AES CORP quarterly report, Q3 FY2013

AES Corporation — Q3 2013 Form 10-Q Summary

Business context and reporting period

AES is a diversified global power generation and utility company operating through six strategic business units: United States, Andes, Brazil, MCAC, EMEA and Asia. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, with prior periods reclassified for discontinued operations and held-for-sale businesses.

Key financial metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Revenue	$4.003 billion	$4.355 billion	$12.108 billion	$12.807 billion
Gross margin	$937 million	$967 million	$2.603 billion	$2.720 billion
Net income attributable to AES	$71 million	$(1.568) billion	$320 million	$(1.087) billion
Income from continuing operations attributable to AES	$129 million	$(1.585) billion	$410 million	$(1.171) billion
Diluted EPS from continuing operations	$0.17	$(2.12)	$0.55	$(1.54)
Adjusted EPS	$0.39	$0.35	$1.01	$0.90
Adjusted pre-tax contribution	$387 million	$380 million	$946 million	$1.002 billion
Cash flow from operations	$855 million	$1.015 billion	$2.040 billion	$2.129 billion

Q3 revenue declined 8% and gross margin declined 3%; nine-month revenue declined 5% and gross margin declined 4%. Gross margin as a percentage of revenue was approximately 23.4% in Q3 2013 versus 22.2% in Q3 2012, and approximately 21.5% for the first nine months of 2013 versus 21.2% in the prior-year period.

As of September 30, 2013, cash and cash equivalents were $2.031 billion, restricted cash was $620 million, and short-term investments were $898 million.
Total assets were $41.250 billion and total equity was $7.966 billion.
Debt consisted of approximately $15.4 billion of non-recourse debt and $5.7 billion of recourse debt based on principal amounts disclosed in management’s discussion.
Parent Company liquidity was $993 million, comprising $196 million of parent and qualified holding-company cash and $797 million of available borrowings under the parent credit facilities.
Capital expenditures were $1.330 billion for the first nine months, including approximately $690 million of growth spending and $640 million of maintenance and environmental spending.

Material changes versus the prior comparable period

Reported earnings improved substantially because the prior-year period included a $1.850 billion DPL goodwill impairment. Q3 2013 included $58 million of goodwill impairment related to Ebute.
Q3 2013 included $81 million of asset impairments, principally $65 million for Poland wind projects and $15 million for Itabo’s San Lorenzo plant. Nine-month asset impairments totaled $129 million.
The Company recorded a $122 million impairment of its Elsta equity-method investment after negotiations indicated lower expected income following expiration of the existing power purchase agreement.
Nine-month 2013 results included a $212 million loss on extinguishment of debt, primarily from parent-company refinancing and the Masinloc refinancing.
Interest expense declined 10% to $357 million in Q3 and 10% to $1.065 billion for the first nine months, reflecting lower debt principal, hedge-related effects and favorable foreign-currency translation.
Brazil Utilities gross margin increased 92% in Q3 and 98% for the first nine months, despite lower revenue, primarily from tariff effects, increased volume and lower fixed costs at Eletropaulo.
Asia Generation revenue and gross margin declined 41% and 34%, respectively, in Q3, driven by lower demand at Kelanitissa and lower rates and margins at Masinloc.
Cash flow from operations declined 16% in Q3 and 4% for the first nine months, while net cash used in investing increased to $1.267 billion, partly because of higher net purchases of short-term investments and lower business-sale proceeds.

Debt, liquidity and capital actions

AES issued $750 million of 4.875% senior notes due 2023 and redeemed or tendered approximately $1.050 billion of older senior notes. The transactions reduced outstanding principal by $300 million and extended maturities on $750 million by approximately ten years.
The parent senior secured credit facility was amended, extending final maturity to July 2023? The filing states an extension to July 26, 2018, from January 29, 2015, with an $800 million commitment and current pricing of LIBOR plus 2.25%.
Approximately $2.4 billion of non-recourse debt was classified as current; approximately $1.0 billion related to covenant defaults at Maritza and Kavarna. These were described as non-payment defaults, and none triggered a parent-company cross-default as of September 30, 2013.
Discontinued businesses Sonel and Kribi had debt in default of $255 million and $256 million, respectively. Saurashtra had $21 million classified as current because a covenant violation was considered probable within twelve months.
The Company repurchased 3.7 million shares for $45 million during Q3. Approximately $237 million remained available under the repurchase program at September 30.

