Q2 2015 Form 10-Q



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________________________________
FORM 10-Q
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2015
or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12291
THE AES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
54 1163725
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
4300 Wilson Boulevard Arlington, Virginia
 
22203
(Address of principal executive offices)
 
(Zip Code)
(703) 522-1315
Registrant’s telephone number, including area code:
______________________________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
 
 
 
 
 
 
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
______________________________________________________________________________________________
The number of shares outstanding of Registrant’s Common Stock, par value $0.01 per share, on August 5, 2015 was 682,826,854
 





THE AES CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015
TABLE OF CONTENTS
 
 
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
ITEM 5.
 
 
 
ITEM 6.
 
 





GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this report, they have the meanings indicated below:
Adjusted EPS
Adjusted Earnings Per Share, a non-GAAP measure
Adjusted PTC
Adjusted Pretax Contribution, a non-GAAP measure of operating performance
AES
The Parent Company and its subsidiaries and affiliates
AFS
Available For Sale
AFUDC
Allowance for Funds Used During Construction
ANEEL
Brazilian National Electric Energy Agency
AOCL
Accumulated Other Comprehensive Loss
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
BNDES
Brazilian Development Bank
CA
Commercial Availability
CAA
United States Clean Air Act
CAMMESA
Wholesale Electric Market Administrator in Argentina
CCR
Coal Combustion Residuals
CDPQ
La Caisse de depot et placement du Quebec
CEEE
Companhia Estadual de Energia
CESCO
Central Electricity Supply Company of Orissa Ltd.
CFE
Federal Commission of Electricity
CO2
Carbon Dioxide
COSO
Committee of Sponsoring Organizations of the Treadway Commission
CPCN
Certificate of Public Convenience and Necessity
DP&L
The Dayton Power & Light Company
DPL
DPL Inc.
DPLER
DPL Energy Resources, Inc.
EPA
United States Environmental Protection Agency
EPC
Engineering, Procurement, and Construction
ERC
Energy Regulatory Commission
EURIBOR
Euro Interbank Offered Rate
FASB
Financial Accounting Standards Board
FCA
Federal Court of Appeals
FX
Foreign Exchange
GAAP
Generally Accepted Accounting Principles in the United States
GHG
Greenhouse Gas
GSA
Gas Supply Agreement
GWh
Gigawatt Hours
HTA
Heads of Terms Agreement
ICC
International Chamber of Commerce
IPALCO
IPALCO Enterprises, Inc.
IPL
Indianapolis Power & Light Company
IURC
Indiana Utility Regulatory Commission
KPI
Key Performance Indicator
kWh
Kilowatt Hours
LIBOR
London Interbank Offered Rate
LNG
Liquefied Natural Gas
MATS
Mercury and Air Toxics Standards
MRE
Energy Reallocation Mechanism
MW
Megawatts
MWh
Megawatt Hours
NEK
Natsionalna Elektricheska Kompania (state-owned electricity public supplier in Bulgaria)
NOV
Notice of Violation
NOX
Nitrogen Dioxide
NPDES
National Pollutant Discharge Elimination System
OCI
Other Comprehensive Income
O&M
Operations and Maintenance
OPGC
Odisha Power Generation Corporation
Parent Company
The AES Corporation
PIS
Partially Integrated System
PM
Particulate Matter
PPA
Power Purchase Agreement
PREPA
Puerto Rico Electric Power Authority
RSU
Restricted Stock Unit
SAIDI
System Average Interruption Duration Index
SAIFI
System Average Interruption Frequency Index
SBU
Strategic Business Unit
SEC
United States Securities and Exchange Commission
SO2
Sulfur Dioxide
SSR
Service Stability Rider
TA
Transportation Agreement
VAT
Value-added tax
VIE
Variable Interest Entity

1




PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE AES CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
 
June 30,
2015
 
December 31,
2014
 
(in millions, except share and per share data)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
1,022

 
$
1,539

Restricted cash
308

 
283

Short-term investments
439

 
709

Accounts receivable, net of allowance for doubtful accounts of $94 and $96, respectively
2,877

 
2,709

Inventory
734

 
702

Deferred income taxes
213

 
275

Prepaid expenses
115

 
175

Other current assets
1,799

 
1,434

Current assets of held-for-sale businesses
8

 

Total current assets
7,515

 
7,826

NONCURRENT ASSETS
 
 
 
Property, Plant and Equipment:
 
 
 
Land
801

 
870

Electric generation, distribution assets and other
30,136

 
30,459

Accumulated depreciation
(9,996
)
 
(9,962
)
Construction in progress
2,499

 
3,784

Property, plant and equipment, net
23,440

 
25,151

Other Assets:
 
 
 
Investments in and advances to affiliates
562

 
537

Debt service reserves and other deposits
403

 
411

Goodwill
1,473

 
1,458

Other intangible assets, net of accumulated amortization of $130 and $158, respectively
241

