AES Corporation: Q1 2020 Form 10-Q Summary
Business context and reporting period
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 filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $2.338 billion | $2.650 billion | Down 12% |
| Operating margin | $507 million | $586 million | Down 13% |
| Net income | $229 million | $233 million | Down 2% |
| Net income attributable to AES | $144 million | $154 million | Down 6% |
| Diluted EPS | $0.22 | $0.23 | Down $0.01 |
| Adjusted EPS | $0.29 | $0.28 | Up $0.01 |
| Operating cash flow | $373 million | $690 million | Down 46% |
| Capital expenditures | $576 million | $504 million | Up 14% |
Operating margin was approximately 21.7% of revenue in Q1 2020, compared with approximately 22.1% in the prior-year quarter. Adjusted PTC, a non-GAAP measure, was $250 million versus $272 million.
At March 31, 2020, total assets were $34.142 billion and total equity was $4.717 billion. Cash and cash equivalents were $1.544 billion, restricted cash was $426 million, and short-term investments were $328 million. Cash, cash equivalents, restricted cash, and debt service reserves totaled $2.210 billion. Management reported $3.3 billion of available liquidity, including approximately $0.8 billion of committed credit availability.
Aggregate gross debt was approximately $21.4 billion, consisting of $17.1 billion of non-recourse debt and $4.0 billion of recourse debt. The Parent Company had approximately $805 million drawn under its credit facility at quarter-end and Parent Company Liquidity of $527 million.
Material changes versus the prior comparable period
- Revenue declined primarily because of the sale of Northern Ireland businesses, lower Colombian generation during the Chivor hydroelectric plant life-extension project, lower Chilean coal pass-through prices, lower regulated utility rates and demand, and foreign-exchange effects.
- US and Utilities operating margin fell $92 million, while South America declined $39 million and Eurasia declined $12 million. MCAC operating margin increased $65 million, driven by higher availability, improved hydrology, lower LNG prices, and higher spot sales.
- Net income attributable to AES decreased $10 million, reflecting lower margins in US and Utilities, South America, and Eurasia; a $43 million other-than-temporary impairment of the OPGC equity-method investment; and prior-year insurance proceeds. These factors were partly offset by MCAC improvement, a $41 million gain on the sale of Redondo Beach land, lower interest expense, foreign-currency derivative gains, and a lower effective tax rate.
- Operating cash flow decreased $317 million, primarily because of lower adjusted net income and increased working-capital requirements, including timing of customer collections and project-related deposits.
- Financing cash flow increased to $1.030 billion from $402 million, mainly because of higher revolving-credit borrowings, including precautionary liquidity draws related to COVID-19.
- Adjusted EPS increased despite lower GAAP EPS because the adjustment excludes impairment, unrealized derivative and foreign-currency effects, and other unusual items.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that COVID-19 had a limited effect on first-quarter results because material impacts began primarily in the second half of March, but expected greater effects in the second quarter and potentially throughout 2020. The filing provides no clear quantitative full-year earnings guidance.
- Utilities and contracted generation represented approximately 85% of revenue, providing relative stability; however, commercial and industrial demand had declined by mid-teen percentages in preliminary April data, with partial residential offsets. International demand declined approximately 5% to 15% in key markets, although take-or-pay and tolling contracts limited exposure in several businesses.
- Management reported adequate operations and supply-chain continuity, but identified potential delays for certain battery-storage and solar projects because of materials delays from China.
- The company completed construction of 1,409 MW of projects in Q1 2020 and reported a 5,345 MW backlog, including 1,764 MW under construction and 3,581 MW of renewables under long-term PPAs. It signed 685 MW of renewables under long-term PPAs during 2020 through the filing date.
- AES drew approximately $250 million at the Parent Company and approximately $300 million at subsidiaries as precautionary liquidity measures. Subsequent to quarter-end, IPALCO issued $475 million of 4.25% ten-year notes, with proceeds expected to repay approximately 60% of subsidiary debt maturing in 2020.
- Non-recourse debt defaults totaled approximately $315 million in the notes, including $310 million related to AES Puerto Rico and AES Ilumina and $5 million related to AES Jordan Solar. These were technical or covenant defaults rather than payment defaults. Management stated that they did not trigger a Parent Company cross-default as of March 31, 2020.
- Other unusual items included the $43 million OPGC impairment, $6 million of asset impairment expense, a $41 million Redondo Beach land-sale gain, and significant derivative-related losses recorded in other comprehensive income. The company estimated that approximately $116 million of pre-tax accumulated other comprehensive loss would be reclassified into earnings over the following 12 months, primarily from interest-rate derivatives.
- Material risks include COVID-19-related demand, collections, supply-chain and financing disruptions; foreign-exchange, commodity, interest-rate, hydrology, regulatory, environmental, and decarbonization risks; Argentina and Chile credit and regulatory exposures; Puerto Rico offtaker bankruptcy; and potential future goodwill or long-lived-asset impairments. Gener had $868 million of goodwill and was considered at risk because its fair value exceeded carrying value by only 3% at the October 2019 test.
- Reasonably possible material contingencies were estimated at $260 million to $689 million, excluding accrued liabilities. Accrued litigation liabilities were approximately $43 million, and environmental liabilities were $4 million, with additional potential environmental losses estimated at up to $13 million where estimable.
Most important facts for investors to verify
- How COVID-19 affected second-quarter demand, collections, project schedules, credit losses, and covenant compliance after the filing date.
- The refinancing or repayment status of approximately $1.7 billion of current non-recourse debt and the resolution of Puerto Rico-related technical defaults.
- Whether Gener goodwill, Chilean coal assets, OPGC, or other investments require additional impairment charges.
- The sustainability of Parent Company Liquidity of $527 million after debt maturities, construction spending, dividend payments, and potential funding for AES Gener’s proposed $500 million capital increase.
- The collectability and timing of the approximately $1.3 billion Mong Duong loan receivable and Argentina and Chile long-term receivables.
- The outcomes of significant legal and regulatory matters, including disputes in Panama, the Dominican Republic, Mexico, Chile, India, and the Alto Maipo contractor arbitration.
- Progress toward the stated coal-generation targets, renewable backlog execution, the $100 million annual digital cost-savings objective, and the planned reduction of coal generation below 30% by year-end 2020 and below 10% by year-end 2030.