Review of Consolidated Results of Operations
|
|
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|
|
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|
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|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in millions, except per share amounts)
|
2016
|
|
2015
|
|
$ change
|
|
% change
|
|
2016
|
|
2015
|
|
$ change
|
|
% change
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US SBU
|
$
|
916
|
|
|
$
|
923
|
|
|
$
|
(7
|
)
|
|
-1
|
%
|
|
$
|
2,582
|
|
|
$
|
2,751
|
|
|
$
|
(169
|
)
|
|
-6
|
%
|
Andes SBU
|
667
|
|
|
652
|
|
|
15
|
|
|
2
|
%
|
|
1,864
|
|
|
1,894
|
|
|
(30
|
)
|
|
-2
|
%
|
Brazil SBU
|
1,027
|
|
|
866
|
|
|
161
|
|
|
19
|
%
|
|
2,761
|
|
|
3,083
|
|
|
(322
|
)
|
|
-10
|
%
|
MCAC SBU
|
547
|
|
|
597
|
|
|
(50
|
)
|
|
-8
|
%
|
|
1,596
|
|
|
1,796
|
|
|
(200
|
)
|
|
-11
|
%
|
Europe SBU
|
207
|
|
|
292
|
|
|
(85
|
)
|
|
-29
|
%
|
|
675
|
|
|
921
|
|
|
(246
|
)
|
|
-27
|
%
|
Asia SBU
|
179
|
|
|
195
|
|
|
(16
|
)
|
|
-8
|
%
|
|
574
|
|
|
501
|
|
|
73
|
|
|
15
|
%
|
Corporate and Other
|
6
|
|
|
7
|
|
|
(1
|
)
|
|
-14
|
%
|
|
8
|
|
|
17
|
|
|
(9
|
)
|
|
-53
|
%
|
Intersegment eliminations
|
(7
|
)
|
|
(10
|
)
|
|
3
|
|
|
-30
|
%
|
|
(18
|
)
|
|
(27
|
)
|
|
9
|
|
|
-33
|
%
|
Total Revenue
|
3,542
|
|
|
3,522
|
|
|
20
|
|
|
1
|
%
|
|
10,042
|
|
|
10,936
|
|
|
(894
|
)
|
|
-8
|
%
|
Operating Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US SBU
|
189
|
|
|
165
|
|
|
24
|
|
|
15
|
%
|
|
436
|
|
|
463
|
|
|
(27
|
)
|
|
-6
|
%
|
Andes SBU
|
203
|
|
|
162
|
|
|
41
|
|
|
25
|
%
|
|
466
|
|
|
412
|
|
|
54
|
|
|
13
|
%
|
Brazil SBU
|
53
|
|
|
91
|
|
|
(38
|
)
|
|
-42
|
%
|
|
174
|
|
|
492
|
|
|
(318
|
)
|
|
-65
|
%
|
MCAC SBU
|
140
|
|
|
148
|
|
|
(8
|
)
|
|
-5
|
%
|
|
370
|
|
|
416
|
|
|
(46
|
)
|
|
-11
|
%
|
Europe SBU
|
54
|
|
|
59
|
|
|
(5
|
)
|
|
-8
|
%
|
|
184
|
|
|
226
|
|
|
(42
|
)
|
|
-19
|
%
|
Asia SBU
|
41
|
|
|
33
|
|
|
8
|
|
|
24
|
%
|
|
124
|
|
|
104
|
|
|
20
|
|
|
19
|
%
|
Corporate and Other
|
7
|
|
|
4
|
|
|
3
|
|
|
75
|
%
|
|
11
|
|
|
28
|
|
|
(17
|
)
|
|
-61
|
%
|
Intersegment eliminations
|
1
|
|
|
3
|
|
|
(2
|
)
|
|
-67
|
%
|
|
6
|
|
|
—
|
|
|
6
|
|
|
NM
|
|
Total Operating Margin
|
688
|
|
|
665
|
|
|
23
|
|
|
3
|
%
|
|
1,771
|
|
|
2,141
|
|
|
(370
|
)
|
|
-17
|
%
|
General and administrative expenses
|
(40
|
)
|
|
(45
|
)
|
|
5
|
|
|
-11
|
%
|
|
(135
|
)
|
|
(150
|
)
|
|
15
|
|
|
-10
|
%
|
Interest expense
|
(354
|
)
|
|
(365
|
)
|
|
11
|
|
|
-3
|
%
|
|
(1,086
|
)
|
|
(995
|
)
|
|
(91
|
)
|
|
9
|
%
|
Interest income
|
110
|
|
|
126
|
|
|
(16
|
)
|
|
-13
|
%
|
|
365
|
|
|
321
|
|
|
44
|
|
|
14
|
%
|
Loss on extinguishment of debt
|
(16
|
)
|
|
(20
|
)
|
|
4
|
|
|
-20
|
%
|
|
(12
|
)
|
|
(161
|
)
|
|
149
|
|
|
-93
|
%
|
Other expense
|
(13
|
)
|
|
(18
|
)
|
|
5
|
|
|
-28
|
%
|
|
(42
|
)
|
|
(47
|
)
|
|
5
|
|
|
-11
|
%
|
Other income
|
18
|
|
|
12
|
|
|
6
|
|
|
50
|
%
|
|
43
|
|
|
42
|
|
|
1
|
|
|
2
|
%
|
Gain on disposal and sale of businesses
|
—
|
|
|
24
|
|
|
(24
|
)
|
|
-100
|
%
|
|
30
|
|
|
24
|
|
|
6
|
|
|
25
|
%
|
Asset impairment expense
|
(79
|
)
|
|
(231
|
)
|
|
152
|
|
|
-66
|
%
|
|
(473
|
)
|
|
(276
|
)
|
|
(197
|
)
|
|
71
|
%
|
Foreign currency transaction gains (losses)
|
(20
|
)
|
|
12
|
|
|
(32
|
)
|
|
NM
|
|
|
(16
|
)
|
|
4
|
|
|
(20
|
)
|
|
NM
|
|
Income tax expense
|
(75
|
)
|
|
(43
|
)
|
|
(32
|
)
|
|
74
|
%
|
|
(165
|
)
|
|
(266
|
)
|
|
101
|
|
|
-38
|
%
|
Net equity in earnings of affiliates
|
11
|
|
|
81
|
|
|
(70
|
)
|
|
-86
|
%
|
|
25
|
|
|
96
|
|
|
(71
|
)
|
|
-74
|
%
|
INCOME FROM CONTINUING OPERATIONS
|
230
|
|
|
198
|
|
|
32
|
|
|
16
|
%
|
|
305
|
|
|
733
|
|
|
(428
|
)
|
|
-58
|
%
|
(Loss) income from operations of discontinued businesses, net of income tax benefit (expense) of $0, $(1), $4 and $6, respectively
|
(1
|
)
|
|
5
|
|
|
(6
|
)
|
|
NM
|
|
|
(7
|
)
|
|
(12
|
)
|
|
5
|
|
|
-42
|
%
|
Net loss from disposal and impairments of discontinued businesses, net of income tax benefit of $401 for the nine months ended September 30, 2016
|
—
|
|
|
—
|
|
|
—
|
|
|
NM
|
|
|
(382
|
)
|
|
—
|
|
|
(382
|
)
|
|
NM
|
|
NET INCOME (LOSS)
|
229
|
|
|
203
|
|
|
26
|
|
|
13
|
%
|
|
(84
|
)
|
|
721
|
|
|
(805
|
)
|
|
NM
|
|
Less: Net income attributable to noncontrolling interests
|
(57
|
)
|
|
(23
|
)
|
|
(34
|
)
|
|
NM
|
|
|
(105
|
)
|
|
(330
|
)
|
|
225
|
|
|
-68
|
%
|
Less: Net loss attributable to redeemable stocks of subsidiaries
|
3
|
|
|
—
|
|
|
3
|
|
|
NM
|
|
|
8
|
|
|
—
|
|
|
8
|
|
|
NM
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
|
$
|
175
|
|
|
$
|
180
|
|
|
$
|
(5
|
)
|
|
-3
|
%
|
|
$
|
(181
|
)
|
|
$
|
391
|
|
|
$
|
(572
|
)
|
|
NM
|
|
AMOUNTS ATTRIBUTABLE TO THE AES CORPORATION COMMON STOCKHOLDERS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax
|
$
|
176
|
|
|
$
|
175
|
|
|
$
|
1
|
|
|
1
|
%
|
|
$
|
208
|
|
|
$
|
403
|
|
|
$
|
(195
|
)
|
|
-48
|
%
|
(Loss) income from discontinued operations, net of tax
|
(1
|
)
|
|
5
|
|
|
(6
|
)
|
|
NM
|
|
|
(389
|
)
|
|
(12
|
)
|
|
(377
|
)
|
|
NM
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO THE AES CORPORATION
|
$
|
175
|
|
|
$
|
180
|
|
|
$
|
(5
|
)
|
|
-3
|
%
|
|
$
|
(181
|
)
|
|
$
|
391
|
|
|
$
|
(572
|
)
|
|
NM
|
|
Net cash provided by operating activities
|
$
|
819
|
|
|
$
|
915
|
|
|
$
|
(96
|
)
|
|
-10
|
%
|
|
$
|
2,182
|
|
|
$
|
1,505
|
|
|
$
|
677
|
|
|
45
|
%
|
DIVIDENDS DECLARED PER COMMON SHARE
|
$
|
0.11
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
10
|
%
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.02
|
|
|
10
|
%
|
NM - Not Meaningful
Components of Revenue, Cost of Sales, Operating Margin, and Operating Cash Flow —
Revenue includes revenue earned from the sale of energy from our utilities and the production and sale of energy from our generation plants, which are classified as regulated and non-regulated
,
respectively, on the Condensed Consolidated Statements of Operations. Revenue also includes the gains or losses on derivatives associated with the sale of electricity.
Cost of sales includes costs incurred directly by the businesses in the ordinary course of business. Examples include electricity and fuel purchases, operations and maintenance costs, depreciation and amortization expense, bad debt expense and recoveries, and general administrative and support costs (including employee-related costs directly associated with the operations of the business). Cost of sales also includes the gains or losses on derivatives (including embedded derivatives other than foreign currency embedded derivatives) associated with the purchase of electricity or fuel.
Operating margin is defined as revenue less cost of sales.
Consolidated Revenue and Operating Margin — Executive Summary
Three months ended September 30, 2016
:
Consolidated Revenue
— Revenue
increase
d
$20 million
, or
1%
, to
$3.54 billion
for the three months ended
September 30, 2016
, compared with
$3.52 billion
for the three months ended
September 30, 2015
. This
increase
was driven primarily by the commencement of operations of Unit 1 at Cochrane in Chile as of July 2016.
Consolidated Operating Margin
— Operating margin
increase
d
$23 million
, or
3%
, to
$688 million
for the three months ended
September 30, 2016
, compared with
$665 million
for the three months ended
September 30, 2015
due to new operations at Cochrane as discussed above as well as lower energy purchase and fuel costs in Chile and higher margins at IPL driven by new rate order and environmental projects placed in service. These results were partially offset by lower rates for energy sold under new contracts at Tietê.
Nine months ended September 30, 2016
:
Consolidated Revenue
— Revenue
decrease
d
$894 million
, or
8%
, to
$10.0 billion
for the
nine months ended
September 30, 2016
, compared with
$10.9 billion
for the
nine months ended
September 30, 2015
. This
decrease
was driven by
unfavorable
FX impact of
$598 million
, primarily in Brazil of
$355 million
, Argentina of $74 million, Kazakhstan of $60 million and Colombia of $54 million. Additionally, revenues decreased in Brazil due to lower rates for energy sold under new contracts at Tietê; operations in 2015 but not in 2016 at Uruguiana; the reversal of a contingent regulatory liability in 2015, and lower demand, partially offset by the annual tariff adjustment, at Eletropaulo. Revenues also declined due to lower pass-through costs at El Salvador and IPP4 in Jordan, the sale of DPLER in January 2016, and lower rates at DPL. These decreases were partially offset by the impact of full operations at Mong Duong in 2016 compared to Unit 1 in March 2015 (with principal operations commencing in April 2015) and the commencement of operations of Unit 1 at Cochrane in Chile as of July 2016.