 
281

Deferred income taxes
571

 
662

Service concession assets
1,538

 

Other noncurrent assets
2,691

 
2,640

Noncurrent assets of held-for-sale businesses
150

 

Total other assets
7,629

 
5,989

TOTAL ASSETS
$
38,584

 
$
38,966

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
1,994

 
$
2,278

Accrued interest
244

 
260

Accrued and other liabilities
2,317

 
2,326

Non-recourse debt, including $220 and $240, respectively, related to variable interest entities
1,999

 
1,982

Recourse debt

 
151

Current liabilities of held-for-sale businesses
9

 

Total current liabilities
6,563

 
6,997

NONCURRENT LIABILITIES
 
 
 
Non-recourse debt, including $1,058 and $1,030, respectively, related to variable interest entities
13,750

 
13,618

Recourse debt
5,014

 
5,107

Deferred income taxes
1,281

 
1,277

Pension and other post-retirement liabilities
1,183

 
1,342

Other noncurrent liabilities
3,110

 
3,222

Noncurrent liabilities of held-for-sale businesses
61

 

Total noncurrent liabilities
24,399

 
24,566

Contingencies and Commitments (see Note 9)

 

Redeemable stock of subsidiaries
538

 
78

EQUITY
 
 
 
THE AES CORPORATION STOCKHOLDERS’ EQUITY
 
 
 
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 815,558,389 issued and 682,607,128 outstanding at June 30, 2015 and 814,539,146 issued and 703,851,297 outstanding at December 31, 2014)
8

 
8

Additional paid-in capital
8,705

 
8,409

Retained earnings
258

 
512

Accumulated other comprehensive loss
(3,445
)
 
(3,286
)
Treasury stock, at cost (132,951,261 shares at June 30, 2015 and 110,687,849 shares at December 31, 2014)
(1,662
)
 
(1,371
)
Total AES Corporation stockholders’ equity
3,864

 
4,272

NONCONTROLLING INTERESTS
3,220

 
3,053

Total equity
7,084

 
7,325

TOTAL LIABILITIES AND EQUITY
$
38,584

 
$
38,966

See Notes to Condensed Consolidated Financial Statements.

2




THE AES CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Regulated
$
2,008

 
$
2,116

 
$
4,088

 
$
4,258

Non-Regulated
1,850

 
2,195

 
3,754

 
4,315

Total revenue
3,858

 
4,311

 
7,842

 
8,573

Cost of Sales:
 
 
 
 
 
 
 
Regulated
(1,634
)
 
(1,844
)
 
(3,441
)
 
(3,776
)
Non-Regulated
(1,470
)
 
(1,648
)
 
(2,926
)
 
(3,184
)
Total cost of sales
(3,104
)
 
(3,492
)
 
(6,367
)
 
(6,960
)
Operating margin
754

 
819

 
1,475

 
1,613

General and administrative expenses
(50
)
 
(52
)
 
(105
)
 
(103
)
Interest expense
(310
)
 
(323
)
 
(673
)
 
(696
)
Interest income
133

 
73

 
223

 
136

Loss on extinguishment of debt
(122
)
 
(15
)
 
(145
)
 
(149
)
Other expense
(14
)
 
(17
)
 
(34
)
 
(25
)
Other income
15

 
33

 
31

 
45

Goodwill impairment expense

 

 

 
(154
)
Asset impairment expense
(37
)
 
(63
)
 
(45
)
 
(75
)
Foreign currency transaction gains (losses)
15

 
7

 
(8
)
 
(12
)
Other non-operating expense

 
(44
)
 

 
(44
)
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES
384

 
418

 
719

 
536

Income tax expense
(120
)
 
(157
)
 
(216
)
 
(211
)
Net equity in earnings of affiliates

 
20

 
15

 
45

INCOME FROM CONTINUING OPERATIONS
264

 
281

 
518

 
370

Income from operations of discontinued businesses, net of income tax expense of $0, $8, $0 and $22, respectively

 
7

 

 
27

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

 
(13
)
 

 
(56
)
NET INCOME
264

 
275

 
518

 
341

Noncontrolling interests:
 
 
 
 
 
 
 
Less: (Income) from continuing operations attributable to noncontrolling interests
(195
)
 
(139
)
 
(307
)
 
(275
)
Less: (Income) loss from discontinued operations attributable to noncontrolling interests

 
(3
)
 

 
9

Total net income attributable to noncontrolling interests
(195
)
 
(142
)
 
(307
)
 
(266
)
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION
$
69

 
$
133

 
$
211

 
$
75

AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
69

 
$
142

 
$
211

 
$
95

Loss from discontinued operations, net of tax

 
(9
)
 

