AES Corporation — Fiscal 2013 Form 10-K Summary
Business context and reporting period
The filing is AES Corporation’s annual report for the year ended December 31, 2013, filed February 25, 2014. It is not a standalone quarterly filing, although fourth-quarter and quarterly data are included. AES operates generation and utility businesses across six strategic business units: US, Andes, Brazil, MCAC, EMEA and Asia. The portfolio included approximately 29,289 MW of generation capacity excluding integrated utility generation, nine utility businesses serving more than 11 million people, and approximately 22,000 employees.
Management’s strategy emphasized cost reduction, capital discipline, debt repayment, shareholder distributions, geographic realignment and greater use of contractual, regulatory and hedging mechanisms to reduce earnings volatility.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Revenue | $15.891 billion | $17.164 billion | Down 7% |
| Operating margin | $3.247 billion | $3.583 billion | Down 9% |
| Income from continuing operations | $730 million | $(420) million | Improved |
| Income from continuing operations attributable to AES | $284 million | $(960) million | Improved |
| Net income attributable to AES | $114 million | $(912) million | Improved |
| Diluted EPS from continuing operations | $0.38 | $(1.27) | Improved |
| Adjusted EPS, non-GAAP | $1.29 | $1.21 | Up 7% |
| Cash flow from operating activities | $2.715 billion | $2.901 billion | Down 6% |
| Proportional free cash flow, non-GAAP | $1.271 billion | $1.250 billion | Up $21 million |
Revenue and operating margin were pressured by dry hydrological conditions in Brazil, Panama, Colombia and Chile, foreign-currency effects, lower prices and customer switching. Adjusted earnings benefited from lower taxes, interest expense, general and administrative expense and foreign-currency losses.
- Effective tax rate was 33%, versus 298% in 2012, primarily because the prior year included a large nondeductible DPL goodwill impairment.
- Interest expense declined to $1.482 billion from $1.544 billion.
- Goodwill impairment expense was $372 million, compared with $1.817 billion in 2012. The 2013 charge included $307 million at DP&L, $58 million at Ebute and $7 million at MountainView.
- Asset impairment expense was $95 million; the filing also reported a $129 million impairment of the Elsta equity-method investment.
- Cash and cash equivalents were $1.642 billion, including approximately $132 million at the Parent Company and qualified holding companies. Restricted cash and debt-service reserves totaled approximately $1.1 billion.
- Total debt was approximately $21.0 billion: $5.7 billion of recourse debt and $15.4 billion of non-recourse debt. Approximately $1.1 billion of non-recourse debt was classified as current because of covenant defaults, primarily at Maritza and Kavarna.
- Parent Company liquidity was $931 million, consisting of $132 million of parent and qualified-holding-company cash plus $799 million of available borrowing capacity.
- Capital expenditures were $1.988 billion, including $1.1 billion of growth capital and $934 million of maintenance and environmental capital.
Material changes versus the prior comparable period
- Revenue declined $1.273 billion, led by decreases in Brazil and Andes and lower Asia revenue. MCAC revenue increased 5%, while EMEA was broadly flat.
- Operating margin declined $336 million. Brazil decreased $98 million, Andes $47 million, EMEA $89 million and Asia $67 million; US decreased $43 million and MCAC $17 million.
- Generation commercial availability improved to 93.55% from 89.09%, while generation volume declined 4% because of low water inflows. SAIDI improved to 5.96 hours from 7.01 hours and SAIFI to 2.97 interruptions from 3.93.
- AES recognized a $269 million regulatory liability related to Eletropaulo customer refunds following an ANEEL ruling concerning the historical regulatory asset base. Eletropaulo obtained a court injunction, but the underlying matter remained unresolved.
- DP&L recorded an additional $307 million goodwill impairment after lower expected capacity prices, weaker dark spreads and Ohio regulatory and competitive pressures.
- AES repaid or refinanced debt, including issuing $750 million of 4.875% senior notes due 2023 and reducing or extending certain nearer-term Parent Company maturities. The Company also repurchased 25.3 million shares for $322 million and increased its quarterly dividend to $0.05 per share in the fourth quarter.
