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The AES Corporation 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
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 June 30, 2010

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 July 31, 2010 was 794,015,970.

 

 

 


Table of Contents

THE AES CORPORATION

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

   3

ITEM 1.

  FINANCIAL STATEMENTS    3
  Condensed Consolidated Statements of Operations    3
  Condensed Consolidated Balance Sheets    4
  Condensed Consolidated Statements of Cash Flows    5
  Condensed Consolidated Statements of Changes in Equity    6
  Notes to Condensed Consolidated Financial Statements    7

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    51

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    88

ITEM 4.

  CONTROLS AND PROCEDURES    90

PART II: OTHER INFORMATION

   91

ITEM 1.

  LEGAL PROCEEDINGS    91

ITEM 1A.

  RISK FACTORS    91

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    91

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES    91

ITEM 4.

  REMOVED AND RESERVED    91

ITEM 5.

  OTHER INFORMATION    91

ITEM 6.

  EXHIBITS    91

 

2


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE AES CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
     (in millions, except per share amounts)  

Revenue:

        

Regulated

   $         2,213     $         1,779     $         4,454     $         3,445  

Non-Regulated

     1,808       1,512       3,638       3,081  
                                

Total revenue

     4,021       3,291       8,092       6,526  
                                

Cost of Sales:

        

Regulated

     (1,641     (1,311     (3,307     (2,531

Non-Regulated

     (1,398     (1,177     (2,817     (2,343
                                

Total cost of sales

     (3,039     (2,488     (6,124     (4,874
                                

Gross margin

     982       803       1,968       1,652  
                                

General and administrative expenses

     (101     (87     (181     (170

Interest expense

     (394     (368     (780     (740

Interest income

     101       89       210       182  

Other expense

     (48     (30     (60     (52

Other income

     69       22       77       243  

Gain on sale of investments

     -        102       -        115  

Asset impairment expense

     (1     (1     (1     (1

Foreign currency transaction gains (losses) on net monetary position

     (71     28       (122     (11

Other non-operating expense

     (5     -        (5     (10
                                

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

     532       558       1,106       1,208  

Income tax expense

     (255     (105     (451     (279

Net equity in earnings of affiliates

     134       50       148       57  
                                

INCOME FROM CONTINUING OPERATIONS

     411       503       803       986  

Income from operations of discontinued businesses, net of income tax expense of $1, $0, $2 and $1, respectively

     27       28       50       46  

Loss from disposal of discontinued businesses, net of income tax benefit of $0, $0, $0 and $0, respectively

     (9     -        (22     -   
                                

NET INCOME

     429       531       831       1,032  

Noncontrolling interests:

        

Less: Income from continuing operations attributable to noncontrolling interests

     (277     (217     (488     (492

Less: Income from discontinued operations attributable to noncontrolling interests

     (8     (11     (12     (19
                                

Total net income attributable to noncontrolling interests

     (285     (228     (500     (511
                                

NET INCOME ATTRIBUTABLE TO THE AES CORPORATION

   $ 144     $ 303     $ 331     $ 521  
                                

BASIC EARNINGS PER SHARE:

        

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

   $ 0.17     $ 0.43     $ 0.42     $ 0.74  

Discontinued operations attributable to The AES Corporation common stockholders, net of tax

     0.01       0.02       0.02       0.04  
                                

NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS

   $ 0.18     $ 0.45     $ 0.44     $ 0.78  
                                

DILUTED EARNINGS PER SHARE:

        

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

   $ 0.17     $ 0.43     $ 0.42     $ 0.74  

Discontinued operations attributable to The AES Corporation common stockholders, net of tax

     0.01       0.02       0.02       0.04  
                                

NET INCOME ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS

   $ 0.18     $ 0.45     $ 0.44     $ 0.78  
                                

AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:

        

Income from continuing operations, net of tax

   $ 134     $ 286     $ 315     $ 494  

Discontinued operations, net of tax

     10       17       16       27  
                                

Net income

   $ 144     $ 303     $ 331     $ 521  
                                

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

THE AES CORPORATION

Condensed Consolidated Balance Sheets

 

     June 30,
2010
    December 31,
2009
 
    

(in millions except share

and per share data)

 
     (unaudited)        

ASSETS

    

CURRENT ASSETS

    

Cash and cash equivalents

   $ 2,891     $ 1,782  

Restricted cash

     572       407  

Short-term investments

     1,716       1,648  

Accounts receivable, net of allowance for doubtful accounts of $288 and $290, respectively

     2,184       2,118  

Inventory

     551       560  

Receivable from affiliates

     16       24  

Deferred income taxes — current

     257       210  

Prepaid expenses

     172       161  

Other current assets

     1,086       1,557  

Current assets of discontinued and held for sale businesses

     119       320  
                

Total current assets

     9,564       8,787  
                

NONCURRENT ASSETS

    

Property, Plant and Equipment:

    

Land

     1,083       1,111  

Electric generation, distribution assets and other

     28,299       26,815  

Accumulated depreciation

     (9,099     (8,774

Construction in progress

     3,803       4,644  
                

Property, plant and equipment, net

     24,086       23,796  
                

Other Assets:

    

Deferred financing costs, net of accumulated amortization of $290 and $293, respectively

     374       377  

Investments in and advances to affiliates

     1,227       1,157  

Debt service reserves and other deposits

     603       595  

Goodwill

     1,293       1,299  

Other intangible assets, net of accumulated amortization of $228 and $223, respectively

     574       510  

Deferred income taxes — noncurrent

     604       587  

Other

     1,533       1,551  

Noncurrent assets of discontinued and held for sale businesses

     843       876  
                

Total other assets

     7,051       6,952  
                

TOTAL ASSETS

   $ 40,701     $ 39,535  
                

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES

    

Accounts payable and other accrued liabilities

   $ 4,067     $ 4,193  

Accrued interest

     259       269  

Non-recourse debt — current

     1,433       1,718  

Recourse debt — current

     471       214  

Current liabilities of discontinued and held for sale businesses

     134       227  
                

Total current liabilities

     6,364       6,621  
                

LONG-TERM LIABILITIES

    

Non-recourse debt — noncurrent

     13,131       12,304  

Recourse debt — noncurrent

     4,637       5,301  

Deferred income taxes — noncurrent

     1,208       1,090  

Pension and other post-retirement liabilities

     1,257       1,322  

Other long-term liabilities

     2,742       3,146  

Long-term liabilities of discontinued and held for sale businesses

     643       811  
                

Total long-term liabilities

     23,618       23,974  
                

Contingencies and Commitments (see Note 8)

    

Redeemable stock of subsidiaries

     65       60  

EQUITY

    

THE AES CORPORATION STOCKHOLDERS’ EQUITY

    

