Georgia Tech Financial Analysis Lab 800 West Peachtree Street NW Atlanta, GA

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1 800 West Peachtree Street NW Atlanta, GA Charles W. Mulford, Director Invesco Chair and Professor Matthew Madsen MBA Student and Graduate Research Asst Accounting and Reporting Practices for Restricted Cash EXECUTIVE SUMMARY For a sample of 41 nonfinancial companies with market caps exceeding $10 billion, we find that restricted cash comprises approximately.80% of total assets. Restricted cash for some firms, however, can constitute several percent of total assets. Most companies report restricted cash as a current asset, though, depending on the restrictions placed on cash, a noncurrent designation may be used. Two companies include restricted cash with unrestricted cash and cash equivalents on the balance sheet. Within our sample we find ten general types of restrictions placed on cash. Cash may be restricted for bankruptcy reorganization, equity transactions, financing obligations, hedging activities, income tax purposes, insurance claims, investment purposes, litigation purposes, operational obligations, and for regulatory purposes. Seven firms provide no explanation for the restrictions placed on cash. Twenty two of the sample companies disclose the change in restricted cash on the statement of cash flows. Three companies classify the change as operating cash flow, sixteen firms as investing cash flow and four companies as financing cash flow. Two companies separate the change in restricted cash into both operating and financing activities. With a few exceptions, we find a general consistency between the primary reasons for the restrictions placed on cash and the classification of the change in restricted cash on the statement of cash flows. September 2014

2 Georgia Tech Financial Analysis Lab Scheller College of Business Georgia Institute of Technology Atlanta, GA The Georgia Tech Financial Analysis Lab conducts unbiased research on issues of financial reporting and analysis. Unbiased information is vital to effective investment decision-making. Accordingly, we think that independent research organizations, such as our own, have an important role to play in providing information to market participants. Because our Lab is housed within a university, all of our research reports have an educational quality, as they are designed to impart knowledge and understanding to those who read them. Our focus is on issues that we believe will be of interest to a large segment of stock market participants. Depending on the issue, we may focus our attention on individual companies, groups of companies, or on large segments of the market at large. A recurring theme in our work is the identification of reporting practices that give investors a misleading signal, whether positive or negative, of corporate earning power. We define earning power as the ability to generate a sustainable stream of earnings that is backed by cash flow. Accordingly, our research may look into reporting practices that affect either earnings or cash flow, or both. At times, our research may look at stock prices generally, though from a fundamental and not technical point of view. Contact Information Charles Mulford Invesco Chair, Professor of Accounting and the Lab's Director Phone: (404) charles.mulford@scheller.gatech.edu Darcy Austin Kevin Bell Matthew Madsen Alex Pfeffer Joseph Schager Graduate Research Assistant and MBA Student Graduate Research Assistant and MBA Student Graduate Research Assistant and MBA Student Graduate Research Assistant and MBA Student Graduate Research Assistant and MBA Student Website: Scheller College of Business, Georgia. The information contained in this research report is solely the opinion of the authors and is based on sources believed to be reliable and accurate, consisting principally of required filings submitted by the companies represented to the Securities and Exchange Commission. HOWEVER, ALL CONTENT HEREIN IS PRESENTED "AS IS," WITHOUT WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED. No data or statement is or should be construed to be a recommendation for the purchase, retention, sale or short-sale of the securities of the companies mentioned.

3 Accounting and Reporting Practices for Restricted Cash Table 1. Sample Companies Included in this Report COMPANY NAME American Electric Power Co., Inc. Boeing Co. Bunge Limited Caterpillar Inc. Chesapeake Energy Corporation Chevron Corporation Chipotle Mexican Grill, Inc. Cobalt International Energy, Inc. ConocoPhillips Corning Inc. Crown Castle International Corp. Delta Air Lines Inc. Dominion Resources, Inc. Dow Chemical Company DTE Energy Co. Edison International Enterprise Products Partners LP Exelon Corporation Exxon Mobil Corporation FirstEnergy Corp. Ford Motor Co. General Motors Company Harley-Davidson, Inc. Kinder Morgan Energy Partners LP Kinder Morgan, Inc. Las Vegas Sands Corp. Motorola Solutions, Inc. Newmont Mining Corp. NextEra Energy, Inc. Northeast Utilities Nucor Corporation PG&E Corp. PPL Corporation Public Service Enterprise Group Inc. Southern Company Southwestern Energy Co. Sprint Nextel Corp. Starwood Hotels & Resorts WW, Inc. United Parcel Service, Inc. United Technologies Corp. Xerox Corp. SECTOR CAPITAL GOODS / INDUSTRIAL GOODS CONSUMER NON-CYCLICAL CAPITAL GOODS / INDUSTRIAL GOODS ENERGY / BASIC MATERIALS ENERGY / BASIC MATERIALS SERVICES ENERGY / BASIC MATERIALS ENERGY / BASIC MATERIALS TECHNOLOGY SERVICES / TECHNOLOGY TRANSPORTATION / SERVICES BASIC MATERIALS / BASIC MATERIALS ENERGY / BASIC MATERIALS CONSUMER CYCLICAL CONSUMER CYCLICAL CONSUMER CYCLICAL / BASIC MATERIALS / BASIC MATERIALS SERVICES TECHNOLOGY BASIC MATERIALS BASIC MATERIALS ENERGY / BASIC MATERIALS SERVICES / TECHNOLOGY SERVICES TRANSPORTATION / SERVICES CAPITAL GOODS / INDUSTRIAL GOODS TECHNOLOGY 3

