AES Corporation: Q3 2016 Form 10-Q Summary
Business context and reporting period
The AES Corporation is a diversified global power generation and utility company operating through six geographic strategic business units: US, Andes, Brazil, MCAC, Europe, and Asia. The filing covers the unaudited three and nine months ended September 30, 2016, compared with the corresponding 2015 periods.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $3.542 billion | $3.522 billion | $10.042 billion | $10.936 billion |
| Operating margin | $688 million | $665 million | $1.771 billion | $2.141 billion |
| Income from continuing operations | $230 million | $198 million | $305 million | $733 million |
| Net income attributable to AES | $175 million | $180 million | $(181) million | $391 million |
| Diluted EPS from continuing operations | $0.26 | $0.26 | $0.31 | $0.58 |
| Net cash from operating activities | $819 million | $915 million | $2.182 billion | $1.505 billion |
| Proportional free cash flow | $400 million | $621 million | $1.070 billion | $948 million |
Q3 Adjusted EPS, a non-GAAP measure, was $0.32 versus $0.38. Nine-month Adjusted EPS was $0.64 versus $0.90. Dividends declared increased to $0.11 per share in Q3 and $0.22 per share for the nine months, compared with $0.10 and $0.20, respectively.
At September 30, 2016, cash and cash equivalents were $1.325 billion, short-term investments were $596 million, and restricted cash and debt service reserves totaled approximately $935 million. Aggregate debt was approximately $20.8 billion, comprising $4.9 billion of recourse debt and $15.9 billion of non-recourse debt. Parent Company liquidity was $561 million, including $42 million of parent and qualified holding-company cash and $519 million of available borrowing capacity.
Material changes versus the prior comparable period
- Q3 revenue increased 1%, and operating margin increased 3%, primarily from the commencement of Cochrane Unit 1 in Chile, lower Chilean energy and fuel costs, and stronger IPL margins.
- Nine-month revenue declined 8%, principally because of unfavorable foreign-exchange effects, lower Brazilian revenue, lower rates at Tietê, the 2015 regulatory-liability reversal at Eletropaulo, and asset sales.
- Nine-month operating margin fell 17%. Brazil operating margin declined 65%, MCAC declined 11%, and Europe declined 19%; Andes increased 13% and Asia increased 19%.
- Q3 net income attributable to AES decreased modestly to $175 million, while nine-month results turned to a net loss attributable to AES of $181 million, largely because of discontinued-operation losses and higher impairments.
- Nine-month operating cash flow rose 45%, driven by collections at Maritza and Brazilian utilities, despite lower reported earnings. Q3 operating cash flow declined 10%, primarily due to lower adjusted earnings and unfavorable collection timing.
- Asset impairment expense was $79 million in Q3 and $473 million for the nine months, compared with $231 million and $276 million, respectively, in 2015. The 2016 charges included Buffalo Gap I, Buffalo Gap II, and DPL.
- The company repurchased 8.7 million shares for $79 million during the nine months; $264 million remained available under the repurchase authorization at September 30.
Guidance, outlook, commentary, risks, and unusual items
- Management is targeting platform expansion, portfolio simplification, cost reduction, strategic partnerships, and disciplined capital allocation. Projects under construction totaled 3,389 MW, representing approximately $6.4 billion of expected capital expenditures and planned completion through 2019.
- A cost-reduction and revenue-enhancement initiative is expected to generate at least $50 million of savings in 2016 and $150 million cumulatively by 2018.
- AES Sul was classified as discontinued and held for sale after an agreement to sell the Brazilian distribution business. The company recorded a $382 million after-tax loss in the first nine months and expected an additional approximately $700 million after-tax loss upon disposal. The sale closed on October 31, 2016 for $440 million net of estimated adjustments and costs.
- Alto Maipo construction difficulties increased projected costs by 10% to 20% over the original $2 billion budget. AES Gener was seeking additional non-recourse debt and sponsor equity; AES's indirect interest was 40%.
- Two subsidiaries, Kavarna and Sogrinsk, had approximately $134 million of non-recourse debt in covenant default. These were not payment defaults, and management stated that they did not trigger or pose a current risk of cross-default under parent recourse debt.
- Material risks include foreign-exchange and commodity volatility, power-price and hydrology changes, regulatory and environmental requirements, political and economic conditions in Brazil and other markets, PREPA's financial challenges in Puerto Rico, and potential additional impairments.
- Reasonably possible material contingencies were estimated at $1.4 billion to $1.7 billion, excluding accrued liabilities and uncertain tax positions. Accrued litigation liabilities were approximately $177 million.
- Management identified no material changes to previously disclosed risk factors and concluded that disclosure controls were effective as of September 30, 2016.
Important facts investors should verify
- Confirm the final fourth-quarter 2016 accounting for the AES Sul sale and the expected cumulative earnings and equity impact.
- Monitor Alto Maipo funding, cost escalation, construction progress, and potential additional sponsor support.
- Assess refinancing and liquidity plans for $1.1 billion of current non-recourse debt, including the $134 million in covenant default.
- Review exposure to Brazil, Argentina, Puerto Rico, foreign exchange, hydrology, commodity prices, and regulatory outcomes.
- Reconcile GAAP earnings and cash flow with management’s non-GAAP Adjusted EPS and proportional free cash flow measures.
- Track pending litigation, tax disputes, environmental matters, and the estimated $1.4 billion to $1.7 billion range of reasonably possible material losses.