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EX-32.2 - EXHIBIT 32.2 - AES CORPaes03312018exhibit322.htm
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EX-31.2 - EXHIBIT 31.2 - AES CORPaes03312018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - AES CORPaes03312018exhibit311.htm



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________________________________________________________
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12291
aeslogominia02a01a01a02a03.jpg
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
 
Smaller reporting company ¨
 
Emerging growth company ¨
 
 
 
 
 
 
 
Non-accelerated filer ¨
 
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
______________________________________________________________________________________________
The number of shares outstanding of Registrant’s Common Stock, par value $0.01 per share, on May 1, 2018 was 661,399,753.
 





THE AES CORPORATION
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018
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
The following terms and acronyms appear in the text of this report and have the definitions indicated below:
Adjusted EPS
Adjusted Earnings Per Share, a non-GAAP measure
Adjusted PTC
Adjusted Pretax Contribution, a non-GAAP measure of operating performance
AFS
Available For Sale
AOCI
Accumulated Other Comprehensive Income
AOCL
Accumulated Other Comprehensive Loss
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
CAA
United States Clean Air Act
CAMMESA
Wholesale Electric Market Administrator in Argentina
CHP
Combined Heat and Power
COFINS
Contribution for the Financing of Social Security
DP&L
The Dayton Power & Light Company
DPL
DPL Inc.
EPA
United States Environmental Protection Agency
EPC
Engineering, Procurement and Construction
EURIBOR
Euro Interbank Offered Rate
FASB
Financial Accounting Standards Board
FX
Foreign Exchange
GAAP
Generally Accepted Accounting Principles in the United States
GHG
Greenhouse Gas
GILTI
Global Intangible Low Taxed Income

GW
Gigawatts
IPALCO
IPALCO Enterprises, Inc.
IPL
Indianapolis Power & Light Company
ISO
Independent System Operator
LIBOR
London Interbank Offered Rate
MW
Megawatts
MWh
Megawatt Hours
NCI
Noncontrolling Interest
NEK
Natsionalna Elektricheska Kompania (state-owned electricity public supplier in Bulgaria)
NM
Not Meaningful
NOV
Notice of Violation
NOX
Nitrogen Oxides
PIS
Program of Social Integration
PPA
Power Purchase Agreement
PREPA
Puerto Rico Electric Power Authority
RSU
Restricted Stock Unit
RTO
Regional Transmission Organization
SBU
Strategic Business Unit
SEC
United States Securities and Exchange Commission
SO2
Sulfur Dioxide
U.S.
United States
USD
United States Dollar
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)
 
March 31, 2018
 
December 31, 2017
 
(in millions, except share and per share data)
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
1,212

 
$
949

Restricted cash
415

 
274

Short-term investments
617

 
424

Accounts receivable, net of allowance for doubtful accounts of $13 and $10, respectively
1,498

 
1,463

Inventory
569

 
562

Prepaid expenses
66

 
62

Other current assets
703

 
630

Current assets of discontinued operations and held-for-sale businesses
358

 
2,034

Total current assets
5,438

 
6,398

NONCURRENT ASSETS
 
 
 
Property, Plant and Equipment:
 
 
 
Land
502

 
502

Electric generation, distribution assets and other
24,311

 
24,119

Accumulated depreciation
(8,168
)
 
(7,942
)
Construction in progress
4,043

 
3,617

Property, plant and equipment, net
20,688

 
20,296

Other Assets:
 
 
 
Investments in and advances to affiliates
1,282

 
1,197

Debt service reserves and other deposits
541

 
565

Goodwill
1,059

 
1,059

Other intangible assets, net of accumulated amortization of $454 and $441, respectively
362

 
366

Deferred income taxes
94

 
130

Service concession assets, net of accumulated amortization of $0 and $206, respectively

 
1,360

Loan receivable
1,474

 

Other noncurrent assets
1,635

 
1,741

Total other assets
6,447

 
6,418

TOTAL ASSETS
$
32,573

 
$
33,112

LIABILITIES AND EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
1,317

 
$
1,371

Accrued interest
289

 
228

Accrued and other liabilities
1,182

 
1,232

Non-recourse debt, includes $986 and $1,012, respectively, related to variable interest entities
2,025

 
2,164

Current liabilities of discontinued operations and held-for-sale businesses
63

 
1,033

Total current liabilities
4,876

 
6,028

NONCURRENT LIABILITIES
 
 
 
Recourse debt
4,060

 
4,625

Non-recourse debt, includes $1,570 and $1,358, respectively, related to variable interest entities
13,601

 
13,176

Deferred income taxes
1,207

 
1,006

Pension and other postretirement liabilities
189

 
230

Other noncurrent liabilities
2,264

 
2,365

Total noncurrent liabilities
21,321

 
21,402

Commitments and Contingencies (see Note 8)
 
 
 
Redeemable stock of subsidiaries
851

 
837

EQUITY
 
 
 
THE AES CORPORATION STOCKHOLDERS’ EQUITY
 
 
 
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 816,331,182 issued and 661,364,449 outstanding at March 31, 2018 and 816,312,913 issued and 660,388,128 outstanding at December 31, 2017)
8

 
8

Additional paid-in capital
8,397

 
8,501

Accumulated deficit
(1,525
)
 
(2,276
)
Accumulated other comprehensive loss
(1,808
)
 
(1,876
)
Treasury stock, at cost (154,966,733 and 155,924,785 shares at March 31, 2018 and December 31, 2017, respectively)
(1,879
)
 
(1,892
)
Total AES Corporation stockholders’ equity
3,193

 
2,465

NONCONTROLLING INTERESTS
2,332

 
2,380

Total equity
5,525

 
4,845

TOTAL LIABILITIES AND EQUITY
$
32,573

 
$
33,112

See Notes to Condensed Consolidated Financial Statements.