4 Accounting and Reporting Practices for Restricted Cash Introduction Since the recession, corporate cash balances have grown considerably. Using data collected by the Georgia Tech Financial Analysis Lab, median cash and short-term investments for each of the 3,000 companies in our sample have increased 28.9% to $86.0 million at September 30, 2013, from $66.7 million at June 30, Analysts and investors have taken note of these growing cash balances. It is not unusual to hear of references to idle cash balances that many consider underutilized, especially in an economy that offers a negative return on cash after inflation. Consider, for example, the large cash balances accumulated at Apple, Inc. When referring to Apple, Larry Popelka at Bloomberg Business Week notes, Large cash balances reduce shareholder value because they create reduced returns on capital. 1 As another example, in a letter directed to the management of Lindsay Corp., Sahm Adrangi at Kerrisdale Capital Management states, The company's cash balance now exceeds 15% of the company's market capitalization and given that this cash earns a negligible return on equity, we urged management to consider employing that cash in a more productive manner. 2 When most analysts and investors refer to a company's cash balance, they refer to the amount reported as cash and cash equivalents on the balance sheet plus short-term investments. Cash and cash equivalents include currency on hand and demand deposits with financial institutions that may be withdrawn without prior notice or penalty. Also included in this caption are shortterm, highly liquid investments that are readily convertible to known amounts of cash and that have original maturities of three months or less. Short-term investments consist of marketable securities with planned holding periods that span less than a year or the operating cycle, whichever is longer. Typically excluded from the cash and cash equivalents caption are cash balances that are restricted in some way. These restrictions may be related to financing activities. For example, at year-end 2012, Edison International holds $4 million of restricted cash to cover outstanding letters of credit. Sprint Nextel holds $5.36 million of restricted cash for lease obligations and contractual obligations with Clearwire Corporation, a company acquired by Sprint in Restrictions may also relate to operating-related or investing-related activities, such as Exelon Corp s 2012 cash balance of $133 million that is restricted for long-term disability benefits for its employees, for financing lease investments and for merger commitments. Other restrictions include cash restricted for capital expenditures, such as Dominion Resources restricted cash balance of $37 million in 2012 to fund certain construction projects, or cash restricted for derivatives-related activities, such as Enterprise Product Partners $4.3 million restricted cash balance at year-end 2012 to cover obligations related to commodities contracts. Generally Accepted Accounting Principles for restricted cash focus primarily on disclosure rules promulgated by the Securities and Exchange Commission (SEC) that apply to cases where cash 1 Popelka, Larry. "Too Much Cash Isn't Good for Apple." Bloomberg Business Week. Feb. 26, Adrangi, Sahm. "Kerrisdale Capital Management Issues Letter to Management, Board Members and Other Stakeholders of Lindsay Corporation." PR Newswire Association LLC, Dec. 23,

5 and cash equivalents are restricted as to withdrawal or usage. According to the Commission s Regulation S-X, Separate disclosure shall be made of the cash and cash items which are restricted as to withdrawal or usage. The provisions of any restrictions shall be described in a note to the financial statements. Restrictions may include legally restricted deposits held as compensating balances against short-term borrowing arrangements, contracts entered into with others, or company statements of intention with regard to particular deposits; however, time deposits and short-term certificates of deposit are not generally included in legally restricted deposits. 3 Restricted cash is cash. However, it is cash that is earmarked for a particular purpose and must be spent for that purpose. Changes in restricted cash balances impact unrestricted cash and cash equivalents and, if material, should be reported on the statement of cash flows. Classification of these changes in restricted cash balances, that is, as operating, investing, and financing cash flow, should be based on the nature of the cash restriction. For example, a change in a restricted cash balance that is related to corporate financing should be reported as a financing activity. An operating-related restriction should be reported as an operating activity. Consider the case of Delta Air Lines, Inc. Delta categorizes $375 million as restricted cash. According to the company, the asset is held for self-insurance and workers compensation claims and certain hedging activities, Restricted cash equivalents and investments are primarily held to meet certain projected self-insurance obligations and generally consist of money market funds and time deposits. These investments are recorded at cost, which approximates fair value. Fair value is based on a market approach using prices and other relevant information generated by market transactions involving identical or comparable assets. A portion of our projected workers' compensation liability is secured with restricted cash collateral. 4 The company also notes, The hedge margin we receive from counterparties is recorded in cash and cash equivalents or restricted cash, cash equivalents and short-term investments, with the offsetting obligation in accounts payable. The hedge margin we provide to counterparties is recorded in accounts receivable. All cash flows associated with purchasing and settling hedge contracts are classified as operating cash flows. 5 3 Securities and Exchange Commission Regulation S-X, Rule , (Washington, D.C.: Securities and Exchange Commission), paragraph S Delta Air Lines, Inc. Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012., p Ibid., p