 
(20
)
Net income
$
69

 
$
133

 
$
211

 
$
75

BASIC EARNINGS PER SHARE:
 
 
 
 
 
 
 
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax
$
0.10

 
$
0.20

 
$
0.30

 
$
0.13

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

 
(0.02
)
 

 
(0.03
)
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
$
0.10

 
$
0.18

 
$
0.30

 
$
0.10

DILUTED EARNINGS PER SHARE:
 
 
 
 
 
 
 
Income from continuing operations attributable to The AES Corporation common stockholders, net of tax
$
0.10

 
$
0.20

 
$
0.30

 
$
0.13

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

 
(0.02
)
 

 
(0.03
)
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
$
0.10

 
$
0.18

 
$
0.30

 
$
0.10

DILUTED SHARES OUTSTANDING
695

 
728

 
701

 
728

DIVIDENDS DECLARED PER COMMON SHARE
$
0.10

 
$
0.05

 
$
0.10

 
$
0.05

See Notes to Condensed Consolidated Financial Statements.

3




THE AES CORPORATION
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
NET INCOME
$
264

 
$
275

 
$
518

 
$
341

Foreign currency translation activity:
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of income tax (expense) benefit of $0, $(7), $0 and $(8), respectively
77

 
24

 
(344
)
 
29

Reclassification to earnings, net of income tax (expense) benefit of $0 for all periods

 
(53
)
 

 
(47
)
Total foreign currency translation adjustments
77

 
(29
)
 
(344
)
 
(18
)
Derivative activity:
 
 
 
 
 
 
 
Change in derivative fair value, net of income tax (expense) benefit of $(20), $22, $(3) and $46, respectively
82

 
(105
)
 
10

 
(225
)
Reclassification to earnings, net of income tax (expense) benefit of $(1), $(10), $(3) and $(13), respectively
7

 
13

 
19

 
32

Total change in fair value of derivatives
89

 
(92
)
 
29

 
(193
)
Pension activity:
 
 
 
 
 
 
 
Change in pension adjustments due to prior service cost, net of income tax (expense) benefit of $0, $(1), $0, and $(1), respectively

 
1

 

 
1

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

 
14

 

 
14

Reclassification to earnings due to amortization of net actuarial loss, net of income tax (expense) benefit of $(2), $2, $(5) and $(1), respectively
4

 
10

 
9

 
16

Total pension adjustments
4

 
25

 
9

 
31

OTHER COMPREHENSIVE INCOME (LOSS)
170

 
(96
)
 
(306
)
 
(180
)
COMPREHENSIVE INCOME
434

 
179

 
212

 
161

Less: Comprehensive (income) attributable to noncontrolling interests
(261
)
 
(102
)
 
(173
)
 
(227
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
$
173

 
$
77

 
$
39

 
$
(66
)
See Notes to Condensed Consolidated Financial Statements.

4




THE AES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
 
2015
 
2014
 
(in millions)
OPERATING ACTIVITIES:
 
 
 
Net income
$
518

 
$
341

Adjustments to net income:
 
 
 
Depreciation and amortization
597

 
625

Impairment expenses
45

 
273

Deferred income taxes
17

 
52

Releases of contingencies
(134
)
 
(48
)
Loss on the extinguishment of debt
145

 
149

Loss on sale of assets
12

 
8

Loss on disposals and impairments — discontinued operations

 
51

Other
70

 
45

Changes in operating assets and liabilities
 
 
 
(Increase) decrease in accounts receivable
(444
)
 
(312
)
(Increase) decrease in inventory
(54
)
 
(39
)
(Increase) decrease in prepaid expenses and other current assets
132

 
(72
)
(Increase) decrease in other assets
(815
)
 
(316
)
Increase (decrease) in accounts payable and other current liabilities
179

 
(194
)
Increase (decrease) in income tax payables, net and other tax payables
(131
)
 
(176
)
Increase (decrease) in other liabilities
453

 
66

Net cash provided by operating activities
590

 
453

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(1,168
)
 
(908
)
Acquisitions, net of cash acquired
(18
)
 
(728
)
Proceeds from the sale of businesses, net of cash sold
2

 
890

Proceeds from the sale of assets
1

 
16

Sale of short-term investments
2,460

 
2,198

Purchase of short-term investments
(2,270
)
 
(1,925
)
(Increase) decrease in restricted cash, debt service reserves and other assets
(51
)
 
127

Other investing
(26
)
 
(61
)
Net cash used in investing activities
(1,070
)
 
(391
)
FINANCING ACTIVITIES:
 
 
 
Borrowings under the revolving credit facilities
361

 
737

Issuance of recourse debt
575

 
1,525

Issuance of non-recourse debt
1,940

 
1,710

Repayments under the revolving credit facilities
(359
)
 
(607
)
Repayments of recourse debt
(915
)
 