Common stock ($0.01 par value, 1,200,000,000 shares authorized; 804,399,275 issued and 795,495,286 outstanding at June 30, 2010 and 677,214,493 issued and 667,679,913 outstanding at December 31, 2009

     8       7  

Additional paid-in capital

     8,457       6,868  

Retained earnings

     942       650  

Accumulated other comprehensive loss

     (2,602     (2,724

Treasury stock, at cost (8,903,989 shares at June 30, 2010 and 9,534,580 shares at December 31, 2009, respectively)

     (118     (126
                

Total The AES Corporation stockholders’ equity

     6,687       4,675  

NONCONTROLLING INTERESTS

     3,967       4,205  
                

Total equity

     10,654       8,880  
                

TOTAL LIABILITIES AND EQUITY

   $         40,701     $         39,535  
                

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

THE AES CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
June 30,
 
     2010     2009  
     (in millions)  

OPERATING ACTIVITIES:

    

Net income

   $ 831     $ 1,032  

Adjustments to net income:

    

Depreciation and amortization

     584       498  

Loss (gain) from sale of investments and impairment expense

     18       (103

Loss on disposal and impairment write-down — discontinued operations

     18       -   

Provision for deferred taxes

     117       (111

Contingencies

     72       (54

Loss (gain) on the extinguishment of debt

     9       (3

Undistributed gain from sale of equity method investment

     (115     -   

Other

     (42     4  

Changes in operating assets and liabilities:

    

Increase in accounts receivable

     (69     (3

Increase in inventory

     (1     (11

Decrease in prepaid expenses and other current assets

     170       34  

Increase in other assets

     (51     (139

Decrease in accounts payable and accrued liabilities

     (91     (292

(Decrease) increase in income taxes and other income tax payables, net

     (90     54  

Increase (decrease) in other liabilities

     56       (32
                

Net cash provided by operating activities

     1,416       874  
                

INVESTING ACTIVITIES:

    

Capital expenditures

     (1,002     (1,193

Acquisitions — net of cash acquired

     (100     -   

Proceeds from the sale of businesses

     198       2  

Sale of short-term investments

     3,139       2,269  

Purchase of short-term investments

     (3,255     (1,740

(Increase) decrease in restricted cash

     (74     305  

(Increase) decrease in debt service reserves and other assets

     (9     40  

Affiliate advances and equity investments

     (27     (87

Proceeds from loan repayments

     132       -   

Other investing

     43       20  
                

Net cash used in investing activities

     (955     (384
                

FINANCING ACTIVITIES:

    

Issuance of common stock

     1,569       -   

Borrowings (repayments) under the revolving credit facilities, net

     88       (31

Issuance of recourse debt

     -        503  

Issuance of non-recourse debt

     1,343       816  

Repayments of recourse debt

     (406     (154

Repayments of non-recourse debt

     (1,297     (491

Payments for deferred financing costs

     (29     (53

Distributions to noncontrolling interests

     (542     (334

Contributions from noncontrolling interests

     -        74  

Financed capital expenditures

     (17     (24

Other financing

     (17     25  
                

Net cash provided by financing activities

     692       331  

Effect of exchange rate changes on cash

     (44     14  
                

Total increase in cash and cash equivalents

     1,109       835  

Cash and cash equivalents, beginning

     1,782       865  
                

Cash and cash equivalents, ending

   $         2,891     $         1,700  
                

SUPPLEMENTAL DISCLOSURES:

    

Cash payments for interest, net of amounts capitalized

   $ 764     $ 697  

Cash payments for income taxes, net of refunds

   $ 429     $ 306  

SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

    

Assets acquired in noncash asset exchange

   $ -      $ 110  

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

THE AES CORPORATION

Condensed Consolidated Statement of Changes in Equity

(Unaudited)

 

    THE AES CORPORATION STOCKHOLDERS              
    Common
Stock
  Treasury
Stock
    Additional
Paid-In
Capital
  Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
    Consolidated
Comprehensive
Income
 
    (in millions)  

Balance at January 1, 2010

  $ 7   $ (126   $ 6,868   $ 650     $ (2,724   $ 4,205    

Net income

    -     -        -     331       -        500     $         831  

Change in fair value of available-for-sale securities, net of income tax

    -     -        -     -        (6     -        (6

Foreign currency translation adjustment, net of income tax

    -     -        -     -        302       (68     234  

Change in unfunded pensions obligation, net of income tax

    -     -        -     -        2       3       5  

Change in derivative fair value, including a reclassification to earnings, net of income tax

    -     -        -     -        (138     (31     (169
                   

Other comprehensive income

                64  
                   

Total comprehensive income

              $ 895  
                   

Cumulative effect of consolidation of entities under variable interest entity accounting guidance

    -     -        -     (47     (38     15    

Cumulative effect of deconsolidation of entities under variable interest entity accounting guidance

    -     -        -     1       -        -     

Capital contributions from noncontrolling interests

    -     -        -     -        -        3    

Dividends declared to noncontrolling interests

    -     -        -     -        -        (646  

Disposition of businesses

    -     -        -     -        -        (14  

Issuance of common stock

    1     -        1,566     -        -        -     

Issuance of common stock under benefit plans and exercise of stock options and warrants, net of income tax

    -     8       9     -        -        -     

Stock compensation

    -     -        14     -        -        -     

Changes in the carrying amount of redeemable stock of subsidiaries

    -     -        -     7       -        -     
                                             

Balance at June 30, 2010

  $         8   $         (118   $         8,457   $         942     $         (2,602   $         3,967    
                                             
    THE AES CORPORATION STOCKHOLDERS              
    Common
Stock
  Treasury
Stock
    Additional
Paid-In
Capital
  (Accumulated
Deficit) /
Retained

Earnings
    Accumulated
Other
Comprehensive
Loss
    Noncontrolling
Interests
    Consolidated
Comprehensive
Income
 
    (in millions)  

Balance at January 1, 2009

  $ 7   $ (144   $ 6,832   $ (8   $ (3,018   $ 3,358    

Net income

    -     -        -     521       -        511     $ 1,032  

Foreign currency translation adjustment, net of income tax

    -     -        -     -        65       268       333  

Change in unfunded pensions obligation, net of income tax

    -     -        -     -        2       -        2  

Change in derivative fair value, including a reclassification to earnings, net of income tax

    -     -        -     -        104       39       143  
                   

Other comprehensive income

                478  
                   

Total comprehensive income

              $ 1,510  
                   

Capital contributions from noncontrolling interests

    -     -        -     -        -        75    

Dividends declared to noncontrolling interests

    -     -        -     -        -        (412  

Issuance of common stock under benefit plans and exercise of stock options and warrants, net of income tax

    -     18       5     -        -        -     

Stock compensation

    -     -        8     -        -        -     
                                             

Balance at June 30, 2009

  $ 7   $ (126   $ 6,845   $ 513     $ (2,847   $ 3,839    
                                             

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

THE AES CORPORATION

Notes to Condensed Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2010 and 2009

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 13 — Discontinued Operations.

