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The AES Corporation 10-Q 2007 UNITED STATES WASHINGTON, D.C. 20549 FORM 10-Q/A (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, 2007 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 0-19281 THE AES CORPORATION (Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code: (703) 522-1315 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 o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filerx Accelerated filer o Non-accelerated filer o Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x The number of shares outstanding of Registrant’s Common Stock, par value $0.01 per share, at July 31, 2007, was 668,613,428.
As previously disclosed in the Company’s 2006 Form 10-K/A dated August 7, 2007 the Company is filing this Form 10-Q/A to correct certain errors that were contained in Item 1 and Item 2 of the Form 10-Q for the period ended March 31, 2007. The adjustments presented in this Form 10-Q/A are not material to any prior reported period. However, the Company has elected to file this Form 10-Q/A so that the quarterly report would conform to the categories of adjustments presented in the Form 10-K/A, which are further described below. The errors primarily related to the accounting for certain contract modifications at our Pakistan subsidiaries. The impact of the restatement adjustment related to the contract modifications was a decrease to net income of $7 million and $6 million for the three months ended March 31, 2007 and 2006, respectively. Additionally, the March 31, 2007 condensed consolidated balance sheet has been restated to reflect the impact of the correction of all errors noted in our 2006 Form 10-K/A filed with the SEC on August 7, 2007; a reclassification adjustment related to our adoption of FIN 48 in the first quarter of 2007; and a reclassification to current from noncurrent debt related to a covenant violation at our TEG/TEP subsidiary. The impact of the FIN 48 balance sheet classification adjustment as of March 31, 2007 was an increase to current assets of $41 million, an increase to noncurrent assets of $13 million, a decrease to current liabilities of $9 million and an increase to noncurrent liabilities of approximately $63 million as of March 31, 2007. The impact of the covenant violation was an increase to the current portion of non-recourse debt and a decrease to noncurrent non-recourse debt of $384 million. Other than the information relating to the restatement as described in Note 1, no attempt has been made in this 10-Q/A to amend or update other disclosures originally presented in the Form 10-Q as filed on June 21, 2007. Except as stated herein, this Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q on June 21, 2007 or amend or update those disclosures. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the SEC subsequent to the filings of the Form 10-Q for the period ended March 31, 2007. THE AES CORPORATION
2 THE
AES CORPORATION
(1) See Note 1 related to the restated condensed consolidated financial statements See Notes to Condensed Consolidated Financial Statements. 3 THE AES CORPORATION
(1) See Note 1 related to the restated condensed consolidated financial statements See Notes to Condensed Consolidated Financial Statements. 4 THE AES CORPORATION
See Notes to Condensed Consolidated Financial Statements. 5 THE AES CORPORATION The financial statements presented in Item 1 and the accompanying management’s discussion and analysis of financial condition and results of operations set forth in Item 2 of this Form 10-Q/A are restated to reflect the correction of errors that were contained in the Company’s condensed consolidated financial statements and other financial information as of and for the three months ended March 31, 2007 and 2006. In addition, the prior period financial statements have been restated to reflect the change in the Company’s segment reporting as discussed in Note 10 and discontinued operations as discussed in Note 7 of the condensed consolidated financial statements. Consolidation In this Quarterly Report the terms “AES”, “the Company”, “us” or “we” refer to the consolidated entity including its subsidiaries and affiliates. The term “The AES Corporation” or “the Parent” refers only to the publicly-held holding company, The AES Corporation, excluding its subsidiaries and affiliates. Furthermore, variable interest entities in which the Company has an interest have been consolidated where the Company is identified as 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. 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 (“GAAP”) for interim financial information and Article 10 of Regulation S-X of the Securities and Exchange Commission (“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 statement of the results of operations, financial position and cash flows for the interim periods. The results of operations for the three months ended March 31, 2007, are not necessarily indicative of results that may be expected for the year ending December 31, 2007. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the restated audited 2006 consolidated financial statements and notes thereto, which are included in the Company’s 2006 Form 10-K/A as filed with the SEC on August 7, 2007. New Accounting Pronouncements Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 As discussed in Note 12, in June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which was effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 and recorded the cumulative effect of applying the provisions of this Interpretation as an adjustment to beginning retained earnings. FIN 48 applies to all tax positions accounted for in accordance with FASB Statement No. 109. The cumulative effect of the adoption resulted in an increase to beginning accumulated deficit of $53 million. Restatement of Consolidated Financial Statements The Company restated its consolidated financial statements for the years ended December 31, 2006, December 31, 2005 and December 31, 2004 in its 2006 Form 10-K/A filed with the SEC on August 7, 2007. The adjustments presented in the restatement are the result of the identification of certain financial 6 statement errors relating to these years which, had they been corrected on a cumulative basis in the 2006 consolidated financial statements, would have materially misstated the results for the year ended December 31, 2006. As a result of these