AES Corporation: Q2 2014 Form 10-Q Summary
Business Context and Reporting Period
The AES Corporation is a diversified global power generation and utility company operating through six strategic business units: US, Andes, Brazil, MCAC, EMEA, and Asia. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with prior periods reclassified for discontinued operations and held-for-sale businesses.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Revenue | $4.311 billion | $3.945 billion | +9% |
| Operating margin | $819 million | $901 million | -9% |
| Income from continuing operations | $281 million | $333 million | -16% |
| Net income attributable to AES | $133 million | $167 million | -20% |
| Diluted EPS from continuing operations | $0.20 | $0.22 | -9% |
| Adjusted EPS | $0.28 | $0.35 | -20% |
| Operating cash flow | $232 million | $567 million | -59% |
| Dividend declared per share | $0.05 | $0.08 | -38% |
| Metric | Six Months 2014 | Six Months 2013 | Change |
|---|---|---|---|
| Revenue | $8.573 billion | $8.095 billion | +6% |
| Operating margin | $1.613 billion | $1.650 billion | -2% |
| Income from continuing operations | $370 million | $564 million | -34% |
| Net income attributable to AES | $75 million | $249 million | -70% |
| Diluted EPS from continuing operations | $0.13 | $0.37 | -65% |
| Adjusted EPS | $0.53 | $0.62 | -15% |
| Operating cash flow | $453 million | $1.185 billion | -62% |
At June 30, 2014, total assets were $39.433 billion and total equity was $7.508 billion. Cash and cash equivalents were $1.515 billion, restricted cash was $482 million, and short-term investments were $424 million. Aggregate debt consisted of approximately $15.9 billion of non-recourse debt and $5.8 billion of recourse debt.
Parent Company liquidity was $694 million, comprising $15 million of parent and qualified holding-company cash and $679 million of available borrowings under parent credit facilities. Parent-level liquidity declined from $931 million at December 31, 2013.
Six-month capital expenditures were $908 million, including $536 million of growth expenditures and $372 million of maintenance and environmental expenditures. Consolidated free cash flow was $128 million, compared with $778 million in the prior-year period; proportional free cash flow was $176 million versus $526 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased, primarily due to higher rates and volumes in Brazil, higher US retail rates, and growth in EMEA and Asia, partly offset by foreign-exchange effects and lower Andes and MCAC revenue.
- Operating margin declined despite higher revenue. Q2 weakness reflected lower margins in Brazil, Asia, EMEA, and the US, including outages, lower hydrology, higher purchased-power costs, and lower plant availability.
- Six-month earnings were materially reduced by a $136 million DPLER goodwill impairment, an $18 million Buffalo Gap goodwill impairment, and $75 million of asset impairments.
- Q2 included $63 million of asset impairments, principally $52 million at Ebute in Nigeria and $11 million at the Newfield wind project in the United Kingdom. AES also recorded a $44 million other-than-temporary impairment of its Silver Ridge Power investment.
- Losses on extinguishment of debt declined to $15 million in Q2 and $149 million for the six months, compared with $165 million and $212 million, respectively, in the prior-year periods.
- Operating cash flow declined largely because of working-capital usage, including increases in accounts receivable and other assets and reductions in accounts payable and tax payables. Brazil, MCAC, and the US were the principal contributors to the decline.
- In February and March 2014, AES refinanced or redeemed portions of its recourse debt. It issued $750 million of 5.50% senior notes due 2024 and $775 million of floating-rate notes due 2019 while retiring or repurchasing existing obligations.
- AES completed or announced portfolio transactions, including the Cameroon sale, the sale of its Silver Ridge Power interest, and the sale of approximately 45% of its Masinloc interest. The Silver Ridge sale closed July 2, and the Masinloc transaction closed July 15, 2014.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a formal quantitative earnings or revenue guidance range. Management stated that it is focused on operational reliability, capital efficiency, disciplined growth, portfolio realignment, debt management, dividends and share repurchases, and reducing currency, commodity, and political risk.
- Generation declined 3% in the first six months, driven by dry hydrological conditions in Brazil and Panama and higher unplanned outages in Ohio and the Philippines. Management expected some dry conditions to continue during the remainder of 2014.
- Hydrology remained a material risk. Lower generation could require costly spot-market power purchases, particularly in Brazil and Panama, and could affect contractual obligations, earnings, and cash flow.
- Masinloc faced a $15 million unfavorable retrospective market-price adjustment related to the Philippines spot market. The filing stated that permanent price-cap measures could have a material impact.
- Argentina presented risks from inflation, currency devaluation, restricted foreign-exchange access, government receivable collections, and regulatory changes. Long-term receivables from Argentine government entities totaled approximately $243 million, excluding certain related amounts and embedded derivatives.
- Maritza and Kavarna in Bulgaria had approximately $1.010 billion of non-recourse debt in covenant default. These were not payment defaults, and management stated that they did not trigger a parent-company cross-default as of June 30, 2014. Continued collection problems at Bulgarian offtaker NEK could nevertheless impair earnings, cash flow, asset values, or liquidity.
- Puerto Rico faced counterparty and liquidity risks related to PREPA. AES Puerto Rico had $95 million of receivables outstanding at June 30, including $27 million overdue; the overdue amount was subsequently collected.
- Aggregate accrued litigation liabilities were approximately $238 million. Management estimated reasonably possible losses from material contingencies, excluding accrued amounts, at approximately $1.2 billion to $1.8 billion where estimable.
- Notable legal and regulatory exposures included Brazilian tax and tariff matters, the Eletrobrás financing dispute, the Maritza EPC arbitration, environmental proceedings, Dominican Republic claims, and potential US environmental compliance costs.
- US environmental rules concerning greenhouse gases, mercury, cooling-water intake structures, wastewater, and interstate air emissions could require material capital expenditures or operating changes, although the ultimate impacts were not yet determinable.
- The company had $1.0 billion of non-recourse debt classified as current because of covenant defaults and $1.1 billion due within twelve months. Management expected repayment through subsidiary operating cash flow, refinancing, or both.
- Parent-company guarantees, indemnities, and other credit-support commitments totaled approximately $620 million, excluding certain collateralized obligations. Total contingent contractual obligations reported in Note 9 were $723 million.
Most Important Facts for Investors to Verify
- Whether operating cash flow and proportional free cash flow recover after the significant first-half working-capital outflow.
- The resolution and liquidity effects of the Maritza and Kavarna covenant defaults, including any potential cross-default or refinancing requirements.
- Collections and regulatory developments involving Argentine, Bulgarian, and Puerto Rican counterparties.
- The financial impact of the Silver Ridge, Masinloc, Cameroon, and other portfolio transactions in subsequent quarters.
- Potential additional impairment at DP&L, Buffalo Gap, or other reporting units, given management’s continuing “at risk” monitoring.
- The outcome and cash exposure of material litigation, tax disputes, environmental proceedings, and the estimated $1.2 billion to $1.8 billion range of reasonably possible contingency losses.
- Future effects of dry hydrology, plant outages, commodity prices, foreign exchange movements, and regulatory price caps on margins and cash flow.
- Whether parent-company liquidity remains sufficient to support debt service, dividends, share repurchases, guarantees, and subsidiary funding needs.