AES Corporation: Q2 2013 Form 10-Q Summary
Business context and reporting period
The AES Corporation is a diversified global power generation and utility company operating across the United States, Andes, Brazil, MCAC, EMEA and Asia. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, with prior periods reclassified for discontinued operations and held-for-sale businesses.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4.068 billion | $4.089 billion | $8.333 billion | $8.675 billion |
| Gross margin | $918 million | $693 million | $1.673 billion | $1.765 billion |
| Gross margin percentage | 22.6% | 17.0% | 20.1% | 20.3% |
| Net income attributable to AES | $167 million | $140 million | $249 million | $481 million |
| Diluted EPS from continuing operations | $0.22 | $0.09 | $0.36 | $0.54 |
| Adjusted EPS | $0.32 | $0.18 | $0.58 | $0.55 |
| Net cash from operating activities | $567 million | $580 million | $1.185 billion | $1.114 billion |
At June 30, 2013, cash and cash equivalents were $1.611 billion, restricted cash was $765 million, and short-term investments were $703 million. Parent Company liquidity was $908 million, comprising $111 million of parent and qualified holding-company cash plus $797 million of available credit-facility borrowings.
Aggregate principal debt outstanding was approximately $15.4 billion of non-recourse debt and $5.7 billion of recourse debt. Current non-recourse debt was $2.9 billion, including approximately $1.7 billion classified as current because of technical covenant defaults at five subsidiaries. Parent Company recourse debt due within twelve months was approximately $118 million.
Material changes versus the prior comparable period
- Second-quarter revenue declined 1%, while gross margin increased 32%, primarily due to improved performance in Andes, Brazil and EMEA, lower costs, derivative mark-to-market effects and new capacity.
- Six-month revenue declined 4% and gross margin declined 5%, reflecting foreign-currency effects, lower EMEA results following the Cartagena disposition, and weaker Asia and U.S. generation performance.
- Second-quarter AES-attributable net income increased 19%, helped by higher gross margin, lower foreign-currency losses, lower interest expense and a 20% effective tax rate versus 37% in the prior year. The improvement was partly offset by a $165 million debt-extinguishment loss.
- Six-month AES-attributable net income fell 48%, primarily because of $212 million of debt-extinguishment losses, lower investment-sale gains, lower gross margin and losses associated with the Ukraine utility disposition.
- Interest expense decreased 10% in both the quarter and six-month period, while general and administrative expense declined 20% and 25%, respectively, due to restructuring and lower employee, professional-fee and business-development costs.
- Operating cash flow increased 6% for the six-month period despite lower net income, while capital expenditures declined to $866 million from $1.071 billion. Growth capital expenditures were $454 million and maintenance and environmental expenditures were $412 million.
- AES issued $750 million of 4.875% senior notes due 2023 and redeemed or tendered $1.050 billion of older senior notes. The transactions reduced outstanding principal by $300 million and extended $750 million of maturities to ten years.
Outlook, management commentary, risks and unusual items
Management emphasized safe and reliable operations, improved capital allocation, geographic portfolio realignment, cost reduction and lower currency, commodity and political risk. Projects under construction totaled 2,227 MW, expected to come online from 2013 through 2016. The 216 MW Kribi plant in Cameroon entered service, and construction began on the 532 MW Cochrane expansion in Chile.
No formal earnings or revenue guidance is provided in the filing. Management expects the 2013 effective tax rate to benefit from one-time factors and favorable tax developments, but expects the rate in 2014 and beyond to be higher because of anticipated changes in U.S. taxes on foreign subsidiary distributions and the expiration of an Asian tax holiday.
- DP&L was awaiting an Ohio regulatory rate-case decision. Management warned that the outcome could materially affect results and cash flow; DP&L also had approximately $470 million of debt maturities due in October 2013.
- Five subsidiaries had technical, non-payment defaults involving approximately $1.691 billion of debt. None triggered a parent-company cross-default at June 30, 2013, but future changes in subsidiary materiality could create acceleration or cross-default risk.
- Parent guarantees and commitments totaled approximately $874 million, including $640 million of guarantees and commitments, $231 million of cash-collateralized letters of credit and $3 million of letters of credit under the senior secured facility.
- Litigation reserves were approximately $320 million. Additional reasonably possible material contingencies were estimated at $883 million to $1.6 billion, excluding recorded reserves and tax contingencies.
- Key operating exposures include foreign exchange, fuel and electricity prices, hydrology in Brazil, Panama, Colombia and Chile, regulatory rate decisions, counterparty collections in Argentina and Bulgaria, and environmental compliance costs.
- Environmental and regulatory capital requirements include approximately $330 million of Chilean emissions-control investment, of which $118 million had been spent through June 30, 2013, and potential U.S. environmental expenditures at IPL.
- Unusual second-quarter items included the $165 million debt-extinguishment loss, a $46 million Beaver Valley impairment recorded in the first half, a $20 million Cartagena gain, a $57 million Uruguaiana liability extinguishment, and a $60 million Beaver Valley PPA termination payment.
- Subsequent to quarter-end, AES amended its revolving credit agreement, extending final maturity to July 2018 and reducing current pricing to LIBOR plus 2.25%; the $800 million commitment remained unchanged.
Important facts for investors to verify
- Reconcile reported and adjusted earnings, particularly the impact of debt extinguishment, derivatives, foreign currency, dispositions and impairments.
- Assess the liquidity consequences of $1.7 billion of non-recourse debt in technical default and DP&L’s pending rate case and $470 million maturity.
- Review parent-level cash availability separately from consolidated cash because most cash is held at subsidiaries and may not be distributable.
- Evaluate collection risk and regulatory changes affecting Argentina’s receivables, including $247 million of long-term financing receivables and additional noncurrent receivables.
- Monitor hydrology, commodity prices, foreign exchange and regulatory developments that could materially change margins and cash flow.
- Review the $883 million to $1.6 billion range of reasonably possible material contingencies, along with environmental and litigation exposures.
- Confirm the sustainability of dividends and share repurchases given parent liquidity, debt maturities, subsidiary distributions and covenant restrictions.