(1,663
)
Repayments of non-recourse debt
(1,457
)
 
(1,349
)
Payments for financing fees
(40
)
 
(105
)
Distributions to noncontrolling interests
(113
)
 
(197
)
Contributions from noncontrolling interests
97

 
110

Proceeds from the sale of redeemable stock of subsidiaries
461

 

Dividends paid on AES common stock
(141
)
 
(72
)
Payments for financed capital expenditures
(84
)
 
(312
)
Purchase of treasury stock
(307
)
 
(32
)
Other financing
(29
)
 
5

Net cash used in financing activities
(11
)
 
(250
)
Effect of exchange rate changes on cash
(19
)
 
(14
)
(Decrease) increase in cash of discontinued and held-for-sale businesses
(7
)
 
75

Total decrease in cash and cash equivalents
(517
)
 
(127
)
Cash and cash equivalents, beginning
1,539

 
1,642

Cash and cash equivalents, ending
$
1,022

 
$
1,515

SUPPLEMENTAL DISCLOSURES:
 
 
 
Cash payments for interest, net of amounts capitalized
$
665

 
$
676

Cash payments for income taxes, net of refunds
$
247

 
$
332

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Assets received upon sale of subsidiaries
$

 
$
44

Assets acquired through capital lease
$
10

 
$
13

See Notes to Condensed Consolidated Financial Statements.

5




THE AES CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2015 and 2014
1. FINANCIAL STATEMENT PRESENTATION
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, 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 GAAP, as contained in the FASB ASC, for interim financial information and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for annual fiscal reporting periods. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, comprehensive income and cash flows. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the 2014 audited consolidated financial statements and notes thereto, which are included in the 2014 Form 10-K filed with the SEC on February 25, 2015 (the “2014 Form 10-K”).
New Accounting Pronouncements Adopted
ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
Effective July 1, 2014, the Company prospectively adopted ASU No. 2014-08, which significantly changed the previous accounting guidance on discontinued operations. Under ASU No. 2014-08, only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results will be reported as discontinued operations. Other changes were as follows: equity method investments that were previously scoped-out of the discontinued operations accounting guidance are now included in the scope; a business can meet the criteria to be classified as held-for-sale upon acquisition and can be reported in discontinued operations; and components where an entity retains significant continuing involvement or where operations and cash flows will not be eliminated from ongoing operations as a result of a disposal transaction can meet the definition of discontinued operations. Additionally, where summarized amounts are presented on the face of the financial statements, reconciliations of those amounts to major classes of line items are also required. ASU No. 2014-08 requires additional disclosures for individually material components that do not meet the definition of discontinued operations. Under the previous accounting guidance, the UK Wind and Ebute disposals in the third and fourth quarters of 2014, respectively, would have met the discontinued operations criteria and would have been reclassified accordingly. Additionally, Armenia Mountain, which met the held-for-sale criteria in the first quarter of 2015, would have met the discontinued operations criteria under the previous accounting guidance and would have been reclassified accordingly.
ASU No. 2014-05, Service Concession Arrangements (Topic 853)
Effective January 1, 2015, the Company adopted ASU No. 2014-05, which states that certain service concession arrangements with public-sector entity grantors are not in scope of ASC 840, Leases and that entities should not recognize the related infrastructure as property, plant and equipment, but should apply other GAAP. The Company has a small number of entities that fall within the scope of this guidance, with the Company’s Mong Duong generation facility in Vietnam being the most significant.
Mong Duong is a build, operate and transfer agreement with the Vietnam government. Management concluded there were two deliverables included within the arrangement, as well as a financing element. Due to the contingent nature of the revenue stream, no amounts of revenue could be recognized during the build phase of the contract. All amounts billed during the operate phase are recognized as revenue when billed, with amounts allocated between the financing element and build and operate deliverables. The financing element is recognized as interest income using the effective interest method as payments for construction of the plant are received over the life of the contract. Costs are expensed as incurred. As the related infrastructure is no longer considered property, plant and equipment, there are no longer any capitalizable expenses beyond those related to the initial build, and accordingly these will be expensed as incurred. All cash flows, excluding those related to the debt incurred