2




THE AES CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(in millions, except per share amounts)
Revenue:
 
 
 
Regulated
$
722

 
$
813

Non-Regulated
2,018

 
1,768

Total revenue
2,740

 
2,581

Cost of Sales:
 
 
 
Regulated
(601
)
 
(703
)
Non-Regulated
(1,483
)
 
(1,321
)
Total cost of sales
(2,084
)
 
(2,024
)
Operating margin
656

 
557

General and administrative expenses
(56
)
 
(54
)
Interest expense
(281
)
 
(287
)
Interest income
76

 
63

Gain (loss) on extinguishment of debt
(170
)
 
17

Other expense
(9
)
 
(24
)
Other income
13

 
73

Gain on disposal and sale of businesses
788

 

Asset impairment expense

 
(168
)
Foreign currency transaction losses
(19
)
 
(20
)
INCOME FROM CONTINUING OPERATIONS BEFORE TAXES AND EQUITY IN EARNINGS OF AFFILIATES
998

 
157

Income tax expense
(231
)
 
(67
)
Net equity in earnings of affiliates
11

 
7

INCOME FROM CONTINUING OPERATIONS
778

 
97

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

NET INCOME
777

 
98

Noncontrolling interests:
 
 
 
Less: Income from continuing operations attributable to noncontrolling interests and redeemable stocks of subsidiaries
(93
)
 
(121
)
Less: Income from discontinued operations attributable to noncontrolling interests

 
(1
)
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
$
684

 
$
(24
)
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
 
 
 
Income (loss) from continuing operations, net of tax
$
685

 
$
(24
)
Loss from discontinued operations, net of tax
(1
)
 

NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
$
684

 
$
(24
)
BASIC EARNINGS PER SHARE:
 
 
 
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
$
1.04

 
$
(0.04
)
DILUTED EARNINGS PER SHARE:
 
 
 
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS
$
1.03

 
$
(0.04
)
DILUTED SHARES OUTSTANDING
663

 
659

DIVIDENDS DECLARED PER COMMON SHARE
$
0.13

 
$
0.12

See Notes to Condensed Consolidated Financial Statements.

3




THE AES CORPORATION
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(in millions)
NET INCOME
$
777

 
$
98

Foreign currency translation activity:
 
 
 
Foreign currency translation adjustments, net of income tax benefit (expense) of $0 and $(1), respectively
25

 
68

Reclassification to earnings, net of $0 income tax
(16
)
 
3

Total foreign currency translation adjustments
9

 
71

Derivative activity:
 
 
 
Change in derivative fair value, net of income tax benefit (expense) of $(15) and $8, respectively
57

 
(5
)
Reclassification to earnings, net of income tax benefit (expense) of $1 and $(1), respectively
10

 
20

Total change in fair value of derivatives
67

 
15

Pension activity:
 
 
 
Reclassification to earnings due to amortization of net actuarial loss, net of income tax expense of $0 and $3, respectively
2

 
6

Total pension adjustments
2

 
6

OTHER COMPREHENSIVE INCOME
78

 
92

COMPREHENSIVE INCOME
855

 
190

Less: Comprehensive income attributable to noncontrolling interests
(122
)
 
(142
)
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE AES CORPORATION
$
733

 
$
48

See Notes to Condensed Consolidated Financial Statements.

4




THE AES CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
 
 
 
 
(in millions)
OPERATING ACTIVITIES:
 
 
 
Net income
$
777

 
$
98

Adjustments to net income:
 
 
 
Depreciation and amortization
254

 
291

Gain on disposal and sale of businesses
(788
)
 

Asset impairment expense

 
168

Deferred income taxes
180

 
(6
)
Provisions for contingencies

 
12

Loss (gain) on extinguishment of debt
170

 
(17
)
Loss on sales of assets
2

 
12

Other
72

 
48

Changes in operating assets and liabilities
 
 
 
(Increase) decrease in accounts receivable
(39
)
 
50

(Increase) decrease in inventory
(16
)
 
(16
)
(Increase) decrease in prepaid expenses and other current assets
(33
)
 
111

(Increase) decrease in other assets
19

 
(43
)
Increase (decrease) in accounts payable and other current liabilities
(66
)
 
(65
)
Increase (decrease) in income tax payables, net and other tax payables

 
38

Increase (decrease) in other liabilities
(17
)
 
27

Net cash provided by operating activities
515

 
708

INVESTING ACTIVITIES:
 
 
 
Capital expenditures
(495
)
 
(474
)
Proceeds from the sale of businesses, net of cash and restricted cash sold
1,180

 
4

Sale of short-term investments
149

 
907

Purchase of short-term investments
(345
)
 
(716
)
Contributions to equity affiliates
(44
)
 

Other investing
(29
)
 
(38
)
Net cash provided by (used in) investing activities
416

 
(317
)
FINANCING ACTIVITIES:
 
 
 
Borrowings under the revolving credit facilities
881

 
225

Repayments under the revolving credit facilities
(783
)
 
(84
)
Issuance of recourse debt
1,000

 

Repayments of recourse debt
(1,774
)
 
(341
)
Issuance of non-recourse debt
757

 
569

Repayments of non-recourse debt
(510
)
 
(295
)
Payments for financing fees
(14
)
 
(18
)
Distributions to noncontrolling interests
(17
)
 
(33
)
Contributions from noncontrolling interests and redeemable security holders
11

 
29

Dividends paid on AES common stock
(86
)
 
(79
)
Payments for financed capital expenditures
(89
)
 
(26
)
Other financing
(6
)
 
(26
)
Net cash used in financing activities
(630
)
 
(79
)
Effect of exchange rate changes on cash
5

 
11

(Increase) decrease in cash and restricted cash of discontinued operations and held-for-sale businesses
74

 
(35
)
Total increase in cash, cash equivalents and restricted cash
380

 
288

Cash, cash equivalents and restricted cash, beginning
1,788

 
1,960

Cash, cash equivalents and restricted cash, ending
$
2,168

 
$
2,248

SUPPLEMENTAL DISCLOSURES:
 
 
 
Cash payments for interest, net of amounts capitalized
$
207

 
$
195

Cash payments for income taxes, net of refunds
$
71

 
$
74

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Non-cash contributions of assets and liabilities for Fluence acquisition
$
20

 
$

Dividends declared but not yet paid
$
86

 
$
79

Conversion of Alto Maipo loans and accounts payable into equity (see Note 10—Equity)
$

 
$
279


See Notes to Condensed Consolidated Financial Statements.

