AES Corporation: Q1 2019 Form 10-Q Summary
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 filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $2.650 billion | $2.740 billion | Down 3% |
| Operating margin | $586 million | $656 million | Down 11% |
| Income from continuing operations | $233 million | $778 million | Down 70% |
| Net income attributable to AES | $154 million | $684 million | Down 77% |
| Diluted EPS | $0.23 | $1.03 | Down $0.80 |
| Adjusted EPS | $0.28 | $0.28 | Flat |
| Adjusted PTC | $272 million | $288 million | Down 6% |
| Cash flow from operations | $690 million | $515 million | Up 34% |
| Capital expenditures | $504 million | $495 million | Up $9 million |
Regulated revenue increased to $785 million from $722 million, while non-regulated revenue declined to $1.865 billion from $2.018 billion. The effective tax rate was 32% versus 23% in the prior-year quarter.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1.426 billion at March 31, 2019, compared with $1.166 billion at December 31, 2018.
- Total cash, cash equivalents, restricted cash and debt-service reserves were $2.375 billion, up from $2.003 billion at year-end.
- Short-term investments were $378 million.
- Aggregate gross debt was approximately $20.1 billion, consisting of approximately $15.8 billion of non-recourse debt and $3.9 billion of recourse debt.
- Current non-recourse debt was approximately $1.3 billion, including $345 million classified as current because of covenant defaults at AES Puerto Rico and AES Ilumina. These were not payment defaults.
- Parent Company liquidity was $809 million, consisting of $34 million of parent and qualified holding-company cash and $775 million of available borrowing capacity. This declined from $1.046 billion at December 31, 2018, primarily because of $245 million borrowed under the parent credit facility.
- The Company stated that it was in compliance with Parent Company debt covenants as of March 31, 2019.
Material Changes Versus the Prior Comparable Period
- Net income and reported EPS fell sharply because Q1 2018 included a $777 million pretax gain from the sale of the Masinloc business in the Philippines. Q1 2018 also included $169 million of parent-company debt extinguishment losses, compared with $10 million in Q1 2019.
- Operating margin declined primarily because of lower generation in Argentina, the sale of assets in South America and Eurasia, lower availability and hydrology in Panama, and the 2018 sale of Masinloc.
- US and Utilities operating margin increased $21 million to $212 million, supported by higher IPL rates and a $23 million reduction in DPL asset retirement obligations.
- South America operating margin declined $39 million to $216 million, driven by lower Argentine generation, foreign-exchange effects and asset sales.
- MCAC operating margin declined $28 million to $75 million, primarily because of the Changuinola tunnel inspection outage and lower Panama hydrology, partly offset by the Colon facility entering operation.
- Eurasia operating margin declined $26 million to $63 million, primarily due to the Masinloc sale, a Kilroot outage and closure of the Ballylumford B station.
- Operating cash flow increased $175 million, reflecting improved working-capital timing, higher insurance collections and lower payments to suppliers, despite lower reported net income.
- Investing cash flow was a $663 million use versus $416 million provided in Q1 2018, largely because the prior-year period included $1.180 billion of proceeds from business-interest sales.
- Financing cash flow was $402 million provided versus $630 million used in Q1 2018, reflecting higher net borrowings and lower parent-company debt repayments.
Guidance, Outlook, Commentary and Unusual Items
- Management reported that it remained on track to attain investment-grade ratings by 2020.
- AES completed 21 MW of new projects, signed long-term contracts for 494 MW of renewable capacity and increased its backlog to 6.2 GW.
- The Company signed a 12-year agreement to sell up to 18 TBTU of LNG annually in the Caribbean beginning in 2020.
- AES agreed to sell businesses in Jordan and the United Kingdom for approximately $211 million; the transactions were expected to close later in 2019.
- In April 2019, AES agreed to acquire the Alto Sertão III wind complex and related Brazilian development projects for approximately $130 million, while assuming approximately $250 million of non-recourse debt.
- AES expected a combined loss on sale and impairment of approximately $200 million in 2019 from the planned sale of its Kilroot and Ballylumford businesses.
- The Andres facility in the Dominican Republic continued operating below full capacity after 2018 lightning damage. Management expected partial-load improvements in Q2 2019 and combined-cycle operation at full capacity by Q4 2019.
- Changuinola, a 223 MW Panama hydroelectric facility, had units taken out of service for tunnel inspection and replacement work that could take up to 10 months. AES notified insurers and asserted claims against its construction contractor, but recovery is uncertain.
- DP&L proposed returning $65 million of excess accumulated deferred income taxes to eligible customers; the timing and final amount remained unknown.
- Argentina implemented a revised generator remuneration scheme that reduced thermal energy prices by $1.60 per MWh compared with the prior framework.
- Contingent contractual obligations totaled $1.108 billion, including guarantees, commitments and letters of credit.
- Accrued litigation liabilities were approximately $55 million. Reasonably possible material contingencies, excluding accrued amounts and tax contingencies, were estimated at $79 million to $439 million where estimable.
- Management identified foreign-exchange, commodity-price, interest-rate, regulatory, environmental, political and macroeconomic risks. A 100-basis-point increase in selected interest rates was estimated to increase 2019 pretax interest expense by approximately $15 million.
Important Facts for Investors to Verify
- Whether the Puerto Rico covenant defaults remain non-payment defaults and whether PREPA-related risks or Puerto Rico’s coal-elimination policy affect asset recoverability or future cash distributions.
- The timing, cost and insurance or contractor recoveries associated with the Changuinola tunnel outage and the Andres facility repair.
- Completion and proceeds from the Jordan, United Kingdom and sPower transactions, and the expected approximately $200 million 2019 loss related to Kilroot and Ballylumford.
- Parent Company liquidity, revolver repayment expectations and access to refinancing or capital markets.
- Potential outcomes of litigation and regulatory matters, including the Dominican Republic CCR lawsuits, Panama land claims, Alto Maipo arbitrations and Puerto Rico environmental proceedings.
- The sustainability of operating cash flow and the ability to fund capital expenditures, debt maturities, dividends and subsidiary support without increasing leverage.
- The effect of foreign-exchange movements, Argentine remuneration changes, hydrology, plant availability and commodity prices on full-year operating performance.