AES

AES Corp. 10-Q Summary: Period Ended September 30, 1999

Business Context and Reporting Period

This Form 10-Q covers The AES Corporation for the quarterly and nine-month periods ended September 30, 1999. AES is a global power company engaged in electricity generation and distribution. The reporting period was characterized by aggressive expansion through acquisitions, significant foreign currency volatility (specifically the Brazilian Real), and substantial capital raising activities to fund growth.

Key Financial Metrics

Note: Total Debt calculated as sum of Current Project Financing Debt, Other Notes Payable (current), Long-term Project Financing Debt, and Other Notes Payable (long-term).

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 38% year-over-year for the quarter and 21% for the nine-month period, driven primarily by acquisitions (NewEnergy, NGE plants, Ede Este, CESCO) and new greenfield projects.
• Net Income Decline: Reported net income decreased 28% for the quarter and 47% for the nine-month period compared to 1998. This decline is largely attributable to non-cash foreign currency transaction losses.
• Foreign Currency Impact: The devaluation of the Brazilian Real resulted in $54 million in transaction losses for the quarter and $198 million for the nine months. Excluding these losses, net income for the nine months would have been $257 million (up 20% from 1998).
• Equity Earnings: Equity in earnings of affiliates swung from a $159 million gain in the prior nine-month period to a $57 million loss, primarily due to the $198 million foreign currency charge on Brazilian affiliates.
• Balance Sheet: Total assets grew to $12.1 billion from $10.8 billion. Cash increased by $211 million, funded by operating cash flow and significant financing activities.

Guidance, Outlook, and Risks

• Acquisition Pipeline: Management is actively pursuing further growth, including the acquisition of the Drax Power Station in the UK (approved Nov 1999) and Tiete in Brazil (completed Nov 1999). The company also completed the acquisition of CILCORP in October 1999.
• Financing Strategy: To support acquisitions and refinancing, AES raised significant capital in late 1999, including $801 million in common stock, $450 million in convertible preferred securities, and $250 million in senior notes.
• Year 2000 Readiness: Approximately 98% of businesses have completed Year 2000 readiness programs. The company has spent $14 million on remediation and expects no significant additional costs, though risks remain regarding third-party suppliers and transmission systems.
• Legal and Regulatory Risks:
  • New York Investigation: The NY Attorney General is investigating whether recent acquisitions (Greenidge and Westover stations) underwent modifications without proper permits.
  • Brazilian Litigation: A temporary injunction suspended a shareholders' agreement for CEMIG, though it was reinstated in November 1999. AES is pursuing restoration of super-majority voting rights.
  • India Cyclone: A cyclone in October 1999 damaged the CESCO distribution system in Orissa; repair costs are being assessed.

Investor Verification Checklist

• Foreign Currency Exposure: Verify the extent of unhedged exposure in Brazil and other emerging markets, given the significant impact of the Real devaluation on reported earnings.
• Acquisition Integration: Assess the financial performance and integration status of recent major acquisitions (NewEnergy, NGE, CILCORP) to ensure they meet projected returns.
• Debt Service Capacity: Review the company's ability to service increased debt levels ($5.75 billion total) amidst high interest expenses ($417 million for nine months).
• Year 2000 Contingencies: Confirm the status of Year 2000 remediation for critical third-party suppliers and transmission partners, as AES's operations are interdependent.
• Regulatory Outcomes: Monitor the outcome of the New York Attorney General's investigation regarding the Greenidge and Westover stations, as penalties or operational restrictions could be material.