5




THE AES CORPORATION
Notes to Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2018 and 2017
(Unaudited)
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 classified as discontinued operations as discussed in Note 16—Discontinued Operations. Certain prior period amounts have been reclassified to comply with newly adopted accounting standards. See further detail in the new accounting pronouncements discussion.
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” 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 months ended March 31, 2018, are not necessarily indicative of expected results for the year ending December 31, 2018. The accompanying condensed consolidated financial statements are unaudited and should be read in conjunction with the 2017 audited consolidated financial statements and notes thereto, which are included in the 2017 Form 10-K filed with the SEC on February 26, 2018 (the “2017 Form 10-K”).
Cash, Cash Equivalents, and Restricted Cash The following table provides a summary of cash, cash equivalents, and restricted cash amounts reported on the Condensed Consolidated Balance Sheet that reconcile to the total of such amounts as shown on the Condensed Consolidated Statements of Cash Flows (in millions):
 
March 31, 2018
 
December 31, 2017
Cash and cash equivalents
$
1,212

 
$
949

Restricted cash
415

 
274

Debt service reserves and other deposits
541

 
565

Cash, Cash Equivalents, and Restricted Cash
$
2,168

 
$
1,788

New Accounting Pronouncements Adopted in 2018 The following table provides a brief description of recent accounting pronouncements that had an impact on the Company’s consolidated financial statements. Accounting pronouncements not listed below were assessed and determined to be either not applicable or did not have a material impact on the Company’s consolidated financial statements.
New Accounting Standards Adopted
ASU Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
This standard changes the presentation of non-service costs associated with defined benefit plans and updates the guidance so that only the service cost component will be eligible for capitalization.
Transition method: retrospective for presentation of non-service cost and prospective for the change in capitalization.
January 1, 2018
No material impact upon adoption of the standard.
2017-05, Other Income — Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
This standard clarifies the scope and application of ASC 610-20 on the sale, transfer, and derecognition of nonfinancial assets and in substance nonfinancial assets to non-customers, including partial sales. It also provides guidance on how gains and losses on transfers of nonfinancial assets and in substance nonfinancial assets to non-customers are recognized. The standard also clarifies that the derecognition of businesses is under the scope of ASC 810. The standard must be adopted concurrently with ASC 606, however an entity will not have to apply the same transition method as ASC 606.
Transition method: modified retrospective.
January 1, 2018
As more transactions will not meet the definition of a business due to the adoption of ASU 2017-01, more dispositions or partial sales will be out of the scope of ASC 810 and will be under this standard.


6




2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
The standard requires an entity to first evaluate whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, and if that threshold is met, the set is not a business. As a second step, to be considered a business at least one substantive process should exist. The revised definition of a business will reduce the number of transactions that are accounted for as business combinations.
Transition method: prospective.
January 1, 2018
Some acquisitions and dispositions will now fall under a different accounting model.
2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
This standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
Transition method: retrospective.
January 1, 2018
For the three months ending March 31, 2017, cash provided by operating activities increased by $5 million, cash used in investing activities decreased by $23 million, and cash used in financing activities was unchanged.
2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The standard significantly revises an entity’s accounting related to (1) classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. Also it amends certain disclosures of financial instruments.
Transition method: modified retrospective. Prospective for equity investments without readily determine fair value.
January 1, 2018
No material impact upon adoption of the standard.
2014-09, 2015-14, 2016-08, 2016-10, 2016-12, 2016-20, 2017-10, 2017-13, Revenue from Contracts with Customers (Topic 606)

See discussion of the ASU below.
January 1, 2018
See impact upon adoption of the standard below.
On January 1, 2018, the Company adopted ASU 2014-09, "Revenue from Contracts with Customers," and its subsequent corresponding updates ("ASC 606"). Under this standard, an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applied the modified retrospective method of adoption to the contracts that were not completed as of January 1, 2018. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the previous revenue recognition standard. For contracts that were modified before January 1, 2018, the Company reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price.
The cumulative effect to our January 1, 2018 Condensed Consolidated Balance Sheet resulting from the adoption of ASC 606 was as follows (in millions):
Condensed Consolidated Balance Sheet
Balance at December 31, 2017
 
Adjustments Due to ASC 606
 
Balance at
January 1, 2018
Assets
 
 
 
 
 
Other current assets
$
630

 
$
61

 
$
691

Deferred income taxes
130

 
(24
)
 
106

Service concession assets, net
1,360

 
(1,360
)
 

Loan receivable

 
1,490

 
1,490

Equity
 
 
 
 
 
Accumulated deficit
(2,276
)
 
67

 
(2,209
)
Accumulated other comprehensive loss
(1,876
)
 
19

 
(1,857
)
Noncontrolling interests
2,380

 
81

 
2,461

The Mong Duong II power plant in Vietnam is the primary driver of changes in revenue recognition under the new standard. This plant is operated under a build, operate, and transfer contract and will be transferred to the Vietnamese government after the completion of a 25-year PPA. Under the previous revenue recognition standard, construction costs were deferred to a service concession asset, which was expensed in proportion to revenue recognized for the construction element over the term of the PPA. Under ASC 606, construction revenue and associated costs are recognized as construction activity occurs. As construction of the plant was substantially completed in 2015, revenues and costs associated with the construction were recognized through retained earnings, and the service concession asset was derecognized. A loan receivable was recognized for the future expected payments for the construction performance obligation. As the payments for the construction performance obligation occur over a 25-year term, a significant financing element was determined to exist which is accounted for

7




under the effective interest rate method. The other performance obligation to operate and maintain the facility is measured based on the capacity made available.
The impact to our Condensed Consolidated Balance Sheet as of March 31, 2018 and Condensed Consolidated Statement of Operations for the period ended March 31, 2018 resulting from the adoption of ASC 606 as compared to the previous revenue recognition standard was as follows (in millions):
 
March 31, 2018
Condensed Consolidated Balance Sheet
As Reported
 
Balances Without Adoption of ASC 606
 
Adoption Impact
Assets
 
 
 
 
 
Other current assets
$
703

 
$
640

 
$
63

Deferred income taxes
94

 
118

 
(24
)
Service concession assets, net

 
1,337

 
(1,337
)
Loan receivable
1,474

 

 
1,474

TOTAL ASSETS
32,573

 
32,397

 
176

Liabilities
 
 
 
 
 
Accrued and other liabilities
1,182

 
1,181

 
1

Equity
 
 
 
 
 
