AES Corporation: 2019 Q2 Form 10-Q Summary
Business context and reporting period
The AES Corporation is a diversified power generation and utility company operating through four strategic business units: US and Utilities, South America, MCAC, and Eurasia. The unaudited filing covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $2.483 billion, down 2% | $5.133 billion, down 3% |
| Operating margin | $502 million, down 16% | $1.088 billion, down 13% |
| Income from continuing operations | $66 million, down 71% | $299 million, down 70% |
| Net income attributable to AES | $17 million, down 94% | $171 million, down 82% |
| Diluted EPS from continuing operations | $0.02 versus $0.15 | $0.26 versus $1.18 |
| Adjusted EPS | $0.26 versus $0.25 | $0.53 versus $0.52 |
| Net cash from operating activities | Not separately provided in the filing excerpt | $1.014 billion versus $914 million |
- Operating margin was approximately 20.2% of revenue in the quarter and 21.2% year to date, compared with approximately 23.7% and 23.8%, respectively, in the prior-year periods.
- Revenue growth at MCAC, primarily from the Colon combined-cycle facility, was more than offset by lower revenue in South America, Eurasia, and US and Utilities.
- Adjusted PTC, a non-GAAP measure, was $240 million for the quarter and $512 million year to date, compared with $255 million and $543 million, respectively.
- At June 30, 2019, cash and cash equivalents were $1.169 billion, short-term investments were $410 million, and restricted cash plus debt-service reserves were $784 million.
- Aggregate gross debt was approximately $20.2 billion, comprising $3.9 billion of recourse debt and $15.8 billion of non-recourse debt principal. Balance-sheet debt included current and noncurrent non-recourse debt of $15.840 billion and recourse debt of $3.920 billion.
- Parent Company liquidity was $888 million, consisting of $169 million of Parent Company and qualified holding-company cash and $719 million of available borrowing capacity under the Parent Company credit facility.
- Capital expenditures were $1.070 billion in the first six months, versus $994 million in 2018. Cash used in investing activities was $1.113 billion, while financing activities provided $108 million.
- The company paid $181 million of common-stock dividends during the first six months and declared a quarterly dividend of $0.1365 per share payable in August 2019.
Material changes versus the prior comparable period
- Reported earnings declined sharply because 2018 included major gains from the sales of Masinloc, Eletropaulo, and Electrica Santiago. The 2019 periods included no comparable gains.
- South America operating margin declined $78 million in the quarter and $117 million year to date, driven by lower generation and prices in Argentina and Chile, lower contract sales, and weaker performance at Tietê and Colombia.
- MCAC operating margin declined $25 million in the quarter and $53 million year to date because of the Changuinola hydroelectric tunnel outage and lower Panama hydrology, partly offset by Colon operations.
- Eurasia operating margin declined $11 million in the quarter and $37 million year to date, reflecting lower Kilroot generation, the Ballylumford B-station closure, and the prior-year sale of Masinloc.
- US and Utilities operating margin increased $21 million in the quarter and $42 million year to date, supported by rate orders at IPL and DPL, higher Southland energy sales, lower maintenance costs, and a $23 million reduction in DPL’s asset-retirement obligation.
- The company recorded $116 million of asset impairment expense, including $115 million related to Kilroot and Ballylumford. It also recorded a $33 million pretax loss on their sale.
- Losses on extinguishment of debt were $51 million in the quarter and $61 million year to date, including a $43 million DPL charge. These amounts were lower year to date than the $176 million recorded in 2018, when the Parent Company refinanced debt.
- Foreign-currency transaction results improved to gains of $22 million in the quarter and $18 million year to date, compared with losses of $30 million and $49 million in the prior-year periods.
Outlook, management commentary, risks, and unusual items
- Management stated that AES remained on track to pursue investment-grade ratings in 2020, a 50% reduction in carbon intensity by 2022 and a 70% reduction by 2030, each measured from 2016, and coal-fired generation below 30% of total generation by 2022.
- AES signed long-term contracts for 1 GW of renewable capacity during the first half of 2019, bringing its renewable backlog to 6.8 GW. Fluence surpassed 1 GW of energy-storage capacity delivered or awarded.
- The filing does not provide a formal consolidated earnings or revenue forecast. Management expects improved operating performance, new-business growth, and cost reductions to mitigate identified challenges.
- Non-recourse debt totaling $342 million was in technical default at AES Puerto Rico, AES Ilumina, and AES Jordan Solar. The defaults were not payment defaults, and management stated they did not trigger, or create a current risk of triggering, a Parent Company cross-default.
- Puerto Rico remains exposed to PREPA’s bankruptcy and regulatory uncertainty. AES reported $71 million of Puerto Rico receivables, including $20 million overdue, and stated that its $547 million of Puerto Rico long-lived assets were recoverable at June 30, 2019.
- The Changuinola tunnel outage may last up to 10 months. AES wrote off $12 million of tunnel lining, capitalized $31 million of replacement-lining costs, and is pursuing potential insurance and contractor claims without assurance of recovery.
- AES recognized $35 million of insurance-recovery income during the first six months related to damage at the Andres facility. Full-load combined-cycle operations were expected by the fourth quarter of 2019.
- Material reasonably possible contingencies, excluding accrued amounts, were estimated at $52 million to $461 million. Recorded litigation liabilities were approximately $56 million, and environmental liabilities were $4 million.
- Parent Company guarantees and commitments totaled approximately $1.109 billion, including $325 million of letters of credit under the unsecured credit facility and $116 million under the senior secured facility.
- Key market exposures include foreign exchange, electricity and fuel prices, hydrology and weather, variable interest rates, environmental regulation, decarbonization requirements, and political and regulatory conditions in operating jurisdictions.
- Chile agreed to cease operation of two coal units totaling 322 MW by 2022 and 2024. Puerto Rico legislation requires elimination of coal generation by January 1, 2028, subject to potential conversion plans and regulatory approvals.
Most important facts for investors to verify
- Whether South America and MCAC operating performance recovers from lower generation, pricing, hydrology, and the Changuinola outage.
- Progress toward resolving the $342 million of technical non-recourse debt defaults and the potential implications for distributions and Parent Company debt covenants.
- Actual cash generation available to the Parent Company, including subsidiary distributions, refinancing access, and the $888 million reported Parent Company liquidity.
- Final proceeds and post-closing adjustments from the Kilroot and Ballylumford sale, the Jordan asset sale, Redondo Beach land sale, and the partial sPower disposition.
- Potential outcomes of the Puerto Rico, Changuinola, environmental, regulatory, arbitration, and other litigation matters, including the $52 million to $461 million range of reasonably possible material losses.
- Execution of AES’s renewable, energy-storage, decarbonization, and coal-reduction targets and the capital requirements associated with those plans.
- Whether future results remain dependent on non-GAAP Adjusted EPS and Adjusted PTC, given the substantial impairment, disposition, debt-refinancing, foreign-exchange, and tax-related items excluded from those measures.