AES Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
AES is a diversified global power generation and utility company operating through four strategic business units: US and Utilities, South America, MCAC, and Eurasia. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, compared with the same periods in 2019. The filing was dated August 5, 2020.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.217 billion | $2.483 billion | $4.555 billion | $5.133 billion |
| Operating margin | $524 million | $502 million | $1.031 billion | $1.088 billion |
| Operating margin percentage | 23.6% | 20.2% | 22.6% | 21.2% |
| Net income attributable to AES | $(83) million | $17 million | $61 million | $171 million |
| Diluted EPS from continuing operations | $(0.13) | $0.02 | $0.09 | $0.26 |
| Adjusted EPS | $0.25 | $0.26 | $0.54 | $0.53 |
| Cash flow from operations | $447 million | $324 million | $820 million | $1.014 billion |
Q2 operating margin increased despite lower revenue, primarily due to improved South America and MCAC performance. Six-month operating margin declined 5%, mainly because of weaker US and Utilities results.
- Cash, cash equivalents and restricted cash totaled $2.107 billion at June 30, 2020, including $1.417 billion of cash and cash equivalents, $364 million of restricted cash, and $326 million of debt-service reserves and other deposits.
- Short-term investments were $422 million. Management reported total available liquidity of approximately $3.5 billion, including approximately $1.3 billion of available committed credit lines.
- Parent Company liquidity was $609 million, down from $814 million at December 31, 2019, reflecting $455 million of revolver borrowings.
- Aggregate debt principal was approximately $21.7 billion, consisting of $17.7 billion of non-recourse debt and $3.7 billion of recourse debt, with the remainder reflected in other debt classifications.
- Capital expenditures were $962 million in the first six months, compared with $1.070 billion in the prior-year period.
Material changes versus the prior comparable period
- Revenue declined 11% in both the quarter and six-month period. The decreases reflected foreign-exchange headwinds, lower demand and pass-through revenues, lower regulated rates at DP&L, reduced activity following the sale of Northern Ireland businesses, and lower market prices in several regions.
- US and Utilities operating margin fell 22% in Q2 and 34% for the six-month period. Key pressures included COVID-19-related demand reductions, lower DP&L regulated rates, milder weather, Southland unit retirements, and higher Puerto Rico ash-disposal costs.
- South America operating margin increased 13% in Q2 but decreased 4% for the six-month period. Q2 benefited from the expected recovery of previously expensed Chilean customer payments, while year-to-date results were affected by dry hydrology and the Chivor life-extension project in Colombia.
- MCAC operating margin increased 25% in Q2 and 51% year to date, primarily due to improved hydrology and availability in Panama and better performance in the Dominican Republic.
- Net loss attributable to AES in Q2 included a $158 million other-than-temporary impairment of the OPGC investment, a $30 million Kazakhstan HPP sale loss, a $37 million parent-company debt extinguishment loss, and higher income taxes. The six-month period included $201 million of OPGC impairments.
- Interest expense decreased 20% in Q2 and 16% year to date, primarily due to refinancing, lower interest rates, and incremental capitalized interest in Chile.
- Operating cash flow decreased 19% year to date, despite increasing in Q2, mainly because of lower earnings and greater working-capital requirements.
Guidance, outlook, management commentary, risks and unusual items
- The filing does not provide a clear numerical full-year GAAP or adjusted EPS guidance.
- Management expects COVID-19 effects to continue during the second half of 2020. Utilities experienced a mid-single-digit percentage demand decline in Q2, while international demand declined 4% to 15% in key markets; most international revenues remain supported by take-or-pay contracts or tolling arrangements.
- AES stated that operations continued without significant disruption and that it had made required payments, maintained dividends, and expected subsidiaries to continue remitting dividends to the Parent Company.
- The company issued $900 million of 3.30% senior secured notes due 2025 and $700 million of 3.95% notes due 2030, using proceeds to refinance or retire earlier-maturing parent debt. IPALCO and DPL also completed debt refinancing transactions.
- Technical, non-payment defaults affected $306 million of subsidiary non-recourse debt at AES Puerto Rico, AES Ilumina, and AES Jordan Solar. Management stated that these defaults did not trigger, or present a current risk of triggering, a Parent Company cross-default.
- COVID-19 may cause further demand declines, customer payment delays, lower spot prices, supply-chain and permitting delays, project delays, credit deterioration, refinancing risk, foreign-exchange volatility, and additional impairments.
- Additional exposures include Argentina’s economic and regulatory instability, Chile’s regulated-price stabilization fund, Puerto Rico’s PREPA bankruptcy, LIBOR transition, decarbonization requirements, environmental compliance, and regulatory proceedings.
- Material contingencies include estimated reasonably possible losses of $265 million to $313 million, excluding accrued amounts. Accrued litigation liabilities were approximately $31 million, and environmental liabilities were $4 million.
- Significant legal claims include large alleged damages in Dominican Republic coal-combustion-residual cases, an arbitration claim exceeding $180 million involving AES Mérida III, and Alto Maipo contractor arbitration claims. Outcomes remain uncertain.
- AES completed 1,437 MW of new projects year to date and reported a 6,191 MW renewable backlog. Management targeted coal generation below 30% by year-end 2020 and below 10% by year-end 2030, subject to announced asset sales and other conditions.
- Subsequent to quarter-end, AES acquired an additional 18.5% of AES Tietê for approximately $250 million, increasing ownership to 42.9%, and the transaction closed August 5, 2020.
Most important facts for investors to verify
- Whether COVID-19 demand, collections, spot prices, and project delays worsen during the second half of 2020.
- The resolution and cash-flow implications of the $306 million of technical subsidiary debt defaults, particularly the Puerto Rico-related defaults.
- The collectability and timing of Chilean and Argentine receivables, including the approximately $1.3 billion Mong Duong loan receivable and related credit reserves.
- Potential additional impairment of Gener’s $868 million goodwill balance and Chilean coal-related assets, which management identified as sensitive to power prices, regulation, and decarbonization.
- Completion and proceeds from announced asset sales, including OPGC, Itabo, and Jordan assets.
- The effect of DP&L rate proceedings, Chilean tariff regulation, Argentina’s regulatory environment, PREPA proceedings, and environmental matters.
- Reconciliation of Adjusted EPS and Adjusted PTC to GAAP results; adjusted measures excluded substantial impairments, disposition losses, debt-extinguishment costs, and tax effects in 2020.