- AES announced or completed eight asset-sale transactions generating $497 million of equity proceeds and exited or planned to exit several markets, including Spain, China, Ukraine, Trinidad and Cameroon.
- Discontinued operations produced a $179 million net loss in 2013, compared with $63 million of net income in 2012, primarily because of disposal losses and impairments.
- The Company corrected a cash-flow classification error: 2012 investing cash outflows were restated to $895 million and financing cash outflows to $1.867 billion, with no impact on earnings or the balance sheet.
Guidance, outlook, management commentary and risks
Management did not provide a conventional consolidated earnings or revenue forecast in the filing. It expected hydrological volatility to continue through 2014 and noted that below-average conditions could require additional power purchases to meet contractual commitments. For 2014–2016, management stated that approximately 75%–80% of generation variable margin and 85%–90% of utility variable margin was hedged or otherwise insulated from commodity-price changes.
- Projects under construction included approximately 2,762 MW of new capacity, including Alto Maipo in Chile, Cochrane and Guacolda V, Mong Duong II in Vietnam and a Jordan peaking project. IPL also had approximately 2,400 MW of environmental upgrades under construction.
- IPL expected approximately $511 million of MATS-related environmental investment through 2016, with regulatory recovery approved subject to stated conditions. IPL also sought approval for a 550–725 MW gas-fired plant and conversion of two coal units, with estimated project costs of $667 million.
- DP&L faced increasing customer switching and a phased competitive-bidding process for standard-service generation. The filing stated that DP&L must separate its generation assets by May 31, 2017.
- Maritza and other businesses faced delayed collections from financially stressed counterparties, including NEK in Bulgaria. As of December 31, 2013, Maritza had $151 million of receivables, including overdue and rescheduled amounts.
- Argentina presented elevated inflation, currency, regulatory and collection risks. The Argentine peso subsequently declined approximately 20% in January 2014, and AES had approximately $481 million invested in Argentina at year-end.
- Environmental risks included MATS, greenhouse-gas regulation, coal-combustion byproducts, water-discharge requirements, cooling-water rules, regional haze and potential Clean Air Act enforcement. Compliance costs could be material and recovery from customers or counterparties was not assured.
- Material contingencies included litigation and regulatory matters. Reserves for litigation were approximately $239 million; reasonably possible additional losses, where estimable and excluding reserves, were estimated at $887 million to $1.4 billion.
- Parent Company guarantees and other credit support totaled approximately $825 million, including $661 million of guarantees and $164 million of letters of credit.
- Approximately 77% of 2013 revenue was generated outside the United States. Key exposures included foreign exchange, commodity prices, interest rates, political and regulatory changes, counterparty credit, project execution and access to capital.
Most important facts an investor should verify
- Whether AES can sustain Parent Company liquidity while funding construction, environmental obligations, debt maturities, dividends and share repurchases.
- The status and resolution of technical defaults totaling approximately $1.1 billion of non-recourse debt, particularly at Maritza and Kavarna.
- Collections and credit quality of Bulgarian, Argentine, Dominican Republic and other government-related counterparties.
- The final outcome and cash impact of the Eletropaulo regulatory liability and related litigation, as well as other Brazilian tax and regulatory disputes.
- Actual hydrological conditions and the resulting generation volumes, spot-market purchases and margins in Brazil, Panama, Colombia and Chile.
- Progress, financing, construction costs and commercial operation dates for Alto Maipo, Cochrane, Mong Duong II, Jordan and IPL projects.
- Future goodwill or long-lived-asset impairments at DP&L, DPLER, Buffalo Gap and other reporting units.
- Environmental compliance expenditures, retirements and potential recoverability of costs from regulators or customers.
- Whether asset sales, cost reductions and portfolio exits produce the expected cash proceeds and reduce earnings volatility.
- The sustainability of the $0.05 quarterly dividend and the remaining share-repurchase authorization in light of debt covenants and subsidiary distribution restrictions.