Consolidated Operating Margin
— Operating margin
decrease
d
$370 million
, or
17%
, to
$1.8 billion
for the
nine months ended
September 30, 2016
, compared with
$2.1 billion
for the
nine months ended
September 30, 2015
. In addition to the
unfavorable
FX impact of
$78 million
primarily in Kazakhstan, Argentina, Brazil, and Colombia, the
decrease
was driven primarily by the reversal of a contingent regulatory liability in 2015, higher fixed costs and lower demand at Eletropaulo, and lower rates for energy sold under new contracts at Tietê. These decreases were partially offset by higher margin and lower fixed costs at Gener as well as the impact from new operations at Mong Duong in Vietnam and Cochrane in Chile as discussed above.
See Item 2.—
SBU Performance Analysis
of this Form 10-Q for additional discussion and analysis of operating results for each SBU.
Consolidated Results of Operations — Other
General and administrative expenses
General and administrative expenses
decrease
d
$5 million
, or
11%
, to
$40 million
for the three months ended
September 30, 2016
. The
decrease
was primarily due to decreased employee-related costs and professional fees.
General and administrative expenses
decrease
d
$15 million
, or
10%
, to
$135 million
for the
nine months ended
September 30, 2016
. The
decrease
was primarily due to decreased employee-related costs and professional fees.
Interest expense
Interest expense
decrease
d
$11 million
, or
3%
, to
$354 million
for the three months ended
September 30, 2016
. This decrease was primarily due to prior year interest expense recorded on payments to the Argentinian tax authority.
Interest expense
increase
d
$91 million
, or
9%
, to
$1.1 billion
for the
nine months ended
September 30, 2016
. This increase was primarily due to a
$101 million
increase at Eletropaulo as a result of the prior year reversal of $
64 million
in interest expense, previously recognized on a contingent regulatory liability, and increased interest expense due to higher regulatory liabilities and interest rates in the current period. Additionally, there was a
$26 million
increase at Mong Duong, mainly due to lower capitalized interest as a result of the commencement of operations in April 2015. These increases were partially offset by lower interest expense of
$20 million
due to a reduction in debt principal and lower interest rates at the Parent Company and DPL.
Interest income
Interest income
decrease
d
$16 million
, or
13%
, to
$110 million
for the three months ended
September 30, 2016
. The
decrease
was primarily due to lower interest income of
$6 million
at Andres due to higher collection of receivables and lower interest rates; and
$4 million
at Eletropaulo due to lower interest on regulatory assets resulting from annual tariff review.
Interest income
increase
d
$44 million
, or
14%
, to
$365 million
for the
nine months ended
September 30, 2016
. This
increase
was primarily due to higher interest income of
$35 million
at Eletropaulo mainly due to higher interest on regulatory assets in the first half of 2016 and higher interest rates, and
$23 million
recognized on the financing element of the service concession arrangement at Mong Duong, which became fully operational from April 2015.
Loss on extinguishment of debt
Loss on extinguishment of debt was
$16 million
and
$12 million
for the
three and nine
months ended
September 30, 2016
and
$20 million
and
$161 million
for the
three and nine
months ended
September 30, 2015
, respectively. See Note
7
—
Debt
included in Item 1.—
Financial Statements
of this Form 10-Q for further information.
Other income and expense
Other income was
$18 million
and
$43 million
for the
three and nine
months ended
September 30, 2016
, and
$12 million
and
$42 million
for the
three and nine
months ended
September 30, 2015
, respectively.
Other expense was
$13 million
and
$42 million
for the
three and nine
months ended
September 30, 2016
, and
$18 million
and
$47 million
for the
three and nine
months ended
September 30, 2015
, respectively.
See Note
13
—
Other Income and Expense
included in Item 1.—
Financial Statements
of this Form 10-Q for further information.
Gain on disposal and sale of businesses
There were
no
gains on disposal and sale of businesses for the
three months ended September 30, 2016
. The were gains on disposal and sale of businesses was
$30 million
for the
nine months ended
September 30, 2016
and
$24 million
for the
three and nine
months ended
September 30, 2015
.
See Note
17
—
Dispositions
included in Item 1.—
Financial Statements
of this Form 10-Q for further information.
Asset impairment expense
Asset impairment expense was
$79 million
and
$473 million
for the
three and nine
months ended
September 30, 2016
, and
$231 million
and
$276 million
for the
three and nine
months ended
September 30, 2015
, respectively. See Note
14
—
Asset Impairment Expense
included in Item 1.—
Financial Statements
of this Form 10-Q for further information.
Foreign currency transaction gains (losses)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in millions)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Parent Company
|
$
|
(23
|
)
|
|
$
|
(2
|
)
|
|
$
|
(29
|
)
|
|
$
|
(21
|
)
|
Colombia
|
(3
|
)
|
|
13
|
|
|
(4
|
)
|
|
18
|
|
Chile
|
(2
|
)
|
|
(12
|
)
|
|
(4
|
)
|
|
(20
|
)
|
Argentina
|
8
|
|
|
13
|
|
|
9
|
|
|
30
|
|
United Kingdom
|
1
|
|
|
4
|
|
|
10
|
|
|
6
|
|
Other
|
(1
|
)
|
|
(4
|
)
|
|
2
|
|
|
(9
|
)
|
Total
(1)
|
$
|
(20
|
)
|
|
$
|
12
|
|
|
$
|
(16
|
)
|
|
$
|
4
|
|
___________________________________________
|
|
(1)
|
Includes
$15 million
of losses and
$39 million
of gains on foreign currency derivative contracts for the
three months ended September 30, 2016
and
2015
, respectively, and
$8 million
and
$85 million
of gains on foreign currency derivative contracts for the
nine months ended
September 30, 2016
and
2015
, respectively.
|
The Company recognized net foreign currency transaction losses of
$20 million
for the three months ended
September 30, 2016
, primarily due to:
|
|
•
|
a loss of
$23 million
at the Parent Company, which was mainly related to foreign currency swaps and options, partially offset by remeasurement gains on intercompany notes.
|
The Company recognized net foreign currency transaction gains of
$12 million
for the three months ended
September 30, 2015
, primarily due to:
|
|
•
|
a gain of
$13 million
in Colombia, which was mainly related to unrealized gains due to the 19% depreciation of the Colombian Peso, resulting in a gain at Chivor (a U.S. Dollar functional currency subsidiary) from liabilities denominated in Colombian Pesos, primarily income tax payable, accounts payable, and non-recourse debt, and positive impact from foreign currency embedded derivatives;
|
|
|
•
|
a gain of
$13 million
in Argentina, which was mainly related to the favorable impact of foreign currency derivatives associated with government receivables at AES Argentina Generacion (an Argentine Peso functional currency subsidiary), partially offset by losses from the remeasurement of U.S. Dollar denominated debt, and losses from the remeasurement of local currency asset balances at Termoandes (a U.S. Dollar functional currency subsidiary); and
|
|
|
•
|
a loss of
$12 million
in Chile, which was mainly due to the 9% depreciation of the Chilean Peso, resulting in a loss at Gener (a U.S. Dollar functional currency subsidiary) from working capital denominated in Chilean Pesos, primarily cash, accounts receivables and VAT receivables.
|
The Company recognized net foreign currency transaction losses of
$16 million
for the
nine months ended
September 30, 2016
, primarily due to:
|
|
•
|
a loss of
$29 million
at the Parent Company, which was mainly related to foreign currency swaps and options, partially offset by remeasurement gains on intercompany notes; and
|
|
|
•
|
a gain of
$10 million
at United Kingdom, which was mainly related to remeasurement gains on intercompany debt.
|
The Company recognized net foreign currency transaction gains of
$4 million
for the
nine months ended
September 30, 2015
, primarily due to:
|
|
•
|
a gain of
$30 million
in Argentina, which was mainly related to the favorable impact of foreign currency derivatives associated with government receivables at AES Argentina Generacion (an Argentine Peso functional currency subsidiary), partially offset by losses from the remeasurement of U.S. Dollar denominated debt, and losses from the remeasurement of local currency asset balances at Termoandes (a U.S. Dollar functional currency subsidiary);
|
|
|
•
|
a gain of
$18 million
in Colombia, which was mainly related to unrealized gains due to the 30% depreciation of the Colombian Peso, resulting in a gain at Chivor (a U.S. Dollar functional currency subsidiary) from liabilities denominated in Colombian pesos, primarily income tax payable, accounts payable, and non-recourse debt, and positive impact from foreign currency embedded derivatives;
|
|
|
•
|
a loss of
$21 million
at the Parent Company, which was mainly due to net remeasurement losses on intercompany notes, partially offset by gains on foreign currency options; and
|
|
|
•
|
a loss of
$20 million
in Chile, which was mainly due to the 15% depreciation of the Chilean Peso, resulting in a loss at Gener (a U.S. Dollar functional currency subsidiary) from working capital denominated in Chilean Pesos, primarily cash, accounts receivables and VAT receivables.
|
Income tax expense
Income tax expense increased $32 million, or 74%, to
$75 million
for the three months ended
September 30, 2016
compared to $
43 million
for the three months ended
September 30, 2015
. The Company’s effective tax rates were
26%
and
27%
for the three months ended
September 30, 2016
and
2015
, respectively.
The net
decrease
in the effective tax rate for the three months ended
September 30, 2016
, compared to the same period in
2015
was principally due to favorable resolution of an audit settlement at certain of our operating subsidiaries in the Dominican Republic this quarter.
Income tax expense
decrease
d
$101 million
, or
38%
, to
$165 million
for the
nine months ended
September 30, 2016
compared to
$266 million
for the
nine months ended
September 30, 2015
. The Company’s effective tax rates were
37%
and
29%
for the
nine months ended
September 30, 2016
and
2015
, respectively.
The net
increase
in the effective tax rate for the
nine months ended
September 30, 2016
, compared to the same period in
2015
was principally due to the unfavorable impact of Chilean income tax law reform enacted during the first quarter of 2016 and the 2016 asset impairments recorded at Buffalo Gap I, Buffalo Gap II, and DPL. See Note
14
—
Asset Impairment Expense
included in Item 1.—
Financial Statements
of this Form 10-Q for further information regarding the Buffalo Gap I, Buffalo Gap II, DPL asset impairments.
Our effective tax rate reflects the tax effect of significant operations outside the U.S. which are generally taxed at lower rates than the U.S. statutory rate of 35%. A future proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate.
Net equity in earnings of affiliates
Net equity in earnings of affiliates
decrease
d
$70 million
to
$11 million
for the three months ended
September 30, 2016
compared to the three months ended
September 30, 2015
. The
decrease
was primarily due to a restructuring of Guacolda in September 2015. See Note
6
—
Investment In and Advances to Affiliates
included in Item 1.—
Financial Statements
of this Form 10-Q for further information.
Net equity in earnings of affiliates
decrease
d
$71 million
to
$25 million
for the
nine months ended
September 30, 2016
compared to the
nine months ended
September 30, 2015
. The
decrease
was primarily due to a restructuring of Guacolda in September 2015. See Note
6
—
Investment In and Advances to Affiliates
included in Item 1.—
Financial Statements
of this Form 10-Q for further information.
Net income attributable to noncontrolling interests
Net income attributable to NCI
increase
d
$34 million
to
$57 million
for the three months ended
September 30, 2016
. This
increase
was primarily due to prior year asset impairment at Buffalo Gap III; partially offset by current year asset impairment at Buffalo Gap I.
Net income attributable to NCI
decrease
d
$225 million
, or
68%
, to
$105 million
for the
nine months ended
September 30, 2016
. This
decrease
was primarily due to lower operating margin at Eletropaulo resulting from the the reversal of a contingent regulatory liability in 2015, asset impairments at Buffalo Gap I and II in 2016, and lower operating margin at Tietê; partially offset by an asset impairment at Buffalo Gap III in 2015.
