, accounted for as derivatives at fair value that are to be amortized to earnings over the remaining term of the associated PPA

   $     181     $     191     $     186     $     191  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Effective Portion of Cash Flow Hedges

The following tables set forth the pre-tax gains (losses) recognized in accumulated other comprehensive loss (“AOCL”) and earnings related to the effective portion of derivative instruments in qualifying cash flow hedging relationships (including amounts that were reclassified from AOCL as interest expense related to interest rate derivative instruments that previously, but no longer, qualify for cash flow hedge accounting), as defined in the accounting standards for derivatives and hedging, for the three months ended March 31, 2013 and 2012:

 

     Gains (Losses)
Recognized in AOCL
   

Classification in

Condensed Consolidated

Statements of Operations

   Gains (Losses)  Reclassified
from AOCL into Earnings
 

Type of Derivative

       2013             2012                2013             2012      
     (in millions)          (in millions)  

Interest rate derivatives

   $ (13   $ 11    

Interest expense

   $ (32   $ (32
      

Non-regulated cost of sales

     (1     (2
      

Net equity in earnings of affiliates

     (2     (1
      

Gain on sale of investments

     -       (92

Cross currency derivatives

     1       14    

Interest expense

     (3     (3
      

Foreign currency transaction gains (losses)

             5               18  

Foreign currency derivatives

             1               6    

Foreign currency transaction gains (losses)

     2       -  

Commodity derivatives

     (5     (6  

Non-regulated revenue

     -       (2
  

 

 

   

 

 

      

 

 

   

 

 

 

Total

   $ (16   $ 25        $ (31   $ (114
  

 

 

   

 

 

      

 

 

   

 

 

 

The pre-tax accumulated other comprehensive income (loss) expected to be recognized as an increase (decrease) to income from continuing operations before income taxes over the next twelve months as of March 31, 2013 is $(146) million for interest rate hedges, $(11) million for cross currency swaps, $(6) million for foreign currency hedges, and $(9) million for commodity and other hedges.

Ineffective Portion of Cash Flow Hedges

The following table sets forth the pre-tax gains (losses) recognized in earnings related to the ineffective portion of derivative instruments in qualifying cash flow hedging relationships, as defined in the accounting standards for derivatives and hedging, for the three months ended March 31, 2013 and 2012:

 

    

Classification in

Condensed Consolidated

Statements of Operations

   Gains (Losses)
Recognized in
Earnings
 

Type of Derivative

      2013     2012  
          (in millions)  

Interest rate derivatives

  

Interest expense

   $ (1   $ (1
     

 

 

   

 

 

 

Total

      $     (1   $     (1
     

 

 

   

 

 

 

 

14


Table of Contents

Not Designated for Hedge Accounting

The following table sets forth the gains (losses) recognized in earnings related to derivative instruments not designated as hedging instruments under the accounting standards for derivatives and hedging and the amortization of balances that had been, but no longer need to be, accounted for as derivatives at fair value, for the three months ended March 31, 2013 and 2012:

 

    

Classification in Condensed Consolidated

Statements of Operations

   Gains (Losses)
Recognized in Earnings
 

Type of Derivative

           2013               2012       
          (in millions)  

Interest rate derivatives

  

Interest expense

   $ 1     $ (2
  

Net equity in earnings of affiliates

     (6     -  

Foreign currency derivatives

  

Foreign currency transaction gains (losses)

     6       (38
  

Net equity in earnings of affiliates

     (3     -  

Commodity and other derivatives

  

Non-regulated revenue

     (21     14  
  

Regulated revenue

     (3     (4
  

Non-regulated cost of sales

     1       3  
  

Regulated cost of sales

     -       (4
     

 

 

   

 

 

 

Total

      $     (25   $     (31
     

 

 

   

 

 

 

Credit Risk-Related Contingent Features

DP&L, our utility in Ohio, has certain over-the-counter commodity derivative contracts under master netting agreements that contain provisions that require DP&L to maintain an investment-grade issuer credit rating from credit rating agencies. Since their rating has fallen below investment grade, certain of the counterparties to the derivative contracts have requested immediate and ongoing full overnight collateralization of the mark-to-market loss (fair value excluding credit valuation adjustments), which was $23 million and $13 million as of March 31, 2013 and December 31, 2012, respectively, for all derivatives with credit risk-related contingent features. As of March 31, 2013 and December 31, 2012, DP&L had posted $14 million and $5 million, respectively, of cash collateral directly with third parties and in a broker margin account and DP&L held $0 million and $0 million of cash collateral that it received from counterparties to its derivative instruments that were in an asset position. After consideration of the netting of counterparty assets, DP&L could have been required to provide additional collateral of $5 million and $2 million as of March 31, 2013 and December 31, 2012.

6. LONG-TERM FINANCING RECEIVABLES

Long-term financing receivables represent receivables from certain Latin American governmental bodies, primarily in Argentina, that have contractual maturities of greater than one year pursuant to amended agreements or government resolutions. These financing receivables are included in “Noncurrent assets — other” in the Condensed Consolidated Balance Sheets.

Argentina — As a result of energy market reforms in 2004 and consistent with contractual arrangements, our subsidiaries entered into three agreements with the Argentine government called Fondos de inversion Mercado Electrico Mayorista (“Foninvemem Agreements”) to contribute a portion of their accounts receivable into a fund for financing the construction of combined cycle and gas-fired plants. These financing receivables accrue interest and are collected in monthly installments over 10 years once the related plant begins operations. In addition, the Company also receives an ownership interest in these newly built plants once the receivables have been fully repaid. The financing receivables under the first two Foninvemem Agreements are being actively collected since the related plants commenced operations in 2010. However, the financing receivables related to the third Foninvemem Agreement are not currently due as commercial operations of the related gas-fired turbine

 

15


Table of Contents

have not been achieved. Collection of these financing receivables is subject to various business risks and uncertainties including timely payment of principal and interest, completion and operation of power plants which generate cash for payments of these receivables, regulatory changes that could impact the timing and amount of collections and economic conditions in Argentina. The Company periodically analyzes each of these factors and assesses collectability of the related financing receivables. The Company’s collection estimates are based on assumptions that it believes to be reasonable but are inherently uncertain. Actual future cash flows could differ from these estimates.

Additionally, our subsidiaries are currently working with the Argentine government to include outstanding receivables of $122 million covered under government resolutions into the third Foninvemem Agreement. On March 26, 2013, the Argentine government passed a resolution to develop a new energy regulatory framework that would apply to all generation companies with certain exceptions. However, as of March 31, 2013 the resolution was not legally binding for our subsidiaries given that certain conditions precedent had not been met. The new regulatory framework will remunerate fixed and variable costs plus a margin that will depend on both the technology and fuel used to generate the electricity. The Company is currently analyzing the impact that this resolution will have on its subsidiaries in future periods, once it is effective.

The following table sets forth the breakdown of financing receivables by country as of March 31, 2013 and December 31, 2012. The decrease in the long-term financing receivables from December 31, 2012 is primarily related to the impact of foreign currency translation.

 

     March 31,
2013
     December 31,
2012
 
     (in millions)  

Argentina(1)

   $ 187      $ 196  

Dominican Republic

     31        35  

Brazil

     8        8  
  

 

 

    

 

 

 

Total long-term financing receivables

   $     226      $     239  
  

 

 

    

 

 

 

 

(1) 

Excludes noncurrent receivables of $122 million and $120 million, respectively, as of March 31, 2013 and December 31, 2012, which have not been converted into long-term financing receivables and currently have no due date.

7. NON-RECOURSE DEBT

Significant transactions

During the three months ended March 31, 2013, we had the following significant debt transactions at our subsidiaries:

 

   

Tietê issued new debt of $251 million partially offset by repayments of $60 million;

 

   

El Salvador issued new debt of $310 million partially offset by repayments of $150 million;

 

   

Sul issued new debt of $150 million partially offset by repayments of $34 million;

 

   

Mong Duong drew $119 million under its construction loan facility; and

 

   

Masinloc refinanced its senior debt facility of $500 million and incurred a loss on extinguishment of debt of $43 million. See Note 12—Other Income and Expense for further information.

 

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Debt in default

The following table summarizes the Company’s subsidiary non-recourse debt in default or accelerated as of March 31, 2013 and is classified as current non-recourse debt unless otherwise indicated:

 

     Primary Nature
of  Default
   March 31, 2013  

Subsidiary

      Default Amount      Net Assets  
          (in millions)  

Maritza

   Covenant    $ 819      $       576  

Sonel

   Covenant      264        361  

Kavarna

   Covenant      196        82  

Saurashtra

   Covenant      25        15  
     

 

 

    

Total

      $ 1,304     
     

 

 

    

The above defaults are not payment defaults, but are instead technical defaults triggered by failure to comply with other covenants and/or other conditions such as (but not limited to) failure to meet information covenants, complete construction or other milestones in an allocated time, meet certain minimum or maximum financial ratios, or other requirements contained in the non-recourse debt documents of the Company.