6 On the balance sheet Delta reports restricted cash, cash equivalents and short-term investments as a current asset. Refer to excerpts from the company s balance sheet provided in Exhibit 1. Exhibit 1: Delta Air Lines, Inc. Excerpts from the Balance Sheet, December 31, 2012 and DELTA AIR LINES, INC. Consolidated Balance Sheets December 31, (in millions, except share data) ASSETS Current Assets: Cash and cash equivalents $ 2,416 $ 2,657 Short-term investments Restricted cash, cash equivalents and short-term investments Accounts receivable, net of an allowance for uncollectible accounts of $36 and $33 at December 31, 2012 and 2011, respectively 1,693 1,563 Fuel inventory Expendable parts and supplies inventories, net of an allowance for obsolescence of $127 and $101 at December 31, 2012 and 2011, respectively Deferred income taxes, net Prepaid expenses and other 1,344 1,250 Total current assets 8,272 7,729 Property and Equipment, Net: Property and equipment, net of accumulated depreciation and amortization of $6,656 and $5,472 at December 31, 2012 and 2011, respectively 20,713 20,223 Other Assets: Goodwill 9,794 9,794 Identifiable intangibles, net of accumulated amortization of $670 and $600 at December 31, 2012 and 2011, respectively 4,679 4,751 Other noncurrent assets 1,092 1,002 Total other assets 15,565 15,547 Total assets $ 44,550 $ 43,499 Source: Delta Air Lines, Inc. Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p. 51. Because they are held for self-insurance and workers compensation claims and certain hedging activities, Delta s restricted cash balances relate to operations. As such, the company reports changes in its restricted cash balances as cash provided by operating activities. During 2012, according to the company s statement of cash flows, restricted cash increased by $51 million, 6

7 appearing as a (use) of cash in the operating section of the statement. 6 from the company s statement of cash flows provided in Exhibit 2. Refer to the excerpts Exhibit 2: Delta Air Lines, Inc. Excerpts from the Statement of Cash Flows, December 31, 2012 and DELTA AIR LINES, INC. Consolidated Statements of Cash Flows Year Ended December 31, (in millions) Cash Flows From Operating Activities: Net income $ 1,009 $ 854 $ 593 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,565 1,523 1,511 Amortization of debt discount, net Loss on extinguishment of debt Fuel hedge derivative contracts (209 ) 135 (136 ) Deferred income taxes 17 (2 ) 9 Pension, postretirement and postemployment expense less than payments (208 ) (308 ) (301 ) Equity-based compensation expense Restructuring and other items SkyMiles used pursuant to advance purchase under American Express Agreements (333) Changes in certain assets and liabilities: Receivables (116 ) (76 ) (141 ) Restricted cash and cash equivalents (51) Fuel inventory (451) (8) (36) Prepaid expenses and other current assets (134) (8) 29 Air traffic liability Frequent flyer deferred revenue (115 ) 82 (345 ) Accounts payable and accrued liabilities Other assets and liabilities (66) (373) (98) Other, net (34) (90) 105 Net cash provided by operating activities 2,476 2,834 2,832 Source: Delta Air Lines, Inc. Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p. 54. Also consider the case of Green Mountain Coffee Roasters, Inc. At September 30, 2012, Green Mountain reports $12.9 million of restricted cash related to an acquisition. As the company notes, 6 The $51 million (use) of cash and cash equivalents appearing on the statement of cash flows for 2012 differs from the $70 million increase in restricted cash, cash equivalents and short-term investments appearing on the balance sheet for 2012 and No explanation is provided for the difference. 7