Discontinued operations
Net losses from discontinued operations were
$1 million
and
$389 million
for the
three and nine
months ended
September 30, 2016
, and
$12 million
for the
nine
months ended
September 30, 2015
. Net income from discontinued operations was
$5 million
for the
three months ended September 30, 2015
. See Note
16
—
Discontinued Operations
included in Item 1.—
Financial Statements
of this Form 10-Q for further information regarding the Sul discontinued operations.
Net (loss) income attributable to The AES Corporation
Net income attributable to The AES Corporation
decrease
d
$5 million
to
$175 million
in the three months ended
September 30, 2016
compared to
$180 million
in the three months ended
September 30, 2015
. Key drivers of the
decrease
were:
|
|
•
|
lower equity in earnings of affiliates;
|
|
|
•
|
lower operating margin at our Brazil SBU;
|
|
|
•
|
devaluation of foreign currencies against the US dollar;
|
|
|
•
|
lower gains on disposal and sale of businesses; and
|
These
decrease
s were partially offset by:
|
|
•
|
lower impairment expense on long lived assets; and
|
|
|
•
|
higher operating margin at our Andes SBU.
|
Net income (loss) attributable to The AES Corporation
decrease
d
$572 million
to a loss of
$181 million
in the
nine months ended
September 30, 2016
compared to income of
$391 million
in the
nine months ended
September 30, 2015
. Key drivers of the
decrease
were:
|
|
•
|
impairments at discontinued operations;
|
|
|
•
|
lower operating margins at our Brazil, MCAC and Europe SBUs;
|
|
|
•
|
higher impairment expense on long lived assets;
|
|
|
•
|
higher interest expense;
|
|
|
•
|
lower equity in earnings of affiliates; and
|
|
|
•
|
devaluation of foreign currencies against the US dollar.
|
These
decrease
s were partially offset by:
|
|
•
|
lower losses on extinguishment of debt;
|
|
|
•
|
higher operating margin at our Andes SBU; and
|
|
|
•
|
higher interest income.
|
SBU Performance Analysis
Non-GAAP Measures
Adjusted Operating Margin, Adjusted PTC, Adjusted EPS, and Proportional Free Cash Flow are non-GAAP supplemental measures that are used by management and external users of our consolidated financial statements such as investors, industry analysts and lenders. The Adjusted Operating Margin, Adjusted PTC, and Proportional Free Cash Flow by SBU for the three and
nine months ended September 30, 2016
are shown below. The percentages represent the contribution by each SBU to the gross metric, excluding Corporate.
Adjusted Operating Margin
Operating Margin is defined as revenue less cost of sales. We define Adjusted Operating Margin as Operating Margin, adjusted for the impact of NCI, excluding unrealized gains or losses related to derivative transactions.
The GAAP measure most comparable to Adjusted Operating Margin is Operating Margin. We believe that Adjusted Operating Margin better reflects the underlying business performance of the Company. Factors in this determination include the impact of NCI, where AES consolidates the results of a subsidiary that is not wholly owned by the Company, as well as the variability due to unrealized derivatives gains or losses. Adjusted Operating Margin should not be construed as an alternative to Operating Margin, which is determined in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Adjusted Operating Margin
(in millions)
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
US SBU
|
$
|
164
|
|
|
$
|
155
|
|
|
$
|
382
|
|
|
$
|
447
|
|
Andes SBU
|
144
|
|
|
125
|
|
|
326
|
|
|
314
|
|
Brazil SBU
|
12
|
|
|
19
|
|
|
37
|
|
|
103
|
|
MCAC SBU
|
107
|
|
|
121
|
|
|
290
|
|
|
335
|
|
Europe SBU
|
36
|
|
|
52
|
|
|
156
|
|
|
206
|
|
Asia SBU
|
19
|
|
|
16
|
|
|
58
|
|
|
49
|
|
Corporate and Other
|
8
|
|
|
3
|
|
|
18
|
|
|
27
|
|
Intersegment Eliminations
|
1
|
|
|
3
|
|
|
6
|
|
|
—
|
|
Total Adjusted Operating Margin
|
491
|
|
|
494
|
|
|
1,273
|
|
|
1,481
|
|
Noncontrolling Interests Adjustment
|
187
|
|
|
178
|
|
|
502
|
|
|
670
|
|
Unrealized derivative gains (losses)
|
10
|
|
|
(7
|
)
|
|
(4
|
)
|
|
(10
|
)
|
Operating Margin
|
$
|
688
|
|
|
$
|
665
|
|
|
$
|
1,771
|
|
|
$
|
2,141
|
|
Adjusted PTC
We define Adjusted PTC as pretax income from continuing operations attributable to The AES Corporation excluding gains or losses of the consolidated entity due to (a) unrealized gains or losses related to derivative transactions, (b) unrealized foreign currency gains or losses, (c) gains or losses due to dispositions and acquisitions of business interests, (d) losses due to impairments, and (e) costs due to the early retirement of debt. Adjusted PTC also includes net equity in earnings of affiliates on an after-tax basis adjusted for the same gains or losses excluded from consolidated entities.
Adjusted PTC reflects the impact of NCI and excludes the items specified in the definition above. In addition to the revenue and cost of sales reflected in Operating Margin, Adjusted PTC includes the other components of our income statement, such as
general and administrative expense
in the corporate segment, as well as business development costs;
interest expense
and
interest income
;
other expense
and
other income
;
realized foreign currency transaction gains and losses
; and
net equity in earnings of affiliates
.
The GAAP measure most comparable to Adjusted PTC is
income from continuing operations attributable to The AES Corporation
. We believe that Adjusted PTC better reflects the underlying business performance of the Company and is considered in the Company’s internal evaluation of financial performance. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions, unrealized foreign currency gains or losses, losses due to impairments and strategic decisions to dispose of or acquire business interests or retire debt, which affect results in a given period or periods. In addition, earnings before tax represents the business performance of the Company before the application of statutory income tax rates and tax adjustments, including the effects of tax planning, corresponding to the various jurisdictions in which the Company operates. Adjusted PTC should not be construed as alternatives to income from continuing operations attributable to The AES Corporation, which is determined in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted PTC
(1)
(in millions)
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
US SBU
|
$
|
114
|
|
|
$
|
101
|
|
|
$
|
257
|
|
|
$
|
263
|
|
Andes SBU
|
134
|
|
|
150
|
|
|
279
|
|
|
322
|
|
Brazil SBU
|
6
|
|
|
15
|
|
|
18
|
|
|
97
|
|
MCAC SBU
|
74
|
|
|
92
|
|
|
197
|
|
|
248
|
|
Europe SBU
|
24
|
|
|
45
|
|
|
127
|
|
|
171
|
|
Asia SBU
|
22
|
|
|
24
|
|
|
70
|
|
|
66
|
|
Corporate and Other
|
(102
|
)
|
|
(112
|
)
|
|
(331
|
)
|
|
(330
|
)
|
Total Adjusted PTC
|
$
|
272
|
|
|
$
|
315
|
|
|
$
|
617
|
|
|
$
|
837
|
|
Non-GAAP Adjustments:
|
|
|
|
|
|
|
|
Unrealized derivative (losses) gains
|
(5
|
)
|
|
12
|
|
|
(1
|
)
|
|
29
|
|
Unrealized foreign currency losses
|
(3
|
)
|
|
(5
|
)
|
|
(12
|
)
|
|
(48
|
)
|
Disposition/acquisition gains
|
3
|
|
|
23
|
|
|
5
|
|
|
32
|
|
Impairment losses
|
(24
|
)
|
|
(139
|
)
|
|
(309
|
)
|
|
(175
|
)
|
Loss on extinguishment of debt
|
(20
|
)
|
|
(21
|
)
|
|
(26
|
)
|
|
(159
|
)
|
Pretax contribution
|
223
|
|
|
185
|
|
|
274
|
|
|
516
|
|
Income tax benefit (expense) attributable to The AES Corporation
|
(47
|
)
|
|
(10
|
)
|
|
(66
|
)
|
|
(113
|
)
|
Income from continuing operations, net of tax, attributable to The AES Corporation
|
$
|
176
|
|
|
$
|
175
|
|
|
$
|
208
|
|
|
$
|
403
|
|
_____________________________
|
|
(1)
|
Adjusted PTC for each segment includes the effect of intercompany transactions with other segments, except for interest, charges for certain management fees, and the write-off of intercompany balances.
|
Adjusted EPS
We define Adjusted EPS as diluted earnings per share from continuing operations excluding gains or losses of both consolidated entities and entities accounted for under the equity method due to (a) unrealized gains or losses related to derivative transactions, (b) unrealized foreign currency gains or losses, (c) gains or losses due to dispositions and acquisitions of business interests, (d) losses due to impairments, and (e) costs due to the early retirement of debt.
The GAAP measure most comparable to Adjusted EPS is diluted earnings per share from continuing operations. We believe that Adjusted EPS better reflects the underlying business performance of the Company and is considered in the Company’s internal evaluation of financial performance. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions, unrealized foreign currency gains or losses, losses due to impairments and strategic decisions to dispose of or acquire business interests or retire debt, which affect results in a given period or periods. Adjusted EPS should not be construed as alternatives to diluted earnings per share from continuing operations, which is determined in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EPS
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Diluted earnings per share from continuing operations
|
$
|
0.26
|
|
|
$
|
0.26
|
|
|
$
|
0.31
|
|
|
$
|
0.58
|
|
|
Unrealized derivative gains
|
—
|
|
|
(0.02
|
)
|
|
—
|
|
|
(0.04
|
)
|
|
Unrealized foreign currency transaction losses
|
0.01
|
|
|
0.01
|
|
|
0.01
|
|
|
0.07
|
|
|
Disposition/acquisition gains
|
—
|
|
|
(0.03
|
)
|
(1)
|
—
|
|
(2)
|
(0.05
|
)
|
(1)
|
Impairment losses
|
0.03
|
|
(3)
|
0.20
|
|
(4)
|
0.47
|
|
(5)
|
0.25
|
|
(6)
|
Loss on extinguishment of debt
|
0.04
|
|
(7)
|
0.03
|
|
|
0.05
|
|
(8)
|
0.23
|
|
(9)
|
Less: Net income tax benefit
|
(0.02
|
)
|
|
(0.07
|
)
|
(10)
|
(0.20
|
)
|
(11)
|
(0.14
|
)
|
(12)
|
Adjusted EPS
|
$
|
0.32
|
|
|
$
|
0.38
|
|
|
$
|
0.64
|
|
|
$
|
0.90
|
|
|
_____________________________
|
|
(1)
|
Amount primarily relates to the gain on sale of Armenia Mountain of $22 million, or $0.03 per share.
|
|
|
(2)
|
Amount primarily relates to the gain on sale of DPLER of $22 million, or $0.03 per share; offset by the loss on deconsolidation of UK Wind of $20 million, or $0.03 per share.
|
|
|
(3)
|
Amount primarily relates to the asset impairment at Buffalo Gap I of $78 million ($23 million, or $0.03 per share, net of NCI).
|
|
|
(4)
|
Amount primarily relates to asset impairments at Buffalo Gap III of $118 million ($27 million, or $0.04 per share, net of NCI); and $113 million at Kilroot ($112 million, or $0.16 per share, net of NCI).
|
|
|
(5)
|
Amount primarily relates to asset impairments at DPL of $235 million, or $0.36 per share; $159 million at Buffalo Gap II ($49 million, or $0.07 per share, net of NCI); and $78 million at Buffalo Gap I ($23 million, or $0.03 per share, net of NCI).
|
|
|
(6)
|
Amount primarily relates to asset impairments at Buffalo Gap III of $118 million ($27 million, or $0.04 per share, net of NCI); $113 million at Kilroot ($112 million, or $0.16 per share, net of NCI); and $38 million at UK Wind ($30 million or $0.04 per share, net of NCI).
|
|
|
(7)
|
Amount primarily relates to losses on early retirement of debt at the Parent Company of $17 million, or $0.02 per share; and an adjustment of $5 million, or $0.01 per share to record the DP&L redeemable preferred stock at its redemption value.
|
|
|
(8)
|
Amount primarily relates to losses on early retirement of debt at the Parent Company of $19 million, or $0.03 per share; and an adjustment of $5 million, or $0.01 per share, to record the DP&L redeemable preferred stock at its redemption value.
|
|
|
(9)
|
Amount primarily relates to losses on early retirement of debt at the Parent Company of $113 million, or $0.16 per share; and $22 million at IPL ($16 million or $0.02 per share, net of NCI).
|
|
|
(10)
|
Amount primarily relates to the per share income tax benefit associated with impairment losses of $46 million, or $0.06 in the three months ended September 30, 2015.
|
|
|
(11)
|
Amount primarily relates to the per share income tax benefit associated with impairment losses of $123 million, or $0.19 in the nine months ended September 30, 2016.
|
|
|
(12)
|
Amount primarily relates to the per share income tax benefit associated with losses on extinguishment of debt of $51 million, or $0.08 and impairment losses of $48 million, or $0.07 in the nine months ended September 30, 2015.
|
Proportional Free Cash Flow
Refer to Item 2.—
Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Proportional Free Cash Flow (a non-GAAP measure)
for the discussion and reconciliation of Proportional Free Cash Flow to its nearest GAAP measure.
