AES Corporation — Q2 2023 Form 10-Q Summary
Business context and reporting period
The AES Corporation is a diversified power generation and utility company operating through four technology-based strategic business units: Renewables, Utilities, Energy Infrastructure, and New Energy Technologies. The filing covers the three and six months ended June 30, 2023, with comparisons to the same periods in 2022. Results were retrospectively presented under the company’s revised SBU structure implemented in March 2023.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 |
|---|---|---|---|---|
| Revenue | $3.027 billion | $3.078 billion | $6.266 billion | $5.930 billion |
| Operating margin | $498 million | $563 million | $1.092 billion | $1.093 billion |
| Net income (loss) | $(19) million | $(136) million | $170 million | $35 million |
| Net income (loss) attributable to AES | $(39) million | $(179) million | $112 million | $(64) million |
| Diluted EPS | $(0.06) | $(0.27) | $0.16 | $(0.10) |
| Adjusted EBITDA | $569 million | $686 million | $1.197 billion | $1.307 billion |
| Cash flow from operations | Not separately provided | Not separately provided | $1.187 billion | $865 million |
Q2 revenue declined 2%, while six-month revenue increased 6%. Q2 operating margin fell 12%; six-month operating margin was essentially flat. Adjusted EBITDA declined 17% in Q2 and 8% year to date. Management reported Q2 Adjusted EBITDA with Tax Attributes of $607 million, compared with $722 million in the prior-year quarter, and year-to-date Adjusted EBITDA with Tax Attributes of $1.248 billion, compared with $1.356 billion.
Q2 results benefited from lower impairment expense, higher interest income, improved Utilities performance, and lower losses from New Energy Technologies. These benefits were more than offset at the operating level by weaker Energy Infrastructure performance, higher costs, lower thermal dispatch, unrealized losses related to a terminated PPA, and increased interest expense.
Segment performance
- Renewables: Q2 revenue increased 19% to $541 million and Adjusted EBITDA increased 2% to $166 million. Year-to-date Adjusted EBITDA rose 3% to $290 million. Growth reflected new projects, higher spot sales, improved hydrology and wind availability, partially offset by derivative losses, higher fixed costs, and foreign exchange effects.
- Utilities: Q2 Adjusted EBITDA increased 10% to $148 million, supported by extreme heat in El Salvador and higher rider revenues. Year-to-date Adjusted EBITDA declined 3% to $310 million because of milder weather in Indiana and Ohio and higher fixed costs.
- Energy Infrastructure: Q2 Adjusted EBITDA decreased 26% to $282 million and year-to-date Adjusted EBITDA decreased 12% to $645 million. Drivers included higher cost of sales, lower thermal dispatch, unrealized losses from the Warrior Run PPA termination, and lower insurance proceeds.
- New Energy Technologies: Adjusted EBITDA losses improved to $(13) million in Q2 and $(39) million year to date, primarily due to lower Fluence losses, improved product margins, and reduced shipping-related costs. Six-month revenue increased by $73 million, primarily from the sale of the Fallbrook project.
Cash flow, liquidity, debt, and capital spending
- Operating cash flow increased 37% to $1.187 billion for the six months, helped by stronger collections, lower inventory, and reduced working-capital requirements.
- Investing cash outflow was $3.750 billion, including $3.396 billion of capital expenditures, compared with $2.583 billion of investing outflow in the prior-year period. Growth capital spending increased primarily because of U.S. renewable projects.
- Total cash, cash equivalents, and restricted cash declined to $2.010 billion from $2.087 billion at December 31, 2022. Unrestricted cash and cash equivalents were $1.322 billion, including $35 million at the Parent Company and qualified holding companies.
- As of June 30, 2023, aggregate gross debt was approximately $26.7 billion, consisting of $20.9 billion of non-recourse debt and $5.5 billion of recourse debt based on principal amounts disclosed by management. Balance-sheet debt included $500 million of current recourse debt and $2.445 billion of current non-recourse debt.
- The Parent Company issued $900 million of 5.45% senior notes due 2028 and AES Clean Energy executed a $500 million bridge loan due December 2023. Commercial paper outstanding was $517 million at a weighted-average rate of 6.06%.
