AES Corporation 2018 Form 10-K Summary
Business context and reporting period
The filing is an audited Form 10-K for the fiscal year ended December 31, 2018, filed February 26, 2019. AES is a geographically diversified power generation and utility company operating through four strategic business units: US and Utilities, South America, MCAC, and Eurasia. Its portfolio includes approximately 31,792 MW of generation capacity and utilities serving approximately 2.4 million people. AES is shifting growth toward wind, solar, energy storage, and natural gas while reducing coal exposure.
During 2018, AES signed long-term power purchase agreements for approximately 2 GW of capacity, completed construction of approximately 1.3 GW of projects, and reported a development backlog of 5,787 MW, including 3,841 MW under construction and 1,946 MW of renewable capacity under signed long-term PPAs.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $10.736 billion | $10.530 billion | Up 2% |
| Operating margin | $2.573 billion | $2.465 billion | Up 4% |
| Income from continuing operations | $1.349 billion | $(148) million | Improved materially |
| Income from continuing operations attributable to AES | $985 million | $(507) million | Improved materially |
| Net income attributable to AES | $1.203 billion | $(1.161) billion | Improved materially |
| Diluted EPS from continuing operations | $1.48 | $(0.77) | Improved materially |
| Adjusted EPS | $1.24 | $1.08 | Up 15% |
| Net cash from operating activities | $2.343 billion | $2.504 billion | Down 6% |
| Capital expenditures | $2.121 billion | $2.177 billion | Down 3% |
Operating margin was 24.0% of revenue, compared with 23.4% in 2017. Adjusted PTC, AES's non-GAAP segment performance measure, increased to $1.185 billion from $1.017 billion. Adjusted PTC improved in US and Utilities, South America, and MCAC, but declined in Eurasia following asset sales.
Revenue increased in South America, MCAC, and US and Utilities, driven by higher tariffs and contract prices, new PPAs, improved hydrology, and the commencement of operations at the Colon facility in Panama and Eagle Valley in the United States. Eurasia revenue declined primarily because of the sale of Masinloc and the 2017 sale or expiration of Kazakhstan assets.
Cash, cash equivalents, and restricted cash increased to $2.003 billion at year-end from $1.788 billion. Unrestricted cash and cash equivalents were $1.2 billion, while Parent Company liquidity was $1.046 billion, including $24 million of Parent and qualified holding-company cash and $1.022 billion of available Parent Company credit facilities.
Debt, liquidity, and balance sheet
- Total gross debt was approximately $19.7 billion, consisting of approximately $15.6 billion of non-recourse debt and $3.7 billion of recourse debt.
- Parent recourse debt declined by approximately $1 billion, or 22%, to approximately $3.7 billion.
- Parent leverage reached 3.95 times in December 2018, which management identified as an investment-grade financial milestone.
- Approximately $1.7 billion of non-recourse debt was classified as current. This included $351 million associated with covenant defaults at AES Puerto Rico and AES Ilumina and $483 million at Colon related to a technical covenant issue. The disclosed defaults were not payment defaults.
- Parent Company debt agreements include restrictions on additional debt, asset sales, dividends, share repurchases, guarantees, and other transactions. AES stated that it was in compliance with Parent-level covenants at December 31, 2018.
- Parent contingent contractual obligations totaled approximately $1.158 billion, including guarantees and commitments of $685 million and letters of credit of $446 million.
Material changes versus the prior comparable period
- GAAP earnings improved substantially, largely because 2018 included significant disposal gains and 2017 included major impairments, the Eletropaulo deconsolidation loss, and U.S. tax reform charges.
- AES recorded $984 million of gains on disposals and business interests in 2018, including a $772 million gain on the sale of Masinloc, compared with a $52 million loss in 2017.
- Asset impairment expense declined to $208 million from $537 million. The principal 2018 charges were $157 million for Shady Point and $37 million for Nejapa.
- Interest expense declined 10% to $1.056 billion, primarily because of lower Parent debt, favorable interest-rate effects in Chile, and increased capitalized interest at Alto Maipo.
- Operating cash flow declined $161 million because of higher working-capital requirements and lower cash generation after noncash adjustments.
- Capital spending remained significant: $1.663 billion for growth, $423 million for maintenance, and $35 million for environmental projects.