US SBU
The following table summarizes Operating Margin, Adjusted Operating Margin, Adjusted PTC, and Proportional Free Cash Flow (in millions) for our US SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
189
|
|
|
$
|
165
|
|
|
$
|
24
|
|
|
15
|
%
|
|
$
|
436
|
|
|
$
|
463
|
|
|
$
|
(27
|
)
|
|
-6
|
%
|
Noncontrolling Interests Adjustment
|
(26
|
)
|
|
(17
|
)
|
|
|
|
|
|
(59
|
)
|
|
(27
|
)
|
|
|
|
|
Derivatives Adjustment
|
1
|
|
|
7
|
|
|
|
|
|
|
5
|
|
|
11
|
|
|
|
|
|
Adjusted Operating Margin
|
$
|
164
|
|
|
$
|
155
|
|
|
$
|
9
|
|
|
6
|
%
|
|
$
|
382
|
|
|
$
|
447
|
|
|
$
|
(65
|
)
|
|
-15
|
%
|
Adjusted PTC
|
$
|
114
|
|
|
$
|
101
|
|
|
$
|
13
|
|
|
13
|
%
|
|
$
|
257
|
|
|
$
|
263
|
|
|
$
|
(6
|
)
|
|
-2
|
%
|
Proportional Free Cash Flow
|
$
|
219
|
|
|
$
|
218
|
|
|
$
|
1
|
|
|
—
|
%
|
|
$
|
469
|
|
|
$
|
477
|
|
|
$
|
(8
|
)
|
|
-2
|
%
|
Operating Margin for the three months ended
September 30, 2016
increase
d by
$24 million
, or
15%
, which was driven primarily by the following (in millions):
|
|
|
|
|
IPL
|
|
Higher retail margin driven by environmental revenues and higher rates due to a new rate order
|
$
|
18
|
|
Other
|
4
|
|
Total IPL Increase
|
22
|
|
DPL
|
|
Increased plant availability which also resulted in reduced penalties
|
15
|
|
Total DPL Increase
|
15
|
|
US Generation
|
|
Warrior Run due to lower availability and higher maintenance costs primarily due to major outages in 2016
|
(7
|
)
|
Other
|
(6
|
)
|
Total US Generation Decrease
|
(13
|
)
|
Total US SBU Operating Margin Increase
|
$
|
24
|
|
Adjusted Operating Margin
increase
d by
$9 million
for the US SBU due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives. AES owns 100% of its businesses in the U.S. with the exception of IPL, which is wholly owned by its indirect subsidiary IPALCO. As of
September 30, 2016
, CDPQ owns a combined direct and indirect interest in IPALCO of 30%.
Adjusted PTC
increase
d by
$13 million
driven by the
$9 million
increase
in Adjusted Operating Margin described above and lower interest expense at DPL and IPL, partially offset by a decrease in the Company’s share of earnings under the HLBV accounting allocation at Buffalo Gap.
Proportional Free Cash Flow
increase
d by
$1 million
, primarily driven by the timing of $29 million in payments for accounts payable and inventory purchases due to the conversion of coal generation assets to natural gas at IPL and inventory optimization efforts at DPL, lower proportional interest payments of $7 million (mainly at DPL) due to timing and lower interest rates, $5 million of lower pension contributions at DPL, and a $15 million increase in Adjusted Operating Margin (net of non-cash impacts of $6 million). These positive impacts were partially offset by a $35 million decrease in the timing of receivables collections resulting primarily from higher rates at IPL, more favorable weather in 2016, and the impact of DPLER’s declining customer base in 2015. Additionally, Proportional Free Cash Flow was negatively impacted by the impact of $20 million of competitive bid deposits received from suppliers in 2015 to participate in DP&L’s auction.
Operating Margin for the
nine months ended
September 30, 2016
decrease
d by
$27 million
, or
6%
, which was driven primarily by the following (in millions):
|
|
|
|
|
DPL
|
|
Impact of lower wholesale prices and completion of DP&L’s transition to a competitive-bid market
|
$
|
(32
|
)
|
Decrease in RTO capacity and other revenues primarily due to lower capacity cleared in the auction
|
(16
|
)
|
Other
|
5
|
|
Total DPL Decrease
|
(43
|
)
|
US Generation
|
|
Southland from an increase in depreciation expense as a result of a change in estimated useful lives of the plants
|
(11
|
)
|
Impact from sale of Armenia Mountain in July 2015
|
(10
|
)
|
Warrior Run due to lower availability and higher maintenance cost primarily due to major outages in 2016
|
(9
|
)
|
Other
|
2
|
|
Total US Generation Decrease
|
(28
|
)
|
IPL
|
|
Higher retail margin driven by environmental revenues and higher rates due to a new rate order
|
28
|
|
Change in accrual resulting from the implementation of new rates
|
18
|
|
Other
|
(2
|
)
|
Total IPL Increase
|
44
|
|
Total US SBU Operating Margin Decrease
|
$
|
(27
|
)
|
Adjusted Operating Margin
decrease
d by
$65 million
for the US SBU due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives. AES owns 100% of its businesses in the U.S. with the exception of IPL, which is wholly owned by its indirect subsidiary IPALCO. As of
September 30, 2016
, CDPQ owns a combined direct and indirect interest in IPALCO of 30%.
Adjusted PTC
decrease
d by
$6 million
, driven by the
$65 million
decrease
in Adjusted Operating Margin described above, partially offset by a gain on contract termination at DP&L and lower interest expense at DPL and IPL in part due to the sell-down impacts as discussed above.
Proportional Free Cash Flow
decrease
d by
$8 million
, primarily driven by a $59 million decrease in Adjusted Operating Margin (net of non-cash impacts of $6 million, primarily related to the implementation of IPL’s new rates
and depreciation), a $58 million decrease in the timing of receivables collections resulting primarily from higher rates at IPL, more favorable weather in 2016, and the impact of DPLER’s declining customer base in 2015. Additionally, Proportional Free Cash Flow was negatively impacted by the 2015 impact of $20 million of competitive bid deposits received from suppliers to participate in DP&L’s auction. These negative impacts were partially offset by a $76 million decrease in proportional coal purchases due to the ongoing conversion of coal generation assets to natural gas at IPL, a build-up of inventory due to mild winter weather in December 2015, and inventory optimization efforts at DPL. Additionally, Proportional Free Cash Flow was positively impacted by a net increase of $17 million in settlements of accounts receivable primarily due to the sale of DPLER in 2016, and lower proportional interest payments of $27 million due to timing and lower interest rates.
ANDES SBU
The following table summarizes Operating Margin, Adjusted Operating Margin, Adjusted Proportional Free Cash Flow (in millions) for our Andes SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
203
|
|
|
$
|
162
|
|
|
$
|
41
|
|
|
25
|
%
|
|
$
|
466
|
|
|
$
|
412
|
|
|
$
|
54
|
|
|
13
|
%
|
Noncontrolling Interests Adjustment
|
(59
|
)
|
|
(37
|
)
|
|
|
|
|
|
(140
|
)
|
|
(98
|
)
|
|
|
|
|
Adjusted Operating Margin
|
$
|
144
|
|
|
$
|
125
|
|
|
$
|
19
|
|
|
15
|
%
|
|
$
|
326
|
|
|
$
|
314
|
|
|
$
|
12
|
|
|
4
|
%
|
Adjusted PTC
|
$
|
134
|
|
|
$
|
150
|
|
|
$
|
(16
|
)
|
|
-11
|
%
|
|
$
|
279
|
|
|
$
|
322
|
|
|
$
|
(43
|
)
|
|
-13
|
%
|
Proportional Free Cash Flow
|
$
|
92
|
|
|
$
|
134
|
|
|
$
|
(42
|
)
|
|
-31
|
%
|
|
$
|
152
|
|
|
$
|
131
|
|
|
$
|
21
|
|
|
16
|
%
|
Including
unfavorable
FX and remeasurement impacts of
$4 million
, Operating Margin for the three months ended
September 30, 2016
increase
d by
$41 million
, or
25%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Gener
|
|
Lower spot prices on energy and fuel purchases
|
$
|
44
|
|
Start of operations at Cochrane’s Unit 1 in July 2016
|
18
|
|
Other
|
(2
|
)
|
Total Gener Increase
|
60
|
|
Chivor
|
|
Lower spot sales prices
|
(9
|
)
|
Lower volume of spot sales
|
(8
|
)
|
Total Chivor Decrease
|
(17
|
)
|
Total Argentina Decrease
|
(2
|
)
|
Total Andes SBU Operating Margin Increase
|
$
|
41
|
|
Adjusted Operating Margin
increase
d by
$19 million
due to the drivers above, adjusted for the impact of NCI. AES owned 71% of Gener and Chivor as of
September 30, 2015
and 67% as of
September 30, 2016
, and 100% of AES Argentina.
Adjusted PTC
decrease
d by
$16 million
, driven by a restructuring of Guacolda in 2015 which increased our equity investment and resulted in additional equity in earnings of $46 million. This negative impact was partially offset by the
increase
of
$19 million
in Adjusted Operating Margin described above.
Proportional Free Cash Flow
decrease
d by
$42 million
, primarily driven by a $35 million decrease in VAT refunds related to our Cochrane and Alto Maipo construction projects, $19 million in higher payments to fuel suppliers in Chile, an $11 million decrease in Argentina mainly associated with lower collections at the CTSN plant, and a $9 million increase in income tax payments in Chile and Argentina. These negative impacts were partially offset by the
$19 million
increase
in Adjusted Operating Margin as described above, and a $25 million favorable impact related to a payment in the prior year to unwind an interest rate swap as part of the Ventanas refinancing in July 2015.
Including
unfavorable
FX and remeasurement impacts of
$32 million
, Operating Margin for the
nine months ended
September 30, 2016
increase
d by
$54 million
, or
13%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Gener
|
|
Lower prices on energy and fuel purchases
|
$
|
60
|
|
Higher spot sales in the SIC market driven by better availability, partially offset by termination of Nueva Renca tolling agreement
|
25
|
|
Start of operations at Cochrane’s Unit 1 in July 2016
|
23
|
|
Lower fixed costs mainly associated with lower maintenance expenses and lower salaries
|
22
|
|
Other
|
(11
|
)
|
Total Gener Increase
|
119
|
|
Argentina
|
|
Higher fixed costs mainly driven by higher inflation and maintenance costs
|
(38
|
)
|
Lower availability mainly associated with planned major maintenance
|
(22
|
)
|
Unfavorable FX impact
|
(17
|
)
|
Higher rates driven by annual price review
|
58
|
|
Total Argentina Decrease
|
(19
|
)
|
Chivor
|
|
Decrease in anciliary services sales partially offset by higher volume of spot sales
|
(17
|
)
|
Unfavorable FX impact
|
(15
|
)
|
Lower spot sales prices
|
(14
|
)
|
Total Chivor Decrease
|
(46
|
)
|
Total Andes SBU Operating Margin Increase
|
$
|
54
|
|
Adjusted Operating Margin
increase
d by
$12 million
due to the drivers above, adjusted for the impact of NCI. AES owned 71% of Gener and Chivor as of
September 30, 2015
and 67% as of
September 30, 2016
, and 100% of AES Argentina.