- Parent Company Liquidity was $918 million, comprising $35 million of Parent Company and qualified holding-company cash and $883 million of available borrowing capacity, compared with $1.165 billion at year-end 2022.
- The company had $617 million outstanding under supplier-financing arrangements, of which $477 million was guaranteed by the Parent Company.
Material changes versus the prior comparable period
- Net loss attributable to AES improved from $(179) million to $(39) million in Q2; six-month results improved from a $(64) million loss to $112 million of income.
- Impairment expense declined to $174 million in Q2 and $194 million year to date, versus $482 million and $483 million, respectively, in 2022. The prior year included a $475 million Maritza impairment; 2023 included a $137 million Norgener impairment, $29 million related to Jordan, and $18 million related to GAF projects.
- Interest expense increased 11% in Q2 and 19% year to date because of higher rates and newly issued debt. Interest income increased 38% in Q2 and 49% year to date due to higher rates and short-term investments.
- The company completed or announced significant portfolio actions, including the Bellefield acquisition, the Bolero Solar Park acquisition, the sPower OpCo B interest sale, and the termination of the Warrior Run PPA.
- Capital expenditures more than doubled year to date, rising from $1.659 billion to $3.396 billion, primarily due to renewable development.
Guidance, outlook, commentary, and unusual items
- AES reported a backlog of 13,170 MW of signed but not-yet-operational projects, including 5,389 MW under construction. It completed 786 MW of wind, solar, and storage projects year to date and expects to complete 3.4 GW during 2023.
- Management expects increased tax attributes from the U.S. renewables business in 2023, with a significant portion expected in the fourth quarter. The filing does not provide a consolidated full-year earnings or EBITDA guidance figure.
- AES continues to target exiting coal generation by year-end 2025, subject to approvals. The company retired Petersburg Unit 2, announced expected retirement of the 276 MW Norgener plant in 2025, and completed termination of the Warrior Run PPA.
- The Warrior Run termination provides $357 million of total proceeds, paid in equal installments through January 2030, while the facility continues to provide capacity through May 31, 2024.
- Puerto Rico presents a material liquidity and debt-servicing risk. AES Puerto Rico was in covenant and payment default, entered into standstill and forbearance agreements with noteholders, and those agreements were scheduled to expire October 15, 2023. Management considered $63 million of Puerto Rico long-lived assets recoverable at June 30, 2023, but indicated a write-down could become necessary.
- Other subsidiary non-recourse debt defaults totaled $339 million at June 30, including AES Maritza, AES Puerto Rico, AES Ilumina, and AES Jordan Solar. Management reported no Parent Company cross-default as of the filing date.
- Parent Company guarantees and commitments totaled approximately $2.6 billion; total letters of credit and surety bonds were approximately $320 million.
- Key external risks include foreign exchange volatility, commodity prices, hydrology and weather, inflation, solar-panel supply-chain and trade restrictions, environmental regulation, coal-transition costs, and regulatory proceedings involving AES Maritza and U.S. utilities.
- Material contingencies included accrued litigation liabilities of approximately $26 million, reasonably possible material litigation losses estimated at $53 million to $89 million where estimable, and environmental matters with potential losses of up to $13 million where estimable.
Most important facts for an investor to verify
- Whether Parent Company Liquidity of $918 million is adequate relative to the $500 million of current recourse debt, $517 million of commercial paper, supplier-finance obligations, dividends, and planned growth spending.
- The refinancing and repayment plan for current non-recourse debt, particularly the $175 million associated with subsidiary defaults and the AES Puerto Rico payment default.
- Execution of the 2023 renewable construction plan and the timing and economics of the 13,170 MW backlog.
- Future impairment exposure for Norgener, Maritza, Jordan, Puerto Rico, and other fossil-fuel or held-for-sale assets as decarbonization and regulatory conditions evolve.
- The financial effect of the Warrior Run PPA termination, including the timing of the $357 million proceeds and related unrealized losses.
- Regulatory outcomes for AES Ohio’s ESP4, AES Indiana’s rate case, AES Maritza’s PPA review, and environmental proceedings.
- Potential dilution or funding implications from the 2024 Equity Units, including the February 2024 purchase contracts covering up to approximately 57.4 million common shares.
- Whether foreign-exchange losses, commodity exposure, hydrology, and higher interest rates continue to pressure Energy Infrastructure and Utilities results.