6




by AES for these arrangements will be reflected in cash flows from operating activities on the Company’s Condensed Consolidated Statements of Cash Flows prospectively.
The guidance was applied on a modified retrospective basis to service concession arrangements in existence at January 1, 2015. Upon adoption of this standard, the impact to the Company’s Condensed Consolidated Balance Sheet as of January 1, 2015 resulted in a reclassification of $1.5 billion from property, plant and equipment to service concession assets, as well as a cumulative adjustment to retained earnings and cumulative translation adjustment of $(18) million, net of tax, and $13 million, respectively.
Accounting Pronouncements Issued But Not Yet Effective
The following accounting standards have been issued but are not yet effective for, nor have been adopted by AES:
ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU No. 2015-11, which simplifies the subsequent measurement of inventory. It replaces the current lower of cost or market test with a lower of cost or net realizable value test. The standard is effective for public entities for annual reporting periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. The new guidance must be applied prospectively. The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
ASU No. 2015-05, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
In April 2015, the FASB issued ASU No. 2015-05, which clarifies how customers in cloud computing arrangements should determine whether the arrangement includes a software license and eliminates the existing requirement for customers to account for software licenses they acquired by analogizing to the accounting guidance on leases. The standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods therein. Early adoption is permitted. The standard permits the use of a prospective or retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the standard on its consolidated financial statements.
ASU No. 2015-03, Interest Imputation of Interest (Subtopic 835-30)
In April 2015, the FASB issued ASU No. 2015-03, which simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this update. The standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods therein, and requires the use of the full retrospective approach. Early adoption is permitted for financial statements that have not been previously issued. As of June 30, 2015, the Company had approximately $385 million in deferred financing costs classified in other noncurrent assets that would be reclassified to reduce the related debt liabilities upon adoption of ASU No. 2015-03.
ASU No. 2015-02, Consolidation Amendments to the Consolidation Analysis (Topic 810)
In February 2015, the FASB issued ASU 2015-02, which makes targeted amendments to the current consolidation guidance and ends the deferral granted to investment companies from applying the VIE guidance. The standard amends the evaluation of whether (1) fees paid to a decision-maker or service providers represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a VIE and (3) a reporting entity is the primary beneficiary of a VIE. The standard is effective for annual periods beginning after December 15, 2015 and interim periods therein. Early adoption is permitted. The Company is currently assessing the impact of the standard on its consolidated financial statements.
ASU No. 2014-12, Compensation Stock Compensation (Topic 718)
In June 2014, the FASB issued ASU No. 2014-12, which is intended to resolve the diverse accounting treatment in practice with compensation awards. The objective of the new standard is to clarify the treatment of accounting for performance targets that affect award vesting. The standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods therein. Early adoption is permitted. The standard permits the use of either a prospective or modified retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of the standard on its financial position and results of operations.
ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)
In May 2014, the FASB issued ASU No. 2014-09 which clarifies principles for recognizing revenue and will result in a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The objective of the new standard is to provide a single and comprehensive revenue recognition model for all contracts with customers to improve comparability. The revenue standard contains principles that an entity will apply to determine the measurement of revenue and timing of when

7




it is recognized. The standard requires an entity to recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB decided to defer the effective date by one year, resulting in the new revenue standard being effective for annual reporting periods beginning after December 15, 2017 and interim periods therein. Early adoption is now permitted only as of the original effective date for public entities (that is, no earlier than 2017 for calendar year-end entities). The standard permits the use of either a full retrospective or modified retrospective approach. The Company has not yet selected a transition method and is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2. INVENTORY
The following table summarizes the Company’s inventory balances as of the periods indicated:
 
June 30, 2015
 
December 31, 2014
 
(in millions)
Fuel and other raw materials
$
391

 
$
357

Spare parts and supplies
343

 
345

Total
$
734

 
$
702

3. FAIR VALUE
The fair value of current financial assets and liabilities, debt service reserves and other deposits approximate their reported carrying amounts. The estimated fair value of the Company’s assets and liabilities have been determined using available market information. By virtue of these amounts being estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. There were no changes in fair valuation techniques during the period and the Company continues to follow the valuation techniques described in Note 4.—Fair Value in Item 8.—Financial Statements and Supplementary Data of its 2014 Form 10-K.
Recurring Measurements
The following table sets forth, by level within the fair value hierarchy, the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of the periods indicated:
 
June 30, 2015
 
December 31, 2014
 
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
$

 
$
332

 
$

 
$
332

 
$

 
$
501

 
$

 
$
501

Certificates of deposit

 
79

 

 
79

 

 
151

 

 
151

Government debt securities

 
33

 

 
33

 

 
57

 

 
57

Subtotal

 
444

 

 
444

 

 
709

 

 
709

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds

 
18

 

 
18

 

 
25

 

 
25

Subtotal

 
18

 

 
18

 

 
25

 

 
25

Total available for sale

 
462

 

 
462

 

 
734

 

 
734

TRADING:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
15

 

 

 
15

 
15

 

 

 
15

Total trading
15

 

 

 
15

 
15

 

 

 
15

DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives

 
14

 
237

 
251

 

 
18

 
218

 
236

Commodity derivatives

 
44

 
18

 
62

 

 
37

 
7

 
44

Total derivatives

 
58

 
255

 
313

 