Adjusted PTC
decrease
d by
$43 million
, driven by restructuring of Guacolda in 2015 which increased our equity investment and resulted in additional equity in earnings of $46 million. This negative impact was partially offset by the
increase
of
$12 million
in Adjusted Operating Margin described above.
Proportional Free Cash Flow
increase
d by
$21 million
, primarily driven by the
$12 million
increase
in Adjusted Operating Margin as described above, $27 million of higher collections at Chivor related to increased sales from the fourth quarter of 2015, a $25 million favorable impact related to a payment in the prior year to unwind an interest rate swap as part of the Ventanas refinancing in July 2015, a $12 million favorable impact related to collections from CAMMESA associated with remuneration of major maintenance costs, and a $15 million reduction in proportional maintenance and non-recoverable environmental capital expenditures due to lower expenditures on emissions control equipment at Chile. These positive impacts were partially offset by higher net tax payments of $47 million primarily related to withholding taxes paid on Chilean distributions to AES affiliates and higher taxable income in Colombia, and $34 million of lower VAT refunds related to our Cochrane and Alto Maipo construction projects.
BRAZIL SBU
The following table summarizes Operating Margin, Adjusted Operating Margin, Adjusted PTC, and Proportional Free Cash Flow (in millions) for our Brazil SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
53
|
|
|
$
|
91
|
|
|
$
|
(38
|
)
|
|
-42
|
%
|
|
$
|
174
|
|
|
$
|
492
|
|
|
$
|
(318
|
)
|
|
-65
|
%
|
Noncontrolling Interests Adjustment
|
(41
|
)
|
|
(72
|
)
|
|
|
|
|
|
(137
|
)
|
|
(389
|
)
|
|
|
|
|
Adjusted Operating Margin
|
$
|
12
|
|
|
$
|
19
|
|
|
$
|
(7
|
)
|
|
-37
|
%
|
|
$
|
37
|
|
|
$
|
103
|
|
|
$
|
(66
|
)
|
|
-64
|
%
|
Adjusted PTC
|
$
|
6
|
|
|
$
|
15
|
|
|
$
|
(9
|
)
|
|
-60
|
%
|
|
$
|
18
|
|
|
$
|
97
|
|
|
$
|
(79
|
)
|
|
-81
|
%
|
Proportional Free Cash Flow
|
$
|
24
|
|
|
$
|
31
|
|
|
$
|
(7
|
)
|
|
-23
|
%
|
|
$
|
106
|
|
|
$
|
(36
|
)
|
|
$
|
142
|
|
|
NM
|
|
Including
favorable
FX impacts of
$5 million
, Operating Margin for the three months ended
September 30, 2016
decrease
d by
$38 million
, or
42%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Eletropaulo
|
|
Higher fixed costs mainly due to higher bad debt and employee-related costs
|
$
|
(17
|
)
|
Regulatory penalties contingency provision in 2015, partially offset by higher regulatory penalties in 2016
|
10
|
|
Other
|
(8
|
)
|
Total Eletropaulo Decrease
|
(15
|
)
|
Tietê
|
|
Lower rates for energy sold under new contracts
|
(24
|
)
|
Other
|
(5
|
)
|
Total Tietê Decrease
|
(29
|
)
|
Other business drivers
|
6
|
|
Total Brazil SBU Operating Margin Decrease
|
$
|
(38
|
)
|
Adjusted Operating Margin
decrease
d by
$7 million
, primarily due to the drivers discussed above, adjusted for the impact of NCI. As of
September 30, 2016
, AES owns 16% of Eletropaulo, 46% of Uruguaiana and 24% of Tietê.
Adjusted PTC
decrease
d by
$9 million
, driven by the
decrease
of
$7 million
in Adjusted Operating Margin as described above.
Proportional Free Cash Flow
decrease
d by
$7 million
, primarily driven by the unfavorable timing of non-income tax payments of $34 million, higher maintenance capital expenditures at Eletropaulo and Sul of $9 million, higher interest payments at Sul and Eletropaulo of $9 million, and a decrease in Adjusted Operating Margin of $12 million (net of $5 million in non-cash impacts, primarily contingency expenses at Eletropaulo in 2015). These negative impacts were offset by favorable timing of $32 million in net collections of higher costs deferred in net regulatory assets in the prior year at Eletropaulo and Sul as a result of unfavorable hydrology in prior periods, and favorable timing of $27 million in collections on current year energy sales.
Including
unfavorable
FX impacts of
$16 million
, Operating Margin for the
nine months ended
September 30, 2016
decrease
d by
$318 million
, or
65%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Eletropaulo
|
|
Negative impact of reversal of contingent regulatory liability in 2015
|
$
|
(97
|
)
|
Higher fixed costs mainly due to higher bad debt and employee-related costs
|
(67
|
)
|
Lower demand mainly due to economic decline
|
(42
|
)
|
Higher regulatory penalties in 2016 partially offset by regulatory penalties contingency provision in 2015
|
(31
|
)
|
Higher tariffs
|
71
|
|
Other
|
(4
|
)
|
Total Eletropaulo Decrease
|
(170
|
)
|
Tietê
|
|
Lower rates for energy sold under new contracts
|
(183
|
)
|
Unfavorable FX impacts
|
(19
|
)
|
Lower rates for energy purchases mainly due to decrease in spot market prices
|
71
|
|
Other
|
(4
|
)
|
Total Tietê Decrease
|
(135
|
)
|
Other business drivers
|
(13
|
)
|
Total Brazil SBU Operating Margin Decrease
|
$
|
(318
|
)
|
Adjusted Operating Margin
decrease
d by
$66 million
, primarily due to the drivers discussed above, adjusted for the impact of NCI. As of
September 30, 2016
, AES owns 16% of Eletropaulo, 46% of Uruguaiana and 24% of Tietê.
Adjusted PTC
decrease
d by
$79 million
, driven by the
decrease
of
$66 million
in Adjusted Operating Margin as described above, as well as higher interest expense of $10 million related to the reversal of a contingent regulatory liability at Eletropaulo in 2015.
Proportional Free Cash Flow
increase
d by
$142 million
, primarily driven by favorable timing of $311 million in net collections of higher costs deferred in net regulatory assets in the prior year at Eletropaulo and Sul as a result of unfavorable hydrology in prior periods, favorable timing of $119 million in collections on current year energy sales, and lower energy purchases of $22 million at Tietê due to favorable hydrology. These positive impacts were partially offset by unfavorable timing of $211 million in payments for energy purchases and regulatory charges at Eletropaulo and Sul, and a $56 million decrease in in Adjusted Operating Margin (net of $10 million in non-cash impacts, primarily due to the reversal of a contingent regulatory liability at Eletropaulo in 2015).
MCAC SBU
The following table summarizes Operating Margin, Adjusted Operating Margin, Adjusted PTC, and Proportional Free Cash Flow (in millions) for our MCAC SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
140
|
|
|
$
|
148
|
|
|
$
|
(8
|
)
|
|
-5
|
%
|
|
$
|
370
|
|
|
$
|
416
|
|
|
$
|
(46
|
)
|
|
-11
|
%
|
Noncontrolling Interests Adjustment
|
(31
|
)
|
|
(27
|
)
|
|
|
|
|
|
(77
|
)
|
|
(79
|
)
|
|
|
|
|
Derivatives Adjustment
|
(2
|
)
|
|
—
|
|
|
|
|
|
|
(3
|
)
|
|
(2
|
)
|
|
|
|
|
Adjusted Operating Margin
|
$
|
107
|
|
|
$
|
121
|
|
|
$
|
(14
|
)
|
|
-12
|
%
|
|
$
|
290
|
|
|
$
|
335
|
|
|
$
|
(45
|
)
|
|
-13
|
%
|
Adjusted PTC
|
$
|
74
|
|
|
$
|
92
|
|
|
$
|
(18
|
)
|
|
-20
|
%
|
|
$
|
197
|
|
|
$
|
248
|
|
|
$
|
(51
|
)
|
|
-21
|
%
|
Proportional Free Cash Flow
|
$
|
91
|
|
|
$
|
259
|
|
|
$
|
(168
|
)
|
|
-65
|
%
|
|
$
|
98
|
|
|
$
|
391
|
|
|
$
|
(293
|
)
|
|
-75
|
%
|
Operating Margin for the three months ended
September 30, 2016
decrease
d by
$8 million
, or
5%
, primarily due to lower availability in Puerto Rico.
Adjusted Operating Margin
decrease
d by
$14 million
due to the driver above as well as additional impacts of NCI and excluding unrealized gains and losses on derivatives. As of
September 30, 2016
, AES owns 90% of Changuinola and 49% of its other generation facilities in Panama, 90% of Andres and Los Mina (92% in 2015) and 45% of Itabo (46% in 2015) in the Dominican Republic, 99% of TEG/TEP and 55% of Merida in Mexico, and a weighted average of 77% of its businesses in El Salvador.
Adjusted PTC
decrease
d by
$18 million
, driven by the
decrease
of
$14 million
in Adjusted Operating Margin as described above and lower interest income due to lower accounts receivable balance in the Dominican Republic.
Proportional Free Cash Flow
decrease
d by $
168 million
, primarily driven by $177 million in collections of overdue receivables in the Dominican Republic in September 2015, and the
$14 million
decrease in Adjusted Operating Margin described above. These negative impacts were partially offset by a favorable change in working capital in Puerto Rico of $17 million, primarily driven by the timing of collections.
Operating Margin for the
nine months ended
September 30, 2016
decrease
d by
$46 million
, or
11%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Mexico
|
|
Lower availability and related costs
|
$
|
(12
|
)
|
Other
|
(3
|
)
|
Total Mexico Decrease
|
(15
|
)
|
Puerto Rico
|
|
Lower availability
|
(10
|
)
|
Other
|
(4
|
)
|
Total Puerto Rico Decrease
|
(14
|
)
|
Panama
|
|
Expenses related to the ongoing construction of a natural gas generation plant and a liquefied natural gas terminal
|
(15
|
)
|
Lower generation and higher energy purchases driven by weaker hydrological conditions
|
(10
|
)
|
Commencement of power barge operations at the end of March 2015
|
11
|
|
Other
|
1
|
|
Total Panama Decrease
|
(13
|
)
|
Other business drivers
|
(4
|
)
|
Total MCAC SBU Operating Margin Decrease
|
$
|
(46
|
)
|
Adjusted Operating Margin
decrease
d by
$45 million
due to the drivers above, adjusted for the impact of NCI and excluding unrealized gains and losses on derivatives. As of
September 30, 2016
, AES owns 90% of Changuinola and 49% of its other generation facilities in Panama, 90% of Andres and Los Mina (92% in 2015) and 45% of Itabo (46% in 2015) in the Dominican Republic, 99% of TEG/TEP and 55% of Merida in Mexico, and a weighted average of 77% of its businesses in El Salvador.
Adjusted PTC
decrease
d by
$51 million
, driven by the
decrease
of
$45 million
in Adjusted Operating Margin as described above and lower interest income due to lower accounts receivables balance in the Dominican Republic.
Proportional Free Cash Flow
decrease
d by
$293 million
, primarily driven by $177 million in collections of overdue receivables in the Dominican Republic in September 2015, the
$45 million
decrease
in Adjusted Operating Margin described above, lower collections of $40 million in Puerto Rico due to lower sales, higher income tax payments of $14 million in El Salvador as a result of higher taxable income in 2015, and $13 million of higher withholding taxes paid on dividend distributions to AES affiliates in the Dominican Republic.