Accumulated deficit
(1,525
)
 
(1,601
)
 
76

Accumulated other comprehensive loss
(1,808
)
 
(1,827
)
 
19

Noncontrolling interest
2,332

 
2,252

 
80

TOTAL LIABILITIES AND EQUITY
32,573

 
32,397

 
176

 
Three Months Ended March 31, 2018
Condensed Consolidated Statement of Operations
As Reported
 
Balances Without Adoption of ASC 606
 
Adoption Impact
Total revenue
2,740

 
2,751

 
(11
)
Total cost of sales
(2,084
)
 
(2,090
)
 
6

Operating margin
656

 
661

 
(5
)
Interest income
76

 
61

 
15

Income from continuing operations before taxes and equity in earnings of affiliates
998

 
988

 
10

Income tax expense
(231
)
 
(230
)
 
(1
)
INCOME FROM CONTINUING OPERATIONS
778

 
769

 
9

NET INCOME
777

 
768

 
9

NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
684

 
675

 
9

New Accounting Pronouncements Issued But Not Yet Effective The following table provides a brief description of recent accounting pronouncements that could have a material impact on the Company’s consolidated financial statements once adopted. Accounting pronouncements not listed below were assessed and determined to be either not applicable or are expected to have no material impact on the Company’s consolidated financial statements.
New Accounting Standards Issued But Not Yet Effective
ASU Number and Name
Description
Date of Adoption
Effect on the financial statements upon adoption
2018-02, Income Statement — Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from AOCI
This amendment allows a reclassification of the stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act from AOCI to retained earnings. Because this amendment only relates to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.
January 1, 2019. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2017-12, Derivatives and Hedging (Topic 815): Targeted improvements to Accounting for Hedging Activities
The standard updates the hedge accounting model to expand the ability to hedge nonfinancial and financial risk components, reduce complexity, and ease certain documentation and assessment requirements. When facts and circumstances are the same as at the previous quantitative test, a subsequent quantitative effectiveness test is not required. The standard also eliminates the requirement to separately measure and report hedge ineffectiveness. For cash flow hedges, this means that the entire change in the fair value of a hedging instrument will be recorded in other comprehensive income and amounts deferred will be reclassified to earnings in the same income statement line as the hedged item.
Transition method: modified retrospective with the cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date. Prospective for presentation and disclosures.
January 1, 2019. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.


8




2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments and Certain Mandatorily Redeemable Noncontrolling Interests
Part 1 of this standard changes the classification of certain equity-linked financial instruments when assessing whether the instrument is indexed to an entity’s own stock.
Transition method: retrospective.
January 1, 2019. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
This standard shortens the period of amortization for the premium on certain callable debt securities to the earliest call date.
Transition method: modified retrospective.
January 1, 2019. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
This standard simplifies the accounting for goodwill impairment by removing the requirement to calculate the implied fair value. Instead, it requires that an entity records an impairment charge based on the excess of a reporting unit's carrying amount over its fair value.
Transition method: prospective.
January 1, 2020. Early adoption is permitted as of January 1, 2017.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The standard updates the impairment model for financial assets measured at amortized cost. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking "expected loss" model that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses as it is done today, except that the losses will be recognized as an allowance rather than a reduction in the amortized cost of the securities.
Transition method: various.
January 1, 2020. Early adoption is permitted only as of January 1, 2019.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
2016-02, 2018-01, Leases (Topic 842)
See discussion of the ASU below.
January 1, 2019. Early adoption is permitted.
The Company is currently evaluating the impact of adopting the standard on its consolidated financial statements.
ASU 2016-02 and its subsequent corresponding updates will require lessees to recognize assets and liabilities for most leases, and recognize expenses in a manner similar to the current accounting method. For Lessors, the guidance modifies the lease classification criteria and the accounting for sales-type and direct financing leases. The guidance also eliminates the current real estate-specific provisions.
The standard must be adopted using a modified retrospective approach at the beginning of the earliest comparative period presented in the financial statements (January 1, 2017). The FASB proposed amending the standard to give another option for transition. The proposed transition method would allow entities to not apply the new lease standard in the comparative periods presented in their financial statements in the year of adoption. Under the proposed transition method, the entity would apply the transition provisions on January 1, 2019 (i.e., the effective date). At transition, lessees and lessors are permitted to make an election to apply a package of practical expedients that allow them not to reassess: (1) whether any expired or existing contracts are or contain leases, (2) lease classification for any expired or existing leases, and (3) whether initial direct costs for any expired or existing leases qualify for capitalization under ASC 842. These three practical expedients must be elected as a package and must be consistently applied to all leases. Furthermore, entities are also permitted to make an election to use hindsight when determining lease term and lessees can elect to use hindsight when assessing the impairment of right-of-use assets.
The Company has established a task force focused on the identification of contracts that would be under the scope of the new standard and on the assessment and measurement of the right-of-use asset and related liability. Additionally, the implementation team has been working on the configuration of a lease accounting system that will support the implementation and the subsequent accounting. The implementation team is in the process of evaluating changes to our business processes, systems and controls to support recognition and disclosure under the new standard.
As the Company has preliminarily concluded that at transition it would be using the package of practical expedients, the main impact expected as of the effective date is the recognition of the right to use asset and the related liability in the financial statements for all those contracts that contain a lease and for which the Company is the lessee. However, income statement presentation and the expense recognition pattern is not expected to change.