In addition, in the event that there is a default, bankruptcy or maturity acceleration at a subsidiary or group of subsidiaries that meets the applicable definition of materiality under the corporate debt agreements of The AES Corporation, there could be a cross-default to the Company’s recourse debt. At March 31, 2013 none of the defaults listed above individually or in the aggregate results in a cross-default under the recourse debt of the Company.

8. CONTINGENCIES AND COMMITMENTS

Guarantees, Letters of Credit and Commitments

In connection with certain project financing, acquisition, power purchase and other agreements, AES has expressly undertaken limited obligations and commitments, most of which will only be effective or will be terminated upon the occurrence of future events. In the normal course of business, AES has entered into various agreements, mainly guarantees and letters of credit, to provide financial or performance assurance to third parties on behalf of AES businesses. These agreements are entered into primarily to support or enhance the creditworthiness otherwise achieved by a business on a stand-alone basis, thereby facilitating the availability of sufficient credit to accomplish their intended business purposes. Most of the contingent obligations relate to future performance commitments which the Company or its businesses expect to fulfill within the normal course of business. The expiration dates of these guarantees vary from less than one year to more than 21 years.

The following table summarizes the Parent Company’s contingent contractual obligations as of March 31, 2013. Amounts presented in the table below represent the Parent Company’s current undiscounted exposure to guarantees and the range of maximum undiscounted potential exposure. The maximum exposure is not reduced by the amounts, if any, that could be recovered under the recourse or collateralization provisions in the guarantees. The amounts include obligations made by the Parent Company for the direct benefit of the lenders associated with the non-recourse debt of its businesses of $24 million.

 

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Contingent Contractual Obligations

   Amount      Number of
Agreements
     Maximum Exposure Range for
Each Agreement
     (in millions)             (in millions)

Guarantees and commitments

   $ 577        20      <$1 - $231

Cash collateralized letters of credit

     254        13      <$1 - $169

Letters of credit under the senior secured credit facility

     3        5      <$1 - $2
  

 

 

    

 

 

    

Total

   $         834        38     
  

 

 

    

 

 

    

During the three months ended March 31, 2013, the Company paid letter of credit fees ranging from 0.25% to 3.25% per annum on the outstanding amounts of letters of credit.

Environmental

The Company periodically reviews its obligations as they relate to compliance with environmental laws, including site restoration and remediation. As of March 31, 2013, the Company had recorded liabilities of $14 million for projected environmental remediation costs. Due to the uncertainties associated with environmental assessment and remediation activities, future costs of compliance or remediation could be higher or lower than the amount currently accrued. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such liabilities, or as yet unknown liabilities, may exceed current reserves in amounts that could be material but cannot be estimated as of March 31, 2013.

Litigation

The Company is involved in certain claims, suits and legal proceedings in the normal course of business. The Company accrues for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company has evaluated claims in accordance with the accounting guidance for contingencies that it deems both probable and reasonably estimable and, accordingly, has recorded aggregate reserves for all claims of approximately $345 million and $321 million as of March 31, 2013 and December 31, 2012, respectively. These reserves are reported on the condensed consolidated balance sheets within “accrued and other liabilities” and “other noncurrent liabilities.” A significant portion of the reserves relate to employment, non-income tax and customer disputes in international jurisdictions, principally Brazil. Certain of the Company’s subsidiaries, principally in Brazil, are defendants in a number of labor and employment lawsuits. The complaints generally seek unspecified monetary damages, injunctive relief, or other relief. The subsidiaries have denied any liability and intend to vigorously defend themselves in all of these proceedings. There can be no assurance that these reserves will be adequate to cover all existing and future claims or that we will have the liquidity to pay such claims as they arise.

The Company believes, based upon information it currently possesses and taking into account established reserves for liabilities and its insurance coverage, that the ultimate outcome of these proceedings and actions is unlikely to have a material effect on the Company’s consolidated financial statements. However, where no reserve has been recognized, it is reasonably possible that some matters could be decided unfavorably to the Company and could require the Company to pay damages or make expenditures in amounts that could be material but could not be estimated as of March 31, 2013. The material contingencies where a loss is reasonably possible primarily include: claims under financing agreements; disputes with offtakers, suppliers and EPC contractors; alleged violation of monopoly laws and regulations; income tax and non-income tax assessments by tax authorities; and environmental and regulatory matters. In aggregate, the Company estimates that the range of potential losses, where estimable, related to these reasonably possible material contingences to be between $944 million and $1.6 billion. The amounts considered reasonably possible do not include amounts reserved, as discussed above. These material contingencies do not include income tax related contingencies which are considered part of our uncertain tax positions.

 

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9. PENSION PLANS

Total pension cost for the three months ended March 31, 2013 and 2012 included the following components:

 

     Three Months Ended March 31,  
     2013     2012  
     U.S.     Foreign     U.S.     Foreign  
     (in millions)  

Service cost

   $ 4     $ 7     $ 4     $ 7  

Interest cost

     11       139       12       141  

Expected return on plan assets

     (15     (130     (14     (122

Amortization of prior service cost

     1       -       1       -  

Amortization of net loss

     7       21       6       10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total pension cost

   $       8     $       37     $       9     $       36  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total employer contributions for the three months ended March 31, 2013 for the Company’s U.S. and foreign subsidiaries were $50 million and $37 million, respectively. The expected remaining scheduled employer contributions for 2013 are $2 million and $132 million for U.S. and foreign subsidiaries, respectively.

10. EQUITY

Changes in Equity

The following table provides a reconciliation of the beginning and ending equity attributable to stockholders of The AES Corporation, noncontrolling interests and total equity as of March 31, 2013 and 2012:

 

    Three Months Ended March 31, 2013     Three Months Ended March 31, 2012  
    The AES
Corporation
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
    The AES
Corporation
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 
    (in millions)     (in millions)  

Balance at January 1

  $ 4,569     $ 2,945     $ 7,514     $ 5,946     $ 3,783     $ 9,729  

Net income

    82       117       199       341       174       515  

Total foreign currency translation adjustment, net of income tax

    (42     7       (35     92       49       141  

Total change in derivative fair value, net of income tax

    7       1       8       90       17       107  

Total pension adjustments, net of income tax

    3       11       14       1       5       6  

Capital contributions from noncontrolling interests

    -       55       55       -       6       6  

Distributions to noncontrolling interests

    -       (27     (27     -       (14     (14

Disposition of businesses

    -       -       -       -       (37     (37

Issuance and exercise of stock-based compensation benefit plans, net of income tax

    14       -       14       19       -       19  

Acquisition of subsidiary shares from noncontrolling interests

    -       (1     (1     -       (1     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31

  $     4,633     $     3,108     $     7,741     $     6,489     $     3,982     $     10,471  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Accumulated Other Comprehensive Loss

The changes in accumulated other comprehensive loss by component, net of tax and noncontrolling interests for the three months ended March 31, 2013 were as follows:

 

     Unrealized
derivative
losses, net
    Unfunded
pension
obligations, net
    Foreign currency
translation
adjustment, net
    Total  
     (in millions)  

Balance at January 1

   $ (481   $ (382   $ (2,057   $ (2,920

Other comprehensive income before reclassifications

     (15     -       (39     (54

Amounts reclassified from accumulated other comprehensive loss

     22       3       (3     22  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

     7       3       (42     (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31

   $     (474   $     (379   $     (2,099   $     (2,952
  

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2013 were as follows:

 

Details About Accumulated Other
Comprehensive Loss Components

  

Affected Line Item in the Condensed
Consolidated Statement of Operations

   Three Months Ended
March 31, 2013 (1)
 
          (in millions)  

Unrealized derivative losses, net

  

   Interest expense    $ (35
   Foreign currency transaction gains (losses)      7  
   Non-regulated cost of sales      (1
     

 

 

 
  

Income from continuing operations before taxes and equity in earnings of affiliates

     (29
   Income tax expense      7  
   Net equity in earnings of affiliates      (2
     

 

 

 
   Income from continuing operations      (24
  

Income from continuing operations attributable to noncontrolling interests

     2  
     

 

 

 
   Net income attributable to the AES Corporation    $ (22
     

 

 

 

Amortization of defined benefit pension actuarial loss, net

  

   Non-regulated cost of sales    $ (1
   Regulated cost of sales      (20
     

 

 

 
  

Income from continuing operations before taxes and equity in earnings of affiliates

     (21
   Income tax expense      7  
     

 

 

 
   Income from continuing operations      (14
  

Income from continuing operations attributable to noncontrolling interests

     11  
     

 

 

 
   Net income attributable to the AES Corporation    $ (3
     

 

 

 

Foreign currency translation adjustment, net

  

   Gain on sale of investment    $ 3  
     

 

 

 
   Net income attributable to the AES Corporation    $ 3  
     

 

 

 

Total reclassifications for the period, net of income tax and noncontrolling interests

   $ (22
     

 

 

 

 

(1) 

Amounts in parentheses indicate debits to the condensed consolidated statement of operations.