EUROPE SBU
The following table summarizes Operating Margin, Adjusted Operating Margin, Adjusted PTC, and Proportional Free Cash Flow (in millions) for our Europe SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
54
|
|
|
$
|
59
|
|
|
$
|
(5
|
)
|
|
-8
|
%
|
|
$
|
184
|
|
|
$
|
226
|
|
|
$
|
(42
|
)
|
|
-19
|
%
|
Noncontrolling Interests Adjustment
|
(8
|
)
|
|
(7
|
)
|
|
|
|
|
|
(23
|
)
|
|
(21
|
)
|
|
|
|
|
Derivatives Adjustment
|
(10
|
)
|
|
—
|
|
|
|
|
|
|
(5
|
)
|
|
1
|
|
|
|
|
|
Adjusted Operating Margin
|
$
|
36
|
|
|
$
|
52
|
|
|
$
|
(16
|
)
|
|
-31
|
%
|
|
$
|
156
|
|
|
$
|
206
|
|
|
$
|
(50
|
)
|
|
-24
|
%
|
Adjusted PTC
|
$
|
24
|
|
|
$
|
45
|
|
|
$
|
(21
|
)
|
|
-47
|
%
|
|
$
|
127
|
|
|
$
|
171
|
|
|
$
|
(44
|
)
|
|
-26
|
%
|
Proportional Free Cash Flow
|
$
|
43
|
|
|
$
|
33
|
|
|
$
|
10
|
|
|
30
|
%
|
|
$
|
462
|
|
|
$
|
207
|
|
|
$
|
255
|
|
|
NM
|
|
Including
unfavorable
FX impacts of
$7 million
, Operating Margin for the three months ended
September 30, 2016
decrease
d by
$5 million
, or
8%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Maritza
|
|
Lower contracted capacity prices due to PPA amendment
|
$
|
(6
|
)
|
Lower availability as well as higher fixed costs due to planned outages
|
(5
|
)
|
Other
|
(1
|
)
|
Total Maritza Decrease
|
(12
|
)
|
Kilroot
|
|
Higher availability due to lower planned outages offset by lower plant dispatch
|
4
|
|
Lower depreciation due to impairment in prior year
|
3
|
|
Other
|
2
|
|
Total Kilroot Increase
|
9
|
|
Other business drivers
|
(2
|
)
|
Total Europe SBU Operating Margin Decrease
|
$
|
(5
|
)
|
Adjusted Operating Margin
decrease
d by
$16 million
due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives. As of
September 30, 2016
, AES owns 89% of Kavarna in Bulgaria, and 37% and 36% respectively, of the Amman East and IPP4 projects in Jordan.
Adjusted PTC
decrease
d by
$21 million
, driven by the
decrease
of
$16 million
in Adjusted Operating Margin described above as well as the sale of a solar project in Spain in 2015.
Proportional Free Cash Flow
increase
d by
$10 million
, primarily driven by $44 million of increased collections at Maritza from NEK, net of payments to the fuel supplier. This favorable increase was partially offset by the
$16 million
decrease
in Adjusted Operating Margin, an $8 million decrease in CO
2
allowances due to a price decrease, and higher collections of $5 million in 2015 at Kavarna.
Including
unfavorable
FX impacts of
$30 million
, Operating Margin for the
nine months ended
September 30, 2016
decrease
d by
$42 million
, or
19%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Kazakhstan
|
|
FX impact
|
$
|
(27
|
)
|
Total Kazakhstan Decrease
|
(27
|
)
|
Maritza
|
|
Lower contracted capacity prices due to PPA amendment
|
(14
|
)
|
Other
|
(1
|
)
|
Total Maritza Decrease
|
(15
|
)
|
Total Europe SBU Operating Margin Decrease
|
$
|
(42
|
)
|
Adjusted Operating Margin
decrease
d by
$50 million
due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives. As of
September 30, 2016
, AES owns 89% of Kavarna in Bulgaria, and 37% and 36% respectively, of the Amman East and IPP4 projects in Jordan.
Adjusted PTC
decrease
d by
$44 million
, driven by the
decrease
of
$50 million
in Adjusted Operating Margin described above,
partially offset by lower interest expense in Bulgaria due to less debt and a non-recurring provision in Kazakhstan in 2015.
Proportional Free Cash Flow
increase
d by
$255 million
, primarily driven by $337 million of increased collections at Maritza from NEK, net of payments to the fuel supplier (MMI). This favorable increase was partially offset by the
$50 million
decrease
in Adjusted Operating Margin, a $25 million decrease in CO
2
allowances due to a price decrease, and higher payments of $7 million at Kavarna due to the settlement of overdue invoices to the national grid operator.
ASIA SBU
The following table summarizes Operating Margin, Adjusted Operating Margin, Adjusted PTC, and Proportional Free Cash Flow (in millions) for our Asia SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
|
2016
|
|
2015
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
41
|
|
|
$
|
33
|
|
|
$
|
8
|
|
|
24
|
%
|
|
$
|
124
|
|
|
$
|
104
|
|
|
$
|
20
|
|
|
19
|
%
|
Noncontrolling Interests Adjustment
|
(22
|
)
|
|
(17
|
)
|
|
|
|
|
|
(66
|
)
|
|
(55
|
)
|
|
|
|
|
Adjusted Operating Margin
|
$
|
19
|
|
|
$
|
16
|
|
|
$
|
3
|
|
|
19
|
%
|
|
$
|
58
|
|
|
$
|
49
|
|
|
$
|
9
|
|
|
18
|
%
|
Adjusted PTC
|
$
|
22
|
|
|
$
|
24
|
|
|
$
|
(2
|
)
|
|
-8
|
%
|
|
$
|
70
|
|
|
$
|
66
|
|
|
$
|
4
|
|
|
6
|
%
|
Proportional Free Cash Flow
|
$
|
48
|
|
|
$
|
50
|
|
|
$
|
(2
|
)
|
|
-4
|
%
|
|
$
|
110
|
|
|
$
|
59
|
|
|
$
|
51
|
|
|
86
|
%
|
Operating Margin for the three months ended
September 30, 2016
increase
d by
$8 million
, or
24%
, due to better availability at Mong Duong in Vietnam.
Adjusted Operating Margin
increase
d by
$3 million
due to Operating Margin adjusted for the impact of NCI. As of
September 30, 2016
, AES owns 51% of Masinloc, prior to its sale in January 2016 AES owned 90% of Kelanitissa and 51% of Mong Duong.
Adjusted PTC
decrease
d by
$2 million
, primarily driven by higher interest expense and lower interest income at Mong Duong partially offset by the
increase
of
$3 million
in Adjusted Operating Margin described above.
Proportional Free Cash Flow
decrease
d by
$2 million
, primarily driven by a $7 million decrease in Masinloc working capital due to timing, which was partially offset by the
$3 million
increase
in Adjusted Operating Margin as described above.
Operating margin for the
nine months ended
September 30, 2016
increase
d by
$20 million
, or
19%
, which was driven primarily by the following (in millions):
|
|
|
|
|
Mong Duong
|
|
Impact of full year operations for 2016 compared to commencement of principal operations in April 2015
|
$
|
16
|
|
Total Mong Duong Increase
|
16
|
|
Other business drivers
|
4
|
|
Total Asia SBU Operating Margin Increase
|
$
|
20
|
|
Adjusted Operating Margin
increase
d by
$9 million
due to the driver above adjusted for the impact of NCI. As of
September 30, 2016
, AES owns 51% of Masinloc, prior to its sale in January 2016 AES owned 90% of Kelanitissa and 51% of Mong Duong.
Adjusted PTC
increase
d by
$4 million
, primarily driven by the
increase
of
$9 million
in Adjusted Operating Margin described above.
Proportional Free Cash Flow
increase
d by
$51 million
, primarily driven by a decrease of $28 million in working capital requirements at Mong Duong due to a build up in the prior year in preparation for commencement of plant operations, and an increase in Adjusted Operating Margin of $30 million (net of proportional non-cash service concession expense of $21 million). These positive impacts were partially offset by higher proportional interest expense of $13 million as interest is no longer capitalized as part of service concession asset expenditures.
Key Trends and Uncertainties
During the remainder of
2016
and beyond, we expect to face the following challenges at certain of our businesses. Management expects that improved operating performance at certain businesses, growth from new businesses and global cost reduction initiatives may lessen or offset their impact. If these favorable effects do not occur, or if the challenges described below and elsewhere in this section impact us more significantly than we currently anticipate, or if volatile foreign currencies and commodities move more unfavorably, then these adverse factors, a combination of factors, (or other adverse factors unknown to us) may have a material impact on our operating margin, net income attributable to The AES Corporation and cash flows. We continue to monitor our operations and address challenges as they arise.
Macroeconomic and Political
During the past few years, economic conditions in some countries where our subsidiaries conduct business have deteriorated. Global economic conditions remain volatile and could have an adverse impact on our businesses in the event these recent trends continue.
Brazil
—
Dilma Rousseff was removed from office as Brazil’s president on August 31, 2016. At this time Michel
Temer was confirmed as president until December 2018. President Temer, with majority congressional support, has committed to implement the fiscal reforms needed in order to improve the country’s finances. If enacted, these market reforms would improve the economic outlook, which may benefit our businesses in Brazil.
In June 2016, AES announced the sale of the Company’s 100% ownership interest in AES Sul. The sale is due to a recent portfolio evaluation where it was determined that AES Sul is no longer aligned with the Company’s strategic goals and therefore its disposal is part of a strategic shift in the Brazil distribution sector. The Company concluded the sale on
October 31, 2016
and will realize an after-tax loss on disposal of approximately
$700 million
, subject to adjustments to the final sale proceeds, in the fourth quarter of 2016. The cumulative impact on earnings of the impairment and loss on sale is expected to be approximately
$1.1 billion
. This includes the reclassification of approximately
$1 billion
of cumulative foreign currency translation losses, resulting in an expected net reduction to AES equity of approximately
$100 million
.
United Kingdom
— On June 23, 2016, the United Kingdom (U.K.) held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit”. As a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unclear what the long-term global implications will be, it is possible that the European or U.K. economy could weaken and our businesses may experience a decline in demand. While the full impact of the Brexit is uncertain, these changes may adversely affect our operations and financial results. The most immediate impact has been a devaluation of the pound and euro against the U.S. dollar. For 2016 and 2017, the Company has hedged against these foreign currency movements, however, the impact could be greater in future years.
Puerto Rico
—
Our subsidiaries in Puerto Rico have long term PPAs with state-owned PREPA. Due to the ongoing economic situation in the territory, PREPA faces significant financial challenges.
On June 28, 2014, the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) was signed into law, which allows public corporations, including PREPA, to adjust their debts. As a result of this event, on July 6, 2014, PREPA entered into a Forbearance Agreement with its lenders in order to permit an opportunity for negotiation of a possible financial restructuring of PREPA. In February 2015, the negotiating position of PREPA was weakened when the federal court deemed the Recovery Act unconstitutional. The Supreme Court upheld the federal court’s opinion on June 13, 2016. Despite this setback, PREPA managed to extend the expiration of the Forbearance Agreement several times, achieving in December 2015 certain preliminary restructuring agreements, called Restructuring Support Agreements (“RSAs”). Under these agreements, bondholders would take a reduction in principal after exchanging their bonds for new securities that would be backed by a special charge on clients’ bills. For its part, the utility would receive five-year debt-service relief, while freeing up cash to modernize its power plants.
On June 28, 2016, PREPA authorized the issuance of the restructuring bonds, based on the approval of the Puerto Rico Energy Commission of a transition charge and adjustment mechanism that PREPA had proposed to pay for the utility’s securitized debt. PREPA is expecting to complete this new bond issuance by December 31, 2016. As a result of the impending restructuring, Fitch has downgraded PREPA’s bonds to “C”, from “CC”, causing the downgrade of AES Puerto Rico, as PREPA is our only off taker.
On June 30, 2016, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law. PROMESA creates a structure for exercising federal oversight over the fiscal affairs of U.S. territories and allows for the establishment of an Oversight Board with broad powers of budgetary and financial control over Puerto Rico. PROMESA also creates procedures for adjusting debts accumulated by the Puerto Rico government and, potentially, other territories. Finally, PROMESA expedites the approval of key energy projects and other critical projects in Puerto Rico. The impact PROMESA will have on PREPA’s contracts and PPA is uncertain.
Other than the downgrade of AES Puerto Rico discussed above, there have been no adverse impacts to AES Puerto Rico due to PREPA’s financial challenges. If PREPA continues to face challenges, or those challenges worsen, or otherwise impact PREPA’s ability to make payments to AES Puerto Rico, there could be a material impact on the Company.
