The AES Corporation: FY 2014 Form 10-K Summary
Business context and reporting period
The filing is an audited annual report for the fiscal year ended December 31, 2014, filed February 25, 2015. AES is a diversified international power-generation and utility company organized into six strategic business units: US, Andes, Brazil, MCAC, Europe and Asia. Its portfolio included approximately 34,732 gross MW of generation capacity, eight utility businesses serving approximately 10.4 million customers, and operations in 18 countries.
The filing includes fourth-quarter 2014 data, but the principal financial discussion covers the full fiscal year. Prior periods were affected by asset sales, discontinued-operations presentation changes and impairments.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $17.146 billion | $15.891 billion | +8% |
| Operating margin | $3.088 billion | $3.247 billion | -5% |
| Operating margin as a percentage of revenue | Approximately 18.0% | Approximately 20.4% | Lower |
| Income from continuing operations | $1.176 billion | $730 million | +61% |
| Income from continuing operations attributable to AES | $789 million | $284 million | +178% |
| Net income attributable to AES | $769 million | $114 million | +575% |
| Diluted EPS from continuing operations | $1.09 | $0.38 | +0.71 |
| Adjusted EPS | $1.30 | $1.29 | +1% |
| Operating cash flow | $1.791 billion | $2.715 billion | -34% |
| Proportional free cash flow | $891 million | $1.271 billion | -30% |
Revenue growth was led by Brazil, which increased $994 million, and the US, Europe and other pass-through-driven businesses. Operating margin declined despite higher revenue, primarily because of poor hydrology in Brazil and Panama, lower availability and outages at certain US and Philippines plants, and weaker results in Asia.
Non-operating items materially affected GAAP earnings. AES recorded $358 million of gains on disposals and investment sales, $164 million of goodwill impairment, $91 million of asset impairment, and $261 million of losses on debt extinguishment. The effective tax rate was 27%, compared with 33% in 2013; management expects future tax rates to be higher.
Liquidity, debt and capital allocation
- Unrestricted cash and cash equivalents were $1.539 billion, including $507 million held at the Parent Company and qualified holding companies. Short-term investments were $709 million and restricted cash and debt-service reserves were $694 million.
- Consolidated debt was approximately $20.9 billion: $15.6 billion of non-recourse debt and $5.3 billion of recourse debt. Debt fair value exceeded carrying value, with disclosed fair values of approximately $16.0 billion for non-recourse debt and $5.6 billion for recourse debt.
- Parent Company liquidity was $1.246 billion, consisting of $507 million of parent-level cash and $739 million of available borrowing capacity under the $800 million credit facility after letters of credit.
- Approximately $858 million of non-recourse debt was classified as current because of covenant defaults at Maritza and Kavarna. The filing states these were not payment defaults, but Kavarna was forecasting a possible payment default by late February 2015.
- Capital expenditures were $2.016 billion on a consolidated cash-flow basis, including growth, maintenance and environmental spending. AES reported $1.8 billion of proceeds from business sales and investments.
- AES repurchased 21.9 million shares for $308 million in 2014. Cumulative repurchases totaled 105.9 million shares for $1.3 billion at year-end. The quarterly dividend was increased from $0.05 to $0.10 per share beginning in the first quarter of 2015.
Material changes versus the prior comparable period
- Brazil revenue increased 20%, but Brazil operating margin declined 15% because of unfavorable foreign exchange, poor hydrology at Tietê and higher energy-purchase costs. Eletropaulo benefited from higher tariffs and the absence of a significant 2013 regulatory-liability charge.
- Andes operating margin increased 10%, supported by higher Chivor generation and prices and improved Argentine remuneration under Resolution 529, partly offset by weaker Chilean prices and availability.
- Asia operating margin fell 55%, primarily because of lower Masinloc availability and spot prices and a Philippine market-price recalculation, plus a lower contracted price at Kelanitissa.
- Europe operating margin declined 3%, as weaker Kilroot and Maritza performance offset the contribution from the Jordan IPP4 plant, which began operations in July 2014.
- AES completed or announced approximately $1.8 billion of asset-sale proceeds, exited Cameroon, Nigeria and Turkey, and brought in strategic partners at Masinloc, Guacolda, the Dominican Republic and IPALCO.
- AES had 7,141 MW under construction, representing approximately $9 billion of total project capital expenditures, with expected commercial operations from 2015 through 2018.
Guidance, outlook, commentary and risks
Management stated that 2014 financial guidance was achieved, including adjusted EPS of $1.30 and proportional free cash flow of $891 million. Management expects improved operating performance, new capacity, cost reductions and platform expansion to offset some headwinds, but the filing does not provide a specific 2015 EPS or cash-flow guidance figure.
- Hydrology was a principal near-term risk. Dry conditions in Brazil, Panama, Chile and Colombia reduced hydro generation and increased spot-market purchases. Management indicated that dry conditions could persist into the first half of 2015.
- Brazil faced potential continued high spot prices, tariff and working-capital pressure, and possible electricity rationing if hydrology did not improve.
- Counterparty and regulatory risks were significant. Maritza had $262 million of receivables from Bulgaria’s NEK, including $205 million overdue, and the PPA and project debt were affected by regulatory and credit events.
- Puerto Rico’s PREPA faced severe financial and liquidity challenges. AES Puerto Rico had $89 million of receivables at year-end, of which $24 million was overdue; the overdue amount was subsequently collected.
- Environmental compliance requires substantial investment, including approximately $511 million for IPL’s MATS program and an estimated $332 million for IPL wastewater compliance projects. Recovery through rates was expected but not assured for all costs.
- The company reported approximately $1.1 billion to $1.2 billion of reasonably possible material contingency losses, excluding accrued liabilities, and approximately $199 million of accrued litigation liabilities.
- Other major risks include high leverage, refinancing needs, foreign exchange and commodity-price volatility, power-plant outages, counterparty defaults, changing utility tariffs, environmental regulation, litigation, tax assessments and political risk in developing markets.
Fourth-quarter 2014 highlights
Fourth-quarter revenue was $4.132 billion, operating margin was $708 million, income from continuing operations was $298 million, and net income attributable to AES was $206 million. Diluted EPS attributable to AES was $0.29. The quarter included $59 million of interest income and a $106 million unrealized foreign-currency derivative gain related to Argentine FONINVEMEM receivables, as well as impairment-related items.
Most important facts for an investor to verify
- Whether Maritza and Kavarna covenant defaults were cured, refinanced or became payment defaults after year-end, and the effect on distributions and parent-level debt.
- Collection status and recoverability of Maritza’s overdue NEK receivables and AES’s Argentine government-related financing receivables.
- Actual hydrological conditions, spot electricity prices and working-capital impacts in Brazil and Panama.
- Progress, financing and commercial-operation timing for the 7,141 MW construction portfolio, including Mong Duong II, Alto Maipo, Cochrane, IPL and Southland projects.
- Regulatory approval and economic terms of IPL’s rate case, MATS and wastewater investments, and Eletropaulo’s tariff and regulatory-asset matters.
- Future effective tax rates following the expiration of Philippine tax benefits, Colombian tax increases and Chilean tax reform.
- The sustainability of the dividend increase and share-repurchase program given parent-level debt maturities, subsidiary distribution restrictions and significant capital commitments.
- The filing’s non-GAAP measures, particularly adjusted EPS and proportional free cash flow, should be reconciled to GAAP results before relying on them for valuation.