AES

AES Corp. 10-Q Summary: Period Ended June 30, 1999

Business Context and Reporting Period

This is an unaudited quarterly report (Form 10-Q) for The AES Corporation, a global power company engaged in electricity generation and distribution. The report covers the three and six-month periods ended June 30, 1999. The company operates through subsidiaries and affiliates worldwide, utilizing both "greenfield" construction and acquisitions to expand its portfolio.

Key Financial Metrics

Note: Total Debt calculated as sum of "Other notes payable - current portion," "Project financing debt - current portion," "Project financing debt," and "Other notes payable."

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 13% for the quarter and 12% for the six-month period compared to 1998, driven by new acquisitions (including plants in Australia, Panama, and New York) and the completion of greenfield projects.
• Profitability Decline: While Operating Income increased 32% year-over-year for the six months, Net Income dropped 57% to $58 million. This decline is primarily attributed to significant non-cash foreign currency transaction losses.
• Foreign Currency Impact: The devaluation of the Brazilian Real resulted in $144 million in foreign currency transaction losses for the six months ended June 30, 1999. Excluding these losses, Net Income would have been $158 million, representing a 15% increase over the prior year.
• Equity Earnings: Equity in earnings of affiliates swung from a $100 million gain in the prior year to a $54 million loss, largely due to the Brazilian currency devaluation.
• Balance Sheet: Total assets increased to $11.2 billion. Stockholders' equity decreased to $1.5 billion, heavily impacted by a $1.195 billion cumulative foreign currency translation adjustment loss recorded in accumulated other comprehensive loss.

Guidance, Outlook, and Risks

• Acquisitions and Financing: The company continues to pursue acquisitions and greenfield projects. Recent financings include a $308.5 million bond for a Pennsylvania plant and a $448 million financing for an Argentina plant. The company maintains a $600 million revolving credit facility and a $2.5 billion universal shelf registration for future issuances.
• Year 2000 Readiness: Approximately 85-90% of businesses have completed Year 2000 readiness programs. The company expects to spend a total of $12-13 million to achieve full readiness, with contingency plans in place for potential supply chain disruptions.
• Legal Proceedings: The EPA issued a Notice of Violation regarding the Beaver Valley plant in Pennsylvania concerning Clean Air Act compliance. Management believes it has meritorious defenses and does not expect a material adverse effect.
• Market Risks: The company faces risks related to foreign currency devaluation, particularly in Brazil, and the complexities of constructing new power plants. Management notes that results for the period ended June 30, 1999, are not necessarily indicative of full-year results.

Investor Verification Checklist

• Foreign Currency Exposure: Verify the extent of unhedged exposure in Brazil and other emerging markets, given the $144 million non-cash loss recorded.
• Debt Service Coverage: Assess the ability to service the increased debt load (Total debt approx. $5.3 billion) given the rise in interest expense to $276 million for the six-month period.
• Acquisition Integration: Review the performance of recent acquisitions (Australia, Panama, New York) to ensure they are delivering the projected revenue and margin improvements.
• Year 2000 Contingency: Confirm the status of the remaining 10-15% of businesses not yet fully Year 2000 ready and the robustness of contingency plans for third-party supplier failures.
• Regulatory Compliance: Monitor the resolution of the EPA Notice of Violation at the Beaver Valley plant for potential future penalties or operational restrictions.