 
55

 
225

 
280

TOTAL ASSETS
$
15

 
$
520

 
$
255

 
$
790

 
$
15

 
$
789

 
$
225

 
$
1,029

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$

 
$
178

 
$
191

 
$
369

 
$

 
$
206

 
$
210

 
$
416

Cross-currency derivatives

 
32

 

 
32

 

 
29

 

 
29

Foreign currency derivatives

 
38

 
15

 
53

 

 
43

 
9

 
52

Commodity derivatives

 
23

 
1

 
24

 

 
16

 
1

 
17

Total derivatives

 
271

 
207

 
478

 

 
294

 
220

 
514

TOTAL LIABILITIES
$

 
$
271

 
$
207

 
$
478

 
$

 
$
294

 
$
220

 
$
514

 _____________________________
(1) 
Amortized cost approximated fair value at June 30, 2015 and December 31, 2014.

8




The following tables present a reconciliation of net derivative assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2015 and 2014 (presented net by type of derivative). Transfers between Level 3 and Level 2 are determined as of the end of the reporting period and principally result from changes in the significance of unobservable inputs used to calculate the credit valuation adjustment.
 
Three Months Ended June 30, 2015
 
Interest Rate
 
Foreign Currency
 
Commodity
 
Cross Currency
 
Total
 
(in millions)
Balance at the beginning of the period
$
(302
)
 
$
223

 
$
4

 
$
(33
)
 
$
(108
)
Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
 
 
Included in earnings

 
7

 

 

 
7

Included in other comprehensive income  derivative activity
57

 

 

 

 
57

Included in other comprehensive income  foreign currency translation activity
(4
)
 
(6
)
 

 

 
(10
)
Included in regulatory (assets) liabilities

 

 
8

 

 
8

Settlements
5

 
(2
)
 
5

 
1

 
9

Transfers of (assets) liabilities out of Level 3
53

 

 

 
32

 
85

Balance at the end of the period
$
(191
)
 
$
222

 
$
17

 
$

 
$
48

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
$

 
$
5

 
$
(1
)
 
$

 
$
4

 
Three Months Ended June 30, 2014
 
Interest Rate
 
Foreign Currency
 
Commodity
 
Total
 
(in millions)
Balance at the beginning of the period
$
(87
)
 
$
101

 
$

 
$
14

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

 
10

 
3

 
13

Included in other comprehensive income  derivative activity
(30
)
 

 

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

 
(2
)
 

 
(2
)
Included in regulatory (assets) liabilities

 

 
15

 
15

Settlements
3

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

 

 
(69
)
Balance at the end of the period
$
(183
)
 
$
107

 
$
16

 
$
(60
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
$

 
$
9

 
$

 
$
9

 
Six Months Ended June 30, 2015
 
Interest Rate
 
Foreign Currency
 
Commodity
 
Total
 
(in millions)
Balance at the beginning of the period
$
(210
)
 
$
209

 
$
6

 
$
5

Total gains (losses) (realized and unrealized):
 
 
 
 
 
 


Included in earnings

 
30

 
2

 
32

Included in other comprehensive income  derivative activity
3

 

 

 
3

Included in other comprehensive income  foreign currency translation activity
7

 
(13
)
 

 
(6
)
Included in regulatory (assets) liabilities

 

 
8

 
8

Settlements
9

 
(4
)
 
1

 
6

Balance at the end of the period
$
(191
)
 
$
222

 
$
17

 
$
48

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
$

 
$
26

 
$
2

 
$
28

 
Six Months Ended June 30, 2014
 
Interest Rate
 
Foreign Currency
 
Commodity
 
Total
 
(in millions)
Balance at the beginning of the period
$
(101
)
 
$
93

 
$
4

 
$
(4
)
Total gains (losses) (realized and unrealized):
 
 
 
 
 
 
 
Included in earnings
1

 
37

 
1

 
39

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

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

 
(20
)
 

 
(20
)
Included in regulatory (assets) liabilities

 

 
12

 
12

Settlements
16

 
(3
)
 
(1
)
 
12

Transfers of (assets) liabilities out of Level 3

 
1

 

 
1

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

 
$
16

 
$
(60
)
Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
$
1

 
$
34

 
$

 
$
35


9




The table below summarizes the significant unobservable inputs used for Level 3 derivative assets (liabilities) as of June 30, 2015:
Type of Derivative
 
Fair Value
 
Unobservable Input
 
Amount or Range (Weighted Avg)
 
 
(in millions)
 
 
 
 
Interest rate
 
$
(191
)
 
Subsidiaries’ credit spreads
 
3.75% — 7.34% (5.17%)
Foreign currency:
 
 
 
 
 
 
Derivative — Argentine Peso
 
220

 
Argentine Peso to USD currency exchange rate after one year
 
13.71 — 36.10 (24.25)
Embedded derivative — Euro
 
2

 
Subsidiaries’ credit spreads
 
4.84% — 7.34% (6.09%)
Commodity:
 