 

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Dividend

The Company paid a dividend of $0.04 per outstanding share to its common stockholders on February 15, 2013.

Stock Repurchase Program

The Company’s Board of Directors has approved a stock repurchase program (the “Program”). The Program does not have an expiration date and it can be modified or terminated by the Company’s Board at any time. Under the Program, the Company may repurchase stock through a variety of methods, including open market repurchases and/or privately negotiated transactions. There can be no assurances as to the amount, timing or prices of repurchases, which may vary based on market conditions and other factors. As of March 31, 2013, $300 million was available under the Program.

There were no common stock repurchases under the Program during the three months ended March 31, 2013. The cumulative total purchases under the Program totaled 58,715,189 shares at a total cost of $680 million, which includes a nominal amount of commissions (average of $11.58 per share including commissions).

The common stock repurchased has been classified as treasury stock and accounted for using the cost method. A total of 65,546,914 and 66,415,984 shares were held as treasury stock at March 31, 2013 and December 31, 2012, respectively. Restricted stock units under the Company’s employee benefit plans are issued from treasury stock. The Company has not retired any common stock repurchased since it began the Program.

11. SEGMENTS

The segment reporting structure uses the Company’s management reporting structure as its foundation to reflect how the Company manages the business internally with further aggregation by geographic regions to provide better socio-political-economic understanding of our business. The management reporting structure is organized along six strategic business units (“SBUs”) — led by our Chief Operating Officer (“COO”), who in turn reports to our Chief Executive Officer (“CEO”). Upon the application of the accounting guidance for segment reporting, the Company has identified eight reportable segments based on the six strategic business units:

 

   

US — Generation;

 

   

US — Utilities;

 

   

Andes — Generation;

 

   

Brazil — Generation;

 

   

Brazil — Utilities;

 

   

MCAC — Generation;

 

   

EMEA — Generation; and

 

   

Asia — Generation.

Corporate and Other — The Company’s EMEA and MCAC Utilities operating segments are reported within “Corporate and Other” because they do not meet the criteria to allow for aggregation with another operating segment or the quantitative thresholds that would require separate disclosure under the segment

 

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reporting accounting guidance. None of these operating segments are currently material to our presentation of reportable segments, individually or in the aggregate. AES Solar and certain other unconsolidated businesses are accounted for using the equity method of accounting; therefore, their operating results are included in “Net Equity in Earnings of Affiliates” on the face of the Consolidated Statements of Operations, not in revenue or Adjusted pre-tax contribution (“Adjusted PTC”). “Corporate and Other” also includes corporate overhead costs which are not directly associated with the operations of our eight reportable segments and other intercompany charges such as self-insurance premiums which are fully eliminated in consolidation.

The Company uses Adjusted PTC as its primary segment performance measure. Adjusted PTC, a non-GAAP measure, is defined by the Company as pre-tax income from continuing operations attributable to AES excluding unrealized gains or losses related to derivative transactions, unrealized foreign currency gains or losses, gains or losses due to dispositions and acquisitions of business interests, losses due to impairments and costs due to the early retirement of debt. The Company has concluded that Adjusted PTC best reflects the underlying business performance of the Company and is the most relevant measure considered in the Company’s internal evaluation of the financial performance of its segments. Additionally, given its large number of businesses and complexity, the Company concluded that Adjusted PTC is a more transparent measure that better assists the investor in determining which businesses have the greatest impact on the overall Company results.

Total revenue includes inter-segment revenue related to the transfer of electricity from generation plants to utilities within Brazil. No material inter-segment revenue relationships exist between other segments. Corporate allocations include certain self-insurance activities which are reflected within segment adjusted PTC. All intra-segment activity has been eliminated with respect to revenue and adjusted PTC within the segment. Inter-segment activity has been eliminated within the total consolidated results. Asset information for businesses that were discontinued or classified as held for sale as of March 31, 2013 is segregated and is shown in the line “Discontinued Businesses” in the accompanying segment tables.

Information about the Company’s operations by segment for the three months ended March 31, 2013 and 2012 was as follows:

 

Revenue

Three Months Ended

March 31,

   Total Revenue      Intersegment     External Revenue  
       2013              2012              2013             2012             2013              2012      
     (in millions)  

US — Generation

   $ 170      $ 198      $ -     $ -      $ 170      $ 198  

US — Utilities

     722        732        -       -        722        732  

Andes — Generation

     691        734        -        (9     691        725  

Brazil — Generation

     386        305        (280     (282     106        23  

Brazil — Utilities

     1,323        1,531        -        -        1,323        1,531  

MCAC — Generation

     458        393        (1     (1     457        392  

EMEA — Generation

     351        477        (8     (9     343        468  

Asia — Generation

     134        182                -                -        134        182  

Corporate and Other

     320        336        (1     (1     319        335  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total Revenue

   $     4,555      $     4,888      $ (290   $ (302   $     4,265      $     4,586  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

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Adjusted Pre-Tax Contribution(1)

Three Months Ended

March 31,

   Total Adjusted
Pre-tax Contribution
    Intersegment     External  Adjusted
Pre-tax Contribution
 
      
       2013             2012             2013             2012             2013             2012      
     (in millions)  

US — Generation

   $ 65     $ 36     $ 2     $ 11     $ 67     $ 47  

US — Utilities

     70       57       -        -        70       57  

Andes — Generation

     80       111       3       (5     83       106  

Brazil — Generation

     40       52       (67     (68     (27     (16

Brazil — Utilities

     2       56       45       46       47       102  

MCAC — Generation

     48       71       3       2       51       73  

EMEA — Generation

     94       187       (2     (14     92       173  

Asia — Generation

     31       32       1       -        32       32  

Corporate and Other

     (165     (189     15       28       (150     (161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

         265           413               -                -            265           413  

 

Reconciliation to Income from Continuing Operations before Taxes and Equity earnings of Affiliates:

  

Non-GAAP Adjustments:

    

Unrealized derivative losses

     (13     (30

Unrealized foreign currency gains (losses)

     (27     29  

Disposition/acquisition gains

     3       178  

Impairment losses

     (48     (58

Debt retirement losses

     (43     -   
  

 

 

   

 

 

 

Pre-tax contribution

     137       532  

Add: income from continuing operations before taxes, attributable to noncontrolling interests

     166       250  

Less: Net equity in earnings of affiliates

     4       13  
  

 

 

   

 

 

 

Income from continuing operations before taxes and equity in earnings of affiliates

   $     299     $     769  
  

 

 

   

 

 

 

 

(1) 

Adjusted pre-tax contribution in each segment before intersegment eliminations includes the effect of intercompany transactions with other segments except for interest and charges for certain management fees.

Assets by segment as of March 31, 2013 and December 31, 2012 were as follows:

 

     Total Assets  
     March 31,
2013
     December 31,
2012
 
     (in millions)  

Assets

     

US — Generation

   $ 3,184      $ 3,259  

US — Utilities

     7,576        7,534  

Andes — Generation

     6,554        6,619  

Brazil — Generation

     1,867        1,590  

Brazil — Utilities

     8,424        8,120  

MCAC — Generation

     4,440        4,293  

EMEA — Generation

     4,568        4,578  

Asia — Generation

     2,702        2,625  

Discontinued businesses

     173        202  

Corporate and Other & eliminations

     3,230        3,010  
  

 

 

    

 

 

 

Total assets

   $     42,718      $     41,830  
  

 

 

    

 

 

 

 

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12. OTHER INCOME AND EXPENSE

Other Income

Other income generally includes contract terminations, gains on asset sales and extinguishments of liabilities, favorable judgments on contingencies, and other income from miscellaneous transactions. The components of other income are summarized as follows:

 

     Three Months  Ended
March 31,
 
  
         2013              2012      
     (in millions)  

Contract termination

   $ 60      $ -  

Gain on sale of assets

     1        2  

Other

     7        16  
  

 

 

    

 

 

 

Total other income

   $         68      $         18  
  

 

 

    

 

 

 

Other income of $68 million for the three months ended March 31, 2013 was primarily due to the termination of the PPA at Beaver Valley.

Other income of $18 million for the three months ended March 31, 2012 was primarily due to the release of a reserve recorded against inventory at Ballylumford and the receipt of dividends from a cost method investment at Gener.

Other Expense

Other expense generally includes losses on asset sales, losses on extinguishment of debt, legal contingencies and losses from other miscellaneous transactions. The components of other expense are summarized as follows:

 

     Three Months  Ended
March 31,
 
  
     2013      2012  
     (in millions)  

Loss on extinguishment of debt

   $ 47      $ -  

Loss on sale and disposal of assets

     15        24  

Contract termination

     7        -  

Other

     6        4  
  

 

 

    

 

 

 

Total other expense

   $         75      $         28  
  

 

 

    

 

 

 

Other expense for the three months ended March 31, 2013 of $75 million was primarily due to the loss on the early extinguishment of debt at Masinloc, the loss on disposal of assets at Eletropaulo and the termination of a coal contract at Beaver Valley.

