assets and liabilities are recognized for the
future tax consequences attributable to differences between
the financial statement carrying amounts of the existing assets
and liabilities, and their respective income tax bases.
Foreign
Currency Translation - Subsidiaries and affiliates whose
functional currency is other than the U.S. Dollar translate
their assets and liabilities into U.S. Dollars at the current
exchange rates in effect at the end of the fiscal period. The
revenue and expense accounts of such subsidiaries and affiliates
are translated into U.S. Dollars at the average exchange rates
that prevailed during the period. The gains or losses that result
from this process, and gains and losses on intercompany foreign
currency transactions which are long-term in nature, and which
the Company does not intend to settle in the foreseeable future,
are shown in accumulated other comprehensive loss in the stock-
holders' equity section of the balance sheet. For subsidiaries
operating in highly inflationary economies, the U.S. Dollar
is considered to be the functional currency, and transaction
gains and losses are included in determining net income. Gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency,
except those that are hedged, are included in determining net
income. Foreign currency gains and losses that will likely be
recovered through tariff adjustments as provided for in power
sales contracts are deferred and recognized as they are recovered
under contract terms.
During
1999, the Brazilian Real experienced a significant devaluation
relative to the U.S. Dollar, declining from 1.21 Reais to the
Dollar at December 31, 1998 to an average of 1.81 Reais to the
Dollar for the year ended December 31, 1999. This devaluation
resulted in significant foreign currency translation and transaction
losses during 1999. The Company record- ed $203 million before
income taxes of noncash foreign currency transaction losses
on its investments in Brazilian affiliates during 1999.
Revenue
Recognition and Concentration - Revenues from the sale of
electricity and steam are recorded based upon output delivered
and capacity provided at rates as specified under contract terms
or prevailing market rates. Electricity distribution revenues
are recognized when power is provided. Several of the Company's
power plants rely primarily on one power sales contract with
a single customer for the majority of revenues. No single customer
accounted for at least 10% of revenues in 1999 or 1998. Three
customers accounted for 14%, 12%, and 10% of revenues in 1997.
The prolonged failure of any of the Company's customers to fulfill
contractual obligations or make required payments could have
a substantial negative impact on AES's revenues and profits.
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Regulation
- The Company has investments in electric distribution businesses
located in the United States and certain foreign countries that
are subject to regulation by the applicable regulatory authority.
For these regulated businesses, assets and liabilities are recorded
to represent probable future increases and decreases of revenues
resulting from the rate-making actions of regulatory agencies.
The Company has recorded assets that result from rate regulation
of $58 million at December 31, 1999. If a regulator excludes
all or part of a cost from recovery, the carrying amount of
the asset is reduced to the extent of the excluded cost. In
addition, electric rates of the distribution companies generally
include a provision that allows for the recovery of changes
in the cost of purchased power, fuel costs, and certain pass-through
taxes. The net effects of any under or over recoveries are recorded
as a current asset or liability and adjust- ed by collections
through billings to customers. The Company has deferred costs
of $54 million and $9 million at December 31, 1999 and 1998,
respectively, that it expects to pass through to its customers
in accordance with and subject to provisions of the relevant
concession agreements.
Derivatives
- The Company enters into various derivative transactions in
order to hedge its exposure to certain market risks. The Company
currently has outstanding interest rate swap, cap, and floor
agreements that hedge against interest rate exposure on floating
rate project financing debt. These transactions, which are classified
as other than trading, are accounted for using settlement accounting,
and interest is expensed or capitalized, as appropriate, using
effective interest rates. Any fees are amortized as yield adjustments.
Written interest rate options are marked-to-market through earnings.
The
Company enters into electric and gas derivative instruments,
including swaps, options, forwards and futures contracts to
manage its risks related to electric and gas sales and purchases.
Gains and losses arising from derivative financial instrument
transactions that hedge the impact of fluctuations in energy
prices are recognized in income concurrent with the related
purchases and sales of the commodity. If a derivative financial
instrument contract is terminated because it is probable that
a transaction or forecasted transaction will not occur, any
gain or loss as of such date is immediately recognized. If a
derivative financial instrument contract is terminated early
for other economic reasons, any gain or loss as of the termination
date is deferred and recorded concurrently with the related
energy purchase or sale.
Certain
electric derivative financial instruments are entered into for
trading purposes. Such derivatives are recorded at market value
with gains and losses reported net within cost of sales. |
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