AES Corporation 2015 Q1 Form 10-Q Summary
Business context and reporting period
The AES Corporation is a diversified global power generation and utility company operating through six strategic business units: US, Andes, Brazil, MCAC, Europe and Asia. The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014. AES reported 702.4 million common shares outstanding as of May 5, 2015.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $3.984 billion | $4.262 billion | Down 7% |
| Operating margin | $721 million | $794 million | Down 9% |
| Income from continuing operations | $254 million | $89 million | Up $165 million |
| Net income attributable to AES | $142 million | $(58) million | Improved $200 million |
| Diluted EPS from continuing operations | $0.20 | $(0.07) | Improved $0.27 |
| Adjusted EPS | $0.25 | $0.24 | Up 4% |
| Operating cash flow | $437 million | $221 million | Up 98% |
| Capital expenditures | $619 million | $399 million | Up 55% |
Revenue was pressured by unfavorable foreign exchange effects of approximately $398 million, lower Brazilian hydropower output, lower activity in Europe and Asia, and weaker results in the Dominican Republic. Operating margin declined despite improvements in the US and Andes businesses, primarily because of Brazil, Europe and currency effects.
Reported earnings benefited materially from the absence of the $154 million goodwill impairment recorded in Q1 2014, the reduction in debt-extinguishment losses from $134 million to $23 million, and higher interest income. The effective tax rate was 29%, compared with 46% in the prior-year quarter.
Cash and cash equivalents were $1.337 billion at March 31, 2015, compared with $1.539 billion at December 31, 2014. Restricted cash, debt service reserves and other deposits totaled approximately $724 million. Parent Company liquidity was $1.031 billion, consisting of $292 million of parent and qualified holding-company cash plus $739 million of available borrowing capacity.
Aggregate debt principal consisted of approximately $15.5 billion of non-recourse debt and $4.9 billion of recourse debt. Approximately $1.8 billion of non-recourse debt was classified as current, including $725 million related to covenant defaults at Maritza and Kavarna in Bulgaria. These were described as technical or covenant defaults rather than payment defaults, and management stated that they did not trigger a parent-company cross-default as of March 31, 2015.
Material changes versus the prior comparable period
- Revenue declined 7%, while operating margin declined 9%; foreign exchange was a major adverse factor.
- Brazil operating margin fell $144 million, primarily because of lower hydrology, higher energy-purchase costs and weaker results at Tietê, Sul and Eletropaulo.
- US operating margin increased $39 million, driven principally by improved DP&L performance, fewer outages and better gas availability.
- Andes operating margin increased $40 million, mainly due to improved Gener performance and higher Argentine rates.
- Adjusted PTC increased to $252 million from $243 million, and Adjusted EPS increased to $0.25 from $0.24.
- Operating cash flow nearly doubled, but higher capital spending and investing outflows resulted in a $202 million decrease in cash during the quarter.
- AES sold a 15% indirect interest in IPALCO to CDPQ for $247 million and repurchased 2.8 million shares for $35 million.
- AES adopted service-concession accounting, reclassifying approximately $1.5 billion from property, plant and equipment to service-concession assets and recording a cumulative retained-earnings adjustment.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific consolidated earnings or revenue forecast in the filing. It expects growth from projects under construction, improved operating performance, cost reductions and strategic partnerships to help offset market and operating challenges. AES had 5,819 MW under construction, representing approximately $7 billion of total capital expenditures, with projects expected to enter service from 2015 through 2018. Mong Duong 2 in Vietnam and the Estrella del Mar power barge in Panama began operations around the reporting period.
- Hydrology and commodity exposure: Dry conditions in Brazil, Panama, Chile and Colombia reduced generation and increased power-purchase costs. Continued drought could materially affect margins and cash flow, particularly in Brazil, where management discussed a potential rationing risk in late 2015 or early 2016.
- Bulgaria: AES signed a non-binding agreement with NEK contemplating a 14% reduction in Maritza capacity payments in exchange for payment of approximately $236 million of overdue receivables. The agreement remained subject to definitive documentation, financing and approvals.
- Argentina: Approximately $343 million of long-term financing receivables were outstanding, primarily related to Argentina. Collection timing and value remain exposed to regulation, economic conditions, currency controls and sovereign-credit risk.
- Puerto Rico: AES Puerto Rico had $88 million of receivables from PREPA, including $31 million overdue at March 31, 2015; the filing states that the overdue amount was subsequently collected.
- Debt refinancing: In April 2015, AES issued $575 million of 5.50% senior notes due 2025 and tendered $500 million of older notes. The company expects an approximately $82 million debt-extinguishment loss in Q2 2015.
- Contingencies: Accrued litigation liabilities were approximately $193 million. Reasonably possible material contingency losses were estimated at $919 million to $974 million, excluding accrued amounts. Parent-level guarantees, indemnities and letters of credit totaled approximately $525 million in disclosed contingent obligations.
- Market sensitivities: Management estimated approximately $10 million of pretax exposure for each specified 10% movement in US power, natural gas and coal prices, $5 million for oil, approximately $5 million for a 10% dollar appreciation against each of several major foreign currencies, and approximately $20 million for a 100-basis-point increase in certain interest rates.
- Controls: Management concluded that disclosure controls and procedures were effective as of March 31, 2015, with no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Maritza and NEK execute a binding PPA amendment and whether the approximately $236 million of overdue receivables are fully collected.
- Whether Maritza and Kavarna covenant defaults are cured, refinanced or become payment defaults or cross-defaults.
- The sustainability of improved US and Andes operating results and the deterioration in Brazil, including hydrology, spot power prices and tariff pass-throughs.
- The cash-flow effect of the $619 million quarterly capital-expenditure program and the 5,819 MW construction portfolio.
- The impact of foreign exchange movements, commodity prices and interest rates on earnings, cash flow and debt-service capacity.
- The final accounting and ownership effects of CDPQ’s additional IPALCO investment and the planned Jordan transaction.
- The outcome and potential cash exposure from litigation, tax disputes, environmental matters and regulatory proceedings, particularly in Brazil and at IPL.