AES Corporation 2018 Q2 Form 10-Q Summary
Business Context and Reporting Period
The AES Corporation is a diversified global power generation and utility company operating through four strategic business units: US and Utilities, South America, MCAC, and Eurasia. The filing covers the unaudited quarter and six months ended June 30, 2018, compared with the corresponding 2017 periods.
AES adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method. Prior-period amounts were not restated. The adoption primarily affected the Mong Duong II project in Vietnam, including recognition of a $1.5 billion loan receivable and derecognition of the former service concession asset.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $2.537 billion, down 3% | $5.277 billion, up 2% |
| Operating margin | $600 million, down 4%; margin approximately 23.7% | $1.256 billion, up 6%; margin approximately 23.8% |
| Income from continuing operations | $224 million, up 58% | $1.002 billion, up from $239 million |
| Net income attributable to AES | $290 million, versus $53 million | $974 million, versus $29 million |
| Diluted EPS from continuing operations | $0.15, versus $0.08 | $1.18, versus $0.04 |
| Adjusted EPS | $0.25, unchanged | $0.52, up 24% |
| Adjusted PTC | $255 million, versus $242 million | $543 million, versus $432 million |
| Cash flow from operations | $399 million, versus $254 million | $914 million, versus $962 million |
Six-month net income was heavily affected by gains on dispositions, including the $777 million pretax gain on the sale of Masinloc, the $89 million gain on the sale of Electrica Santiago, and the $196 million after-tax gain on the sale of Eletropaulo. The quarter also included a $92 million asset impairment charge, including $83 million for a U.S. generation facility.
Interest expense was $263 million in the quarter and $544 million year to date, down 5% and 3%, respectively. Interest income increased to $76 million in the quarter and $152 million year to date, partly because of the financing component recognized under ASC 606. Effective tax rates were 39% for the quarter and 27% year to date.
Cash Flow, Debt, and Liquidity
- Cash, cash equivalents, and restricted cash increased to $2.142 billion at June 30, 2018, from $1.788 billion at December 31, 2017. This included $1.140 billion of cash and cash equivalents, $379 million of restricted cash, and $623 million of debt service reserves and other deposits.
- Capital expenditures were $994 million for the first six months, including $792 million of growth investments, $178 million of maintenance spending, and $24 million of environmental spending.
- Investing cash flow was positive $120 million, primarily because $1.808 billion of net proceeds was received from business sales.
- Financing cash flow was negative $729 million, reflecting substantial recourse debt repayments, dividends, non-recourse debt activity, and other financing uses.
- Aggregate debt principal was approximately $19.6 billion, consisting of approximately $4.1 billion of recourse debt and $15.5 billion of non-recourse debt.
- Parent Company liquidity was $838 million at June 30, 2018, consisting of $151 million of Parent Company and qualified holding-company cash plus $687 million of available borrowing capacity.
- The Parent Company issued $1.0 billion of senior notes and used the proceeds to refinance or repurchase higher-cost debt. It recognized $169 million of Parent Company losses on debt extinguishment during the first six months.
- Parent Company debt covenants were reported as compliant. AES paid quarterly dividends of $0.13 per common share and declared another $0.13 dividend payable in August 2018.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased because of the Masinloc sale, the Kazakhstan asset sales and concession expiration, and lower DPL volumes. These effects were partly offset by higher South America contract and spot sales and stronger MCAC contracted energy sales.
- Six-month revenue and operating margin increased because of higher tariffs in Argentina, improved contract prices and sales in Colombia and Chile, stronger Dominican Republic operations, improved Panama hydrology, higher U.S. regulated rates, and lower DPL maintenance costs.
- Eurasia performance declined materially following the Masinloc sale and the Kazakhstan dispositions. Eurasia operating margin fell 57% in the quarter and 41% year to date.
- Adjusted PTC increased despite lower quarterly operating margin, supported by lower interest expense and stronger results in South America and MCAC. Adjusted EPS was flat in the quarter but increased year to date.
- Operating cash flow declined 5% year to date despite higher reported net income, primarily because 2018 net income included large noncash disposal gains and other adjustments.
- General and administrative expense declined 29% in the quarter and 12% year to date, mainly due to lower personnel costs and professional fees.
- AES completed or announced significant portfolio actions, including sales of Masinloc, Eletropaulo, Electrica Santiago, and DPL peaker assets, retirement of the Stuart and Killen units, and formation of the Fluence energy-storage joint venture.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide a formal full-year revenue or earnings guidance figure. Management stated that results for the interim periods are not necessarily indicative of full-year results.
- Management expects improved operating performance, growth from new businesses, and global cost-reduction initiatives to help offset market, regulatory, foreign exchange, and operating challenges.
- AES stated that it remained on track to achieve its $100 million cost-savings program. It reported a 5,725 MW backlog, including 4,252 MW under construction and 1,473 MW of renewables supported by long-term PPAs.
- Alto Maipo was 68% complete. The project’s restructuring included up to $400 million of additional AES Gener funding commitments and continued exposure to construction milestones, cost overruns, financing, environmental matters, and litigation.
- AES Puerto Rico and AES Ilumina had $363 million of non-recourse debt in covenant default, although the defaults were not payment defaults and were not considered to trigger Parent Company cross-defaults at June 30, 2018.
- Puerto Rico receivables totaled $59 million, including $15 million overdue. Management believed the $615 million carrying value of Puerto Rico assets was recoverable based on information available at filing.
- Argentina was determined to be highly inflationary during the second quarter. Continued Argentine peso depreciation could negatively affect 2018 results, although management stated that the primary Argentine businesses use the U.S. dollar as their functional currency.
- The proposed or pending IPL and DP&L rate cases could affect future regulated revenues. Orders were expected in the fourth quarter of 2018.
- DG Comp continued to review the Maritza PPA in Bulgaria. Potential outcomes include termination of the PPA and compensation negotiations; the filing states that an unfavorable resolution could materially affect the business.
- AES recorded $92 million of impairment expense in the first half, including an $83 million impairment of a U.S. generation facility due to an unfavorable economic outlook.
- Contingent contractual obligations totaled $1.102 billion, including guarantees and commitments, letters of credit, and asset-sale indemnities. The company also reported $115 million to $145 million of reasonably possible material contingency losses, excluding accrued amounts.
- Key market exposures include electricity and fuel prices, foreign exchange, interest rates, regulatory changes, environmental compliance, hydrology, power demand, and access to project-level financing.
Most Important Facts for Investors to Verify
- Separate recurring operating performance from the significant gains on Masinloc, Eletropaulo, and Electrica Santiago dispositions.
- Assess the effect of the Masinloc sale and other portfolio exits on future revenue, operating margin, cash distributions, and Eurasia results.
- Monitor Alto Maipo construction completion, additional funding requirements, project debt restructuring, and related environmental and arbitration matters.
- Track the $363 million of subsidiary debt in covenant default and the potential for future restrictions on distributions or Parent Company cross-defaults.
- Evaluate Parent Company liquidity of $838 million against debt maturities, construction commitments, guarantees, letters of credit, dividends, and reliance on subsidiary distributions.
- Review the sustainability of operating cash flow, given that first-half reported earnings benefited substantially from noncash and disposition-related items.
- Monitor Argentine peso depreciation, commodity and interest-rate sensitivity, and the impact of regulatory or environmental decisions.
- Confirm the final accounting effects of the Tax Cuts and Jobs Act, including GILTI and other provisional tax amounts, as the filing states that the accounting was incomplete at June 30, 2018.