Other expense for the three months ended March 31, 2012 of $28 million was primarily due to losses on the disposal of assets at Eletropaulo.

 

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13. ASSET IMPAIRMENT EXPENSE

 

     Three Months Ended
March 31,
 
       2013          2012    
     (in millions)  

Beaver Valley

   $ 46      $ -  

Kelanitissa

     -        5  

Other

     2        5  
  

 

 

    

 

 

 

Total asset impairment expense

   $     48      $     10  
  

 

 

    

 

 

 

Beaver Valley — In January 2013, Beaver Valley, a wholly-owned 125 Megawatt (“MW”) coal-fired plant in Pennsylvania, entered into an agreement to early terminate its PPA with the offtaker in exchange for a lump sum payment of $60 million which was received on January 9, 2013. The termination was effective January 8, 2013. Beaver Valley also terminated its fuel supply agreement. Under the PPA termination agreement, annual capacity agreements between the offtaker and PJM Interconnection, LLC (“PJM”) (a regional transmission organization) for 2013 — 2016 have been assigned to Beaver Valley. The termination of the PPA resulted in a significant reduction in the future cash flows of the asset group and was considered an impairment indicator. The carrying amount of the asset group was not recoverable. The carrying amount of the asset group exceeded the fair value of the asset group, resulting in an asset impairment expense of $46 million. Beaver Valley is reported in the US Generation segment.

14. OTHER NON-OPERATING EXPENSE

There was no other non-operating expense for the three months ended March 31, 2013. Other non-operating expense for the three months ended March 31, 2012 consisted of the other-than-temporary impairment of the following equity method investments:

 

     Three Months
Ended March 31,
 
     2012  
     (in millions)  

China generation

   $ 31  

InnoVent

     17  

Other

     1  
  

 

 

 

Total other-non operating expense

   $       49  
  

 

 

 

China — During the first quarter of 2012, the Company concluded it was more likely than not that it would sell its interests in certain investments in China before the end of their joint venture terms. These investments include coal-fired, hydropower and wind generation facilities accounted for under the equity method of accounting. These were considered impairment indicators. In measuring the other-than-temporary impairment, the carrying value of $164 million of these investments was compared to their fair value of $133 million resulting in an other-than-temporary impairment expense of $31 million.

InnoVent — During the first quarter of 2012, the Company concluded it was more likely than not that it would sell its interest in InnoVent S.A.S. (“InnoVent”), an equity method investment in France with wind generation projects totaling 75 MW. InnoVent had a carrying value of $36 million which exceeded its fair value of $19 million, resulting in an other-than-temporary impairment expense of $17 million.

 

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15. DISCONTINUED OPERATIONS AND HELD FOR SALE BUSINESSES

In addition to the businesses reported as discontinued operations in the 2012 Form 10-K, discontinued operations include the results of the following businesses classified as held for sale in March of 2013:

 

   

Ukraine Utilities businesses

The following table summarizes the revenue, income from operations, income tax expense, impairment and loss on disposal of all discontinued operations for the three months ended March 31, 2013 and 2012:

 

     Three Months
Ended March 31,
 
       2013         2012    
     (in millions)  

Revenue

   $ 147     $ 191  
  

 

 

   

 

 

 

Income from operations of discontinued businesses, before income tax

   $ 13     $ 8  

Income tax benefit (expense)

     1       (2
  

 

 

   

 

 

 

Income from operations of discontinued businesses, after income tax

   $     14     $     6  
  

 

 

   

 

 

 

Net loss from disposal and impairments of discontinued businesses, after income tax

   $ (36   $ (5
  

 

 

   

 

 

 

Ukraine Utilities sale — On January 29, 2013, the Company agreed to sell its two power distribution businesses in Ukraine to VS Energy International. Under the agreement, the Company sold its 89.1% equity interest in AES Kyivoblenergo, which serves 881,000 customers in the Kiev region, and its 84.6% percent equity interest in AES Rivneoblenergo, which serves 412,000 customers in the Rivne region. The Company recognized an asset impairment of $38 million upon fair value measurement during the three months ended March 31, 2013. The transaction closed on April 29, 2013 and net proceeds of $109 million were received. These businesses were previously reported in “Corporate and Other.”

16. DISPOSITIONS

Cartagena — On February 9, 2012, a subsidiary of the Company completed the sale of 80% of its interest in the wholly-owned holding company of AES Energia Cartagena S.R.L. (“AES Cartagena”), a 1,199 MW gas-fired generation business in Spain. The Company owned approximately 70.81% of AES Cartagena through this holding company structure, as well as 100% of a related operations and maintenance company. During the first quarter of 2012, net proceeds from the sale of the 80% interest were approximately $229 million and the Company recognized a pretax gain of $178 million. Under the terms of the sale agreement, the buyer had an option to purchase the Company’s remaining 20% interest at a fixed price of $36 million during a five month period beginning March 2013. Of the total proceeds received in February 2012, approximately $9 million was deferred and allocated to the buyer’s option to purchase the Company’s remaining interest. The buyer exercised the option to purchase the Company’s remaining 20% interest in AES Cartagena on April 26, 2013. Net proceeds from the exercise of the option were approximately $24 million and the Company will recognize a pretax gain of $20 million in the second quarter of 2013.

Due to the Company’s continuing ownership interest extending beyond one year from the completion of the sale of its 80% interest, the prior period operating results of AES Cartagena were not reclassified as discontinued operations.

 

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17. EARNINGS PER SHARE

Basic and diluted earnings per share are based on the weighted average number of shares of common stock and potential common stock outstanding during the period. Potential common stock, for purposes of determining diluted earnings per share, includes the effects of dilutive restricted stock units, stock options and convertible securities. The effect of such potential common stock is computed using the treasury stock method or the if-converted method, as applicable.

The following tables present a reconciliation of the numerator and denominator of the basic and diluted earnings per share computation for income from continuing operations for the three months ended March 31, 2013 and 2012. In the table below, income represents the numerator and weighted-average shares represent the denominator:

 

    Three Months Ended March 31,  
    2013     2012  
    Income     Shares     $ per Share     Income     Shares     $ per Share  
    (in millions except per share data)  

BASIC EARNINGS PER SHARE

           

Income from continuing operations attributable to The AES Corporation common stockholders

  $ 106       745     $ 0.14     $ 341       766     $ 0.45  

EFFECT OF DILUTIVE SECURITIES

           

Convertible securities

    -       -       -       6       15       -  

Stock options

    -       1       -       -       1       -  

Restricted stock units

    -       3       -       -       3       (0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

DILUTED EARNINGS PER SHARE

  $     106       749     $     0.14     $     347       785     $     0.44  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The calculation of diluted earnings per share excluded 8 and 7 million options outstanding at March 31, 2013 and 2012, respectively, that could potentially dilute basic earnings per share in the future. These options were not included in the computation of diluted earnings per share because the exercise price of those options exceeded the average market price during the related period.

The calculation of diluted earnings per share also excluded 1 and 2 million restricted stock units outstanding at March 31, 2013 and 2012, respectively, that could potentially dilute basic earnings per share in the future. These restricted stock units were not included in the computation of diluted earnings per share because the average amount of compensation cost per share attributed to future service and not yet recognized exceeded the average market price during the related period and thus to include the restricted units would have been anti-dilutive.

For the three months ended March 31, 2013 all 15 million convertible debentures were omitted from the earnings per share calculation because they were anti-dilutive. For the three months ended March 31, 2012, all convertible debentures were included in the earnings per share calculation.

During the three months ended March 31, 2013, 1 million shares of common stock were issued under the Company’s profit sharing plan.

18. SUBSEQUENT EVENTS

Dividend — On April 18, 2013, the Company’s Board of Directors declared a dividend of $0.04 per outstanding share payable on May 15, 2013 to the shareholders of record at the close of business on May 1, 2013.

Cartagena — On April 26, 2013, the Company’s remaining 20% interest held in AES Cartagena was sold upon the exercise of the purchase option by the buyer. See Note 16 — Dispositions for further information.

 

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Ukraine Utilities Sale — The sale transaction of Ukraine utilities was closed on April 29, 2013. See Note 15 — Discontinued Operations and Held for Sale Businesses for further information.