 
 
 
 
 
Other
 
17

 
 
 
 
Total
 
$
48

 
 
 
 
Nonrecurring Measurements
When evaluating impairment of goodwill, long-lived assets, discontinued operations and held-for-sale businesses, and equity method investments, the Company measures fair value using the applicable fair value measurement guidance. Impairment expense is measured by comparing the fair value at the evaluation date to their then-latest available carrying amount. The following table summarizes major categories of assets and liabilities measured at fair value on a nonrecurring basis during the period indicated and their level within the fair value hierarchy:
 
Six Months Ended June 30, 2015
 
Carrying
Amount (1)
 
Fair Value(5)
 
Pretax
Loss
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Equity method investment:
 
 
 
 
 
 
 
 
 
Solar Spain
$
29

 
$

 
$

 
$
29

 
$

Long-lived assets held and used: (2)
 
 
 
 
 
 
 
 
 
UK Wind (Development Projects)
38

 

 
1

 

 
37

Other
29

 

 
21

 

 
8

 
Six Months Ended June 30, 2014
 
Carrying
Amount (1)
 
Fair Value(5)
 
Pretax
Loss
 
Level 1
 
Level 2
 
Level 3
 
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
Long-lived assets held and used: (2)
 
 
 
 
 
 
 
 
 
DPL (East Bend)
$
14

 
$

 
$
2

 
$

 
$
12

Ebute
99

 

 

 
47

 
52

UK Wind (Newfield)
11

 

 

 

 
11

Discontinued operations and held-for-sale businesses: (3)
 
 
 
 
 
 
 
 


Cameroon
372

 

 
334

 

 
38

Equity method investments
 
 
 
 
 
 
 
 
 
Silver Ridge Power
317

 

 

 
273

 
44

Goodwill: (4)
 
 
 
 
 
 
 
 
 
DPLER
136

 

 

 

 
136

Buffalo Gap
28

 

 

 
10

 
18

_____________________________
(1) 
Represents the carrying value at the date of measurement, before fair value adjustment.
(2) 
See Note 15—Asset Impairment Expense for further information.
(3) 
See Note 17—Discontinued Operations and Held-For-Sale Businesses for further information. Fair value of long-lived assets held-for-sale excludes costs to sell.
(4) 
See Note 14—Goodwill Impairment for further information.
(5) 
Fair value measurements were estimated at various dates within the applicable reporting period and not necessarily as of the period’s end date.
The following table summarizes the significant unobservable inputs used in the Level 3 measurement of long-lived assets during the six months ended June 30, 2015:
 
Fair Value
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)
 
(in millions)
 
 
 
 
 
 
Equity method investment:
 
 
 
 
 
 
 
Solar Spain
$
29

 
Discounted cash flow
 
Annual revenue growth
 
-3% to 0% (0%)

 
 
 
 
 
Annual pretax operating margin
 
-13% to 56% (24%)

 
 
 
 
 
Cost of equity
 
12
%
Financial Instruments not Measured at Fair Value in the Condensed Consolidated Balance Sheets
The following table sets forth the carrying amount, fair value and fair value hierarchy of the Company’s financial assets and liabilities that are not measured at fair value in the Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014, but for which fair value is disclosed.

10




 
Carrying
Amount
 
Fair Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
June 30, 2015
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Accounts receivable — noncurrent (1)
$
260

 
$
247

 
$

 
$

 
$
247

Liabilities
 
 
 
 
 
 
 
 
 
Non-recourse debt
15,749

 
16,101

 

 
12,644

 
3,457

Recourse debt
5,014

 
5,150

 

 
5,150

 

December 31, 2014
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
Accounts receivable — noncurrent (1)
$
301

 
$
290

 
$

 
$

 
$
290

Liabilities
 
 
 
 
 
 
 
 
 
Non-recourse debt
15,600

 
16,008

 

 
12,538

 
3,470

Recourse debt
5,258

 
5,552

 

 
5,552

 

_____________________________
(1) 
These accounts receivable principally relate to amounts due from CAMMESA, and are included in Noncurrent assets—Other in the accompanying Condensed Consolidated Balance Sheets. The fair value and carrying amount of these receivables exclude VAT of $31 million and $36 million at June 30, 2015 and December 31, 2014, respectively.
4. INVESTMENTS IN MARKETABLE SECURITIES
The Company’s investments in marketable debt and equity securities as of June 30, 2015 and December 31, 2014 by security class and by level within the fair value hierarchy have been disclosed in Note 3—Fair Value. The security classes are determined based on the nature and risk of a security and are consistent with how the Company manages, monitors and measures its marketable securities. As of June 30, 2015, $411 million of AFS debt securities had stated maturities within one year and $33 million had stated maturities between one and two years. Gains and losses on the sale of investments are determined using the specific-identification method. For the three and six months ended June 30, 2015 and 2014, pretax realized gains and losses related to AFS and trading securities were less than $1 million, there were no unrealized losses on AFS securities, and no other-than-temporary impairments of marketable securities were recognized in earnings or OCI. The following table summarizes the gross proceeds from sale of AFS securities for the periods indicated:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions)
Gross proceeds from sales of AFS securities
$
1,395