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 an 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 (the “Codification” or “ASC”) for interim financial information and Article 10 of Regulation S-X issued by the 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, changes in equity and cash flows. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of results that may be expected for the year ending December 31, 2010. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the 2009 audited consolidated financial statements and notes thereto, which are included in the 2009 Form 10-K filed with the SEC on February 25, 2010.

Significant New Accounting Policies

Accounting Standards Update (“ASU”) No. 2009-16, Accounting for Transfers of Financial Assets (former Financial Accounting Standard (“FAS”) No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140)

Effective January 1, 2010, the Company prospectively adopted the new accounting guidance on transfers of financial assets, which among other things: removes the concept of a qualifying special purpose entity; introduces the concept of participating interests and specifies that in order to qualify for sale accounting a partial transfer of a financial asset or a group of financial assets should meet the definition of a participating interest; clarifies that an entity should consider all arrangements made contemporaneously with or in contemplation of a transfer and requires enhanced disclosures to provide financial statement users with greater transparency about transfers of financial assets and a transferor’s continuing involvement with transfers of financial assets accounted for as sales. Upon adoption on January 1, 2010, the Company recognized $40 million as accounts receivable and an associated secured borrowing on its condensed consolidated balance sheet; both of which have since grown to $50 million as of June 30, 2010, as additional interests in receivables have been sold. IPL, the Company’s integrated utility in Indianapolis, had securitized these accounts receivable through IPL Funding, a special

 

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purpose entity, and previously recognized the transaction as a sale and had not recognized the accounts receivable and secured borrowing on its balance sheet. Under the facility, interests in these accounts receivable are sold, on a revolving basis, to unrelated parties (the Purchasers) up to the lesser of $50 million or an amount determinable under the facility agreement. The Purchasers assume the risk of collection on the interest sold without recourse to IPL, which retains the servicing responsibilities for the interest sold. Under the new accounting guidance, the retained interest in these securitized accounts receivable does not meet the definition of a participating interest, thereby requiring the Company to recognize on its condensed consolidated balance sheet the portion transferred and the proceeds received as accounts receivable and a secured borrowing, respectively.

ASU No. 2009-17, Consolidations, Improvements to Financial Reporting by Enterprises involved with Variable Interest Entities (former FAS No. 167, Amendments to FASB Interpretation No. 46(R))

Effective January 1, 2010, the Company prospectively adopted the new accounting guidance on the consolidation of VIEs. The new guidance requires an entity to qualitatively, rather than quantitatively, assess the determination of the primary beneficiary of a VIE. This determination is based on whether the entity has the power to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Other key changes include: a requirement for the ongoing reconsideration of the primary beneficiary, the criteria for determining whether service provider or decision maker contracts are variable interests, the consideration of kick-out and removal rights in determining whether an entity is a VIE, the types of events that trigger the reassessment of whether an entity is a VIE and the expansion of the disclosures previously required.

The determination of the entity that has the power to direct the activities that most significantly impact the economic performance of the VIE required significant judgment and assumptions for certain of the Company’s businesses. That determination considered the purpose and design of the businesses, the risks that the businesses were designed to create and pass along to other entities, the activities of the businesses that could be directed and which entity could direct them, and the expected relative impact of those activities on the economic performance of the businesses through their life. The businesses for which significant judgment and assumptions were required were primarily certain generation businesses who have power purchase agreements (“PPAs”) to sell energy exclusively or primarily to a single counterparty for the term of those agreements. For these generation businesses, the counterparty has the power to dispatch energy and, in some instances, to make decisions regarding the sale of excess energy. As such, the counterparty has power to direct certain activities that significantly impact the economic performance of the business. However, the counterparty usually does not have the power to direct any of the other activities that could significantly impact the economic performance, primarily through the cash flows and gross margin (if any) earned by the business from the sale of energy to the counterparty and sometimes through the absorption of fuel price risk by the counterparty. These other activities include: daily operation and management, maintenance and repairs and capital expenditures, plant expansion, decisions regarding overall financing of ongoing operations and budgets and, in some instances, decisions regarding sale of excess energy. As such, the AES generation business has power to direct some activities of the business that significantly impact its economic performance, primarily through the cash flows and gross margin earned from capacity payments received from being available to produce energy and from any sale of energy to other entities (particularly during any period beyond the end of the power purchase agreement). For these VIEs, the determination as to which set of activities most significantly impact the economic performance of the business required significant judgment and assumptions and resulted in the conclusion that the activities directed by the counterparty were less significant than those directed by the AES business.

The adoption of the new guidance resulted in the deconsolidation of certain immaterial VIEs previously consolidated. Additionally, assets, liabilities and operating results of two of our VIEs, previously accounted for under the equity method of accounting, were required to be consolidated. Cartagena, a 71% owned generation business in Spain, and Cili, a 51% owned generation business in China, were consolidated under the new guidance resulting in a cumulative effect adjustment of $47 million to retained earnings as of January 1, 2010. The cumulative effect adjustment is primarily comprised of losses that were not recognized while the equity

 

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method of accounting was suspended for Cartagena. As of June 30, 2010, total assets and total liabilities related to these VIEs were $781 million and $865 million. In addition, revenue for the three and six months ended June 30, 2010 included $85 million and $187 million, respectively, of revenue from these VIEs. Prior period operating results of these VIEs are reflected in “Net equity in earnings of affiliates” except for those prior periods during which the equity method of accounting was suspended.

2. INVENTORY

The following table summarizes the Company’s inventory balances as of June 30, 2010 and December 31, 2009:

 

     June 30,
2010
   December 31,
2009
     (in millions)

Coal, fuel oil and other raw materials

   $ 284    $ 293

Spare parts and supplies

     267      267
             

Total

   $         551    $         560
             

3. FAIR VALUE DISCLOSURES

The following table summarizes the carrying and fair value of certain of the Company’s financial assets and liabilities as of June 30, 2010 and December 31, 2009:

 

     June 30, 2010      December 31, 2009  
      Carrying
Amount
   Fair Value      Carrying
Amount
   Fair Value  
     (in millions)  

Assets

           

Marketable securities

   $ 1,758    $ 1,758       $ 1,691    $ 1,691   

Derivatives

     155      155         141      141   
                               

Total assets

   $ 1,913    $ 1,913       $ 1,832    $ 1,832   
                               

Liabilities

           

Debt

   $ 19,672    $ 20,046       $ 19,537    $ 20,008   

Derivatives

     510      510         310      310   
                               

Total liabilities

   $     20,182    $     20,556       $     19,847    $     20,318   
                               

The Company’s nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis include goodwill; intangible assets, such as sales concessions, land rights and emissions allowances; and long-lived tangible assets including property, plant and equipment. The Company recognized a loss on disposal and impairment losses totaling $9 million and $22 million before taxes and noncontrolling interests related to nonfinancial assets and liabilities at our Pakistan businesses currently reflected as discontinued operations during the three and six months ended June 30, 2010, respectively. See further discussion of these adjustments in Note 13 — Discontinued Operations and Held for Sale Businesses.