Recourse Debt — On April 30, 2013, the Company issued $500 million aggregate principal amount of 4.875% senior notes due 2023 (the “Notes”). In connection with this offering, the Company has commenced the tender offers (the “Tender Offers”) to purchase for cash up to $800 million aggregate principal amount of four series of our outstanding senior notes, including any and all of our outstanding 7.75% senior notes due 2014 (the “2014 Notes”), of which $500 million are currently outstanding; up to $100 million of our outstanding 7.75% senior notes due 2015 (the “2015 Notes”), of which $500 million are currently outstanding; up to $100 million of our outstanding 9.75% senior notes due 2016 (the “2016 Notes”), of which $535 million are currently outstanding; and up to $100 million of our outstanding 8.00% senior notes due 2017 (the “2017 Notes” and, together with the 2014 Notes, the 2015 Notes and the 2016 Notes, the “Outstanding Notes”), of which $1,500 million are currently outstanding. We intend to use the net proceeds from this offering, as well as, if necessary, other available funds, to fund the Tender Offers and to pay certain related fees and expenses. If any net proceeds from this offering remain after completion of the Tender Offers, we intend to use such proceeds for general corporate purposes.

 

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ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Quarterly Report on Form 10-Q (“Form 10-Q”), the terms “AES,” “the Company,” “us,” or “we” refer to the consolidated entity and all of its subsidiaries and affiliates, collectively. The term “The AES Corporation” or “the Parent Company” refers only to the parent, publicly-held holding company, The AES Corporation, excluding its subsidiaries and affiliates.

The condensed consolidated financial statements included in Item 1. — Financial Statements of this Form 10-Q and the discussions contained herein should be read in conjunction with our 2012 Form 10-K.

FORWARD-LOOKING INFORMATION

The following discussion may contain forward-looking statements regarding us, our business, prospects and our results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause our actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described in Item 1A. — Risk Factors of our 2012 Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC that advise of the risks and factors that may affect our business.

Overview of Our Business

We are a diversified power generation and utility company organized into six market-oriented Strategic Business Units (“SBUs”): US (United States), Andes (Chile, Colombia, and Argentina), Brazil, MCAC (Mexico, Central America and the Caribbean), EMEA (Europe, Middle East and Africa), and Asia. For additional information regarding our business, see Item 1. — Business of our 2012 Form 10-K.

Our Organization — The management reporting structure is organized along six SBUs led by our Chief Operating Officer (“COO”), who in turn reports to our Chief Executive Officer (“CEO”). Our CEO and COO are based in Arlington, Virginia. For financial reporting purposes, the Company has identified eight reportable segments based on the six SBUs. Accordingly, management’s discussion and analysis of revenue and gross margin is organized as follows:

 

   

US SBU

 

   

US — Generation segment

 

   

US — Utilities segment

 

   

Andes SBU

 

   

Andes — Generation segment

 

   

Brazil SBU

 

   

Brazil — Generation segment

 

   

Brazil — Utilities segment

 

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MCAC SBU

 

   

MCAC — Generation segment

 

   

EMEA SBU

 

   

EMEA — Generation segment

 

   

Asia SBU

 

   

Asia — Generation segment

Corporate and Other — The Company’s EMEA and MCAC utilities as well as Corporate are reported within “Corporate and Other” because they do not require separate disclosure under segment reporting accounting guidance. See Note 11 — Segments included in Item 1. — Financial Statements for further discussion of the Company’s segment structure used for financial reporting purposes.

Management’s Priorities

Management is focused on the following priorities:

 

   

Management of our portfolio of generation and utility businesses to create value for our stakeholders, including customers and shareholders, through safe, reliable, and sustainable operations and effective cost management;

 

   

Driving our operating business to manage capital more effectively and to increase the amount of discretionary cash available for deployment into debt repayment, growth investments, shareholder dividends and share buybacks;

 

   

Realignment of our geographic focus. To this end, we will continue to exit markets where we do not have a competitive advantage or where we are unable to earn a fair risk-adjusted return relative to monetization alternatives. In addition, we will focus our growth investments on platform expansions or opportunities to expand our existing operations; and

 

   

Reduce the cash flow and earnings volatility of our businesses by proactively managing our currency, commodity and political risk exposures, mostly through contractual and regulatory mechanisms, as well as commercial hedging activities. We also will continue to limit our risk by utilizing non-recourse project financing for the majority of our businesses.

Q1 2013 Performance

During the first quarter of 2013, Adjusted EPS declined $0.11 to $0.26. This decline was anticipated and was primarily driven by a one-time arbitration settlement at Cartagena in Spain recorded in the first quarter of 2012, the impact of low hydrology in Panama and Brazil, and unfavorable movements in foreign currency exchange rates, predominantly the Brazilian Real.

We continued to execute on our strategic objectives of safe, reliable and sustainable operations, improvement of available capital and deployment of discretionary cash and realignment of our geographic focus. Key highlights of our progress during the first quarter include:

Safe, Reliable and Sustainable Operations.

During the first quarter of 2013, we commenced commercial operations at our 270 MW coal-fired Ventanas IV plant in Chile. To supplement our future growth, we commenced construction of our 532 MW coal-fired Cochrane platform expansion project in Chile. This brings our total projects under construction to 2,443 MW, expected to come on-line 2013-2016.

 

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Improving Available Capital and Deployment of Discretionary Cash.

Building on actions that commenced in 2012, during the first quarter 2013, we deployed our discretionary cash to pay a dividend of $0.04 per share and invested $75 million in our subsidiaries to expand our existing facilities. Additionally, in April 2013, we initiated certain transactions to reduce debt and extend near-term maturities at the Parent Company. For further details please see Note 18 — Subsequent Events.

Realigning Our Geographic Focus.

Continuing on our efforts to further streamline our portfolio, we announced or closed the sale of three assets, for a total of $133 million in equity proceeds to AES, exiting our operations in Spain and the Ukraine.

Earnings Per Share Results in Q1 2013

 

     Three Months Ended
March 31,
 
     2013      2012  

Diluted earnings per share from continuing operations

   $     0.14      $     0.44  

Adjusted earnings per share (a non-GAAP measure)(1)

   $ 0.26      $ 0.37  

 

(1) 

See reconciliation and definition under Non-GAAP Measures.

During the three months ended March 31, 2013, diluted earnings per share from continuing operations decreased principally due to lower gross margin and a decrease in the gain on sale of investments resulting from the sale of 80% of our interest in Cartagena in the first quarter of 2012, as well as the other drivers described below in other operating highlights.

Adjusted earnings per share, a non-GAAP measure, decreased by 30% primarily due to lower gross margin, partially offset by higher other income due to the PPA termination at Beaver Valley.

Other Operating Highlights

 

     Three Months Ended March 31,  
     2013      2012      % Change  
     (in millions)  

Revenue

   $     4,265      $     4,586        -7

Gross margin

   $ 755      $ 1,072        -30

Net income attributable to The AES Corporation

   $ 82      $ 341        -76

Adjusted pre-tax contribution (a non-GAAP measure)(1)

   $ 265      $ 413        -36

Net cash provided by operating activities

   $ 618      $ 534        16

 

(1) 

See reconciliation and definition below under Non-GAAP Measures.

The following briefly describes the key changes in our reported revenue, gross margin, net income attributable to The AES Corporation, net cash provided by operating activities, diluted earnings per share from continuing operations and adjusted earnings per share (a non-GAAP measure) for the three months ended March 31, 2012 and 2011 and should be read in conjunction with our Consolidated Results of Operations and Segment Analysis discussion within Management’s Discussion and Analysis of Financial Condition below.

 

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Three months ended March 31, 2013:

Revenue decreased $321 million, or 7%, to $4.3 billion in the three months ended March 31, 2013 compared with $4.6 billion in the three months ended March 31, 2012. Excluding the impact of foreign currency of $239 million, the key drivers of the change at each of the SBU’s are as follows:

 

   

US — Overall unfavorable impact of $38 million due to lower capacity revenue and lower average retail and average wholesale prices at DPL in Ohio, the impact of the PPA buyout at Beaver Valley in Pennsylvania, partially offset by higher wholesale volume at DPL and higher retail and wholesale volume at IPL in Indiana.

 

   

Andes — Overall unfavorable impact of $16 million due to lower prices and volumes in Chile and impact of outage in Argentina during the first quarter of 2013 partially offset by higher prices in Colombia due to lower water inflows.

 

   

Brazil — Overall favorable impact of $97 million due to the temporary restart of operations at Uruguaiana during February and March of 2013 and higher tariff at Eletropaulo compared to the 2012 tariff reset provision, partially offset by overall lower demand and lower volumes in our Brazil utilities.

 

   

MCAC — Overall favorable impact of $71 million due to higher sales in the Dominican Republic, higher volume at Merida in Mexico and impact of tariff reset in El Salvador.

 

   

EMEA — Overall unfavorable variance of $147 million due to the sale of 80% of our ownership and a non-recurring favorable arbitration settlement in Cartagena in the first quarter of 2012, lower capacity prices at Ballylumford in line with PPA beginning April 2012, and a mark-to-market loss on an embedded derivative at Sonel in Cameroon partially offset by lower outages in 2013.

 

   

Asia — Overall unfavorable variance of $48 million due to lower volume in Sri Lanka, lower prices in the Philippines and the impact of a mark-to-market gain on a derivative in 2012 in the Philippines, partially offset by higher demand.