8 Restricted cash and cash equivalents represents cash that is not available for use in our operations. Restricted cash of $12.9 million and $27.5 million as of September 29, 2012 and September 24, 2011, respectively, consists primarily of cash placed in escrow related to our acquisition of Van Houtte. 7 On the balance sheet, Green Mountain reports both restricted cash and cash equivalents as a current asset, separate from other cash balances. Refer to excerpts from the company s balance sheet provided in Exhibit 3. Exhibit 3: Green Mountain Coffee Roasters, Inc. Excerpts from the Balance Sheet, September 29, 2012 and September 24, Green Mountain Coffee Roasters, Inc. Consolidated Balance Sheets (Dollars in thousands) September 29, 2012 September 24, 2011 Assets Current assets: Cash and cash equivalents $ 58,289 $ 12,989 Restricted cash and cash equivalents 12,884 27,523 Receivables, less uncollectible accounts and return allowances of $34,517 and $21,407 at September 29, 2012 and September 24, 2011, respectively 363, ,321 Inventories 768, ,248 Income taxes receivable 32,943 18,258 Other current assets 35,019 28,072 Deferred income taxes, net 51,613 36,231 Current assets held for sale 25,885 Total current assets 1,322,956 1,131,527 Fixed assets, net 944, ,219 Intangibles, net 498, ,494 Goodwill 808, ,305 Other long-term assets 42,109 47,759 Long-term assets held for sale 120,583 Total assets $ 3,615,789 $ 3,197,887 Source: Green Mountain Coffee Roasters, Inc. Form 10-K Annual Report to the Securities and Exchange Commission, September 29, 2012, p. 45. On the company s statement of cash flows, Green Mountain classifies the change in restricted cash as an investing activity. This treatment is consistent with the nature of the restriction placed 7 Green Mountain Coffee Roasters, Inc. Form 10-K Annual Report to the Securities and Exchange Commission, September 29, 2012, p

9 on the company s restricted cash. That is, because restricted cash relates primarily to an acquisition, changes in restricted cash should be reflected as an investing activity on the statement of cash flows. 8 Refer to excerpts from the company s statement of cash flows provided in Exhibit 4. Exhibit 4: Green Mountain Coffee Roasters, Inc. Excerpts from the Statement of Cash Flows, September 29, 2012 and September 24, Green Mountain Coffee Roasters, Inc. Consolidated Statements of Cash Flows (Dollars in thousands) Fiscal years ended September 29, 2012 September 24, 2011 September 25, 2010 Cash flows from operating activities: Net cash provided by (used in) operating activities 477, (2,297) Cash flows from investing activities: Change in restricted cash (2,875) 2,074 (75) Proceeds from sale of short-term investments 50,000 Acquisition of Timothy s Coffee of the World Inc. (154,208) Acquisition of Diedrich Coffee, Inc., net of cash acquired (305,261) Acquisition of LJVH Holdings, Inc. (Van Houtte), net of cash acquired (907,835) Proceeds from the sale of subsidiary, net of cash acquired 137,733 Capital expenditures for fixed assets (401,121) (283,444) (126,205) Other investing activities 618 1,533 2,314 Net cash used in investing activities (265,645) (1,187,672) (533,435) Cash flows from financing activities: Net cash (used in) provided by financing activities (173,124) 1,199, ,322 Change in cash balances included in current assets held for sale 5,160 (5,160) Effect of exchange rate changes on cash and cash equivalents 1, Net increase (decrease) in cash and cash equivalents 45,300 8,588 (237,410) Cash and cash equivalents at beginning of period 12,989 4, ,811 Cash and cash equivalents at end of period $ 58,289 $ 12,989 $ 4,401 Source: Green Mountain Coffee Roasters, Inc. Form 10-K Annual Report to the Securities and Exchange Commission, September 29, 2012, p The company did not provide an explanation as to why the change in restricted cash on the statement of cash flows does not equal the change in restricted cash on the balance sheet. 9

10 Purpose and Design While Delta Air Lines and Green Mountain Coffee provide detailed disclosures concerning their restricted cash balances, not all companies are as forthcoming. Further, little is known about the significance of restricted cash balances, the nature of the restrictions placed on cash or the manner in which restricted cash is reported on the balance sheet or the statement of cash flows. For example, is restricted cash reported as a current asset or noncurrent asset? Is it grouped with other assets or, in a way that can be characterized as misleading, is restricted cash included on the balance sheet with unrestricted cash? As to the statement of cash flows, does the cash flow classification of the change in restricted cash, that is, as operating, investing or financing activities, coincide with the nature of the restrictions placed on cash? In this research study, we seek answers to these questions for the purpose of gaining better insight into extant reporting practices for restricted cash. Using EdgarPro, we draw a sample of all NYSE listed US-based companies with a market capitalization of more than $10 billion and fiscal year-ends ending in December 2012, reporting the existence of restricted cash. 9 From this group of companies we manually examine the 2012 year end Form 10-K reports, specifically their balance sheets and statements of cash flow, including footnotes, for disclosures of restricted cash values and explanations of restricted cash use. An initial sample of 67 companies that report a restricted cash balance at 2012 is compiled. From this initial sample we delete 26 financial firms. Our final sample consists of 41 nonfinancial companies that report a restricted cash balance at year-end, December, As shown in Table 1, the 41 companies represent nine market sectors, though half of the companies in the sample are categorized as either an energy or utility firm. For each company we record the amount of restricted cash reported on the balance sheet, we identify the nature of the restriction placed on cash and note where the restricted cash is reported, that is, as a component of cash and cash equivalents, as a current asset or as a noncurrent asset. We also investigate how the change in restricted cash is reported on the statement of cash flows. Results Table 2 presents the restricted cash balances, reasons for the cash restrictions and how restricted cash is reported on the balance sheet. Restricted cash to total assets for the sample is.80%. There are a few notable outliers. For example, Cobalt International Energy carries approximately 12.12% of total assets as restricted cash, while Crown Castle International Corp. maintains a restricted cash to total asset ratio of 3.58%. Two other companies with significant restricted cash holdings are Harley-Davidson, Inc., at 2.05% of total assets, and Nucor Corp., with restricted cash comprising 1.94% of total assets. In the sample of 41 firms, 26 companies report restricted cash as a current asset while seven firms report it as a noncurrent asset. Six firms split restricted cash into current and noncurrent classifications. There are two companies in the sample, Dow Chemical Co. and Motorola 9 EdgarPro is the on-line search tool of Edgar Online and permits searches of corporate filings with the Securities and Exchange Commission. Here we searched annual report filings reported December 2012 on Form 10-K for companies using the search term restricted cash. 10

