AES Corporation 2017 Q2 Form 10-Q Summary
Business context and reporting period
AES is a diversified power generation and utility company operating through six geographic strategic business units: US, Andes, Brazil, MCAC, Europe and Asia. The unaudited filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $3.470 billion | $3.229 billion | $6.962 billion | $6.500 billion |
| Operating margin | $670 million | $574 million | $1.263 billion | $1.083 billion |
| Net income attributable to AES | $53 million | $(482) million | $29 million | $(356) million |
| EPS from continuing operations | $0.08 | $(0.16) | $0.04 | $0.05 |
| Adjusted EPS | $0.25 | $0.17 | $0.42 | $0.32 |
| Cash flow from operations | $251 million | $723 million | $954 million | $1.363 billion |
| Free cash flow | $106 million | $554 million | $652 million | $1.044 billion |
Revenue increased 7% in both the quarter and year-to-date period. Operating margin increased 17% in both periods, reflecting higher availability and margins in MCAC, Andes, Europe and Brazil. Approximate consolidated operating margin was 19.3% in Q2 2017 versus 17.8% in Q2 2016, and 18.1% year to date versus 16.7%.
Cash and cash equivalents were $1.213 billion at June 30, 2017, supplemented by $740 million of short-term investments and $891 million of restricted cash and debt service reserves. Parent Company liquidity was $1.220 billion, consisting of $127 million of parent and qualified holding-company cash and $1.093 billion of available borrowings.
Aggregate debt was approximately $20.8 billion, including $4.4 billion of recourse debt and $16.4 billion of non-recourse debt. Current non-recourse debt was $2.6 billion, including $994 million associated with subsidiary covenant defaults. Parent-level debt covenants were in compliance at June 30, 2017.
Material changes versus the prior comparable period
- Net income attributable to AES improved from a loss of $482 million to income of $53 million in Q2, primarily because 2016 included substantial discontinued-operations and DPL impairments.
- Year-to-date net income attributable to AES improved to $29 million from a loss of $356 million. The improvement included higher operating margins, a $60 million YPF legal settlement, and lower impairment expense, partly offset by Kazakhstan-related losses and DPL impairments.
- Q2 asset impairment expense declined to $90 million from $235 million; six-month expense declined to $258 million from $394 million. The 2017 charges primarily related to Kazakhstan hydroelectric assets, while 2016 included major DPL and Buffalo Gap II charges.
- Operating cash flow declined 65% in Q2 and 30% year to date. Management attributed the decline largely to prior-year collections of overdue Maritza receivables, prior-year recovery of Eletropaulo regulatory assets and the absence of Sul's cash flow following its 2016 sale.
- Capital expenditures were $1.123 billion year to date, including $799 million for growth investments, $286 million for maintenance and $38 million for environmental projects.
- AES completed a $2.0 billion non-recourse financing for the Southland repowering project and issued $525 million of parent secured term debt, using proceeds to redeem $517 million of convertible securities.
Outlook, management commentary and unusual items
- Management reported 4,759 MW under construction, representing approximately $9.0 billion of total capital expenditures and $1.6 billion of AES equity funded, with projects expected to come online through 2021.
- The company expects to achieve approximately $400 million of cumulative savings through 2020 from overhead reductions, procurement efficiencies and operational improvements.
- AES continued its strategy of reducing complexity, including announced sales or shutdowns involving 3,737 MW of merchant coal-fired generation in Ohio and Kazakhstan.
- Management reported no formal GAAP earnings guidance in the provided filing. The filing states that 2017 results are not necessarily indicative of full-year results.
- Alto Maipo continues to face construction delays, cost overruns and contractor problems. Its $613 million of construction debt and $139 million of derivative liabilities were in technical default and classified as current. AES had approximately $360 million invested and an additional $55 million equity commitment; management warned of potential material impairment if restructuring and construction efforts fail.
- Puerto Rico's PREPA filed for Title III bankruptcy after its restructuring agreement was rejected. AES Puerto Rico had $381 million of non-recourse debt in default and classified as current, and $103 million of receivables, including $46 million overdue at June 30. PREPA may seek to reject contracts, including AES's power purchase agreement.
- Other material risks include political and regulatory uncertainty in Brazil, pending DPL rate-case approval, possible US solar-panel tariffs, commodity and foreign-exchange volatility, environmental compliance costs, and numerous litigation and tax matters.
- Recorded litigation liabilities were approximately $173 million. Reasonably possible material contingency losses, excluding accrued amounts and uncertain tax positions, were estimated at $1.5 billion to $1.8 billion where estimable. Parent-level guarantees and commitments totaled approximately $1.081 billion.
- Subsequent events included completion of the sPower acquisition on July 25, 2017, formation of the Fluence energy-storage joint venture with Siemens, and completion of the Alto Sertao II acquisition on August 3, 2017.
Most important facts for investors to verify
- Whether Alto Maipo secures a permanent replacement contractor, resolves lender defaults and contains further cost overruns.
- The effect of PREPA's bankruptcy, potential PPA rejection and the recoverability of AES Puerto Rico assets and receivables.
- Parent Company liquidity, subsidiary cash distributions and the risk that non-recourse defaults could trigger restrictions, guarantees or cross-defaults.
- Whether operating cash flow can recover after unusually favorable 2016 collections and whether planned growth capital expenditures remain financeable.
- The final outcome of the DPL rate case, asset-sale and shutdown plans, and related regulatory restrictions.
- Potential additional impairments in Kazakhstan, DPL, Alto Maipo or other assets as power prices, regulations, construction conditions and foreign exchange change.
- Exposure to the estimated $1.5 billion to $1.8 billion range of reasonably possible material contingencies and the major Eletrobrás, tax, environmental and Panama proceedings.
- The effects of pending accounting standards, particularly revenue recognition and leases, which the company was still evaluating.