Gross margin decreased $317 million, or 30%, to $755 million in the three months ended March 31, 2013 compared with $1.1 billion in the three months ended March 31, 2012. Excluding the impact of foreign currency of $28 million, the key drivers of the change at each of the SBU’s are as follows:

 

   

US — Overall unfavorable variance of $18 million driven by lower rates as discussed above at DPL and the PPA buyout at Beaver Valley, partially offset by lower amortization expense at DPL and higher retail and wholesale volume at IPL.

 

   

Andes — Overall unfavorable impact of $30 million due to lower gas availability and coal generation in Chile, lower generation and prices in Argentina, partially offset by new operations of Ventanas IV in Chile.

 

   

Brazil — Overall unfavorable impacts of $79 million due to lower water inflows in the system resulting in a higher allocation of energy purchases to Tietê partially offset by the temporary restart of operations at Uruguaiana as discussed above and lower volumes at Brazil utilities.

 

   

MCAC — Overall unfavorable variance of $16 million due to higher purchased energy in Panama due to low hydrology, higher fuel costs and higher outages in Dominican Republic partially offset by higher volume in the Dominican Republic.

 

   

EMEA — Overall unfavorable variance of $135 million due to the sale of 80% of our ownership and a non-recurring favorable arbitration settlement in Cartagena in the first quarter of 2012, lower capacity prices at Ballylumford, and a mark-to-market loss on an embedded derivative at Sonel in Cameroon, partially offset by lower outages in 2013.

 

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Asia — Overall unfavorable impact of $12 million due to the impact of the mark-to-market gain on a derivative in 2012 and lower prices in the Philippines.

Net income attributable to The AES Corporation decreased $259 million to $82 million in the three months ended March 31, 2013 compared to $341 million in the three months ended March 31, 2012. The key drivers of the decrease included:

 

   

the decrease in gross margin as described above;

 

   

a decrease in gains on the sale of investments due to the prior year gain recorded on the sale of 80% of our interest in Cartagena in the first quarter of 2012;

 

   

higher other expenses primarily due to the early extinguishment of debt at Masinloc;

 

   

an increase in asset impairment expense due to impairment at Beaver Valley in Pennsylvania; and

 

   

higher foreign currency transaction losses in 2013 compared to 2012.

These decreases were partially offset by:

 

   

lower tax expense in the first quarter of 2013 due to lower income before tax and a decrease in the effective tax rate from 35% to 27%;

 

   

higher other income primarily due to a gain arising from the termination of the PPA at Beaver Valley; and

 

   

a decrease in other non-operating expense due to the prior year other-than-temporary impairment losses of equity method investments in China and France.

Net cash provided by operating activities increased $84 million, or 16%, to $618 million in the three months ended March 31, 2013 compared with $534 million in the three months ended March 31, 2012. This net increase was primarily the result of the following:

 

   

US — an increase of $67 million at our generation businesses primarily due to proceeds of $60 million from the PPA termination at Beaver Valley in January 2013.

 

   

Andes — a decrease of $59 million at our generation businesses primarily driven by income tax payments at Chivor.

 

   

MCAC — an increase of $75 million at our generation businesses primarily due to the prepayment of gas in 2012 at Andres and higher collections and lower payments at Itabo.

Non-GAAP Measure

Adjusted pre-tax contribution (“adjusted PTC”) and Adjusted earnings per share (“adjusted EPS”) are non-GAAP supplemental measures that are used by management and external users of our consolidated financial statements such as investors, industry analysts and lenders.

We define adjusted PTC as pre-tax income from continuing operations attributable to AES excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions, (b) unrealized foreign currency gains or losses, (c) gains or losses due to dispositions and acquisitions of business interests, (d) losses due to impairments, and (e) costs due to the early retirement of debt. Adjusted PTC also includes net equity in earnings of affiliates on an after-tax basis.

 

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We define adjusted EPS as diluted earnings per share from continuing operations excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions, (b) unrealized foreign currency gains or losses, (c) gains or losses due to dispositions and acquisitions of business interests, (d) losses due to impairments, and (e) costs due to the early retirement of debt.

The GAAP measure most comparable to adjusted PTC is income from continuing operations attributable to AES. The GAAP measure most comparable to adjusted EPS is diluted earnings per share from continuing operations. We believe that adjusted PTC and adjusted EPS better reflect the underlying business performance of the Company and are considered in the Company’s internal evaluation of financial performance. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions, unrealized foreign currency gains or losses, losses due to impairments and strategic decisions to dispose of or acquire business interests or retire debt, which affect results in a given period or periods. In addition, for adjusted PTC, earnings before tax represents the business performance of the Company before the application of statutory income tax rates and tax adjustments, including the effects of tax planning, corresponding to the various jurisdictions in which the Company operates. Adjusted PTC and adjusted EPS should not be construed as alternatives to income from continuing operations attributable to AES and diluted earnings per share from continuing operations, which are determined in accordance with GAAP.

 

     Three Months Ended
March  31, 2013
    Three Months Ended
March  31, 2012
 
     Net of
NCI*
    Per Share
(Diluted) Net
of NCI* and
Tax
    Net of
NCI*
    Per Share
(Diluted) Net
of NCI* and
Tax
 
     (In millions, except per share amounts)  

Income from continuing operations attributable to AES and Diluted EPS

   $ 106     $ 0.14     $ 341     $ 0.44  

Add back income tax expense from continuing operations attributable to AES

     31         191    
  

 

 

     

 

 

   

Pre-tax contribution

     137         532    

Adjustments

        

Unrealized derivative losses(1)

     13       0.01       30       0.03  

Unrealized foreign currency transaction (gains)/ losses(2)

     27       0.02       (29     (0.02

Disposition/ acquisition (gains)

     (3     - (3)      (178     (0.14 )(4) 

Impairment losses

     48       0.05 (5)      58       0.06 (6) 

Debt retirement losses

     43       0.04 (7)      -        -   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted pre-tax contribution and Adjusted EPS

   $     265     $     0.26     $     413     $     0.37  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* NCI is defined as Noncontrolling Interests
(1) 

Unrealized derivative losses were net of income tax per share of $0.01 and $0.01 in the three months ended March 31, 2013 and 2012, respectively.

(2) 

Unrealized foreign currency transaction (gains)/losses were net of income tax per share of $0.01 and $(0.01) in the three months ended March 31, 2013 and 2012, respectively.

(3) 

Amount primarily relates to the gain from the sale of Chengdu, an equity method investment in China for $3 million ($2 million, or $0.00 per share, net of income tax of $0.00 per share).

(4) 

Amount primarily relates to the gain from the sale of 80% of our interest in Cartagena for $178 million ($107 million, or $0.14 per share, net of income tax of $0.09 per share).

(5) 

Amount primarily relates to asset impairments at Beaver Valley of $46 million ($32 million, or $0.04 per share, net of income tax of $0.02 per share).

(6) 

Amount primarily relates to the other-than-temporary impairment of equity method investments in China of $32 million ($26 million, or $0.03 per share, net of income tax of $0.01 per share), and at InnoVent of $17 million ($12 million, or $0.02 per share, net of income tax of $0.01 per share).

(7) 

Amount primarily relates to the loss on early retirement of debt at Masinloc of $43 million ($28 million, or $0.04 per share, net of noncontrolling interest of $3 million and of income tax of $0.01 per share).

 

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Consolidated Results of Operations

 

     Three Months Ended March 31,  
Results of operations    2013     2012     $ change     % change  
     (in millions, except per share amounts)  

Revenue:

  

US — Generation

   $ 170     $ 198     $ (28   $ -14

US — Utilities

     722       732       (10     -1

Andes — Generation

     691       734       (43     -6

Brazil — Generation

     386       305       81       27

Brazil — Utilities

     1,323       1,531       (208     -14

MCAC — Generation

     458       393       65       17

EMEA — Generation

     351       477       (126     -26

Asia — Generation

     134       182       (48     -26

Corporate and Other(1)

     320       336       (16     -5

Intersegment eliminations(2)

     (290     (302     12       4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

   $     4,265     $     4,586     $     (321   $     -7
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross Margin:

        

US — Generation

   $ 31     $ 53     $ (22   $ -42

US — Utilities

     118       114       4       4

Andes — Generation

     134       167       (33     -20

Brazil — Generation

     163       225       (62     -28

Brazil — Utilities

     40       83       (43     -52

MCAC — Generation

     87       105       (18     -17

EMEA — Generation

     121       247       (126     -51

Asia — Generation

     41       54       (13     -24

Corporate and Other(1)

     7       23       (16     -70

Intersegment eliminations(2)

     13       1       12       NM   

General and administrative expenses

     (61     (87     26       30

Interest expense

     (377     (416     39       9

Interest income

     66       91       (25     -27

Other expense

     (75     (28     (47     -168

Other income

     68       18       50       278

Gain on sale of investments

     3       179       (176     -98

Asset impairment expense

     (48     (10     (38     -380

Foreign currency transaction losses

     (32     (1     (31     NM   

Other non-operating expense

     -       (49     49       100

Income tax expense

     (82     (268     186       69

Net equity in earnings of affiliates

     4       13       (9     -69
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     221       514       (293     -57

Income from operations of discontinued businesses

     14       6       8       133

Net loss from disposal and impairments of discontinued businesses

     (36     (5     (31     -620
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     199       515       (316     -61

Noncontrolling interests:

        

Income from continuing operations attributable to noncontrolling interests

     (115     (173     58       34

Income from discontinued operations attributable to noncontrolling interests

     (2     (1     (1     -100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to The AES Corporation

   $ 82     $ 341     $ (259   $ -76
  

 

 

   

 

 

   

 

 

   

 

 

 

AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:

        

Income from continuing operations, net of tax

   $ 106     $ 341     $ (235   $ -69

Loss from discontinued operations, net of tax

     (24     -       (24     N/A   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 82     $ 341     $ (259   $ -76
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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NM — Not meaningful

(1) 

Corporate and other includes revenue and gross margin from our utility businesses in El Salvador and Africa.

