AES Corporation — Form 10-Q Summary
Business context and reporting period
The 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 and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $2.625 billion | $2.837 billion | $7.758 billion | $8.114 billion |
| Operating margin | $701 million | $671 million | $1.789 billion | $1.927 billion |
| Income from continuing operations attributable to AES | $210 million | $102 million | $380 million | $883 million |
| Net income attributable to AES | $210 million | $101 million | $381 million | $1.075 billion |
| Diluted EPS from continuing operations | $0.32 | $0.15 | $0.57 | $1.33 |
| Adjusted EPS | $0.48 | $0.35 | $1.02 | $0.88 |
| Operating cash flow | Not separately reported | Not separately reported | $1.775 billion | $1.681 billion |
Q3 operating margin was approximately 26.7% of revenue versus approximately 23.7% in the prior-year quarter. Nine-month operating margin was approximately 23.1% versus approximately 23.7% in 2018. Adjusted PTC increased to $426 million in Q3 from $327 million and to $938 million for nine months from $870 million.
At September 30, 2019, AES had $1.145 billion of cash and cash equivalents, $334 million of short-term investments, and $696 million of restricted cash and debt service reserves. Aggregate principal debt was approximately $19.8 billion, consisting of $3.6 billion of recourse debt and $16.2 billion of non-recourse debt. Parent Company liquidity was $751 million, including $28 million of cash and $723 million of available borrowing capacity.
Capital expenditures were $1.628 billion for the first nine months, compared with $1.592 billion in 2018. Net cash used in investing activities was $1.711 billion, while financing activities used $133 million. Cash, cash equivalents, and restricted cash declined to $1.841 billion from $2.003 billion at December 31, 2018.
Material changes versus the prior comparable period
- Q3 revenue declined 7%, principally from lower prices and generation in US and Utilities and South America, unfavorable foreign exchange, and dispositions in Eurasia. Nine-month revenue declined 4%.
- Q3 net income attributable to AES more than doubled, primarily due to higher US and Utilities and MCAC margins, insurance recoveries, the absence of the prior-year Shady Point impairment, and favorable disposal-related comparisons.
- Nine-month net income attributable to AES fell 65%, primarily because 2018 included large gains from the Masinloc, Eletropaulo, and Electrica Santiago transactions. The 2019 period also included the $115 million Kilroot and Ballylumford impairment and $116 million of total impairment expense.
- Adjusted EPS rose despite lower GAAP EPS for the nine-month period, reflecting the exclusion of prior-year disposal gains and current-year foreign exchange, impairment, and debt-extinguishment effects.
- Operating cash flow increased 6% to $1.775 billion. The improvement was more than offset by higher investing cash uses and lower proceeds from business sales.
- AES prepaid $443 million of recourse debt in September 2019. Subsidiaries issued $3.580 billion and repaid $2.978 billion of non-recourse debt during the first nine months.
Guidance, outlook, commentary, risks, and unusual items
- Management continued to target a 50% reduction in carbon intensity by 2022 and a 70% reduction by 2030, both from a 2016 baseline, and expects coal generation to fall below 30% of total generation by 2022.
- AES signed 921 MW of renewable PPAs in Q3, bringing year-to-date additions to 1.9 GW and the backlog to 6.1 GW. Approximately 3,030 MW was under construction and expected to enter service through 2021.
- The company completed 1,625 MW of projects during Q3, received approval to develop the 2.2 GW Son My 2 CCGT project in Vietnam, and reported that Fluence had delivered or been awarded more than 1.5 GW of energy-storage capacity.
- Q3 results benefited from $73 million of insurance recovery income, while Argentina generated $87 million of foreign-currency transaction losses. Nine-month other income included $108 million of insurance recoveries.
- Changuinola’s 223 MW hydro facility experienced a tunnel leak; approximately one-third of the tunnel was being upgraded, with completion expected in early 2020. AES had capitalized $49 million of upgrade costs and written off $12 million.
- Non-recourse debt defaults totaled approximately $341 million, including AES Puerto Rico, AES Ilumina, and AES Jordan Solar. These were covenant or technical defaults rather than payment defaults, and management stated that no parent-level cross-default was triggered as of September 30, 2019.
- Key risks include Puerto Rico PREPA bankruptcy and related receivable and debt exposure, Argentina’s currency devaluation and political uncertainty, Chilean protests and decarbonization initiatives, commodity and power-price volatility, foreign exchange and interest-rate risk, environmental compliance, and potential impairments.
- Parent Company guarantees and commitments totaled approximately $1.059 billion, including $382 million of letters of credit under the unsecured facility and $32 million under the senior secured facility. Reasonably possible material contingency losses were estimated at $49 million to $456 million, excluding accrued amounts.
- The filing does not provide a specific consolidated earnings or revenue guidance range. Management stated that liquidity was expected to be adequate for the foreseeable future, subject to capital-market access, subsidiary performance, currency rates, power prices, and subsidiary distributions.
Most important facts for investors to verify
- Whether Puerto Rico and other subsidiary covenant defaults remain isolated and do not trigger parent-level cross-defaults or restrict distributions.
- The collectability and timing of the approximately $1.4 billion Mong Duong loan receivable and Argentine government-related receivables.
- Progress, final costs, insurance recoveries, and potential contractor recoveries related to the Changuinola tunnel upgrade.
- The outcome of regulatory, environmental, litigation, and arbitration matters, including the Alto Maipo and Dominican Republic CCR claims.
- The effect of Argentina’s currency and regulatory conditions and Chile’s decarbonization plan on generation, tariffs, asset recoverability, and cash distributions.
- Whether the company’s renewable and energy-storage development pipeline can offset declining generation, dispositions, and pressure on conventional power margins.
- Future impairment risk for Gener goodwill and coal-fired assets, and the sustainability of adjusted earnings after excluding foreign exchange, insurance, debt-refinancing, disposal, and impairment items.