9




Under ASC 842, it is expected that fewer contracts will contain a lease. However, due to the elimination of today's real estate-specific guidance and changes to certain lessor classification criteria, more leases will qualify as sales-type leases and direct financing leases. Under these two models, a lessor will derecognize the asset and will recognize a lease receivable. According to ASC 842, the lease receivable does not include variable payments that depend on the use of the asset (e.g. Mwh produced by a facility). Therefore, the lease receivable could be lower than the carrying amount of the underlying asset at lease commencement, In such circumstances, the difference between the initially recognized lease receivable and the carrying amount of the underlying asset is recognized as a selling loss at lease commencement. The Company is assessing how this guidance will apply to new renewable contracts executed or modified after the effective date where all the payments are contingent on the level of production and is also evaluating the related impact to the allocation of earnings under HLBV accounting.
2. INVENTORY
The following table summarizes the Company’s inventory balances as of the periods indicated (in millions):
 
March 31, 2018
 
December 31, 2017
Fuel and other raw materials
$
281

 
$
284

Spare parts and supplies
288

 
278

Total
$
569

 
$
562

3. FAIR VALUE
The fair value of current financial assets and liabilities, debt service reserves and other deposits approximate their reported carrying amounts. The estimated fair values of the Company’s assets and liabilities have been determined using available market information. By virtue of these amounts being estimates and based on hypothetical transactions to sell assets or transfer liabilities, the use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. For further information on our valuation techniques and policies, see Note 4—Fair Value in Item 8.—Financial Statements and Supplementary Data of our 2017 Form 10-K.
Recurring Measurements The following table presents, 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 dates indicated (in millions). For the Company’s investments in marketable debt securities, the security classes presented are determined based on the nature and risk of the security and are consistent with how the Company manages, monitors and measures its marketable securities:
 
March 31, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DEBT SECURITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured debentures
$

 
$
291

 
$

 
$
291

 
$

 
$
207

 
$

 
$
207

Certificates of deposit

 
260

 

 
260

 

 
153

 

 
153

Total debt securities

 
551

 

 
551

 

 
360

 

 
360

EQUITY SECURITIES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual funds
20

 
52

 

 
72

 
20

 
52

 

 
72

Other equity securities

 
3

 

 
3

 

 

 

 

Total equity securities
20

 
55

 

 
75

 
20

 
52

 

 
72

DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives

 
42

 

 
42

 

 
15

 

 
15

Cross-currency derivatives

 
45

 

 
45

 

 
29

 

 
29

Foreign currency derivatives

 
37

 
225

 
262

 

 
29

 
240

 
269

Commodity derivatives

 
8

 
3

 
11

 

 
30

 
5

 
35

Total derivatives — assets

 
132

 
228

 
360

 

 
103

 
245

 
348

TOTAL ASSETS
$
20

 
$
738

 
$
228

 
$
986

 
$
20

 
$
515

 
$
245

 
$
780

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
DERIVATIVES:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$

 
$
81

 
$
129

 
$
210

 
$

 
$
111

 
$
151

 
$
262

Cross-currency derivatives

 
1

 

 
1

 

 
3

 

 
3

Foreign currency derivatives

 
41

 

 
41

 

 
30

 

 
30

Commodity derivatives

 
1

 

 
1

 

 
19

 
1

 
20

Total derivatives — liabilities

 
124

 
129

 
253

 

 
163

 
152

 
315

TOTAL LIABILITIES
$

 
$
124

 
$
129

 
$
253

 
$

 
$
163

 
$
152

 
$
315

As of March 31, 2018, all AFS debt securities had stated maturities within one year. For the three months ended March 31, 2018 and 2017, no other-than-temporary impairments of marketable securities were recognized in

10




earnings or Other Comprehensive Income (Loss). Gains and losses on the sale of investments are determined using the specific-identification method. The following table presents gross proceeds from the sale of AFS securities during the periods indicated (in millions):
 
Three Months Ended March 31,
 
2018
 
2017
Gross proceeds from sale of AFS securities
$
147

 
$
429

The following tables present a reconciliation of net derivative assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2018 and 2017 (presented net by type of derivative in millions). 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 March 31, 2018
Interest Rate
 
Foreign Currency
 
Commodity
 
Total
Balance at January 1
$
(151
)
 
$
240

 
$
4

 
$
93

Total realized and unrealized gains (losses):
 
 
 
 
 
 

Included in earnings
14

 
(6
)
 
1

 
9

Included in other comprehensive income — derivative activity
27

 

 

 
27

Settlements
6

 
(9
)
 
(2
)
 
(5
)
Transfers of liabilities into Level 3
(8
)
 

 

 
(8
)
Transfers of liabilities out of Level 3
(17
)
 

 

 
(17
)
Balance at March 31
$
(129
)
 
$
225

 
$
3

 
$
99

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
$
16

 
$
(15
)
 
$
1

 
$
2

Three Months Ended March 31, 2017
Interest Rate
 
Foreign Currency
 
Commodity
 
Total
Balance at January 1
$
(179
)
 
$
255

 
$
5

 
$
81

Total realized and unrealized losses:
 
 
 
 
 
 
 
Included in earnings

 
(16
)
 

 
(16
)
Included in other comprehensive income — derivative activity
(12
)
 

 

 
(12
)
Settlements
10

 
(8
)
 
(3
)
 
(1
)
Transfers of liabilities into Level 3
(4
)
 

 

 
(4
)
Transfers of assets out of Level 3
2

 

 

 
2

Balance at March 31
$
(183
)
 
$
231

 
$
2

 
$
50

Total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities held at the end of the period
$
2

 
$
(24
)
 
$

 
$
(22
)
The following table summarizes the significant unobservable inputs used for Level 3 derivative assets (liabilities) as of March 31, 2018 (in millions, except range amounts):
Type of Derivative
 
Fair Value
 
Unobservable Input
 
Amount or Range (Weighted Average)
Interest rate
 
$
(129
)
 
Subsidiaries’ credit spreads
 
2.38% to 4.38% (3.54%)
Foreign currency:
 
 
 
 
 
 
Argentine Peso
 
225

 
Argentine Peso to USD currency exchange rate after one year
 
24.33 to 56.28 (38.75)
Commodity:
 
 
 
 
 
 
Other
 
3

 
 
 
 
Total
 
$
99

 
 
 
 
For interest rate derivatives and foreign currency derivatives, increases (decreases) in the estimates of the Company’s own credit spreads would decrease (increase) the value of the derivatives in a liability position. For foreign currency derivatives, increases (decreases) in the estimate of the above exchange rate would increase (decrease) the value of the derivative.
Nonrecurring Measurements
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 the then-latest available carrying amount. The following table summarizes our major categories of assets and liabilities measured at fair value on a nonrecurring basis and their level within the fair value hierarchy (in millions):

11




 
Measurement Date
 
Carrying Amount (1)
 
Fair Value
 
Pretax Loss
Three Months Ended March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Long-lived assets held and used: (2)
 
 
 
 
 
 
 
 
 
 
 
DPL
02/28/2017
 
$
77

 
$

 
$

 
$
11

 
$
66

Other
02/28/2017
 
15

 