- AES completed the sale of its Eletropaulo interest for gross proceeds of approximately $340 million and recognized an after-tax gain of approximately $199 million. It also sold Masinloc, Electrica Santiago, CTNG, and DPL peaker assets.
- The company adopted ASC 606 revenue recognition in 2018. The adoption increased 2018 net income attributable to AES by approximately $40 million compared with the previous accounting method and resulted in recognition of a $1.423 billion loan receivable primarily related to the Mong Duong II project in Vietnam.
Guidance, outlook, commentary, risks, and unusual items
Management expected to sign approximately 2 to 3 GW of new PPAs annually through 2022 and targeted a 50% reduction in portfolio carbon intensity from 2016 to 2022 and a 70% reduction by 2030. AES did not provide a clear consolidated revenue or EPS forecast in the filing text.
- Alto Maipo: The Chilean hydro project was approximately 75% complete, had experienced cost overruns above its original $2 billion budget, and received up to $400 million of additional funding commitments, including $200 million contributed by AES Gener. Construction and environmental arbitration matters remain material contingencies.
- Andres facility: A September 2018 lightning incident damaged the steam turbine and generator. Management expected partial simple-cycle operation, with full combined-cycle capacity targeted for the fourth quarter of 2019. Insurance recovery remains subject to policy terms and deductibles.
- Changuinola: A tunnel leak in Panama could require repairs lasting up to 10 months. AES had notified insurers and asserted claims against its construction contractor, but collection was not assured.
- Puerto Rico: PREPA remained in Title III bankruptcy proceedings. AES reported $351 million of related non-recourse debt in covenant default and $68 million of receivables from Puerto Rico, including $18 million overdue. Management nevertheless considered the $598 million carrying amount of Puerto Rico assets recoverable at year-end.
- Regulatory and environmental exposure: Key uncertainties include greenhouse-gas rules, coal combustion residuals, water-discharge requirements, Clean Air Act proceedings, environmental remediation, and recovery of compliance costs through customer rates or contracts.
- Maritza, Bulgaria: The European Commission's DG Comp continued reviewing the plant's PPA under state-aid rules. An unfavorable outcome could materially affect the plant and AES.
- Goodwill and impairments: The Gener reporting unit had $868 million of goodwill and only a 7% fair-value cushion at the October 2018 impairment test, making it particularly sensitive to lower power prices, weaker operating performance, regulatory changes, or higher discount rates.
- Foreign exchange and commodities: AES recognized $72 million of foreign-currency transaction losses in 2018, primarily due to Argentine peso devaluation. The company remains exposed to electricity, coal, gas, oil, environmental-credit, interest-rate, and foreign-exchange volatility.
- Legal matters: Material proceedings include disputes involving Panama land rights, Alto Maipo contractors, Kazakhstan concession payments, environmental matters, and a Dominican Republic lawsuit seeking approximately $476 million related to coal combustion residuals. Management stated that the ultimate outcomes could be material but were not estimable for certain matters.
- Credit profile: The filing states that AES had below-investment-grade ratings from Standard & Poor's, Fitch, and Moody's as of year-end 2018.
Most important facts for an investor to verify
- Whether Parent-level debt reduction and the 3.95x leverage milestone are sustainable without relying on recurring asset sales.
- The refinancing and covenant resolution plan for $1.7 billion of current non-recourse debt, including the Puerto Rico defaults and Colon technical covenant issue.
- Actual cash distributions from subsidiaries to the Parent Company, given restricted subsidiary cash of approximately $2.9 billion and the Parent's dependence on subsidiary distributions.
- Alto Maipo's final construction cost, completion schedule, additional funding requirements, and related arbitration outcomes.
- Recovery of insurance and contractor claims related to the Andres damage and Changuinola tunnel repairs.
- The effect of renewable generation and declining wholesale prices on Gener, Guacolda, and other coal-fired assets, including potential future impairment of Gener goodwill.
- The outcome of DG Comp's review of the Maritza PPA and other regulatory and environmental proceedings.
- Future cash tax payments under the TCJA, including GILTI, interest-deduction limitations, and the transition-tax regulations.
- Whether adjusted EPS growth reflects recurring operating improvement or primarily nonrecurring disposal gains, impairments, tax effects, and debt-extinguishment costs.