11 Solutions, Inc., that combine restricted cash with unrestricted cash and cash equivalents on the balance sheet. In the case of Dow Chemical, the amount of restricted cash is parenthetically disclosed on the balance sheet. Motorola, however, relegates disclosure of the amount of restricted cash to a footnote to the financial statements, rendering the balance sheet somewhat misleading. Table 2 also presents a summary of the restrictions placed on cash. The reasons are many and varied. We group the restrictions into ten general categories, excluding the seven firms for which no reason for the restriction on cash is provided. The ten categories and examples of the restrictions included within each are summarized below. Bankruptcy Reorganization - these are cash restrictions related to claims or predetermined responsibilities surrounding the reorganization of a firm, held in escrow. For example, PG&E Corp. notes,... restricted cash primarily consists of cash held in escrow pending the resolution of the remaining disputed claims that were filed in the Utility s reorganization proceeding under Chapter 11 of the U.S. Bankruptcy Code. 10 Equity Transactions - these are cash restrictions related to the issue or repurchase of a company s own equity securities or related to dividends on those securities. For example, Chesapeake Energy Corp. notes,... for CHK Utica, we must retain a minimum cash balance equal to two quarterly dividend payments. 11 Financing Obligations - these are cash restrictions related to the repayment of debt, lease obligations of an acquired firm, or funds set aside to cover financial obligations of the firm due to leverage. For example, Starwood Hotels & Resorts Worldwide reports, The majority of our restricted cash balance relates to cash used as collateral to reduce fees on letters of credit. 12 Additionally, General Motors Company records, GM Financial is required to hold certain funds in restricted cash accounts to provide additional collateral for borrowings under the credit facilities. GM Financial's funding agreements contain various covenants requiring minimum financial ratios, asset quality and portfolio performance ratios (portfolio net loss and delinquency ratios, and pool level cumulative net loss ratios) as well as limits on deferment levels. Failure to meet any of these covenants could result in an event of default under these agreements. 13 Hedging Activities - these are cash restrictions set aside for margin requirements to maintain commodity or investment positions as deposit requirements fluctuate. For example, Enterprise Products Partners LP notes, Restricted cash represents amounts held in connection with our commodity derivative instruments portfolio and related physical 10 PG&E Corp., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Chesapeake Energy Corp., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Starwood Hotels & Resorts Worldwide Inc, Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p General Motors Co., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p

12 natural gas, crude oil and NGL purchases. Additional cash may be restricted to maintain this portfolio as commodity prices fluctuate or deposit requirements change. 14 Income Tax Purposes - these are cash restrictions secured for tax payments or predetermined tax obligations due to a transfer or sale of an asset. Chevron Corporation is a company that uses restricted cash for this purpose. Though the company also discloses other reasons for its restricted cash, Restricted cash of $1.5 billion and $1.2 billion associated with tax payments, upstream abandonment activities, funds held in escrow for an asset acquisition and capital investment projects at December 31, 2012 and 2011, respectively, was invested in short-term marketable securities and recorded as Deferred charges and other assets on the Consolidated Balance Sheet. 15 Insurance Claims - these are cash restrictions reserved to pay for various insurance premiums, cover projected long-term disability benefits, provide payment for workers compensation claims, and/or guarantee self-insurances and their ensuing obligations. For example, Exelon Corp. notes,... restricted cash represented restricted funds for payment of medical, dental, vision and long-term disability benefits. 16 Delta Air Lines reports, Restricted cash equivalents are held to meet certain projected self-insurance obligations and generally consist of money market funds and time deposits A portion of our projected workers' compensation liability is secured with restricted cash collateral. 17 Further, Boeing Co. notes that their restricted cash is... restricted to pay group term life insurance premiums for certain employees and certain claims related to workers compensation. 18 Investment Purposes - these are cash restrictions related to collateral required for asset purchases and mergers, equity investments, margin requirements, short term investments, speculation, and other venture initiatives. For example, Bunge Limited notes, Restricted cash at December 31, 2011, includes an escrowed cash deposit related to an equity investment, which was completed in the first quarter of NextEra Energy Inc. reports,... restricted cash included in other current assets was restricted primarily for margin cash collateral. 20 Additionally, Southwestern Energy Co. notes,... restricted cash represents proceeds deposited by the Company with a qualified intermediary to facilitate like-kind exchange transactions pursuant to Section 1031 of the Internal Revenue Code that allows Southwestern Energy to postpone paying tax on any gain when 14 Enterprise Products Partners LP, Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p. F Chevron Corp., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p. FS Exelon Corp., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Delta Air Lines Inc., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Boeing Co., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Bunge Limited, Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p. F NextEra Energy Inc., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p