Valuation Techniques:

The fair value measurement accounting guidance describes three main approaches to measuring the fair value of assets and liabilities: (1) market approach; (2) income approach and (3) cost approach. The market approach uses prices and other relevant information generated from market transactions involving identical or comparable assets or liabilities. The income approach uses valuation techniques to convert future amounts to a

 

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single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. The cost approach is based on the amount that would currently be required to replace an asset. The Company does not currently determine the fair value of any of our financial assets and liabilities using the cost approach. Financial assets and liabilities that are measured at fair value on a recurring basis at AES fall into two broad categories: investments and derivatives.

Our investments are generally measured at fair value using the market approach and our derivatives are valued using the income approach.

Investments

The Company’s investments measured at fair value generally consist of marketable debt and equity securities. Equity securities are adjusted to fair value using quoted market prices. Debt securities primarily consist of unsecured debentures, certificates of deposit and government debt securities held by our Brazilian subsidiaries. Returns and pricing on these instruments are generally indexed to the CDI (Brazilian equivalent to LIBOR) or Selic (overnight borrowing rate) rates in Brazil and are adjusted based on the banks’ assessment of the specific businesses. Fair value is determined based on comparisons to market data obtained for similar assets and are considered Level 2 inputs. For more detail regarding the fair value of investments see Note 4 — Investments in Marketable Securities.

Derivatives

When deemed appropriate, the Company manages its risk from interest and foreign currency exchange rate and commodity price fluctuations through the use of financial and physical derivative instruments. The Company’s derivatives are primarily interest rate swaps to hedge non-recourse debt to establish a fixed rate on variable rate debt, foreign exchange instruments to hedge against currency fluctuations, commodity derivatives to hedge against fluctuations in commodity prices, and embedded derivatives associated with commodity contracts. The Company’s subsidiaries are counterparties to various over-the-counter derivatives, which include interest rate swaps and options, foreign currency options and forwards, and commodity swaps. In addition, the Company’s subsidiaries are counterparties to certain PPAs and fuel supply agreements that are derivatives or include embedded derivatives.

For the derivatives where there is a standard industry valuation model, the Company uses that model to estimate the fair value. For the derivatives (such the PPAs and fuel supply agreements that are derivatives or include embedded derivatives) where there is not a standard industry valuation model, the Company has created internal valuation models to estimate the fair value. For all derivatives, the income approach is used, which consists of forecasting future cash flows based on contractual notional amounts and applicable and available market data as of the valuation date. The following are among the most common market data used in the income approach: volatilities, spot and forward benchmark interest rates (such as LIBOR and EURIBOR), foreign exchange rates and commodity prices. Forward rates and prices generally come from published information provided by pricing services for an instrument with the same duration as the derivative instrument being valued. In situations where significant inputs are not observable, the Company uses relevant techniques to best estimate the input, such as regression, Monte Carlo simulation or similarly traded instrument available in the market.

For each derivative, the income approach is used to estimate the stream of cash flows over the remaining term of the contract. Those cash flows are then discounted using the relevant spot benchmark interest rate (such as LIBOR and EURIBOR) plus a spread that reflects the credit or nonperformance risk. This risk is estimated by the Company using credit spreads and risk premiums that are observable in the market whenever possible or estimates of the borrowing costs based on quotes from banks, industry publications and/or information on financing closed on similar projects. To the extent that management can estimate the fair value of these assets or liabilities without the use of significant unobservable inputs, these derivatives are classified as Level 2.

 

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In certain instances, the published forward rates or prices may not extend through the remaining term of the contract and management must make assumptions to extrapolate the curve, which result in the use of unobservable inputs. In addition, in certain instances, the financial or physical instrument is traded in an inactive market requiring us to use unobservable inputs. Similarly, in certain instances, the spread that reflects the credit or nonperformance risk is unobservable. Where the use of unobservable inputs is significant, these derivatives are classified as Level 3.

The following table sets forth by level within the fair value hierarchy certain of the Company’s financial assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009. Financial assets and liabilities have been classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the determination of the fair value of the assets and liabilities and their placement within the fair value hierarchy levels.

 

     Total
June  30,
2010
   Quoted Market
Prices in Active
Market for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
     (in millions)

Assets

           

Available-for-sale securities

   $             1,749    $             125    $             1,582    $ 42

Trading securities

     8      8      -      -

Derivatives

     155      -      99      56
                           

Total assets

   $ 1,912    $ 133    $ 1,681    $ 98
                           

Liabilities

           

Derivatives

   $ 510    $ -    $ 231    $             279
                           

Total liabilities

   $ 510    $ -    $ 231    $ 279
                           
     Total
December 31,
2009
   Quoted Market
Prices in Active
Market for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs

(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
     (in millions)

Assets

           

Available-for-sale securities

   $ 1,676    $ 133    $ 1,501    $ 42

Trading securities

     7      7      -      -

Derivatives

     141      -      111      30
                           

Total assets

   $ 1,824    $ 140    $ 1,612    $ 72
                           

Liabilities

           

Derivatives

   $ 310    $ -    $ 280    $ 30
                           

Total liabilities

   $ 310    $ -    $ 280    $ 30
                           

 

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The following tables present a reconciliation of 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, 2010 and 2009:

 

      Three Months Ended June 30,  
     2010     2009  
     Interest
Rate
    Cross
Currency
    Foreign
Exchange
    Commodity     Total     Total  
     (in millions)  

Balance at beginning of period(1)

   $ (18   $ (7   $ (1   $ 19     $ (7   $ (217

Total gains (losses) (realized and unrealized):(1)

            

Included in earnings(2)

     -        (1     -        (1     (2     (5

Included in other comprehensive income

     (10     (28     -        -        (38     77  

Included in regulatory assets

     (2     -        -        5       3       1  

Purchases, issuances and settlements(1)

     -        2       22       (4     20       9  

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

     (209     -        (3     -        (212     -   

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

     13       -        -        -        13       126  
                                                

Balance at June 30(1)

   $ (226   $       (34   $ 18     $         19     $ (223   $ (9
                                                

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)

   $ (1   $ (1   $ 20     $ (6   $ 12     $ (5
                                                
     Six Months Ended June 30,  
     2010     2009  
     Interest
Rate
    Cross
Currency
    Foreign
Exchange
    Commodity     Total     Total  
     (in millions)  

Balance at beginning of period(1)

   $ (12   $ (12   $ -      $ 24     $ -      $ (69

Total gains (losses) (realized and unrealized):(1)

            

Included in earnings(2)

     -        5       -        2       7       (24

Included in other comprehensive income

     (13     (30     -        -        (43     140  

Included in regulatory assets

     (3     -        -        5       2       2  

Purchases, issuances and settlements(1)

     1       3       22       (12     14       (1

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

     (208     -        (4     -        (212     -   

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

     9       -        -        -        9       (57
                                                

Balance at June 30(1)

   $ (226   $ (34   $ 18     $ 19     $ (223   $ (9
                                                

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)

   $ (1   $ 5     $             20     $ (10   $ 14     $ (13
                                                

 

(1)

Derivative assets and (liabilities) are presented on a net basis.