United States of America
—
The outcome of the 2016 U.S. elections could result in significant changes to U.S. environmental policies, energy policies and tax laws, the impact of which is uncertain.
Philippines
—
In October 2016, President Rodrigo Duterte announced a change in policy towards the U.S, the impact of which on our businesses in the Philippines is uncertain.
Macroeconomic and Political
—
Summary
If global economic conditions deteriorate further, it could also affect the prices we receive for the electricity we
generate or transmit. Utility regulators or parties to our generation contracts may seek to lower our prices based on prevailing market conditions pursuant to PPAs, concession agreements or other contracts as they come up for renewal or reset. In addition, rising fuel and other costs coupled with contractual price or tariff decreases could restrict our ability to operate profitably in a given market. Additionally, we operate in multiple countries and as such are subject to volatility in exchange rates at the subsidiary level and between our functional currency, the U.S. Dollar, and currencies of the countries in which we operate. The above mentioned market drivers have already impacted us significantly in 2016 and we expect them to continue to do so during the remainder of the year. See Item 3.—
Quantitative and Qualitative Disclosures About Market Risk
for further information. Each of these factors, as well as those discussed above, could result in a decline in the value of our assets including those at the businesses we operate, our equity investments and projects under development that could result in asset impairments that could be material to our operations. We continue to monitor our projects and businesses.
Regulatory
In March 2016, the IURC issued an order authorizing IPL to increase its basic rates and charges by approximately $31 million annually. The order also authorized IPL to collect, over a ten-year period, approximately $118 million of previously deferred regulatory assets related to IPL’s participation in the regional transmission organization known as MISO. Such deferred costs will be amortized to expense over ten years. The rate order also authorized an increase in IPL’s depreciation rates of $24 million annually compared to the twelve months ended June 30, 2014, which is the period upon which the rate increase was calculated. IPL also received approval to implement three new rate riders for current recovery of ongoing MISO costs, capacity costs and sharing of wholesale sales margins with customers at 50%. The order approved recovery of IPL’s pension expenses and return on IPL’s discretionary pension fundings. As part of the order, the IURC also noted that they found IPL’s service company cost allocations to be reasonable and directed IPL to request FERC to review its Service Company allocations. The IURC also closed their investigation into IPL’s underground network. Some of the intervening parties in the IURC rate case have filed petitions for reconsideration of the IURC's March 2016 order with respect to certain issues. The IURC has not yet acted on those petitions. In addition, the Indiana Office of Utility Consumer Counselor and some other intervening parties have filed notices of appeal of the order.
In June 2016, the Supreme Court of Ohio issued an opinion to repeal the current electric security plan (“ESP”) of DPL which had been approved by the Public Utilities Commission of Ohio (“PUCO”) in September 2013 and was in effect for the years 2014-2016 (“ESP 2”). ESP 2, among other matters, permitted DPL to collect a non-bypassable service stability rider (“SSR”) equal to approximately $9 million per month for each of those years. In the opinion, the court briefly stated, without expanding upon the basis, that the PUCO’s approval of ESP 2 was reversed on the authority of one of the court’s prior rulings in a separate case not involving DPL. In view of that reversal, on July 27, 2016, DPL filed a motion to withdraw its ESP 2 and implement rates consistent with those in effect under its June 2009 ESP (“ESP 1”).
PUCO granted DPL’s request on August 26, 2016, thereby terminating ESP 2 and implementing the provisions, terms and conditions of ESP 1 until the rates consistent with the outcome of DPL’s pending ESP filed in February 2016 (“ESP 3”) become effective. The impact of reverting to the ESP 1 rates is not expected to be material during this interim period.
On September 23, 2016, DP&L filed to withdraw its request for a Reliable Electricity Rider (“RER”) in the pending ESP 3 case. On October 11, 2016, DP&L filed an amended application supporting the alternative to the RER proposed in its initial ESP filing, named the Distribution Modernization Rider (“DMR”), requesting to recover $145 million per year for seven years. There can be no assurance that ESP 3 will be approved as filed or on a timely basis. If ESP 3 is not approved on a timely basis or if the final ESP 3 provides for terms that are more adverse than those submitted in DP&L's application, our results of operations, financial condition and cash flows could be materially impacted
.
Operational
Sensitivity to Hydrological Conditions
— Our hydroelectric generation facilities are sensitive to changes in the weather, particularly the level of water inflows into generation facilities. At times, dry hydrological conditions in Panama, Brazil, Colombia and Chile have presented challenges for our businesses in these markets. There is a risk that low rainfall and water inflows could reduce reservoir levels, generation output, and increase prices for electricity. Alternatively, wet conditions could also have an adverse impact by depressing spot prices for excess energy sales for generation businesses. For distribution businesses, wet conditions could result in lowered demand as well as floods and other damage which could disrupt service and require emergency repairs. Future hydrology conditions are always uncertain, but currently the Company does not expect a material impact due to hydrology in 2016.
Foreign Exchange and Commodities
Our businesses are exposed to and proactively manage market risk. Our primary market risk exposure is to the price of commodities, particularly electricity, oil, natural gas, coal, and environmental credits. In 2015, large declines in commodities and appreciation in the USD had a significant impact on our results. During the
nine months ended September 30, 2016
, commodities and FX have remained volatile; continued volatility in these markets could have a material impact on our full year 2016 results. For additional information, refer to Item 3.—
Quantitative and Qualitative Disclosures About Market Risk
.
Impairments
Long-lived Assets
—
Due to decreased wind production and a decline in forward power curves the Company tested the recoverability of its long-lived assets at Buffalo Gap I, II, and III during the nine months ended
September 30, 2016
. See Note
14
—
Asset Impairment Expense
included in Item 1.—
Financial Statements
of this Form 10-Q for further information. After recognizing asset impairment expense at Buffalo Gap I and II, the carrying value of the long-lived asset groups at Buffalo Gap I, II, and III totaled $241 million at
September 30, 2016
.
During the
nine months ended
September 30, 2016
, the Company recognized an asset impairment expense of
$235 million
at DPL. See Note
14
—
Asset Impairment Expense
included in Item 1.—
Financial Statements
of this Form 10-Q for further information. After recognizing this asset impairment expense at DPL, the carrying value of the long-lived asset groups at DPL, including those that were not impaired, totaled
$1.1 billion
at
September 30, 2016
.
Events or changes in circumstances that may necessitate further recoverability tests and potential impairments of long-lived assets may include, but are not limited to, adverse changes in the regulatory environment, unfavorable changes in power prices or fuel costs, increased competition due to additional capacity in the grid, technological advancements, declining trends in demand, or an expectation that it is more likely than not that the asset will be disposed of before the end of its previously estimated useful life.
Construction
During the third quarter of 2016, the Alto Maipo project in Chile experienced technical difficulties in construction which resulted in an increase in projected costs of 10% to 20% over the original $2 billion budget. The additional cost is expected to be funded through a combination of non-recourse debt and sponsors' equity. The Company’s subsidiary, AES Gener, is currently working with its partner, as well as external lenders, to secure additional funding for the completion of the project. Currently, the Company's indirect equity interest in the project is 40%.
Environmental
The Company is subject to numerous environmental laws and regulations in the jurisdictions in which it operates. The Company expenses environmental regulation compliance costs as incurred unless the underlying expenditure qualifies for capitalization under its property, plant and equipment policies. The Company faces certain risks and uncertainties related to these environmental laws and regulations, including existing and potential GHG legislation or regulations, and actual or potential laws and regulations pertaining to water discharges, waste management (including disposal of coal combustion byproducts) and certain air emissions, such as SO
2
, NO
x
, particulate matter and mercury. Such risks and uncertainties could result in increased capital expenditures or other compliance costs which could have a material adverse effect on certain of our U.S. or international subsidiaries and our consolidated results of operations. For further information about these risks, see Item 1A.—
Risk Factors—Our businesses are subject to stringent environmental laws and regulations; Our businesses are subject to enforcement initiatives from environmental regulatory agencies; and Regulators, politicians, non-governmental organizations and other private parties have expressed concern about greenhouse gas, or GHG, emissions and the potential risks associated with climate change and are taking actions which could have a material adverse impact on our consolidated results of operations, financial condition and cash flows
included in the 2015 Form 10-K. The following discussion of the impact of environmental laws and regulations on the Company updates the discussion provided in Item 1.—
Business—Environmental and Land Use Regulations
of the 2015 Form 10-K.
Update on CSAPR
— On September 7, 2016, the EPA finalized an update to the CSAPR to address the 2008 ozone NAAQS ("CSAPR Update Rule"). CSAPR addresses the "good neighbor" provision of the CAA, which prohibits sources within each state from emitting any air pollutant in an amount which will contribute significantly to any other state’s nonattainment, or interference with maintenance of, any NAAQS. The final rule finds that NO
x
ozone season emissions in 22 states (including Indiana, Maryland, Ohio and Oklahoma) affect the ability of downwind states to attain and maintain the 2008 ozone NAAQS. For these 22 states, the EPA is issuing federal implementation plans that generally update existing CSAPR NO
x
ozone season emission budgets for electric generating units within these states, and implement these budgets through modifications to the existing CSAPR
NO
x
ozone season allowance trading program. Implementation will start in the 2017 ozone season (May—September 2017). Affected facilities will receive fewer ozone season NO
x
allowances in 2017 and later, resulting in the need to purchase additional allowances. At this time, we cannot predict what the impact will be with respect to these new standards and requirements, but it could be material if certain facilities will need to purchase additional allowances based on reduced allocations.
Selenium Rule
—
IPL’s NPDES permits may be updated to include Selenium water quality based effluent limits based on a site specific evaluation process which includes determining if there is a reasonable potential to exceed the revised final Selenium water quality standards for the specific receiving water body utilizing actual and/or project discharge information for the IPL generating facilities. As a result, it is not yet possible to predict the total impacts of this final rule at this time, including any challenges to such final rule and the outcome of any such challenges. However, if additional capital expenditures are necessary, they could be material. IPL would seek recovery of these capital expenditures; however, there is no guarantee it would be successful in this regard.
Capital Resources and Liquidity
Overview
—
As of
September 30, 2016
, the Company had unrestricted cash and cash equivalents of
$1.3 billion
, of which
$42 million
was held at the Parent Company and qualified holding companies. The Company had
$596 million
in short-term investments, held primarily at subsidiaries. In addition, we had restricted cash and debt service reserves of
$935 million
. The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of
$15.9 billion
and
$4.9 billion
, respectively. Of the approximately
$1.1 billion
of our current non-recourse debt,
$1.0 billion
was presented as such because it is due in the next 12 months and
$134 million
relates to debt considered in default due to covenant violations. The defaults are not payment defaults, but are instead technical defaults triggered by failure to comply with other covenants and/or conditions such as (but not limited to) failure to meet information covenants, complete construction or milestones in an allocated time, and meet minimum or maximum financial ratios, or other requirements contained in the non-recourse debt documents of the Company.
We expect such current maturities will be repaid from net cash provided by operating activities of the subsidiary to which the debt relates, through opportunistic refinancing activity, or some combination thereof.
None
of our recourse debt matures within the next twelve months. From time to time, we may elect to repurchase our outstanding debt through cash purchases, privately negotiated transactions, or otherwise when management believes that such securities are attractively priced. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements and other factors. The amounts involved in any such repurchases may be material.
We rely mainly on long-term debt obligations to fund our construction activities. We have, to the extent available at acceptable terms, utilized non-recourse debt to fund a significant portion of the capital expenditures and investments required to construct and acquire our electric power plants, distribution companies and related assets. Our non-recourse financing is designed to limit cross-default risk to the Parent Company or other subsidiaries and affiliates. Our non-recourse long-term debt is a combination of fixed and variable interest rate instruments. Generally, a portion or all of the variable rate debt is fixed through the use of interest rate swaps. In addition, the debt is typically denominated in the currency that matches the currency of the revenue expected to be generated from the benefiting project, thereby reducing currency risk. In certain cases, the currency is matched through the use of derivative instruments. The majority of our non-recourse debt is funded by international commercial banks, with debt capacity supplemented by multilaterals and local regional banks.