13 the proceeds are reinvested in a similar property. 21 Finally, United Technologies Corp. defines their restricted cash when,... on occasion, [they] are required to maintain cash deposits with certain banks with respect to contractual obligations related to acquisitions or divestitures or other legal obligations. 22 Litigation Purposes - these are cash restrictions related to funds collected for and due to services, deposited into escrow, and conditioned for use by the purchaser on a later date. For example, Xerox Corp. notes, Various litigation matters in Brazil require us to make cash deposits to escrow as a condition of continuing litigation. 23 Operational Obligations - these are cash restrictions related to contractual responsibilities and/or any other duties required of the company for its labor or work. For example, Kinder Morgan Energy Partners LP states, Cash held in escrow is restricted cash, and as of December 31, 2012, our restricted cash consisted of (i) $2 million deposited into a third-party escrow account to comply with certain contractual stipulations related to our Canadian terminal operations; and (ii) $5 million consisting of cash margin deposits associated with our energy commodity contract positions and overthe-counter swap partners. 24 Additionally, Newmont Mining Corp. notes,... restricted cash is legally restricted for purposes of settling asset retirement obligations related to the Con mine in Yellowknife, NWT, Canada operations. 25 Regulatory Purposes - these are cash restrictions related to pre-defined responsibilities required of certain companies to comply with corporate program and/or laws and regulations to continue to pursue business. For example, Corning, Inc. describes, Restricted cash mainly represents time deposits with local Korean banks who support small-size companies. Deposits are kept with these banks as part of the Company s corporate responsibility program. 26 Further, Ford Motor Company notes, restricted cash balances include cash held to meet certain local governmental and regulatory reserve requirements Southwestern Energy Co., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p United Technologies Corp., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Xerox Corp., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Kinder Morgan Energy Partners LP, Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Newmont Mining Corp., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Corning, Inc., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p Ford Motor Co., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p. FS