(2) 

Represents intersegment eliminations of revenue and gross margin primarily related to transfers of electricity from Tietê (Brazil — Generation) to Eletropaulo (Brazil — Utilities).

Key Trends and Uncertainties

During the remainder of 2013 and beyond, we expect to face the following challenges at certain of our businesses. Management expects that improved operating performance at certain businesses, growth from new businesses and global cost reduction initiatives may lessen or offset their impact. If these favorable effects do not occur, or if the challenges described below and elsewhere in this section impact us more significantly than we currently anticipate, or if volatile foreign currencies and commodities move more unfavorably, then these adverse factors (or other adverse factors unknown to us) may impact our gross margin, net income attributable to The AES Corporation and cash flows. We continue to monitor our operations and address challenges as they arise. For the risk factors related to our business, see Item 1. — Business and Item 1A. — Risk Factors of the 2012 Form 10-K.

Regulatory

Rate Case Proceedings

Two of our utility businesses, DP&L in the United States and AES Sul in Brazil, are in the process of their regulated tariff review and/or reset by the applicable regulatory agency. The tariff outcome will determine the amount that our utility businesses can charge to customers for electricity.

DP&L — On October 5, 2012, DP&L filed an Electric Security Plan (ESP) with the Public Utilities Commission of Ohio (“PUCO”) to establish Standard Service Offer (SSO) rates that were to be in effect starting January 1, 2013. The plan was refiled on December 12, 2012 to correct for certain projected costs. The plan requested approval of a non-bypassable charge that is designed to recover $138 million per year for five years from all customers. DP&L also requested approval of a switching tracker that would measure the incremental amount of switching over a base case and defer the lost value into a regulatory asset which would be recovered from all customers beginning January 2014. The ESP states that DP&L plans to file on or before December 31, 2013 its plan for legal separation of its generation assets. The ESP proposes a three year, five month transition to market, whereby a wholesale competitive bidding structure will be phased in to supply generation service to customers located in DP&L’s service territory that have not chosen an alternative generation supplier. As a result of this filing, DP&L’s overall SSO generation revenue is projected to decrease by approximately $46 million for the first year, due to a portion of DP&L’s SSO load being sourced through a competitive bid and other adjustments that were made to the SSO generation rates. As more SSO supply is sourced through a competitive bid, DP&L will continue to experience a decrease in SSO generation revenue each year throughout the blending period. DP&L’s retail transmission rates will increase as a retail, non-bypassable transmission charge will be implemented; however, this revenue will be offset slightly by a decrease in wholesale transmission revenue from Competitive Retail Electric Service Providers operating in DP&L’s service territory. An evidentiary hearing on this case was held March 18, 2013 through April 3, 2013. An order is expected to be issued by the PUCO late in the second quarter or early in the third quarter of 2013. The PUCO authorized that the rates being collected prior to December 31, 2012 would continue until the new ESP rates go into effect. See Item 1. — Business — US SBU Businesses — U.S. Utilities, DPL Inc. included in the 2012 Form 10-K for further information. In addition to the regulatory risks noted above, DP&L also faces a number of additional uncertainties related to the impact of customer switching and low power prices which could impact DP&L’s results of operations, its ability to refinance certain debt (or to do so on favorable terms) which is due in the near to intermediate term, and/or realize the benefits associated with the remaining goodwill. Any of the above-referenced conditions, events or factors could have a material impact on the Company or its results of operations.

 

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Sul — On April 16, 2013, the Brazilian energy regulator (the “Regulator”) approved the periodic tariff reset of AES Sul which occurs every five years. As part of the current tariff reset, the Regulator adjusted certain amounts Sul charged its customers in the period prior to the tariff reset. As a result of these adjustments, Sul has recorded regulatory liabilities for excess maintenance costs and disallowed capital expenditure of $21 million and $7 million, respectively, as of March 31, 2013. These regulatory liabilities were offset by a regulatory asset representing an additional tariff of $18 million related to energy purchases.

Other

The Government of Brazil recently announced an Energy Cost Reduction Program, which targets a 20 percent reduction in electricity prices. About one-third of this planned reduction is expected to be driven by lowering sector charges (indirect taxes). The remaining two-thirds of this reduction is being targeted through re-negotiations of new conditions with various generators and transmission and distribution companies, whose concession contracts are up for renewal between 2015 and 2017. The Government of Brazil issued Provision Measure 579 (PM 579) and other related rules. PM 579 was converted into Law 12.783 in January 2013 and the implementation of the Energy Cost Reduction Program was completed in February of 2013 with an average discount of 18% for residential customers and 32% for industrial ones. In order to ensure the discount rate announced by Government, MP 605 and Decree 7.891 were published in January 2013, removing tariff cross-subsidies by an increase of Treasury annual intake to Energy Development Account (CDE) of R$ 8.8 billion, instead of R$ 3.3 billion. The concession at Tietê, our generation business in Brazil, was granted after 1995 and expires in 2029 and thus is not subject to this regulation. Furthermore, we are insulated in the short-term, as 100 percent of Tietê’s output is contracted with Eletropaulo through December of 2015. Beyond 2015, any developments will be a function of the supply-demand and new investment dynamics in Brazil. With regard to our two distribution businesses in Brazil, Eletropaulo and Sul, both utilities also have concessions granted after 1995 and valid until 2028 and 2027, respectively, and thus are not expected to be affected by PM 579. These distribution businesses earn a return on the regulated asset base and energy purchases are treated as a pass-through cost. The final rule did not result in a material impact to our Brazilian businesses or on our results of operations.

Operational

Fluctuations in Foreign Exchange Rates

The Company is sensitive to changes in economic and political conditions, including foreign exchange rates. In Argentina and the Dominican Republic, the potential weakening of economic indicators, such as increased inflation, devaluation of the local currency, currency convertibility restrictions and large government deficits could have a material impact on the Company. Potential outcomes can include negative impacts in our gross margin and cash flows, and create an inability of the business to pay dividends or obtain currency to service foreign obligations, all of which can negatively impact the value of our assets. See Item 3 — Quantitative and Qualitative Disclosures about Market Risk of this Form 10-Q for more information.

Due to our global presence, the Company has significant exposure to foreign currency fluctuations. The exposure is primarily associated with the impact of the translation of our foreign subsidiaries’ operating results from their local currency to U.S. dollars that is required for the preparation of our consolidated financial statements. Additionally, there is a risk of transaction exposure when an entity enters into transactions, including debt agreements, in currencies other than their functional currency. These risks are further described in Item 1A. — Risk Factors of the 2012 Form 10-K, “Our financial position and results of operations may fluctuate significantly due to fluctuations in currency exchange rates experienced at our foreign operations.” In the three months ended March 31, 2013, changes in foreign currency exchange rates have had a significant impact on our operating results. If the current foreign currency exchange rate volatility continues, our gross margin and other financial metrics could continue to be affected.

 

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Fluctuations in Commodity Prices

The Company is sensitive to changes in natural gas prices. High coal prices relative to natural gas creates pressure at our U.S. businesses, which may affect the results of certain of our coal plants, particularly those which are merchant plants that are exposed to market risk and those that have hybrid merchant risk, meaning those businesses that have a PPA in place, but purchase fuel at market prices or under short term contracts. See Item 3 — Quantitative and Qualitative Disclosures About Market Risk of this Form 10-Q for more information.