 

 
7

 
8

Held-for-sale businesses: (3)
 
 
 
 
 
 
 
 
 
 
 
Kazakhstan
03/31/2017
 
171

 

 
29

 

 
94

_____________________________
(1) 
Represents the carrying values at the dates of measurement, before fair value adjustment.
(2) 
See Note 14—Asset Impairment Expense for further information.
(3) 
Per the Company’s policy, pretax loss is limited to the impairment of long-lived assets. Any additional loss will be recognized on completion of the sale. See Note 17—Held-for-Sale Businesses and Dispositions for further information.
Financial Instruments not Measured at Fair Value in the Condensed Consolidated Balance Sheets
The following table presents (in millions) the carrying amount, fair value and fair value hierarchy of the Company’s financial assets and liabilities that are not measured at fair value in the Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017, but for which fair value is disclosed:
 
 
March 31, 2018
 
 
Carrying
Amount
 
Fair Value
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
Accounts receivable — noncurrent (1)
$
156

 
$
295

 
$

 
$

 
$
295

Liabilities:
Non-recourse debt
15,626

 
16,006

 

 
14,250

 
1,756

 
Recourse debt
4,065

 
4,173

 

 
4,173

 

 
 
December 31, 2017
 
 
Carrying
Amount
 
Fair Value
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
Accounts receivable — noncurrent (1)
$
163

 
$
217

 
$

 
$
6

 
$
211

Liabilities:
Non-recourse debt
15,340

 
15,890

 

 
13,350

 
2,540

 
Recourse debt
4,630

 
4,920

 

 
4,920

 

_____________________________
(1) 
These amounts primarily relate to amounts due from CAMMESA, the administrator of the wholesale electricity market in Argentina, and are included in Other noncurrent assets in the accompanying Condensed Consolidated Balance Sheets. The fair value and carrying amount of these receivables exclude VAT of $30 million and $31 million as of March 31, 2018 and December 31, 2017, respectively.
4. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
For further information on the derivative and hedging accounting policies see Note 1—General and Summary of Significant Accounting PoliciesDerivatives and Hedging Activities of Item 8.—Financial Statements and Supplementary Data in the 2017 Form 10-K.
Volume of Activity — The following table presents the Company’s maximum notional (in millions) over the remaining contractual period by type of derivative as of March 31, 2018, regardless of whether they are in qualifying cash flow hedging relationships, and the dates through which the maturities for each type of derivative range:
Derivatives
 
Maximum Notional Translated to USD
 
Latest Maturity
Interest Rate (LIBOR and EURIBOR)
 
$
4,475

 
2041
Cross-Currency Swaps (Chilean Unidad de Fomento and Chilean Peso)
 
419

 
2029
Foreign Currency:
 
 
 
 
Argentine Peso
 
180

 
2026
Chilean Peso
 
388

 
2020
Colombian Peso
 
285

 
2019
Others, primarily with weighted average remaining maturities of a year or less
 
327

 
2020
Accounting and Reporting Assets and Liabilities — The following tables present the fair value of assets and liabilities related to the Company’s derivative instruments as of March 31, 2018 and December 31, 2017 (in millions):

12




Fair Value
March 31, 2018
 
December 31, 2017
Assets
Designated
 
Not Designated
 
Total
 
Designated
 
Not Designated
 
Total
Interest rate derivatives
$
41

 
$
1

 
$
42

 
$
15

 
$

 
$
15

Cross-currency derivatives
45

 

 
45

 
29

 

 
29

Foreign currency derivatives
13

 
249

 
262

 
8

 
261

 
269

Commodity derivatives

 
11

 
11

 
5

 
30

 
35

Total assets
$
99

 
$
261

 
$
360

 
$
57

 
$
291

 
$
348

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives
$
90

 
$
120

 
$
210

 
$
125

 
$
137

 
$
262

Cross-currency derivatives
1

 

 
1

 
3

 

 
3

Foreign currency derivatives
1

 
40

 
41

 
1

 
29

 
30

Commodity derivatives

 
1

 
1

 
9

 
11

 
20

Total liabilities
$
92

 
$
161

 
$
253

 
$
138

 
$
177

 
$
315

 
March 31, 2018
 
December 31, 2017
Fair Value
Assets
 
Liabilities
 
Assets
 
Liabilities
Current
$
70

 
$
170

 
$
84

 
$
211

Noncurrent
290

 
83

 
264

 
104

Total
$
360

 
$
253

 
$
348

 
$
315

As of March 31, 2018, all derivative instruments subject to credit risk-related contingent features were in an asset position.
Credit Risk-Related Contingent Features (1)
 
 
 
 
 
December 31, 2017
Present value of liabilities subject to collateralization
 
 
$
15

Cash collateral held by third parties or in escrow
 
 
9

 _____________________________
(1) 
Based on the credit rating of certain subsidiaries
Earnings and Other Comprehensive Income (Loss) — The next table presents (in millions) the pretax gains (losses) recognized in AOCL and earnings related to all derivative instruments for the periods indicated:
 
Three Months Ended March 31,
2018
 
2017
Effective portion of cash flow hedges
 
 
 
Gains (losses) recognized in AOCL
 
 
 
Interest rate derivatives
$
47

 
$
(22
)
Cross-currency derivatives
19

 
12

Foreign currency derivatives
6

 
(15
)
Commodity derivatives

 
12

Total
$
72

 
$
(13
)
Gains (losses) reclassified from AOCL into earnings
 
 
 
Interest rate derivatives
$
(16
)
 
$
(24
)
Cross-currency derivatives
10

 
4

Foreign currency derivatives
1

 
(2
)
Commodity derivatives
(4
)
 
1

Total
$
(9
)

$
(21
)
Gains (losses) recognized in earnings related to
 
 
 
Not designated as hedging instruments:
 
 
 
Foreign currency derivatives
$
108

 
$
(32
)
Commodity derivatives and other
9

 
(2
)
Total
$
117

 
$
(34
)
AOCL is expected to decrease pretax income from continuing operations for the twelve months ended March 31, 2019, by $44 million, primarily due to interest rate derivatives.
5. FINANCING RECEIVABLES
Receivables with contractual maturities of greater than one year are considered financing receivables. The Company’s financing receivables are primarily related to amended agreements or government resolutions that are due from CAMMESA, the administrator of the wholesale electricity market in Argentina. The following table presents financing receivables by country as of the dates indicated (in millions):
 