(2)

The gains (losses) included in earnings for these Level 3 derivatives are classified as follows: interest rate and cross currency derivatives as interest expense, foreign exchange derivatives as foreign currency transaction gains (losses) and commodity derivatives as non-regulated cost of sales. See Note 5 — Derivative Instruments and Hedging Activities for further information regarding the classification of gains and losses included in earnings in the condensed consolidated statements of operations.

 

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(3)

Transfers in and out of Level 3 are determined as of the end of the reporting period and are from and to Level 2, except as noted below. The (assets) liabilities transferred out of Level 3 during the six months ended June 30, 2009 include a PPA that was dedesignated as a cash flow hedge because the normal purchase normal sale scope exception from derivative accounting was elected as of December 31, 2008. As such, the agreement was measured at fair value using significant unobservable inputs at December 31, 2008, but is subsequently being amortized and is no longer adjusted for subsequent changes in fair value. Otherwise, the (assets) liabilities transferred out of Level 3 are primarily the result of a decrease in the significance of unobservable inputs used to calculate the credit valuation adjustments of these derivative instruments. Similarly, the assets (liabilities) transferred into Level 3 are primarily the result of an increase in the significance of unobservable inputs used to calculate the credit valuation adjustments of these derivative instruments.

The following table presents a reconciliation of available-for-sale securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2010 and 2009:

 

      Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      2010    2009     2010    2009  
     (in millions)  

Balance at beginning of period (1)

   $ 42    $ 13     $   42    $ 42  

Purchases, issuances and settlements

     -          (11     -      (40
                              

Balance at June 30

   $               42    $ 2     $ 42    $ 2  
                              
          

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

   $ -    $ -      $ -    $ -   
                              

 

(1)

Available-for-sale securities in Level 3 are auction rate securities and variable rate demand notes which have failed remarketing or are not actively trading and for which there are no longer adequate observable inputs available to measure the fair value.

 

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4. INVESTMENTS IN MARKETABLE SECURITIES

The following table sets forth the Company’s investments in marketable debt and equity securities as of June 30, 2010 and December 31, 2009 by security class and by level within the fair value hierarchy. 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.

 

     June 30, 2010   December 31, 2009
    Level 1   Level 2   Level 3   Total   Level 1   Level 2   Level 3   Total
    (in millions)

AVAILABLE-FOR-SALE:(1)

               

Debt securities:

               

Unsecured debentures(2)

  $ -   $ 579   $ -   $ 579   $ -   $ 667   $ -   $ 667

Certificates of deposit(2)

    -     771     -     771     -     652     -     652

Government debt securities

    -     147     -     147     -     152     -     152

Other debt securities

    -     -     42     42     -     -     42     42
                                               

Subtotal

    -     1,497     42     1,539     -     1,471     42     1,513

Equity securities:

               

Mutual funds

    118     65     -     183     117     -     -     117

Common stock

    7     -     -     7     16     -     -     16

Money market funds

    -     20     -     20     -     30     -     30
                                               

Subtotal

    125     85     -     210     133     30     -     163
                                               

Total available-for-sale

  $     125   $     1,582   $     42   $     1,749   $     133   $     1,501   $     42   $     1,676
                                               

TRADING:

               

Equity securities:

               

Mutual funds

    8     -     -     8     7     -     -     7
                                               

Total trading

    8     -     -     8     7     -     -     7
                                               

TOTAL

  $ 133   $ 1,582   $ 42   $ 1,757   $ 140   $ 1,501   $ 42   $ 1,683
                                               

Held-to-maturity securities(3)

          1           8
                       

Total marketable securities

        $ 1,758         $ 1,691
                       

 

(1)

Amortized cost approximated fair value at June 30, 2010 and December 31, 2009, with the exception of certain common stock investments with a cost basis of $6 million carried at its fair value of $7 million and $16 million as of June 30, 2010 and December 31, 2009, respectively.

(2)

Unsecured debentures are instruments similar to certificates of deposit that are held primarily by our subsidiaries in Brazil. The unsecured debentures and certificates of deposit included here do not qualify as cash equivalents, but meet the definition of a security under the relevant guidance and are therefore classified as available-for-sale securities.

(3)

Held-to-maturity securities are carried at amortized cost and not measured at fair value on a recurring basis. These investments consist primarily of certificates of deposit and government debt securities. The amortized cost approximated fair value of the held-to-maturity securities at June 30, 2010 and December 31, 2009. As of June 30, 2010, all held-to-maturity debt securities had stated maturities within one year.

As of June 30, 2010, all available-for-sale debt securities had stated maturities within one year, with the exception of $42 million of auction rate securities and variable rate demand notes held by IPL. These securities, classified as other debt securities in the table above, had stated maturities of greater than ten years as of June 30, 2010.

 

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The following table summarizes the pre-tax gains and losses related to available-for-sale and trading securities for the three and six months ended June 30, 2010 and 2009. There were no realized losses on the sale of available-for-sale securities. Gains and losses on the sale of investments are determined using the specific identification method. There was no other-than-temporary impairment recognized in earnings or other comprehensive income for the three and six months ended June 30, 2010 and 2009.

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010     2009    2010     2009
     (in millions)    (in millions)

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

   $ 1     $ 1    $ 1     $ 1

Losses included in other comprehensive income

   $ (3   $ -    $ (10   $ -

Proceeds from sales

   $     2,247     $     1,222    $     3,210     $     2,143

Gross realized gains on sales

   $ 1     $ 1    $ 1     $ 1

5. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Risk Management Objectives

The Company is exposed to market risks associated with its enterprise-wide business activities, namely the purchase and sale of fuel and electricity as well as foreign currency risk and interest rate risk. In order to manage the market risks associated with these business activities, we enter into contracts that incorporate derivatives and financial instruments, including forwards, futures, options, swaps or combinations thereof, as appropriate. The Company applies hedge accounting for all contracts as long as they are eligible under the accounting standards for derivatives and hedging. While derivative transactions are not entered into for trading purposes, some contracts are not eligible for hedge accounting.