14 Table 2. Restricted Cash 2012 (amounts in thousands) TICKER Restricted Cash 2012 Reported Cash & Cash Equiv Restricted Cash Reported as Separate Current Asset 2012 Restricted Cash Included with Reported Cash & Cash Equivalents 2012 Restricted Cash Reported as Separate Non- Current Asset 2012 Total Assets 2012 American Electric Power Co., Inc. $ 241,000 $ 279,000 $ 241,000 $ 54,367, % Financing Obligations Boeing Co. $ 25,000 $ 10,341,000 $ 25,000 $ 88,896, % Insurance Claims Bunge Limited $ 1,000 $ 569,000 $ 1,000 $ 27,280, % Investment Purposes Restricted Cash to Total Assets 2012 PRIMARY REASON FOR RESTRICTION Caterpillar Inc. $ 53,000 $ 5,490,000 $ 53,000 $ 89,356, % Explanation Not Provided Chesapeake Energy Corp. $ 111,000 $ 287,000 $ 111,000 $ 41,611, % Equity Transactions Chevron Corporation $ 1,500,000 $ 20,939,000 $ 1,500,000 $ 232,982, % Income Tax Purposes and Investment Purposes Chipotle Mexican Grill, Inc. $ 24,799 $ 322,553 $ 24,799 $ 1,668, % Insurance Claims Cobalt International Energy, Inc. $ 486,092 $ 1,425,815 $ 90,440 $ 395,652 $ 4,011, % Financing Obligations ConocoPhillips $ 748,000 $ 3,618,000 $ 748,000 $ 117,144, % Equity Transactions Corning Inc. $ 28,145 $ 4,988,000 $ 28,145 $ 29,375, % Regulatory Purposes Crown Castle International Corp. $ 575,938 $ 441,364 $ 575,938 $ 16,088, % Financing Obligations and Operational Obligations Delta Air Lines Inc. $ 375,000 $ 2,416,000 $ 375,000 $ 44,550, % Insurance Claims and Hedging Activities Dominion Resources, Inc. $ 37,000 $ 248,000 $ 37,000 $ 46,838, % Investment Purposes Dow Chemical Company $ 146,000 $ 4,318,000 $ 146,000 $ 69,605, % Financing Obligations DTE Energy Co. $ 122,000 $ 65,000 $ 122,000 $ 26,339, % Financing Obligations Edison International $ 4,000 $ 170,000 $ 4,000 $ 44,394, % Financing Obligations Enterprise Products Partners LP $ 4,300 $ 16,100 $ 4,300 $ 35,934, % Investment Purposes and Hedging Activities Exelon Corporation $ 133,000 $ 1,486,000 $ 133,000 $ 78,554, % Insurance Claims, Investment Purposes, and Financing Obligations Exxon Mobil Corporation $ 341,000 $ 9,582,000 $ 341,000 $ 333,795, % Explanation Not Provided FirstEnergy Corp. $ 62,000 $ 172,000 $ 62,000 $ 50,406, % Explanation Not Provided Ford Motor Co. $ 344,000 $ 15,659,000 $ 344,000 $ 190,554, % Financing Obligations, Insurance Claims, and Regulatory Purposes General Motors Company $ 1,368,000 $ 18,422,000 $ 686,000 $ 682,000 $ 149,422, % Operational Obligations, Financing Obligations, and Investment Purposes Harley-Davidson, Inc. $ 188,008 $ 1,068,138 $ 188,008 $ 9,170, % Explanation Not Provided Kinder Morgan Energy Partners LP $ 7,000 $ 518,000 $ 7,000 $ 32,094, % Operational Obligations and Hedging Activities Kinder Morgan, Inc. $ 52,000 $ 714,000 $ 52,000 $ 68,185, % Operational Obligations and Hedging Activities Las Vegas Sands Corp. $ 6,459 $ 2,512,766 $ 4,521 $ 1,938 $ 22,163, % Explanation Not Provided Motorola Solutions, Inc. $ 63,000 $ 1,468,000 $ 63,000 $ 12,679, % Explanation Not Provided Newmont Mining Corp. $ 102,000 $ 1,561,000 $ 12,000 $ 90,000 $ 29,650, % Operational Obligations NextEra Energy, Inc. $ 400,000 $ 329,000 $ 149,000 $ 251,000 $ 64,439, % Financing Obligations and Investment Purposes Northeast Utilities $ 6,300 $ 45,748 $ 6,300 $ 28,302, % Investment Purposes Nucor Corporation $ 275,163 $ 1,052,862 $ 275,163 $ 14,152, % Investment Purposes PG&E Corp. $ 330,000 $ 194,000 $ 330,000 $ 51,923, % Bankruptcy Reorganization PPL Corporation $ 54,000 $ 901,000 $ 54,000 $ 43,634, % Investment Purposes Public Service Enter. Group, Inc. $ 23,000 $ 379,000 $ 23,000 $ 31,725, % Financing Obligations Southern Company $ 7,000 $ 628,000 $ 7,000 $ 63,149, % Explanation Not Provided Southwestern Energy Co. $ 8,542 $ 53,583 $ 8,542 $ 6,737, % Investment Purposes Sprint Nextel Corp. $ 5,362 $ 6,351,000 $ 1,653 $ 3,709 $ 51,570, % Financing Obligations Starwood Hotels & Resorts WW, Inc. $ 158,000 $ 305,000 $ 158,000 $ 8,861, % Operational Obligations, Financing Obligations, and Investment Purposes United Parcel Service, Inc. $ 288,000 $ 7,327,000 $ 288,000 $ 38,863, % Insurance Claims United Technologies Corp. $ 35,000 $ 4,819,000 $ 35,000 $ 89,409, % Investment Purposes Xerox Corp. $ 365,000 $ 1,246,000 $ 365,000 $ 30,015, % Litigation Purposes Median 0.80% Source: Financial statement data taken from Form 10-K annual report to the Securities and Exchange Commission, December 31, Institute of Technology, Atlanta, GA

15 Table 3 presents the classification of the change in restricted cash on the statement of cash flows. Twenty of the sample companies did not present explicitly the change in restricted cash on their cash flow statements. 28 For the 21 companies that did present the change in restricted cash on the statement, three companies classify the change as operating cash flow, sixteen companies classify the change as investing cash flow and four companies classify the change as financing cash flow. Note that two companies, Crown Castle International Corp., and Starwood Hotels and Resorts Worldwide, Inc., separate the change in restricted cash into both operating and financing activities. We find a general consistency between the primary reasons for the restrictions placed on cash and the classification of the change in restricted cash on the statement of cash flows. For example, among the three firms that classify the change in restricted cash as an operating item, all three include operating-related actions, such as hedging activities, insurance claims or operational obligations, among the primary reasons for their restrictions on cash. Similarly, among the firms reporting the change in restricted cash as investing cash flow, most include investment purposes among the primary reasons for their cash restrictions. There are, however, exceptions. For example, Chesapeake Energy Corp. reports restricted cash primarily for the payment of dividends. Yet the company classifies the change in restricted cash as investing cash flow. A financing designation would appear to be more appropriate. Similarly, Cobalt International Energy, Inc. indicates that its restricted cash relates to outstanding letters of credit, by all indications, a financing purpose. Yet, on the statement of cash flows, the company classifies the change in restricted cash as an investing activity. Also, Corning, Inc. restricts certain cash balances primarily for what could be characterized as for regulatory purposes. According to the company, restricted cash balances are carried in Korean banks as part of its corporate responsibility program. 29 Such a restriction could be viewed as related to operations. Yet, the company classifies the change in restricted cash as a component of investing cash flow. Among the four firms that classify the change in restricted cash as a financing activity, there are two companies that provide the primary reason for the restriction on cash. Both of these companies provide a financing-related purpose for their restricted cash. 28 One company, Dow Chemical Co., reported the change in restricted cash on the statement of cash flows in years prior to 2012, but there was no change in the account during Corning, Inc., Form 10-K Annual Report to the Securities and Exchange Commission, December 31, 2012, p