March 31, 2018
 
December 31, 2017
Argentina
$
174

 
$
177

Other
12

 
17

Total
$
186

 
$
194

Argentina — Collection of the principal and interest on these receivables is subject to various business risks and uncertainties, including, but not limited to, the operation of power plants which generate cash for payments of

13




these receivables, regulatory changes that could impact the timing and amount of collections, and economic conditions in Argentina. The Company monitors these risks, including the credit ratings of the Argentine government, on a quarterly basis to assess the collectability of these receivables. The Company accrues interest on these receivables once the recognition criteria have been met. The Company’s collection estimates are based on assumptions that it believes to be reasonable but are inherently uncertain. Actual future cash flows could differ from these estimates.
6. INVESTMENTS IN AND ADVANCES TO AFFILIATES
Summarized Financial Information — The following table summarizes financial information of the Company’s 50%-or-less-owned affiliates that are accounted for using the equity method (in millions):
 
Three Months Ended March 31,
50%-or-less-Owned Affiliates
2018
 
2017
Revenue
$
206

 
$
167

Operating margin
28

 
32

Net income
12

 
11

sPower — In February 2017, the Company and Alberta Investment Management Corporation (“AIMCo”) entered into an agreement to acquire FTP Power LLC (“sPower”). In July 2017, AES closed on the acquisition of its 48% ownership interest in sPower for $461 million. In November 2017, AES acquired an additional 2% ownership interest in sPower for $19 million. As the Company does not control sPower, it is accounted for as an equity method investment. The sPower portfolio includes solar and wind projects in operation, under construction, and in development located in the United States. The sPower equity method investment is reported in the US and Utilities SBU reportable segment.
Fluence — In July 2017, the Company entered into a joint venture with Siemens AG to form a global energy storage technology and services company under the name Fluence. On January 1, 2018, Siemens and AES closed on the creation of the joint venture with each party holding a 50% ownership interest. The Company contributed $7 million in cash and $20 million in non-cash assets from the AES Advancion energy storage development business as consideration for the transaction, and received an equity interest in Fluence with a fair value of $50 million. See Note 17—Held-for-sale Businesses and Dispositions for further discussion. As the Company does not control Fluence, it is accounted for as an equity method investment. The Fluence equity method investment is reported as part of Corp and Other.
7. DEBT
Recourse Debt
In March 2018, the Company repurchased via tender offers $671 million aggregate principal of its existing 5.50% senior unsecured notes due in 2024 and $29 million of its existing 5.50% senior unsecured notes due in 2025. As a result of these transactions, the Company recognized a loss on extinguishment of debt of $44 million for the three months ended March 31, 2018.
In March 2018, the Company issued $500 million aggregate principal of 4.00% senior notes due in 2021 and $500 million of 4.50% senior notes due in 2023. The Company used the proceeds from these issuances to repurchase via tender offer in full the $228 million balance of its 8.00% senior notes due in 2020 and the $690 million balance of its 7.375% senior notes due in 2021. As a result of these transactions, the Company recognized a loss on extinguishment of debt of $125 million for the three months ended March 31, 2018.
In March 2017, the Company repurchased via tender offers $276 million aggregate principal of its existing 7.375% senior unsecured notes due in 2021 and $24 million of its existing 8.00% senior unsecured notes due in 2020. As a result of these transactions, the Company recognized a loss on extinguishment of debt of $47 million for the three months ended March 31, 2017.
Non-Recourse Debt
During the three months ended March 31, 2018, the Company’s subsidiaries had the following significant debt transactions:
Subsidiary
 
Issuances
 
Repayments
 
Gain (Loss) on Extinguishment of Debt
Tietê
 
$
385

 
$
(231
)
 
$

Southland
 
194

 

 

Total
 
$
579

 
$
(231
)
 
$


14




AES Argentina — In February 2017, AES Argentina issued $300 million aggregate principal of unsecured and unsubordinated notes due in 2024. The net proceeds from this issuance were used for the prepayment of $75 million of non-recourse debt related to the construction of the San Nicolas Plant resulting in a gain on extinguishment of debt of approximately $65 million.
Non-Recourse Debt in Default — The current portion of non-recourse debt includes the following subsidiary debt in default as of March 31, 2018 (in millions).
Subsidiary
 
Primary Nature of Default
 
Debt in Default
 
Net Assets
Alto Maipo
 
Covenant
 
$
629

 
$
359

AES Puerto Rico
 
Covenant
 
334

 
124

AES Ilumina
 
Covenant
 
35

 
16

 
 
 
 
$
998

 
 
The above defaults are not payment defaults. All of the subsidiary non-recourse debt defaults were triggered by failure to comply with covenants and/or other conditions such as (but not limited to) failure to meet information covenants, complete construction or other milestones in an allocated time, meet certain minimum or maximum financial ratios, or other requirements contained in the non-recourse debt documents of the applicable subsidiary.
The AES Corporation’s recourse debt agreements include cross-default clauses that will trigger if a subsidiary or group of subsidiaries for which the non-recourse debt is in default provides more than 20% or more of the Parent Company’s total cash distributions from businesses for the four most recently completed fiscal quarters. As of March 31, 2018, the Company had no defaults which resulted in or were at risk of triggering a cross-default under the recourse debt of the Parent Company. In the event the Parent Company is not in compliance with the financial covenants of its senior secured revolving credit facility, restricted payments will be limited to regular quarterly shareholder dividends at the then-prevailing rate. Payment defaults and bankruptcy defaults would preclude the making of any restricted payments.
8. COMMITMENTS AND CONTINGENCIES
Guarantees, Letters of Credit and Commitments — In connection with certain project financings, acquisitions and dispositions, power purchases and other agreements, the Parent Company has expressly undertaken limited obligations and commitments, most of which will only be effective or will be terminated upon the occurrence of future events. In the normal course of business, the Parent Company has entered into various agreements, mainly guarantees and letters of credit, to provide financial or performance assurance to third parties on behalf of AES businesses. These agreements are entered into primarily to support or enhance the creditworthiness otherwise achieved by a business on a stand-alone basis, thereby facilitating the availability of sufficient credit to accomplish their intended business purposes. Most of the contingent obligations relate to future performance commitments which the Company or its businesses expect to fulfill within the normal course of business. The expiration dates of these guarantees vary from less than one year to more than 17 years.
The following table summarizes the Parent Company’s contingent contractual obligations as of March 31, 2018. Amounts presented in the following table represent the Parent Company’s current undiscounted exposure to guarantees and the range of maximum undiscounted potential exposure. The maximum exposure is not reduced by the amounts, if any, that could be recovered under the recourse or collateralization provisions in the guarantees.
Contingent Contractual Obligations
 