Interest Rate Risk

AES and its subsidiaries utilize variable rate debt financing for construction projects and operations, resulting in an exposure to interest rate risk. Interest rate swap, cap and floor agreements are entered into to manage interest rate risk by effectively fixing or limiting the interest rate exposure on the underlying financing. These interest rate contracts range in maturity through 2027, and are typically designated as cash flow hedges. The following table sets forth, by type of interest rate derivative, the Company’s current and maximum outstanding notional under its interest rate derivative instruments, the weighted average remaining term and the percentage of variable-rate debt hedged that is based on the related index as of June 30, 2010 regardless of whether the derivative instruments are in qualifying cash flow hedging relationships:

 

      June 30, 2010  
     Current    Maximum (1)              

Interest Rate Derivatives

   Derivative
Notional
   Derivative
Notional
Translated
to USD
   Derivative
Notional
   Derivative
Notional
Translated
to USD
    Weighted
Average
Remaining
Term (1)
    % of Debt
Currently
Hedged
by  Index (2)
 
     (in millions)     (in years)        

Libor (U.S. Dollar)

   2,517    $     2,517    2,743    $     2,743      10      69

Euribor (Euro)

   1,185      1,450    1,242      1,519      14      73

Libor (British Pound Sterling)

   47      70    47      70      10      68

Securities Industry and Financial Markets Association Municipal Swap Index (U.S. Dollar)

   40      40    40      40       13       N/A (3) 

 

(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, 2010 and the

 

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maturity of the derivative instrument, which includes forward starting derivative instruments that generally start around when a construction project had been expected to be completed and commence operations. The weighted average remaining term represents the remaining tenor of our interest rate derivatives weighted by the corresponding maximum notional in USD.

(2)

Excludes variable-rate debt tied to other indices where the Company has no interest rate derivatives.

(3)

The debt that was being hedged is no longer exposed to variable interest payments.

Cross currency swaps are utilized in certain instances to manage the risk related to fluctuations in both interest rates and certain foreign currencies. These cross currency contracts range in maturity through 2028. The following table sets forth, by type of foreign currency denomination, the Company’s outstanding notionals of its cross currency derivative instruments as of June 30, 2010 which are all in qualifying cash flow hedge relationships. These swaps are amortizing and therefore the notional amount represents the maximum outstanding notional as of June 30, 2010:

 

     June 30, 2010  

Cross Currency Swaps

   Notional    Notional Translated
to USD
    Weighted Average
Remaining Term (1)
    % of Debt Currently
Hedged by Index (2)
 
     (in millions)     (in years)        

Chilean Unidad de Fomento (CLF)

   6    $     217      16      83

 

(1)

Represents the remaining tenor of our cross currency swaps weighted by the corresponding notional.

(2)

Represents the proportion of foreign currency denominated debt hedged by the same foreign currency denominated notional of the cross currency swap.

Foreign Currency Risk

We are exposed to foreign currency risk as a result of our investments in foreign subsidiaries and affiliates. AES operates businesses in many foreign environments and such operations in foreign countries may be impacted by significant fluctuations in foreign currency exchange rates. Foreign currency options and forwards are utilized, where possible, to manage the risk related to fluctuations in certain foreign currencies. These foreign currency contracts range in maturity through 2011. The following tables set forth, by type of foreign currency denomination, the Company’s outstanding notionals over the remaining terms of its foreign currency derivative instruments as of June 30, 2010 regardless of whether the derivative instruments are in qualifying hedging relationships:

 

     June 30, 2010  

Foreign Currency Options

   Notional    Notional Translated
to USD (1)
     Probability  Adjusted
Notional (2)
   Weighted Average
Remaining Term (3)
 
     (in millions)    (in years)  

Brazilian Real (BRL)

   116    $             65       $             45    <1   

Euro (EUR)

   7      10         9    <1   

Philippine Peso (PHP)

   143      3         2    <1   

British Pound (GBP)

   3      4         4    <1   

 

  (1)

Represents contractual notionals at inception of the derivative instrument.

  (2)

Represents the gross notional amounts times the probability of exercising the option, which is based on the relationship of changes in the option value with respect to changes in the price of the underlying currency.

  (3)

Represents the remaining tenor of our foreign currency options weighted by the corresponding notional in USD.

 

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     June 30, 2010  

Foreign Currency Forwards

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

Chilean Peso (CLP)

   91,404    $ 178    <1   

Colombian Peso (COP)

   105,832                  54    <1   

Argentine Peso (ARS)

   76      17    <1   

 

  (1)

Represents the remaining tenor of our foreign currency forwards weighted by the corresponding notional in USD.

In addition, certain of our subsidiaries have entered into contracts which contain embedded derivatives that require separate valuation and accounting due to the fact that the item being purchased or sold is denominated in a currency other than their own functional currency or the currency of the item. These contracts range in maturity through 2025. The following table sets forth, by type of foreign currency denomination, the Company’s outstanding notionals over the remaining terms of its foreign currency embedded derivative instruments as of June 30, 2010:

 

     June 30, 2010  

Embedded Foreign Currency Derivatives

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

Philippine Peso (PHP)

   13,781    $             297    4   

Kazakhstani Tenge (KZT)

   43,644      296    10   

Argentine Peso (ARS)

   330      84    10   

Euro (EUR)

   35      43    5   

Hungarian Forint (HUF)

   927      4    1   

Brazilian Real (BRL)

   2      1    1   

 

  (1)

Represents the remaining tenor of our foreign currency embedded derivatives weighted by the corresponding notional in USD.

Commodity Price Risk

We are exposed to the impact of market fluctuations in the price of electricity, fuel and environmental credits. Although we primarily consist of businesses with long-term contracts or retail sales concessions (which provide our distribution businesses with a franchise to serve a specific geographic region), a portion of our current and expected future revenues are derived from businesses without significant long-term purchase or sales contracts. These businesses subject our results of operations to the volatility of prices for electricity, fuel and environmental credits in competitive markets. We have used a hedging strategy, where appropriate, to hedge our financial performance against the effects of fluctuations in energy commodity prices. The implementation of this strategy can involve the use of commodity forward contracts, futures, swaps and options. Some of our businesses hedge certain aspects of their commodity risks using financial hedging instruments.

