AES Corporation — Q3 2018 Form 10-Q Summary
Business context and reporting period
AES is a diversified power generation and utility company operating through four strategic business units: US and Utilities, South America, MCAC, and Eurasia. The filing covers the three and nine months ended September 30, 2018, and was filed November 5, 2018. The financial statements are unaudited and prior periods were reclassified for discontinued operations and the revised segment structure.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $2.837 billion | $2.693 billion | $8.114 billion | $7.887 billion |
| Operating margin | $671 million | $640 million | $1.927 billion | $1.820 billion |
| Income from continuing operations | $192 million | $235 million | $1.194 billion | $474 million |
| Net income attributable to AES | $101 million | $152 million | $1.075 billion | $181 million |
| Diluted EPS from continuing operations | $0.15 | $0.22 | $1.33 | $0.27 |
| Adjusted EPS | $0.35 | $0.23 | $0.88 | $0.65 |
| Net cash from operating activities | Not separately provided in the statements | Not separately provided in the statements | $1.681 billion | $1.701 billion |
- Q3 revenue increased 5% and operating margin increased 5%, while nine-month revenue increased 3% and operating margin increased 6%.
- Q3 net income attributable to AES declined 34%, primarily because of a $73 million U.S. generation-facility impairment, a $33 million tax-reform true-up, lower Eurasia results, and post-closing adjustments related to Electrica Santiago.
- Nine-month net income attributable to AES increased by $894 million, principally due to gains on the sales of Masinloc, Electrica Santiago, and Eletropaulo, as well as lower prior-year impairments and lower interest expense.
- Adjusted PTC increased to $327 million in Q3 from $238 million and to $870 million for nine months from $670 million. Management uses this non-GAAP measure to assess underlying performance.
- Cash and cash equivalents were $1.187 billion at September 30, 2018, supplemented by $401 million of short-term investments and $935 million of restricted cash and debt-service reserves.
- Capital expenditures were $1.592 billion for nine months, including $1.266 billion for growth investments, $296 million for maintenance, and $30 million for environmental projects.
- Gross debt was approximately $19.8 billion, consisting of $3.8 billion of recourse debt and $15.6 billion of non-recourse debt. Parent Company liquidity was $1.085 billion, including $43 million of parent and qualified holding-company cash and $1.042 billion of available credit capacity.
- Dividends declared were $0.13 per share in Q3 and $0.26 per share for the first nine months, compared with $0.12 and $0.24, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- US and Utilities, South America, and MCAC operating margins improved by $20 million, $60 million, and $2 million, respectively, in Q3. Eurasia operating margin declined by $67 million, largely because of the Masinloc sale and prior-year Kazakhstan dispositions.
- Nine-month operating margin increased $107 million. South America contributed a $142 million increase, US and Utilities $56 million, and MCAC $43 million, partially offset by a $167 million Eurasia decline.
- AES completed the sale of its 51% interest in Masinloc for $1.05 billion of cash proceeds and recognized a $773 million pretax gain. It also sold Electrica Santiago for $287 million of consideration and recognized a $69 million pretax gain.
- AES completed the sale of its 17% Eletropaulo interest in June 2018, receiving $340 million of gross proceeds and recording a $243 million pretax, $199 million after-tax gain in discontinued operations.
- The Company refinanced or repurchased significant parent debt in March 2018, issuing $1.0 billion of senior notes and repurchasing approximately $1.0 billion of higher-cost notes. Nine-month loss on extinguishment of debt was $187 million.
- ASC 606 adoption materially changed the presentation of the Mong Duong II project. At September 30, 2018, it resulted in a $1.441 billion loan receivable and increased reported nine-month net income attributable to AES by approximately $31 million versus the prior accounting method.
- Q3 2018 included $74 million of asset impairment expense, including $73 million related to a U.S. generation facility. Nine-month impairment expense was $166 million versus $260 million in the prior year.
Outlook, commentary, risks, and unusual items
- Management stated that it remained focused on improving portfolio returns, reducing costs, strengthening the balance sheet, and pursuing selective growth. The Company was on track for a $100 million cost-savings program and reported a 5,701 MW development backlog, including 3,836 MW under construction.
- Alto Maipo was approximately 70% complete. The project restructuring includes potential additional AES Gener funding of up to $400 million. Failure to meet construction milestones could adversely affect financing and project value.
- A lightning event damaged the Andres facility in the Dominican Republic. AES recorded a $20 million loss, expected partial-load operations, planned rental generation, and anticipated restoration to combined-cycle full capacity by Q4 2019.
- AES Puerto Rico and AES Ilumina had $357 million of non-recourse debt in covenant default, classified as current. The defaults were not payment defaults, and management stated they did not trigger a parent-company cross-default as of September 30, 2018.
- Material exposure remains to foreign exchange, commodity prices, interest rates, regulatory decisions, power-market conditions, environmental requirements, and political and economic conditions in Argentina, Puerto Rico, Chile, and other jurisdictions.
- The Company recorded a $708 million provisional U.S. transition-tax liability under the Tax Cuts and Jobs Act, including a $33 million Q3 true-up. The accounting was not complete at September 30, 2018.
- Maritza’s power purchase agreement in Bulgaria remained under review by the European Commission’s DG Comp. An unfavorable resolution could materially affect the business and the Company.
- Environmental and litigation contingencies included approximately $48 million of accrued claims, estimated reasonably possible material contingency losses of $99 million to $127 million, and parent-company guarantees and commitments totaling $853 million.
- No formal full-year financial guidance is provided in the filing text. Management discussed expected operating improvements, cost savings, project completion, regulatory rate increases, and continued portfolio optimization rather than issuing a specific earnings forecast.
Important facts for investors to verify
- Reconcile GAAP EPS of $1.33 for nine months with Adjusted EPS of $0.88 and assess the effects of asset sales, impairments, debt extinguishment, foreign exchange, and tax adjustments.
- Review the sustainability and distributability of subsidiary cash flows supporting the Parent Company’s $1.085 billion liquidity position and dividends.
- Monitor the $357 million of subsidiary debt in covenant default and any potential change in material-subsidiary or cross-default status.
- Assess Alto Maipo completion costs, additional funding requirements, construction milestones, and related arbitration exposure.
- Evaluate recoverability of the impaired U.S. generation facility and other assets exposed to changing power prices, regulation, and environmental requirements.
- Track the finalization of the TCJA transition-tax accounting and its effect on future tax expense and cash taxes.
- Follow the Andres facility insurance recovery and restoration timetable, the Maritza PPA review, and other disclosed legal and regulatory proceedings.
- Consider the comparability impact of ASC 606 adoption and the substantial Mong Duong II loan receivable when analyzing revenue, earnings, and cash flow.