AES Corporation 2017 Q3 Form 10-Q Summary
Business context and reporting period
The AES Corporation is a diversified power generation and utility company operating through five strategic business units: US, Andes, Brazil, MCAC, and Eurasia. The unaudited report covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods. During the quarter, Europe and Asia reporting units were combined into Eurasia.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $3.632 billion | $3.542 billion | $10.594 billion | $10.042 billion |
| Operating margin | $711 million | $688 million | $1.974 billion | $1.771 billion |
| Operating margin percentage | 19.6% | 19.4% | 18.6% | 17.6% |
| Income from continuing operations | $261 million | $230 million | $509 million | $305 million |
| Net income attributable to AES | $152 million | $175 million | $181 million | $(181) million |
| Diluted EPS from continuing operations | $0.23 | $0.26 | $0.27 | $0.31 |
| Adjusted EPS | $0.24 | $0.32 | $0.66 | $0.64 |
| Operating cash flow | $735 million | $819 million | $1.689 billion | $2.182 billion |
| Free cash flow | $601 million | $665 million | $1.253 billion | $1.709 billion |
Adjusted EPS, Adjusted PTC, and Free Cash Flow are non-GAAP measures defined by the company and should not be viewed as substitutes for GAAP results.
- Adjusted PTC was $245 million in Q3 and $678 million for the first nine months, compared with $272 million and $617 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $1.398 billion at September 30, 2017, including $81 million held at the Parent Company and qualified holding companies. Short-term investments were $563 million, and restricted cash and debt service reserves totaled approximately $1.2 billion.
- Aggregate debt was approximately $22.0 billion, consisting of $5.0 billion of recourse debt and $17.1 billion of non-recourse debt. Approximately $4.1 billion of debt bore variable rates without an interest-rate derivative fixing the rate.
- Parent Company liquidity was $632 million, comprising $81 million of Parent Company and qualified holding-company cash and $551 million of available borrowings under Parent Company credit facilities.
- Capital expenditures were $1.587 billion for the first nine months, including $1.109 billion of growth investment, $423 million of maintenance spending, and $55 million of environmental expenditures.
- The quarterly common dividend was increased to $0.12 per share from $0.11 in the prior-year quarter; $0.12 per share was declared for each quarter of 2017.
Material changes versus the prior comparable periods
- Q3 revenue increased 3%, while nine-month revenue increased 5%, aided by favorable foreign exchange, stronger Brazil and MCAC results, and new Los Mina combined-cycle operations in the Dominican Republic.
- Q3 operating margin increased 3%; nine-month operating margin increased 11%. Brazil and MCAC were the largest contributors, while Andes declined due to lower availability, maintenance at Ventanas, emissions-related regulation, and weaker SING market margins.
- Q3 net income attributable to AES declined 13% because of lower Andes performance, higher taxes, debt-extinguishment losses, an Andes receivable allowance, a water-rights write-off, and hurricane-related losses.
- Nine-month net income attributable to AES improved from a $181 million loss to $181 million of income, primarily because 2016 included a $389 million after-tax loss from discontinued operations and larger prior-year impairments.
- Q3 operating cash flow declined 10% and nine-month operating cash flow declined 23%, principally because of lower Eletropaulo collections, delayed Gener collections, the absence of Sul's cash flow following its 2016 sale, and the absence of Maritza's 2016 overdue-receivable collection.
- Current-year impairments totaled $260 million, including $92 million for Kazakhstan hydroelectric assets, $94 million for Kazakhstan CHP assets, $66 million at DPL, and $8 million at Tait Energy Storage. This was below the $473 million recorded in the first nine months of 2016.
- AES acquired a 48% equity-method interest in sPower for $461 million and acquired the 386 MW Alto Sertão II wind complex in Brazil for $189 million plus assumed non-recourse debt and potential contingent consideration.
- AES completed significant debt refinancing, including a $500 million 5.125% senior-notes issuance due 2027 and a $525 million secured term loan due 2022, while redeeming or repurchasing other debt.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 4,795 MW of projects under construction, representing approximately $8.7 billion of total capital expenditures, with projects expected to come online through 2021. It also targeted $400 million of cumulative savings through 2020 from overhead reductions, procurement efficiencies, and operational improvements.
- Alto Maipo continues to face construction delays, contractor termination, cost overruns of up to 22% over the original $2 billion budget, and technical defaults on $623 million of construction debt and $139 million of derivative liabilities. AES reported approximately $1.4 billion of long-lived assets, $60 million of deferred tax assets, $360 million invested, and an additional $55 million equity commitment. Management considered the assets recoverable as of September 30, 2017, but warned of potential material impairment if restructuring, construction, or financing efforts fail.
- PREPA's Title III bankruptcy and Hurricanes Irma and Maria affected Puerto Rico operations. AES Puerto Rico and AES Ilumina had $365 million and $36 million, respectively, of non-recourse debt in default and classified as current. Puerto Rico receivables totaled $63 million, including $30 million overdue. Management estimated approximately $6 million of damage at AES Ilumina and considered the $622 million Puerto Rico asset carrying value recoverable at the reporting date.
- AES transferred its Kazakhstan hydroelectric plants to the Republic of Kazakhstan on October 2, 2017 and expected to record at least a $37 million loss in the fourth quarter; recovery of $77 million placed in escrow remained subject to arbitration.
- Eletropaulo was pursuing migration to Brazil's Novo Mercado. If AES lost control, it expected to deconsolidate Eletropaulo and recognize approximately $452 million of cumulative translation losses and $243 million of pension losses attributable to AES in earnings.
- Material reasonably possible contingencies were estimated at $1.6 billion to $1.9 billion, excluding accrued liabilities. Accrued litigation liabilities were approximately $174 million, and parent-level guarantees and commitments totaled approximately $967 million.
- Other significant exposures include the Eletrobrás litigation involving Eletropaulo, environmental and regulatory proceedings, a Changuinola tunnel leak in Panama, commodity and foreign-exchange volatility, proposed US energy-market and solar-panel trade remedies, and potential environmental compliance costs.
- The company had no material changes to the risk factors disclosed in its 2016 Form 10-K. Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
Most important facts for an investor to verify
- Whether Alto Maipo can complete construction, replace its contractor, resolve technical defaults, and avoid impairment or additional equity funding.
- The ultimate recovery of Puerto Rico receivables and the effect of PREPA bankruptcy, PPA renegotiation, hurricane damage, and insurance coverage.
- The final economics and accounting effect of Eletropaulo's Novo Mercado migration and any resulting AES deconsolidation.
- The amount ultimately recovered from Kazakhstan and the total fourth-quarter loss on the hydroelectric-plant transfer.
- The liquidity impact of $22.0 billion of total debt, $2.3 billion of current non-recourse debt, subsidiary defaults, variable-rate exposure, and Parent Company reliance on subsidiary distributions.
- The resolution and potential cash exposure from the $1.6 billion to $1.9 billion range of reasonably possible material contingencies.
- Whether the improvement in adjusted earnings and operating margins is sustainable after excluding settlements, foreign-exchange effects, impairments, debt-refinancing items, and other unusual gains or losses.