AES Corporation 10-Q Summary: Q1 2018
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 unaudited report covers the three months ended March 31, 2018, with comparison to the three months ended March 31, 2017. During the quarter, AES reorganized certain reporting segments and adopted ASC 606 revenue recognition using the modified retrospective method.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $2.740 billion | $2.581 billion | Up 6% |
| Operating margin | $656 million | $557 million | Up 18% |
| Operating margin as percentage of revenue | 24.0% | 21.6% | Up approximately 240 bps |
| Income from continuing operations | $778 million | $97 million | Up $681 million |
| Net income attributable to AES | $684 million | $(24) million | Improved $708 million |
| Diluted EPS from continuing operations | $1.03 | $(0.04) | Improved $1.07 |
| Adjusted EPS | $0.28 | $0.17 | Up 65% |
| Cash flow from operating activities | $515 million | $708 million | Down $193 million |
| Capital expenditures | $495 million | $474 million | Up $21 million |
| Cash, cash equivalents and restricted cash | $2.168 billion | $2.248 billion | Comparable period cash-flow balance |
| Dividends declared per common share | $0.13 | $0.12 | Up 8% |
Revenue growth reflected higher South American tariffs and Chilean contract prices, higher contracted energy sales in MCAC, favorable foreign exchange effects, and higher fuel pass-through revenues. Operating margin improved primarily due to higher regulated rates, lower maintenance costs, improved availability, and better hydrology. The Eurasia operating margin declined because of asset sales, expired Kazakhstan concessions, lower Philippine availability, and unfavorable commodity derivative valuation.
Debt, Liquidity and Balance Sheet
- Total assets were $32.573 billion at March 31, 2018, compared with $33.112 billion at December 31, 2017.
- Recourse debt was approximately $4.1 billion and non-recourse debt was approximately $15.6 billion. Total debt was approximately $19.7 billion.
- Parent Company liquidity was $883 million, consisting of $76 million of parent and qualified holding-company cash and $807 million of available borrowings under parent credit facilities.
- Unrestricted cash and cash equivalents were $1.2 billion; short-term investments were $617 million; restricted cash and debt-service reserves totaled $956 million.
- AES issued $1.0 billion of senior notes and used proceeds to refinance higher-cost debt. It repurchased approximately $700 million of notes due 2024 and 2025 and retired additional notes due 2020 and 2021.
- Financing activities used $630 million of cash, primarily reflecting recourse debt repayments, partially offset by new debt issuance.
Material Changes Versus the Prior Comparable Period
- Net income attributable to AES improved from a $24 million loss to $684 million of income, primarily due to the sale of Masinloc, the absence of prior-year impairments, and improved operating margins.
- AES completed the sale of its 51% interest in Masinloc in the Philippines for cash proceeds of approximately $1.05 billion, recognizing a pretax gain of approximately $777 million and U.S. tax expense of approximately $155 million.
- AES sold the DPL peaker assets for approximately $239 million and transferred the retired Beckjord facility, recognizing a $12 million disposal loss.
- Operating cash flow declined because of higher working-capital requirements, including timing of collections and the deconsolidation of Eletropaulo.
- Adjusted PTC increased to $288 million from $190 million, reflecting improved underlying performance despite the exclusion of the Masinloc gain and debt-refinancing losses.
- ASC 606 primarily affected the Mong Duong II project in Vietnam, replacing a service concession asset with a loan receivable of approximately $1.5 billion and increasing first-quarter net income by approximately $9 million versus the former accounting method.
- No asset impairment expense was recorded in Q1 2018, compared with $168 million in Q1 2017.
Guidance, Outlook, Commentary and Risks
- No formal quantitative full-year earnings guidance is provided in the filing. Management expects improved operating performance, growth from new businesses, and global cost-reduction initiatives to help offset operating and market challenges.
- AES announced a $100 million cost-savings program and continued portfolio transformation, including renewable development, energy storage through Fluence, and approximately 3.8 GW of projects under construction expected to come online through 2020.
- Alto Maipo remains a significant risk. Its construction debt of $629 million was in technical default, the project was more than 64% complete, and a May 2018 restructuring contemplated up to $400 million of additional AES Gener funding. Failure to complete restructuring conditions or construction milestones could result in material impairment.
- Non-recourse debt defaults totaling $998 million related to Alto Maipo, AES Puerto Rico, and AES Ilumina. These were covenant or other technical defaults rather than payment defaults, and management stated they did not trigger a parent-company cross-default as of March 31, 2018.
- Puerto Rico exposure remains subject to PREPA’s bankruptcy and post-hurricane recovery. AES reported $81 million of Puerto Rico receivables, of which $3 million was overdue, and believed the related assets were recoverable.
- Maritza’s power purchase agreement remains under review by the European Commission’s competition authorities; an unfavorable resolution could materially affect the business.
- Material reasonably possible litigation and other contingency losses were estimated at $139 million to $172 million, excluding approximately $51 million of accrued claims. Parent-company guarantees, commitments and letters of credit totaled approximately $910 million of maximum exposure.
- The company remains exposed to commodity prices, foreign exchange, interest rates, regulatory changes, environmental obligations, power availability, and political and economic conditions in its operating countries.
Important Facts for Investors to Verify
- Whether the Masinloc proceeds, tax expense, and gain are properly treated as nonrecurring when assessing normalized earnings and cash generation.
- The status and final terms of the Alto Maipo restructuring, additional funding requirements, construction progress, and potential impairment exposure.
- The resolution of technical debt defaults at Alto Maipo, AES Puerto Rico, and AES Ilumina and any possible effect on parent-company distributions or cross-default provisions.
- The collectability and timing of Argentine receivables and the approximately $1.5 billion Vietnam loan receivable recognized under ASC 606.
- The sustainability of higher operating margins and the extent to which improvements came from recurring tariffs, contract pricing, availability, maintenance savings, or one-time effects.
- The impact of foreign exchange, commodity prices, interest rates, environmental matters, regulatory proceedings, and outstanding litigation on future cash flows.