AES Corporation — Q2 2021 Form 10-Q Summary
Business context and reporting period
AES is a diversified power generation and utility company operating through the U.S. and Utilities, South America, MCAC, and Eurasia strategic business units. The filing covers the three and six months ended June 30, 2021, with comparative periods ended June 30, 2020. Results are unaudited and include regulated utilities, contracted generation, renewable development, energy storage, LNG infrastructure, and international power assets.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $2.700 billion | $2.217 billion | $5.335 billion | $4.555 billion |
| Operating margin | $728 million | $524 million | $1.392 billion | $1.031 billion |
| Operating margin percentage | 27.0% | 23.6% | 26.1% | 22.6% |
| Net income attributable to AES | $28 million | $(83) million | $(120) million | $61 million |
| Diluted EPS from continuing operations | $0.03 | $(0.13) | $(0.19) | $0.09 |
| Adjusted EPS | $0.31 | $0.25 | $0.59 | $0.54 |
| Net cash provided by operating activities | Not separately provided in the filing summary | Not separately provided in the filing summary | $604 million | $820 million |
Revenue increased 22% in the quarter and 17% year to date. Operating margin increased 39% and 35%, respectively, led primarily by South America. Adjusted PTC, a non-GAAP measure, was $303 million in the quarter and $550 million year to date, compared with $238 million and $488 million in the prior-year periods.
- Cash and cash equivalents were $1.213 billion at June 30, 2021, compared with $1.089 billion at December 31, 2020.
- Restricted cash and debt service reserves totaled $813 million, including $404 million of restricted cash and $409 million of debt service reserves and other deposits.
- Total gross debt was approximately $20.2 billion, consisting of $3.4 billion of recourse debt and $16.5 billion of non-recourse debt.
- Parent Company liquidity was $1.314 billion, comprising $373 million of Parent Company and qualified holding-company cash and $941 million of available credit-facility borrowings.
- Capital expenditures were $999 million for the first six months, compared with $962 million in the prior-year period.
- Free cash flow is not presented as a GAAP measure in the filing text, and the filing does not provide a single consolidated free-cash-flow figure.
Material changes versus the prior comparable period
- South America revenue increased $253 million in the quarter and $425 million year to date, primarily from revenue recognized on the early termination of Angamos contracts, improved Colombian hydrology, higher Argentine generation and tariffs, and higher Brazilian generation.
- U.S. and Utilities operating margin increased $29 million in the quarter and $16 million year to date, supported by Southland Energy, El Salvador, and new U.S. renewable projects.
- MCAC operating margin declined $13 million in the quarter and $31 million year to date, mainly because of the Itabo sale, the disconnection of the Estrella del Mar I power barge, and lower Mexican availability.
- Interest expense increased $19 million in the quarter but decreased $24 million year to date, reflecting refinancing benefits, realized gains on de-designated interest-rate swaps, and lower rates, partly offset by other factors.
- Operating cash flow declined $216 million year to date to $604 million, primarily because working-capital requirements increased, including lower income-tax liabilities and lower deferred income associated with Angamos contract revenue.
- Six-month net income attributable to AES declined from $61 million to a $120 million loss despite higher revenue and operating margin, primarily because of substantial asset impairments.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a formal consolidated earnings or revenue guidance range. Management emphasizes growth in renewable energy, energy storage, modernized utility grids, and LNG infrastructure.
- AES reported a renewable and energy-storage backlog of 8,471 MW, including 2,549 MW under construction and expected online through 2023 and 5,922 MW signed under long-term PPAs.
- Management continued to target a reduction of coal generation to below 10% by year-end 2025. In July 2021, AES Andes announced the retirement of 1.1 GW of coal generation, bringing pro forma coal generation to approximately 20% of total generation volume.
- Asset impairment expense was $872 million in the quarter and $1.345 billion year to date. The principal charges were $649 million for Ventanas, $155 million for Angamos, $475 million for Puerto Rico, and $67 million for the Mountain View I and II repowering project.
- The company recognized a $212 million gain from remeasuring its existing interest in the sPower development platform when forming AES Clean Energy Development and a $61 million gain from Fluence’s issuance of shares to a new investor. These gains materially affected reported earnings and Adjusted EPS.
- Angamos generated $220 million of year-to-date net gains from early contract terminations; the filing excludes these gains from certain non-GAAP measures because management considers them nonrecurring.
- Three subsidiaries had $261 million of non-recourse debt in technical default at June 30, 2021. The defaults were not payment defaults, and management stated that they did not trigger or threaten a Parent Company cross-default at that date.
- Material reasonably possible contingencies, excluding accrued amounts, were estimated at $260 million to $929 million where estimable. The company had approximately $41 million of accrued litigation liabilities and $3 million of environmental remediation liabilities.
- Key risks include COVID-19 recovery uncertainty, dry hydrology and power-purchase obligations, foreign exchange and commodity volatility, LIBOR transition, regulatory and political developments in Chile and Puerto Rico, environmental and coal-combustion-residual obligations, and potential changes in tax legislation.
- Subsequent events included the sale of a 49% interest in Chile Renovables for consideration of up to $441 million, completion of the Guacolda sale for $34 million, a proposed exchange offer for registered senior notes, and an agreement to acquire operating wind assets in New York.
Most important facts for investors to verify
- Whether the large 2021 impairments accurately reflect the recoverable value and remaining useful lives of coal and renewable assets, particularly in Chile, Puerto Rico, and Mountain View.
- The sustainability of reported earnings excluding the $212 million sPower remeasurement gain, $61 million Fluence gain, Angamos termination gains, and other unusual items.
- The ability of subsidiaries to refinance or repay approximately $1.3 billion of current non-recourse debt, including the $261 million in technical default.
- The timing and value of expected asset-sale proceeds, including Chile Renovables, Guacolda, Jordan, and Mong Duong.
- Whether operating cash flow can support approximately $1 billion of semiannual capital expenditures, dividends, debt service, and renewable-growth investments.
- The potential financial exposure from litigation, environmental matters, regulatory proceedings, and the estimated $260 million to $929 million range of reasonably possible material contingencies.
- The effect of dry hydrology, foreign exchange movements, commodity prices, inflation, and future decarbonization requirements on margins and cash flows.