 
$
1,158

 
$
2,481

 
$
2,218

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
There have been no changes to the information disclosed under Derivatives and Hedging Activities in Note 1—General and Summary of Significant Accounting Policies included in Item 8.—Financial Statements and Supplementary Data in the 2014 Form 10-K.
Volume of Activity — The following three tables set forth, by type of derivative, the Company’s outstanding notional under its derivatives and the weighted average remaining term as of June 30, 2015 regardless of whether the derivative instruments are in qualifying cash flow hedging relationships:
 
 
Current
 
Maximum
 
 
 
 
Interest Rate and Cross-Currency(1)
 
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:
 
 
 
 
 
 
 
 
 
 
 
 
LIBOR (U.S. Dollar)
 
2,689

 
$
2,689

 
3,061

 
$
3,061

 
11
 
55
%
EURIBOR (Euro)
 
506

 
564

 
506

 
564

 
7
 
75
%
Cross-Currency Swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Chilean Unidad de Fomento
 
4

 
172

 
4

 
172

 
13
 
82
%
_____________________________
(1) 
The Company’s interest rate derivative instruments primarily include accreting and amortizing notionals. The maximum derivative notional represents the largest notional at any point between June 30, 2015 and the maturity of the derivative instrument, which includes forward-starting derivative instruments. The interest rate and cross-currency derivatives range in maturity through 2033 and 2028, respectively.
(2) 
The percentage of variable-rate debt currently hedged is based on the related index and excludes forecasted issuances of debt and variable-rate debt tied to other indices where the Company has no interest rate derivatives.
Foreign Currency Derivatives
 
Notional (1)
 
Notional Translated to USD
 
Weighted Average Remaining Term (2)
 
 
(in millions)
 
(in years)
Foreign Currency Options and Forwards:
 
 
 
 
 
 
Chilean Unidad de Fomento
 
8

 
$
311

 
<1
Chilean Peso
 
80,373

 
126

 
<1
Brazilian Real
 
103

 
33

 
<1
Euro
 
107

 
119

 
<1
Colombian Peso
 
145,874

 
56

 
<1
Argentine Peso
 
2,032

 
224

 
10
British Pound
 
16

 
24

 
<1
Philippine Peso
 
751

 
17

 
<1
Embedded Foreign Currency Derivatives:
 
 
 
 
 
 
Kazakhstani Tenge
 
3,761

 
20

 
1
_____________________________

11




(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 2025 and 2017, respectively.
Commodity Derivatives
 
Notional
 
Weighted-Average Remaining Term(1)
 
 
(in millions)
 
(in years)
Power (MWh)
 
9

 
2
Coal (Metric tons)
 
1

 
2
_____________________________
(1) 
Represents the remaining tenor of our commodity derivatives weighted by the corresponding volume. These derivatives range in maturity through 2017.
Accounting and Reporting Assets and Liabilities — The following tables present the fair values of the Company’s derivative instruments as of June 30, 2015 and December 31, 2014, first by whether they are designated hedging instruments, then by whether they are current or noncurrent, to the extent 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.
 
June 30, 2015
 
December 31, 2014
 
Designated
 
Not Designated
 
Total
 
Designated
 
Not Designated
 
Total
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivatives
$
7

 
$
244

 
$
251

 
$
6

 
$
230

 
$
236

Commodity derivatives
31

 
31

 
62

 
25

 
19

 
44

Total assets
$
38

 
$
275

 
$
313

 
$
31

 
$
249

 
$
280

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
369

 
$

 
$
369

 
$
416

 
$

 
$
416

Cross-currency derivatives
32

 

 
32

 
29

 

 
29

Foreign currency derivatives
32

 
21

 
53

 
38

 
14

 
52

Commodity derivatives
11

 
13

 
24

 
7

 
10

 
17

Total liabilities
$
444

 
$
34

 
$
478

 
$
490

 
$
24

 
$
514

 
June 30, 2015
 
December 31, 2014
 
Assets
 
Liabilities
 
Assets
 
Liabilities
 
(in millions)
Current
$
91

 
$
151

 
$
77

 
$
148

Noncurrent
222

 
327

 
203

 
366

Total
$
313

 
$
478

 
$
280

 
$
514

Derivatives subject to master netting agreement or similar agreement:
 
 
 
 
 
 
 
Gross amounts recognized in the balance sheet
$
36

 
$
425

 
$
53