Sensitivity to Weather Conditions

Brazil — Given that approximately two-thirds of Brazil’s electric supply is dependent upon hydroelectric generation, changes in weather conditions can have a significant impact on reservoir levels and electricity prices. Lower than expected rainfall during the spring and summer has caused reservoir levels to be lower than their historical levels and affected the availability of hydroelectric generation facilities. If reservoir levels are not able to recover, or deteriorate further, it is expected that higher thermal dispatch will cause more volatility in spot prices. Although the purchased energy cost is a pass-through for AES’s distribution businesses in Brazil, gaps between the purchase of energy and recovery in the tariff could cause temporary cash flow constraints on those businesses. Additionally, if the overall system is short of water, our hydroelectric generation facilities are required to purchase a portion of their contracted energy from the spot market even though such facilities may have enough water to meet their contractual requirements. To the extent that a hydroelectric generation facility needs to purchase energy to meet its contractual requirements, rather than generate, purchasing can be more expensive, thereby creating losses on those contracts, which could have a material adverse impact on our results of operations.

Macroeconomic and Political

During the past few years, economic conditions in some countries where our subsidiaries conduct business have deteriorated. Global economic conditions remain volatile and could have an adverse impact on our businesses in the event these recent trends continue.

Our business or results of operations could be impacted if we or our subsidiaries are unable to access the capital markets on favorable terms or at all, are unable to raise funds through the sale of assets or are otherwise unable to finance or refinance our activities. At this time, several European Union countries continue to face uncertain economic environments, the impacts of which are described below. The Company could also be adversely affected if capital market disruptions result in increased borrowing costs (including with respect to interest payments on the Company’s or our subsidiaries’ variable rate debt) or if commodity prices affect the profitability of our plants or their ability to continue operations.

United States — As noted in Item 1A — Risk Factors — ”We may not be adequately hedged against our exposure to changes in commodity prices or interest rates” of the 2012 Form 10-K and Item 3. — Quantitative and Qualitative Disclosures About Market Risk Commodity Price Risk of this Form 10-Q, the Company’s U. S. businesses continue to face pressure as a result of low natural gas prices, which is the marginal price-setting fuel in most U. S. markets. This has affected the results of certain of our coal-fired plants in the region, including our coal-fired generating assets within our utility businesses. IPL in Indiana benefits from high wholesale power prices in periods where our available generation exceeds our captive load obligations. At DPL in Ohio, where retail competition exists, our coal-fired generating assets sell excess power into the deregulated market and are subject to greater sensitivity to changes in power prices. Businesses that have a PPA in place, but purchase fuel at market prices or under short term contracts may not be fully hedged against changes in either power or fuel prices.

Argentina — In Argentina, the deterioration of certain economic indicators such as non-receding inflation, increased government deficits and foreign currency accessibility combined with the potential devaluation of the local currency and the potential fall in export commodity prices could cause significant volatility in our results of

 

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operations, cash flows, the ability to pay dividends to the Parent Company, and the value of our assets. At March 31, 2013, AES had noncurrent assets of $562 million in Argentina, including long-term receivables of $309 million. See Note 6 — Long-term Financing Receivables in Item 1. — Financial Statements of this Form 10-Q for further information on the long-term receivables.

Bulgaria — Our investments in Bulgaria rely on offtaker contracts with NEK, the state-owned national electricity distribution company. Maritza, a coal-fired generation facility, has experienced ongoing delays in the collection of outstanding receivables from its offtaker. As of March 31, 2013, Maritza had an outstanding receivables balance of $51 million with the offtaker. Although Maritza continued to collect past due receivables during the first quarter of 2013, there can be no assurance that the business will succeed in making these collections, which could result in a write-off of the receivables. In addition, depending on NEK’s ability to honor its obligations and other factors, the value of other assets could also be impaired, or the business may be in default of its loan covenants. The Company has long-lived assets in Bulgaria of $1.6 billion. Any of the above items could have a material impact on our results of operations. For further information on the importance of long-term contracts and our counterparty credit risk, see Item 1A. — Risk Factors — “We may not be able to enter into long-term contracts, which reduce volatility in our results of operations…” of the 2012 Form 10-K. Additionally, the country is scheduled to hold general elections in May 2013 and the new government will need to address several economic challenges faced by the country including higher electricity tariff. At this time, it is difficult to predict the effects of change in the political situation. See Note 29 — Subsequent Events to our consolidated financial statements included in Item 8. — Financial Statements and Supplementary Data of the 2012 Form 10-K for further information. As a result of any of the foregoing events, we may face a loss of earnings and/or cash flows from the affected businesses and may have to provide loans or equity to support affected businesses or projects, restructure them, write down their value and/or face the possibility that these projects cannot continue operations or provide returns consistent with our expectations, any of which could have a material impact on the Company.

Euro Zone — During the past few years, certain European Union countries have continually faced a sovereign debt crisis and it is possible that this crisis could spread to other countries. This crisis has resulted in an increased risk of default by governments and the implementation of austerity measures in certain countries. If the crisis continues, worsens, or spreads, there could be a material adverse impact on the Company. Our businesses may be impacted if they are unable to access the capital markets, face increased taxes or labor costs, or if governments fail to fulfill their obligations to us or adopt austerity measures which adversely impact our projects. As discussed in Item 1A. — Risk Factors — “Our renewable energy projects and other initiatives face considerable uncertainties including development, operational and regulatory challenges” of the 2012 Form 10-K, our renewables businesses are dependent on favorable regulatory incentives, including subsidies, which are provided by sovereign governments, including European governments. If these subsidies or other incentives are reduced or repealed, or sovereign governments are unable or unwilling to fulfill their commitments or maintain favorable regulatory incentives for renewables, in whole or in part, this could impact the ability of the affected businesses to continue to sustain and/or grow their operations and could result in losses or asset impairments for these businesses which could be material. The carrying value of our investment in AES Solar Energy Ltd., whose primary operations are in Europe, was $114 million at March 31, 2013. In addition, any of the foregoing could also impact contractual counterparties of our subsidiaries in core power or renewables. If such counterparties are adversely impacted, then they may be unable to meet their commitments to our subsidiaries.

If global economic conditions deteriorate further, it could also affect the prices we receive for the electricity we generate or transmit. Utility regulators or parties to our generation contracts may seek to lower our prices based on prevailing market conditions pursuant to PPAs, concession agreements or other contracts as they come up for renewal or reset. In addition, rising fuel and other costs coupled with contractual price or tariff decreases could restrict our ability to operate profitably in a given market. Each of these factors, as well as those discussed above, could result in a decline in the value of our assets including those at the businesses we operate, our equity investments and projects under development and could result in asset impairments that could be material to our operations. We continue to monitor our projects and businesses.

 

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Impairments

Goodwill The Company seeks business acquisitions as one of its growth strategies. We have achieved significant growth in the past as a result of several business acquisitions, which also resulted in the recognition of goodwill. In the fourth quarter of 2012, the Company completed its annual October 1 goodwill impairment evaluation and identified two reporting units, DPL and Ebute, which were considered “at risk”. A reporting unit is considered “at risk” when its fair value is not higher than its carrying amount by more than 10%. While there were no potential impairment indicators during the three months ended March 31, 2013 related to DPL and Ebute that could result in the recognition of goodwill impairment, it is possible that we may incur goodwill impairment at any of our reporting units in future periods if adverse changes in their business or operating environments occur. The carrying amount of the goodwill at DPL and Ebute as of March 31, 2013 was approximately $759 million and $58 million, respectively. In 2012, the Company had recognized goodwill impairment of $1.82 billion at the DP&L reporting unit.

Environmental

The Company is subject to numerous environmental laws and regulations in the jurisdictions in which it operates. The Company expenses environmental regulation compliance costs as incurred unless the underlying expenditure qualifies for capitalization under its property, plant and equipment policies. The Company faces certain risks and uncertainties related to these environmental laws and regulations, including existing and potential greenhouse gas (“GHG”) legislation or regulations, and actual or potential laws and regulations pertaining to water discharges, waste management (including disposal of coal combustion byproducts), and certain air emissions, such as SO2, NOx, particulate matter and mercury. Such risks and uncertainties could result in increased capital expenditures or other compliance costs which could have a material adverse effect on certain of our U.S. or international subsidiaries and our consolidated results of operations. For further information about these risks, see Item 1A. — Risk Factors, “Our businesses are subject to stringent environmental laws and regulations,” “Our businesses are subject to enforcement initiatives from environmental regulatory agencies,” and “Regulators, politicians, non-governmental organizations and other private parties have expressed concern about greenhouse gas, or GHG, emissions and the potential risks associated with climate change and are taking actions which could have a material adverse impact on our consolidated results of operations, financial condition and cash flows” set forth in the Company’s Form 10-K for the year ended December 31, 2012. The following discussion of the impact of environmental laws and regulations on the Company updates the discussion provided in Item 1. Business — Regulatory Matters — Environmental and Land Use Regulations of the Company’s Form 10-K for the year ended December 31, 2012. For further information about environmental laws and regulations impacting the Company, including a discussion of U.S. and international legislation and regulation of GHG emissions, see Item 1. Business — Regulatory Matters — Environmental and Land Use Regulations set forth in the Company’s Form 10-K for the year ended December 31, 2012.

Update on Air Emissions Regulations and Legislation