AES Corporation 2021 Q3 Form 10-Q Summary
Business context and reporting period
AES Corporation is a diversified power generation and utility company operating through the US and Utilities, South America, MCAC, and Eurasia strategic business units. The filing covers the unaudited three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Approximately 85% of revenue is derived from regulated utilities and long-term sales or supply contracts. AES continued shifting its portfolio toward renewable energy, energy storage, LNG infrastructure, and modernized grids while accelerating the retirement of certain coal assets.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $3.036 billion | $2.545 billion | $8.371 billion | $7.100 billion |
| Operating margin | $760 million | $756 million | $2.152 billion | $1.787 billion |
| Net income attributable to AES | $343 million | $(333) million | $223 million | $(272) million |
| Diluted EPS from continuing operations | $0.48 | $(0.50) | $0.31 | $(0.41) |
| Adjusted EPS | $0.50 | $0.42 | $1.07 | $0.96 |
| Adjusted PTC | $428 million | $331 million | $978 million | $819 million |
| Cash flow from operations | $775 million | $1.267 billion | $1.379 billion | $2.087 billion |
Q3 operating margin was essentially flat despite 19% revenue growth, reflecting stronger US and Utilities results offset by lower South America margin. Nine-month operating margin increased 20%.
Q3 income tax expense was $126 million, compared with a $147 million benefit in the prior year. Effective tax rates were 22% for Q3 and 16% for the nine-month period. The nine-month rate included an approximately $96 million discrete benefit from releasing a valuation allowance at a Brazilian subsidiary.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $1.411 billion at September 30, 2021, compared with $1.089 billion at December 31, 2020.
- Including restricted cash and debt service reserves, cash, cash equivalents, and restricted cash totaled $1.974 billion.
- Parent Company liquidity was $1.513 billion, consisting of $338 million of Parent Company and qualified holding-company cash and $1.175 billion of available revolving-credit capacity.
- Aggregate gross debt was approximately $20.2 billion, including $3.4 billion of recourse debt and $16.5 billion of non-recourse debt.
- Current non-recourse debt was approximately $1.5 billion, including $254 million classified as current due to technical covenant defaults at AES Puerto Rico, AES Ilumina, and AES Jordan Solar. These were not payment defaults.
- AES amended its revolving credit facility in September 2021, increasing commitments from $1.0 billion to $1.25 billion and extending maturity to September 2026. No drawings were outstanding at September 30, 2021.
- In March 2021, AES issued approximately $1.0 billion of Equity Units, including Series A convertible preferred stock and purchase contracts requiring an expected additional $1.0 billion of cash proceeds upon settlement in 2024.
Material changes versus the prior comparable period
- Revenue increased 19% in Q3 and 18% for the first nine months, driven by higher US and Utilities, MCAC, Eurasia, and South America revenue.
- Net income attributable to AES improved from losses of $333 million in Q3 2020 and $272 million for the first nine months of 2020 to profits of $343 million and $223 million, respectively.
- Interest expense declined 17% in Q3 and 10% year to date, primarily due to refinancing, lower interest rates, realized gains on de-designated interest-rate swaps, and lower Angamos interest expense.
- Asset impairment expense fell sharply in Q3 to $29 million from $849 million, but increased for the nine-month period to $1.374 billion from $855 million.
- Significant 2021 impairments included $649 million at Ventanas 3 and 4, $475 million in Puerto Rico, $155 million at Angamos, and $67 million at Mountain View I and II.
- Adjusted PTC increased 29% in Q3 and 19% year to date. US and Utilities improved materially, while South America declined, particularly in Q3.
- Operating cash flow declined 34% year to date to $1.379 billion, primarily because working-capital requirements increased following recognition of Angamos contract-termination revenue and other timing effects.
- Capital expenditures increased to $1.534 billion from $1.375 billion, mainly reflecting renewable development and utility transmission, distribution, and storage investments.
Guidance, outlook, commentary, and unusual items
- Management reported 643 MW of renewables and energy storage completed or acquired year to date and 1,088 MW newly signed under long-term PPAs since the second-quarter earnings call.
- The renewable and storage backlog reached 9,213 MW expected to be completed through 2024, including 2,645 MW under construction and 6,568 MW signed under long-term PPAs.
- Alto Maipo was approximately 99% complete and expected to begin generating energy in Q4 2021. Its management was negotiating with creditors to restructure obligations; a failure could result in a loss of up to $566 million representing AES’s after-tax investment, net of noncontrolling interests.
- Coal-related decarbonization actions drove substantial impairments and may require further asset retirements, regulatory approvals, or capital expenditures. Management stated that the remaining carrying values of certain Chilean, Puerto Rico, and Hawaii coal assets were recoverable as of the filing date.
- Mong Duong, Jordan, and Estrella del Mar I were classified as held for sale. The Mong Duong sale was expected to close in early 2022, while the Estrella del Mar I sale closed on October 27, 2021.
- Fluence completed an IPO on November 1, 2021. AES’s ownership declined from 43.2% to 34.2%, with Fluence continuing to be accounted for under the equity method.
- Key operating risks include COVID-19 recovery uncertainty, dry hydrology in Brazil and other markets, commodity and foreign-exchange volatility, supply-chain constraints affecting solar equipment, inflation, LIBOR transition, and changing tax and environmental regulation.
- Material reasonably possible litigation and contingency losses, excluding accrued amounts, were estimated at $256 million to $893 million where estimable. Parent Company guarantees and commitments totaled approximately $2.274 billion.
Important facts investors should verify
- Whether the $254 million of subsidiary technical defaults remain unresolved and whether any future event could trigger Parent Company cross-defaults or restrict distributions.
- Progress and creditor negotiations at Alto Maipo, including construction completion, project cash flows, covenant compliance, and potential exposure up to $566 million.
- The sustainability of improved Adjusted EPS and Adjusted PTC after excluding impairments, asset-sale gains, derivative effects, Angamos contract-termination gains, and other unusual items.
- Whether further impairments or accelerated retirements arise from Chilean, Puerto Rico, Hawaii, or other decarbonization initiatives.
- Conversion and settlement terms of the 2024 Equity Units, including potential common-stock issuance and dilution.
- Cash conversion and working-capital trends, given the year-to-date decline in operating cash flow despite higher reported earnings.
- Outcomes of material legal, regulatory, environmental, tax, and commercial matters, including AES Maritza’s PPA review, CCR-related litigation, AES Mérida arbitration, and tax examinations.