16 Table 3. Presentation of Change in Restricted Cash on Statement of Cash Flows (amounts in thousands) Change in Restricted Cash on Statement of Cash Flow Presentation 2012 Cash Flows Inc (Dec) Company 2012 Operating Investing Financing American Electric Power Co., Inc. N/A Boeing Co. N/A Bunge Limited ($45,000) Caterpillar Inc. N/A Chesapeake Energy Corporation $222,000 Chevron Corporation N/A Chipotle Mexican Grill, Inc. N/A Cobalt International Energy, Inc. ($208,403) ConocoPhillips $748,000 Corning Inc. $11,974 Crown Castle International Corp. $288,763 Delta Air Lines Inc. $51,000 Dominion Resources, Inc. ($108,000) Dow Chemical Company $0 DTE Energy Co. ($2,000) Edison International N/A Enterprise Products Partners LP ($34,200) Exelon Corporation $34,000 Exxon Mobil Corporation ($63,000) FirstEnergy Corp. N/A Ford Motor Co. N/A General Motors Company ($865,000) Harley-Davidson, Inc. ($41,647) Kinder Morgan Energy Partners LP N/A Kinder Morgan, Inc. N/A Las Vegas Sands Corp. ($693) Motorola Solutions, Inc. N/A Newmont Mining Corp. N/A NextEra Energy, Inc. N/A Northeast Utilities N/A Nucor Corporation $48,625 PG&E Corp. ($50,000) PPL Corporation ($96,000) Public Service Enter. Group, Inc. N/A Southern Company ($4,000) Southwestern Energy Co. $167,788 Sprint Nextel Corp. N/A Starwood Hotels & Resorts WW, Inc. ($67,000) United Parcel Service, Inc. N/A United Technologies Corp. N/A Xerox Corp. N/A Source: Financial statement data taken from Form 10-K annual report to the Securities and Exchange Commission. N/A - companies that do not report the change in restricted cash on the cash flow statement. C and NC - refer to a current asset (C) and noncurrent asset (NC) classification

17 Conclusion For a sample of 41 nonfinancial companies with market caps exceeding $10 billion, we find that restricted cash comprises approximately.80% of total assets. Restricted cash for some firms, however, can constitute several percent of total assets, including Cobalt International Energy, where restricted cash comprises 12.12% of total assets. Most companies report restricted cash as a current asset, though, depending on the restrictions placed on cash, a noncurrent designation may be used. Two companies include restricted cash with unrestricted cash and cash equivalents on the balance sheet. Of the two, Motorola Solutions, Inc. provides only a footnote reference to identify the amount of restricted cash contained within reported cash and cash equivalents. Dow Chemical provides a parenthetical disclosure on the balance sheet of the amount of restricted cash included within unrestricted cash and cash equivalents. Within our sample we find ten general types of restrictions placed on cash. Cash may be restricted for bankruptcy reorganization, equity transactions, financing obligations, hedging activities, income tax purposes, insurance claims, investment purposes, litigation purposes, operational obligations, and for regulatory purposes. Seven firms provide no explanation for the restrictions placed on cash. Twenty one of the sample companies disclose the change in restricted cash on the statement of cash flows. Three companies classify the change as operating cash flow, sixteen firms as investing cash flow and four companies as financing cash flow. Two companies separate the change in restricted cash into both operating and financing activities. With a few exceptions, we find a general consistency between the primary reasons for the restrictions placed on cash and the classification of the change in restricted cash on the statement of cash flows. For analysts and investors these findings highlight the potential importance that restricted cash can have on a company s financial performance and position. For some firms, restricted cash is a material asset and changes in that asset can have a material effect on operating cash flow. For CFOs, these results offer benchmarking data for evaluating restricted cash balances and highlight the need to pay particular attention to the classification of changes in restricted cash balances on the statement of cash flows. For regulators and accounting standard setters these results offer insight into how disclosure rules for restricted cash are being implemented. 17