Amount
(in millions)
 
Number of Agreements
 
Maximum Exposure Range for Each Agreement (in millions)
Guarantees and commitments
 
$
795

 
24

 
<$1 — 272
Letters of credit under the unsecured credit facility
 
52

 
4

 
$2 — 26
Asset sale related indemnities (1)
 
27

 
1

 
$27
Letters of credit under the senior secured credit facility
 
36

 
20

 
<$1 — 13
Total
 
$
910

 
49

 
 
_____________________________
(1) 
Excludes normal and customary representations and warranties in agreements for the sale of assets (including ownership in associated legal entities) where the associated risk is considered to be nominal.
During the three months ended March 31, 2018, the Company paid letter of credit fees ranging from 1.33% to 3% per annum on the outstanding amounts of letters of credit.
Contingencies
Environmental — The Company periodically reviews its obligations as they relate to compliance with environmental laws, including site restoration and remediation. For each period ended March 31, 2018 and December 31, 2017, the Company had recognized liabilities of $5 million for projected environmental remediation costs. Due to the uncertainties associated with environmental assessment and remediation activities, future costs of

15




compliance or remediation could be higher or lower than the amount currently accrued. Moreover, where no liability has been recognized, it is reasonably possible that the Company may be required to incur remediation costs or make expenditures in amounts that could be material but could not be estimated as of March 31, 2018. In aggregate, the Company estimates the range of potential losses related to environmental matters, where estimable, to be up to $19 million. The amounts considered reasonably possible do not include amounts accrued as discussed above.
Litigation The Company is involved in certain claims, suits and legal proceedings in the normal course of business. The Company accrues for litigation and claims when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The Company has recognized aggregate liabilities for all claims of approximately $51 million and $50 million as of March 31, 2018 and December 31, 2017, respectively. These amounts are reported on the Condensed Consolidated Balance Sheets within Accrued and other liabilities and Other noncurrent liabilities. A significant portion of these accrued liabilities relate to regulatory matters and commercial disputes in international jurisdictions. There can be no assurance that these accrued liabilities will be adequate to cover all existing and future claims or that we will have the liquidity to pay such claims as they arise.
Where no accrued liability has been recognized, it is reasonably possible that some matters could be decided unfavorably to the Company and could require the Company to pay damages or make expenditures in amounts that could be material but could not be estimated as of March 31, 2018. The material contingencies where a loss is reasonably possible primarily include claims under financing agreements; disputes with offtakers, suppliers and EPC contractors; alleged violation of monopoly laws and regulations; income tax and non-income tax matters with tax authorities; and regulatory matters. In aggregate, the Company estimates the range of potential losses, where estimable, related to these reasonably possible material contingencies to be between $139 million and $172 million. The amounts considered reasonably possible do not include the amounts accrued, as discussed above. These material contingencies do not include income tax-related contingencies which are considered part of our uncertain tax positions.
9. REDEEMABLE STOCK OF SUBSIDIARIES
The following table summarizes the Company’s redeemable stock of subsidiaries balances as of the periods indicated (in millions):
 
March 31, 2018
 
December 31, 2017
IPALCO common stock
$
618

 
$
618

Colon quotas (1)
173

 
159

IPL preferred stock
60

 
60

Redeemable stock of subsidiaries
$
851

 
$
837

 _____________________________
(1) 
Characteristics of quotas are similar to common stock.
Colon — Our partner in Colon made capital contributions of $10 million during the three months ended March 31, 2018. No capital contributions were made during the three months ended March 31, 2017. Any subsequent adjustments to allocate earnings and dividends to our partner, or measure the investment at fair value, will be classified as temporary equity each reporting period as it is probable that the shares will become redeemable.

16




10. EQUITY
Changes in Equity — The following table is a reconciliation of the beginning and ending equity attributable to stockholders of The AES Corporation, NCI and total equity as of the periods indicated (in millions):
 
Three Months Ended March 31, 2018
 
Three Months Ended March 31, 2017
 
The Parent Company Stockholders’ Equity
 
NCI
 
Total Equity
 
The Parent Company Stockholders’ Equity
 
NCI
 
Total Equity
Balance at the beginning of the period
$
2,465

 
$
2,380

 
$
4,845

 
$
2,794

 
$
2,906

 
$
5,700

Net income (loss) (1)
684

 
93

 
777

 
(24
)
 
122

 
98

Total foreign currency translation adjustment, net of income tax
3

 
6

 
9

 
61

 
10

 
71

Total change in derivative fair value, net of income tax
44

 
23

 
67

 
12

 
3

 
15

Total pension adjustments, net of income tax
2

 

 
2

 
(1
)
 
7

 
6

Cumulative effect of a change in accounting principle (2)
86

 
81

 
167

 
31

 

 
31

Fair value adjustment (3)
(6
)
 

 
(6
)
 

 

 

Disposition of businesses (4)

 
(249
)
 
(249
)
 

 

 

Distributions to noncontrolling interests

 
(9
)
 
(9
)
 

 
(19
)
 
(19
)
Contributions from noncontrolling interests

 
1

 
1

 

 
17

 
17

Dividends declared on common stock
(86
)
 

 
(86
)
 
(79
)
 

 
(79
)
Issuance and exercise of stock-based compensation
1

 

 
1

 
1

 

 
1

Sale of subsidiary shares to noncontrolling interests

 
1

 
1

 
(4
)
 
22

 
18

Acquisition of subsidiary shares from noncontrolling interests

 

 

 
200

 
67

 
267

Less: Net loss attributable to redeemable stock of subsidiaries

 
5

 
5

 

 
3

 
3

Balance at the end of the period
$