We also enter into short-term contracts for the supply of electricity and fuel in other competitive markets in which we operate. When hedging the output of our generation assets, we have PPAs or other hedging instruments that lock in the spread in dollars per MWh between the cost of fuel to generate a unit of electricity and the price at which the electricity can be sold (“Dark Spread” where the fuel is coal). The portion of our sales and fuel purchases that are not subject to such agreements will be exposed to commodity price risk. Eastern Energy in New York and Deepwater in Texas, two of our North America generation businesses, and IPL, a North America utility business, sell electricity into the power pools managed by the New York Independent System Operator (“NYISO”), Electric Reliability Council of Texas (“ERCOT”), and the Midwest Independent System Operator (“MISO”), respectively. In addition, Eastern Energy has hedged a portion of its power exposure for 2010 by entering into hedges of natural gas prices, as movements in natural gas prices affect power prices. While there is

 

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a strong relationship between natural gas and power prices, the natural gas hedges do not currently qualify for hedge accounting treatment and are included in the below table entitled “Commodity Derivatives”. The following table sets forth the Company’s current notionals under its commodity derivative instruments at Eastern Energy, Deepwater and IPL and the percentage of forecasted electricity sales hedged as of June 30, 2010 for 2010 and 2011:

 

     2010     2011  

Commodity Hedges

   Notional     % of
Forecasted
Sales Hedged
    Notional     % of
Forecasted
Sales Hedged
 
     (in millions)           (in millions)        

Natural gas swaps (MMBTU)

   12      31   -      -

NYISO electricity swaps (MWh)

   1      28   - (1)    - %(1) 

ERCOT electricity swaps (MWh)

   - (1)    12   -      -

MISO electricity swaps (MWh)

   - (1)    17 %(2)    -      -

 

  (1)

De minimis amount.

  (2)

This amount is based on wholesale energy forecasts above committed regulated energy sales.

The PPAs and fuel supply agreements entered into by the Company are evaluated to determine if they meet the definition of a derivative or contain embedded derivatives, either of which require separate valuation and accounting. To be a derivative under the accounting standards for derivatives and hedging, an agreement would need to have a notional and an underlying, require little or no initial net investment, and could be net settled. Generally, these agreements do not meet the definition of a derivative, often due to the inability to be net settled. On a quarterly basis, we evaluate the markets for the power or fuel to be delivered under these agreements to determine if facts and circumstances have changed such that the agreements could then be net settled and then meet the definition of a derivative.

Nonetheless, certain of the PPAs and fuel supply agreements entered into by the Company are derivatives or contain embedded derivatives requiring separate valuation and accounting. These agreements range in maturity through 2024. The following table sets forth by type of commodity, the Company’s outstanding notionals for the remaining term of its commodity derivatives (excluding the commodity hedges at Eastern Energy, Deepwater and IPL, which are presented in the above table) and embedded derivative instruments as of June 30, 2010:

 

     June 30, 2010  

Commodity Derivatives

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

Natural gas (MMBTU)

   92      8   

Petcoke (Metric tons)

   14      14   

Coal (Metric tons)

   - (2)    <1   

Log wood (Tons)

   - (2)    3   

 

  (1)

Represents the remaining tenor of our commodity and embedded derivatives weighted by the corresponding volume.

  (2)

De minimis amount.

 

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Accounting and Reporting

The following table sets forth the Company’s derivative instruments as of June 30, 2010 and December 31, 2009 by type of derivative and by level within the fair value hierarchy. Derivative assets and liabilities are recognized at their fair value. Derivative assets and liabilities are combined with other balances and included in the following captions in our consolidated balance sheets: current derivative assets in other current assets, noncurrent derivative assets in other noncurrent assets, current derivative liabilities in accounts payable and accrued liabilities, and noncurrent derivative liabilities in other long-term liabilities.

 

    June 30, 2010     December 31, 2009
    Level 1   Level 2     Level 3     Total     Level 1   Level 2   Level 3   Total
    (in millions)     (in millions)

Assets

               

Current assets:

         

Foreign exchange derivatives

  $             -   $ 21      $ 3      $ 24      $ -   $ 6   $ -   $ 6

Commodity derivatives

               

Electricity

    -     12        -        12        -     22     -     22

Natural gas

    -     20        9        29        -     -     11     11

Other

    -     1        14        15        -     -     17     17
                                                     

Total current assets

    -     54        26        80        -     28     28     56
                                                     

Noncurrent assets:

               

Interest rate derivatives

    -     37        -        37        -     83     2     85

Foreign exchange derivatives

    -     5 (1)      30        35        -     -     -     -

Other

    -     3        -        3        -     -     -     -
                                                     

Total noncurrent assets

    -     45        30        75        -     83     2     85
                                                     

Total assets

  $ -   $ 99      $ 56      $ 155      $ -   $ 111   $ 30   $ 141
                                                     

Liabilities

               

Current liabilities:

               

Interest rate derivatives

  $ -   $ 79      $ 56      $ 135 (1)    $ -   $ 118   $ 7   $ 125

Cross currency derivatives

    -     -        14        14        -     -     -                 -

Foreign exchange derivatives

    -     12        -        12        -     3     -     3

Commodity derivatives

               

Electricity

    -     4        -        4        -     2     -     2

Natural gas

    -     -        -        -        -     5                 -     5

Other

    -     -                    -                    -                    -                 -     2     2
                                                     

Total current liabilities

    -     95        70        165        -     128     9     137
                                                     

Noncurrent liabilities:

               

Interest rate derivatives

    -     135        170        305 (1)      -     150     7     157

Cross currency derivatives

    -     -        20        20        -     -     12     12

Foreign exchange derivatives

    -     1        15 (1)      16        -     2     -     2

Commodity derivatives

               

Natural gas

    -     -        1        1        -     -     2     2

Other fuel

    -                 -        3        3        -     -     -     -
                                                     

Total noncurrent liabilities

    -     136        209        345        -     152     21     173
                                                     

Total liabilities

  $ -   $ 231      $ 279      $ 510      $ -   $ 280   $ 30   $ 310
                                                     

 

(1)

Includes the impact of consolidating Cartagena beginning January 1, 2010 under VIE accounting guidance as follows: $2 million of noncurrent assets and $2 million in noncurrent liabilities on foreign exchange derivatives and $18 million of current liabilities and $53 million of noncurrent liabilities for interest rate derivatives as of June 30, 2010.

 

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The following table sets forth the fair value and balance sheet classification of derivative instruments as of June 30, 2010 and December 31, 2009:

 

    June 30, 2010   December 31, 2009
    Designated as
Hedging
Instruments
    Not Designated as
Hedging
Instruments
    Total   Designated as
Hedging
Instruments
  Not Designated as
Hedging
Instruments
  Total
    (in millions)

Assets

           

Other current assets:

           

Foreign exchange derivatives

  $ 6      $ 18 (1)    $ 24   $ -   $ 6   $ 6

Commodity derivatives:

           

Electricity

    12        -        12         22     -         22

Natural gas

    -        29        29     -     11     11

Other

    -            15            15     -         17     17
                                       

Total other current assets

    18        62        80     22     34     56
                                       

Other assets:

           

Interest rate derivatives

        37        -        37     85     -     85

Foreign exchange derivatives

    -        35 (1)      35     -     -     -

Other

    -        3        3     -     -     -
                                       

Total other assets — noncurrent

    37        38        75     85     -     85
                                       

Total assets

  $ 55      $ 100      $ 155   $ 107   $ 34   $ 141
                                       

Liabilities

           