errors, the Company also restated its results of operations for the three month period ended March 31, 2006 on its Form 10-Q for the three months ended March 31, 2007 filed with the SEC on June 21, 2007. Subsequent to the date of that filing, certain other errors were noted related to both the three months ended March 31, 2007 and 2006, the corrections of which are reflected in this Form 10-Q/A. In connection with the filing of our Form 10-Q on June 21, 2007, the results of operations for the three months ended March 31, 2006 were restated to reflect the correction of certain errors identified in our Form 10-K filed on May 23, 2007. The Company identified errors related to accounting for certain items in our Brazil and La Electricidad de Caracas (“EDC”) subsidiaries, derivative instruments, income taxes and share-based compensation. The condensed consolidated financial statements for the interim period ended March 31, 2006 were restated and resulted in a decrease to previously reported income from continuing operations and net income of $2 million and $3 million, respectively. The restatement adjustments included several key categories as described below: Brazil Adjustments Prior year errors related to certain subsidiaries in Brazil included adjustments of the U.S. GAAP fixed asset basis and related depreciation at Eletropaulo and other errors identified through account reconciliation or review procedures. The cumulative impact of correcting errors related to our Brazil subsidiaries on net income was a decrease of $4 million for the quarter ended March 31, 2006. La Electricidad de Caracas (“EDC”) Prior year errors related to the Company’s former Venezuelan subsidiary, EDC, included adjustments of errors identified through account reconciliation or review procedures. The cumulative impact of correcting errors related to EDC on net income was an increase of $1 million for the quarter ended March 31, 2006. Capitalization of Certain Costs Certain errors were discovered with fixed asset balances at several of the Company’s facilities related to capitalization of development costs, overhead and capitalized interest. The impact of correcting errors related to capitalization on net income was a decrease of $5 million for the quarter ended March 31, 2006. Derivatives Certain errors were identified resulting from the detailed review of certain prior year contracts and included the evaluation of hedge effectiveness; and the identification and evaluation of derivatives. The impact of correcting all derivative errors on net income was an increase of $3 million for the quarter ended March 31, 2006. 7 Income Tax Adjustments Income tax adjustments related to the correction of income tax expense for certain state deferred tax assets and other miscellaneous items. The net impact of individual income tax errors resulted in an increase to income tax expense of $2 million for the quarter ended March 31, 2006. Other Adjustments As a result of work performed in the course of our year end closing process, certain other errors were identified which increased net income by $6 million for the quarter ended March 31, 2006. The Company recently concluded an internal review of accounting for share-based compensation (the “LTC Review”), which originally was disclosed in the Company’s Form 8-K filed on February 26, 2007. As a result of the LTC Review, the Company identified certain errors in its previous accounting for share based compensation. These errors required adjustments to the Company’s previous accounting for these awards under the guidance of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), Statement of Financial Accounting Standard (“SFAS”) No. 123, Accounting for Stock-Based Compensation and SFAS No. 123R, Share-Based Payment (“SFAS 123R”). The Company recorded an immaterial adjustment related to share-based compensation for the quarter ended March 31, 2006. For further discussion of other aspects of the Company’s restatement of its financial statements, see Part I—Restatement of Consolidated Financial Statements in the Company’s May 23, 2007 2006 Annual Report on Form 10-K. 8 Selected Operations and Comprehensive Income Data The following table sets forth the previously reported and restated amounts of selected items within the condensed consolidated statement of operations.
August 2007 Restatement of Consolidated Financial Statements The tables to follow detail the impact of the restatement adjustments on the Company’s financial statements. Significant adjustments included: Condensed Consolidated Statement of Operations Revenue—Primarily related to the determination that certain power sales agreements at our AES Pakistan subsidiaries contained leases resulting in a decrease to revenue when accounted for on a straight-line basis of approximately $12 million and $11 million for the three months ended March 31, 2007 and 2006, respectively. Minority Interest—Net impact of revenue adjustments resulted in a decrease of minority interest of approximately $5 million and $7 million for the three months ended March 31, 2007 and 2006, respectively. Condensed Consolidated Balance Sheet Other Current Assets —Increase of approximately $41 million related to the FIN 48 reclass adjustment. Deferred Income Taxes, noncurrent—Increase of approximately $13 million related to the FIN 48 reclass adjustment. Other Noncurrent Assets—Increase of approximately $29 million related to the AES Southland Lease adjustment. 9 Non-recourse debt—Increase of $384 million in non-recourse debt-current portion to reflect the default at TEG/TEP subsidiaries, offset by a decrease of $384 million in non-recourse debt noncurrent. Other Long-Term Liabilities—Increase of $326 million primarily related to increase in the regulatory liability (“Special Obligation”) in Brazil of $141 million; an increase in the FIN 48 liability of $66 million; and an increase in deferred income of $108 million. The following table details the impact of the restatement adjustments on the condensed consolidated statement of operations for the three months ended March 31, 2007:
10 The following table details the impact of the restatement adjustments on the condensed consolidated statement of operations for the three months ended March 31, 2006:
11 The following table details the impact of the restatement on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2007:
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