Guidance, outlook, commentary and risks

Management emphasized portfolio optimization, increased discretionary cash generation, geographic realignment, cost management and continued use of non-recourse project financing.
AES had 2,231 MW under construction as of the filing date, expected to come online by 2016. Management also reported completion of two U.K. wind facilities totaling 36 MW during Q3.
Management expects the effective tax rate in 2014 and beyond to be higher than the 2013 rate because of one-time 2013 benefits, higher U.S. taxes on certain foreign distributions and the anticipated expiration of an Asian tax holiday.
Hydrological conditions were materially below historical levels in Brazil, Panama, Colombia and Chile. Management estimated water inflows were approximately 24% to 31% below historical levels through early October and warned that lower generation could require purchases of higher-priced electricity.
DP&L’s Ohio regulatory order provides for a non-bypassable Service Stability Rider of $110 million annually for 2014 through 2016, requires a generation divestiture plan and mandates competitive sourcing of standard-service load. DP&L must divest its generation assets by May 31, 2017.
Maritza had $135 million of outstanding receivables from its Bulgarian offtaker, equal to 133 days of sales outstanding. Continued collection and covenant compliance remain uncertain.
Parent guarantees and commitments totaled $849 million, including $654 million of guarantees and commitments and $192 million of cash-collateralized letters of credit.
Recorded litigation reserves were approximately $260 million. The estimated range of reasonably possible losses from material contingencies, excluding recorded reserves, was $889 million to $1.4 billion.
Environmental remediation liabilities were $8 million, with reasonably possible additional environmental losses estimated at $8 million to $46 million where estimable.
The filing identifies significant exposure to foreign exchange, commodity prices, interest rates, regulatory changes, political and sovereign risks, power-market volatility, environmental requirements and refinancing availability.

Discontinued operations and unusual items

Discontinued operations produced a net loss of $52 million in Q3 and $86 million for the first nine months, compared with net income of $28 million and $93 million, respectively, in the prior-year periods.
Cameroon businesses and the Saurashtra wind project were classified as held for sale, with combined impairments of $77 million. The Cameroon sale remained subject to government approval and other conditions.
AES completed the sale of its Ukraine utility businesses for $113 million of net proceeds and sold its remaining Cartagena interest for approximately $24 million.
Subsequent to quarter-end, AES increased its quarterly common dividend from $0.04 to $0.05 per share, effective with the first-quarter 2014 payment.
In November 2013, AES agreed to sell its remaining Poland wind development projects for $8 million and expected to recognize an approximately $3 million pretax loss in Q4 2013.
Disclosure controls and procedures were concluded to be effective as of September 30, 2013, with no material changes to internal control over financial reporting during the quarter.

Most important facts for investors to verify

Whether the improvement in GAAP earnings is sustainable after excluding impairment, refinancing, foreign-exchange, disposal and discontinued-operation effects.
The ability of Maritza, Kavarna and other subsidiaries with covenant defaults to refinance or cure those defaults without reducing distributions to the parent.
Cash availability at the parent level versus cash held at subsidiaries, including restrictions on upstreaming dividends.
Actual hydrological conditions, spot power prices and energy-purchase requirements in Latin America.
The resolution and financial impact of DP&L’s regulatory proceeding, required generation divestiture and competitive-bidding transition.
Collection of Bulgarian and Argentine receivables and the potential for related impairments.
Progress and final consideration for the Cameroon, Saurashtra and Poland asset sales.
Exposure to the disclosed litigation, tax, environmental and regulatory contingencies, particularly the Eletropaulo and IPL matters.