Accounts payable and other accrued liabilities:

           

Interest rate derivatives

  $ 119 (1)    $ 16      $ 135   $ 115   $ 10   $ 125

Cross currency derivatives

    14        -        14     -     -     -

Foreign exchange derivatives

    2        10        12     2     1     3

Commodity derivatives:

           

Electricity

    4        -        4     2     -     2

Natural gas

    -        -        -     -     5     5

Other

    -        -        -     -     2     2
                                       

Total accounts payable and other accrued liabilities — current

    139        26        165     119     18     137
                                       

Other long-term liabilities:

           

Interest rate derivatives

    287 (1)      18        305     141     16     157

Cross currency derivatives

    20        -        20     12     -     12

Foreign exchange derivatives

    -        16 (1)      16     -     2     2

Commodity derivatives:

           

Natural gas

    -        1        1     -     2     2

Other fuel

    -        3        3     -     -     -
                                       

Total other long-term liabilities

    307        38        345     153     20     173
                                       

Total liabilities

  $ 446      $ 64      $ 510   $ 272   $ 38   $ 310
                                       

 

(1)

Includes the impact of consolidating Cartagena beginning January 1, 2010 under VIE accounting guidance as follows: $2 million of noncurrent assets and $2 million in noncurrent liabilities on foreign exchange derivatives and $18 million of current liabilities and $53 million of noncurrent liabilities for interest rate derivatives as of June 30, 2010.

 

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The Company has elected not to offset net derivative positions in the financial statements. Accordingly, the Company does not offset such derivative positions against the fair value of amounts (or amounts that approximate fair value) recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) under master netting arrangements. At June 30, 2010 and December 31, 2009, we held $23 million and $8 million, respectively, of cash collateral that we received from counterparties to our derivative positions, which is classified as restricted cash and accrued and other liabilities in the condensed consolidated balance sheets. Also, at June 30, 2010 and December 31, 2009, we had no cash collateral posted with (held by) counterparties to our derivative positions.

The table below sets forth 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 June 30, 2010 for the following types of derivative instruments:

 

     Accumulated
Other Comprehensive
Income (Loss)
     (in millions)

Interest rate derivatives

   $     (113)

Cross currency derivatives

   $ (14)

Foreign currency derivatives

   $ 5

Commodity derivatives

   $ 7

The balance in accumulated other comprehensive loss related to derivative transactions that will be reclassified into earnings as interest expense is recognized for interest rate hedges and cross currency swaps, as depreciation is recognized for interest rate hedges during construction, as foreign currency gains and losses are recognized for hedges of foreign currency exposure, and as electricity sales and fuel purchases are recognized for hedges of forecasted electricity and fuel transactions. These balances are included in the condensed consolidated statements of cash flows as operating and/or investing activities based on the nature of the underlying transaction. Additionally, $1 million of pre-tax accumulated other comprehensive income is expected to be recognized as an increase to income from continuing operations before income taxes over the next twelve months. This amount relates to a PPA that was dedesignated as a cash flow hedge because the normal purchase normal sale scope exception from derivative accounting was elected as of December 31, 2008.

 

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The following tables set forth the 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, as defined in the accounting standards for derivatives and hedging, for the three and six months ended June 30, 2010 and 2009:

 

     Gains (Losses)
Recognized in AOCL
   

Classification in Condensed
Consolidated Statement of Operations

  Gains (Losses) Reclassified
from AOCL into
Earnings
 
    Three Months Ended
June  30,
      Three Months Ended
June 30,
 
     2010     2009           2010              2009       
     (in millions)         (in millions)  

Interest rate derivatives

  $ (160 )(3)    $ 48      Interest expense   $ (34 )(1)    $ 2 (1) 
      Non-regulated cost of sales     -        -   

Cross currency
derivatives

    (27 )       28      Interest expense     -        -   
     

Foreign currency transaction gains (losses)

    -        -   

Foreign currency
derivatives

            7        - (2)    

Foreign currency transaction gains (losses)

    -        -   

Commodity derivatives — electricity

    (12 )       28      Non-regulated revenue     2                57   
                                 

Total

  $ (192   $         104        $     (32   $ 59   
                                 
     Gains (Losses)
Recognized in AOCL
   

Classification in Condensed
Consolidated Statement of Operations

  Gains (Losses) Reclassified
from AOCL into

Earnings
 
    Six Months Ended
June 30,
      Six Months Ended
June 30,
 
     2010     2009       2010     2009  
     (in millions)         (in millions)  

Interest rate derivatives

  $ (232 )(3)    $ 93      Interest expense   $ (67 )(1)    $ 1 (1) 
      Non-regulated cost of sales     -        -   

Cross currency
derivatives

    (30 )       34      Interest expense     (1 )       -   
     

Foreign currency transaction gains (losses)

    -        -   

Foreign currency
derivatives

    7        - (2)    

Foreign currency transaction gains (losses)

    -        -   

Commodity derivatives — electricity

    -                109      Non-regulated revenue         10                87   
                                 

Total

  $     (255)      $ 236        $ (58   $ 88   
                                 

 

(1)

Includes amounts that were reclassified from AOCL related to derivative instruments that previously, but no longer, qualify for cash flow hedge accounting.

(2)

De minimis amount.

(3)

Includes $12 million related to Cartagena for the three months ended June 30, 2010 and $32 million for the six months ended June 30, 2010, which was consolidated prospectively beginning January 1, 2010 under VIE accounting guidance.

 

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The following tables set forth the 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 and six months ended June 30, 2010 and 2009:

 

    

Classification in Condensed
Consolidated Statement of Operations

   Gains (Losses)
Recognized in Earnings
 
      Three Months Ended
June 30,
 
          2010             2009      
          (in millions)  

Interest rate derivatives

  

Interest expense

   $ 6      $ 9   

Cross currency derivatives

  

Interest expense

     (1 )       -   

Foreign currency derivatives

  

Foreign currency transaction gains (losses)

     -        -   

Commodity derivatives — electricity

  

Non-regulated revenue

     -        -   
                   

Total

      $         5      $         9   
                   
    

Classification in Condensed
Consolidated Statement of Operations

   Gains (Losses)
Recognized in Earnings
 
        Six Months Ended
June 30,
 
            2010             2009      
          (in millions)  

Interest rate derivatives

   Interest expense    $ 2      $ 7   

Cross currency derivatives

   Interest expense      5        2   

Foreign currency derivatives

  

Foreign currency transaction gains (losses)

     - (1)      -   

Commodity derivatives — electricity

   Non-regulated revenue      -        (2
                   

Total

      $ 7      $ 7   
                   

The following tables set forth the gains (losses) recognized in earnings related to derivative instruments not designated as hedging instruments under the accounting standards for derivatives and hedging, f