Given our long-term debt obligations, the Company is subject to interest rate risk on debt balances that accrue interest at variable rates. When possible, the Company will borrow funds at fixed interest rates or hedge its variable rate debt to fix its interest costs on such obligations. In addition, the Company has historically tried to maintain at least 70% of its consolidated long-term obligations at fixed interest rates, including fixing the interest rate through the use of interest rate swaps. These efforts apply to the notional amount of the swaps compared to the amount of related underlying debt. Presently, the Parent Company’s only material unhedged exposure to variable interest rate debt relates to indebtedness under its floating rate senior unsecured notes due 2019. On a consolidated basis, of the Company’s
$20.8 billion
of total debt outstanding as of
September 30, 2016
, approximately
$3.9 billion
bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate. Brazil holds $1.4 billion of our floating rate non-recourse exposure as we have no ability to fix local debt interest rates efficiently.
In addition to utilizing non-recourse debt at a subsidiary level when available, the Parent Company provides a portion, or in certain instances all, of the remaining long-term financing or credit required to fund development, construction or acquisition of a particular project. These investments have generally taken the form of equity investments or intercompany loans, which are subordinated to the project’s non-recourse loans. We generally obtain the funds for these investments from our cash flows from operations, proceeds from the sales of assets and/
or the proceeds from our issuances of debt, common stock and other securities. Similarly, in certain of our businesses, the Parent Company may provide financial guarantees or other credit support for the benefit of counterparties who have entered into contracts for the purchase or sale of electricity, equipment or other services with our subsidiaries or lenders. In such circumstances, if a business defaults on its payment or supply obligation, the Parent Company will be responsible for the business’ obligations up to the amount provided for in the relevant guarantee or other credit support. At
September 30, 2016
, the Parent Company had provided outstanding financial and performance-related guarantees, indemnities or other credit support commitments to or for the benefit of our businesses, which were limited by the terms of the agreements, of approximately
$524 million
in aggregate (excluding those collateralized by letters of credit and other obligations discussed below). These amounts exclude normal and customary representations and warranties in agreements for the sale of assets (including ownership in associated legal entities) where the associated risk is considered to be nominal.
As a result of the Parent Company’s below-investment-grade rating, counterparties may be unwilling to accept our general unsecured commitments to provide credit support. Accordingly, with respect to both new and existing commitments, the Parent Company may be required to provide some other form of assurance, such as a letter of credit, to backstop or replace our credit support. The Parent Company may not be able to provide adequate assurances to such counterparties. To the extent we are required and able to provide letters of credit or other collateral to such counterparties, this will reduce the amount of credit available to us to meet our other liquidity needs. At
September 30, 2016
, we had
$6 million
in letters of credit outstanding, provided under our senior secured credit facility,
$146 million
in letters of credit outstanding under unsecured credit facilities and
$3 million
in cash collateralized letters of credit outstanding outside of our senior secured credit facility. These letters of credit operate to guarantee performance relating to certain project development activities, construction activities and subsidiary operations. During the quarter ended
September 30, 2016
, the Company paid letter of credit fees ranging from
0.2%
to
2.5%
per annum on the outstanding amounts.
We expect to continue to seek, where possible, non-recourse debt financing in connection with the assets or businesses that we or our affiliates may develop, construct or acquire. However, depending on local and global market conditions and the unique characteristics of individual businesses, non-recourse debt may not be available on economically attractive terms or at all. If we decide not to provide any additional funding or credit support to a subsidiary project that is under construction or has near-term debt payment obligations and that subsidiary is unable to obtain additional non-recourse debt, such subsidiary may become insolvent, and we may lose our investment in that subsidiary. Additionally, if any of our subsidiaries lose a significant customer, the subsidiary may need to withdraw from a project or restructure the non-recourse debt financing. If we or the subsidiary choose not to proceed with a project or are unable to successfully complete a restructuring of the non-recourse debt, we may lose our investment in that subsidiary.
Many of our subsidiaries depend on timely and continued access to capital markets to manage their liquidity needs. The inability to raise capital on favorable terms, to refinance existing indebtedness or to fund operations and other commitments during times of political or economic uncertainty may have material adverse effects on the financial condition and results of operations of those subsidiaries. In addition, changes in the timing of tariff increases or delays in the regulatory determinations under the relevant concessions could affect the cash flows and results of operations of our businesses.
Long-Term Receivables
— As of
September 30, 2016
, the Company had approximately
$245 million
and
$37 million
of accounts receivable classified as
Noncurrent assets—other
and
Current assets—Accounts receivable
, respectively, related to certain of its generation businesses in Argentina and the United States, and its utility business in Brazil. The noncurrent portion primarily consists of accounts receivable in Argentina that, pursuant to amended agreements or government resolutions, have collection periods that extend beyond
September 30,
2017
, or one year from the latest balance sheet date. The majority of Argentinian receivables have been converted into long-term financing for the construction of power plants. See Note
5
—Financing Receivables
included in Part I—Item 1.—
Financial Statements
of this Form 10-Q and Item 1.—
Business—Regulatory Matters—Argentina
included in our
2015
Form 10-K for further information.
Consolidated Cash Flows
The following table reflects the changes in operating, investing, and financing cash flows for the comparative
three and nine
month periods (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Cash flows provided by (used in):
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Operating activities
|
|
$
|
819
|
|
|
$
|
915
|
|
|
$
|
(96
|
)
|
|
$
|
2,182
|
|
|
$
|
1,505
|
|
|
$
|
677
|
|
Investing activities
|
|
(543
|
)
|
|
(569
|
)
|
|
26
|
|
|
(1,869
|
)
|
|
(1,639
|
)
|
|
(230
|
)
|
Financing activities
|
|
(215
|
)
|
|
97
|
|
|
(312
|
)
|
|
(258
|
)
|
|
86
|
|
|
(344
|
)
|
Operating Activities
The following table summarizes the key components of our consolidated operating cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in millions)
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Income
|
|
$
|
229
|
|
|
$
|
203
|
|
|
$
|
26
|
|
|
$
|
(84
|
)
|
|
$
|
721
|
|
|
$
|
(805
|
)
|
Depreciation and amortization
|
|
291
|
|
|
283
|
|
|
8
|
|
|
877
|
|
|
880
|
|
|
(3
|
)
|
Impairment expenses
|
|
79
|
|
|
231
|
|
|
(152
|
)
|
|
475
|
|
|
276
|
|
|
199
|
|
Loss on the extinguishment of debt
|
|
16
|
|
|
20
|
|
|
(4
|
)
|
|
12
|
|
|
165
|
|
|
(153
|
)
|
Other adjustments to net income
|
|
14
|
|
|
(15
|
)
|
|
29
|
|
|
438
|
|
|
(50
|
)
|
|
488
|
|
Non-cash adjustments to net income
|
|
400
|
|
|
519
|
|
|
(119
|
)
|
|
1,802
|
|
|
1,271
|
|
|
531
|
|
Net income, adjusted for non-cash items
|
|
$
|
629
|
|
|
$
|
722
|
|
|
$
|
(93
|
)
|
|
$
|
1,718
|
|
|
$
|
1,992
|
|
|
$
|
(274
|
)
|
Net change in operating assets and liabilities
(1)
|
|
$
|
190
|
|
|
$
|
193
|
|
|
$
|
(3
|
)
|
|
$
|
464
|
|
|
$
|
(487
|
)
|
|
$
|
951
|
|
Net Cash Provided by Operating Activities
(2)
|
|
$
|
819
|
|
|
$
|
915
|
|
|
$
|
(96
|
)
|
|
$
|
2,182
|
|
|
$
|
1,505
|
|
|
$
|
677
|
|
(1)
Refer to the table below for explanations of the variance in operating assets and liabilities.
(2)
Amounts included in the table above include the results of discontinued operations, where applicable.
The variance of
$3 million
in changes in operating assets and liabilities for the
three months ended September 30, 2016
compared to the
three months ended September 30, 2015
was driven by:
|
|
|
|
|
Decreases in:
|
(in millions)
|
Other assets, primarily long-term regulatory assets at Eletropaulo and service concession assets at Vietnam
|
$
|
223
|
|
Accounts payable and other current liabilities, primarily at Eletropaulo and Kelanitissa
|
(69
|
)
|
Increases in:
|
|
Accounts receivable, primarily at Andres and Itabo
|
(161
|
)
|
Other operating assets and liabilities
|
4
|
|
Total decrease in cash from changes in operating assets and liabilities
|
$
|
(3
|
)
|
The variance of
$951 million
in changes in operating assets and liabilities for the
nine months ended September 30, 2016
compared to the
nine months ended September 30, 2015
was driven by:
|
|
|
|
|
Decreases in:
|
(in millions)
|
Accounts receivable, primarily at Maritza and Eletropaulo
|
$
|
649
|
|
Prepaid expenses and other current assets, primarily regulatory assets at Eletropaulo and Sul
|
293
|
|
Other assets, primarily long-term regulatory assets at Eletropaulo and service concession assets at Vietnam
|
866
|
|
Accounts payable and other current liabilities, primarily at Eletropaulo and Sul
|
(805
|
)
|
Income taxes payable, net and other taxes payable, primarily at Tietê and Chivor
|
(144
|
)
|
Increases in:
|
|
Other liabilities
|
45
|
|
Other operating assets and liabilities
|
47
|
|
Total increase in cash from changes in operating assets and liabilities
|
$
|
951
|
|
Investing Activities
Net cash used in investing activities decreased by
$26 million
for the
three months ended September 30, 2016
, compared to the
three months ended September 30, 2015
, which was primarily driven by:
|
|
|
|
|
Decreases in:
|
(in millions)
|
Capital expenditures
(1)
|
$
|
4
|
|
Proceeds from the sales of businesses, net of cash sold (primarily related to the sales of Solar Spain and Armenia Mountain in Q3 2015)
|
(93
|
)
|
Net purchases of short-term investments
|
106
|
|
Restricted cash, debt service and other assets
|
28
|
|
Other investing activities
|
(19
|
)
|
Total decrease in net cash used in investing activities
|
$
|
26
|
|
|
|
(1)
|
Refer to the tables below for a breakout of capital expenditures by type and by primary business driver.
|
Net cash used in investing activities increased
$230 million
for the
nine months ended September 30, 2016
, compared to the
nine months ended September 30, 2015
, which was primarily driven by:
|
|
|
|
|
Increases in:
|
(in millions)
|
Capital expenditures
(1)
|
$
|
(83
|
)
|
Proceeds from the sales of businesses, net of cash sold (primarily related to the sale of DPLER)
|
61
|
|
Net purchases of short-term investments
|
(128
|
)
|
Restricted cash, debt service and other assets
|
(63
|
)
|
Other investing activities
|
(17
|
)
|
Total increase in net cash used in investing activities
|
$
|
(230
|
)
|
|
|
(1)
|
Refer to the tables below for a breakout of capital expenditures by type and by primary business driver.
|
Capital Expenditures
The following table summarizes the Company's capital expenditures for growth investments, maintenance, and environmental reported in investing cash activities for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In millions)
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Growth Investments
|
|
$
|
(339
|
)
|
|
$
|
(349
|
)
|
|
$
|
10
|
|
|
$
|
(1,126
|
)
|
|
$
|
(1,091
|
)
|
|
$
|
(35
|
)
|
Maintenance
|
|
(141
|
)
|
|
(110
|
)
|
|
(31
|
)
|
|
(458
|
)
|
|
(414
|
)
|
|
(44
|
)
|
Environmental
(1)
|
|
(35
|
)
|
|
(60
|
)
|
|
25
|
|
|
(186
|
)
|
|
(182
|
)
|
|
(4
|
)
|
Total capital expenditures
|
|
$
|
(515
|
)
|
|
$
|
(519
|
)
|
|
$
|
4
|
|
|
$
|
(1,770
|
)
|
|
$
|
(1,687
|
)
|
|
$
|
(83
|
)
|
|
|
(1)
|
Includes both recoverable and non-recoverable environmental capital expenditures. See Non-GAAP Proportional Free Cash Flow for more information.
|
Cash used for capital expenditures
decreased
by
$4 million
for the
three months ended September 30, 2016
, compared to the
three months ended September 30, 2015
, which was primarily driven by:
|
|
|
|
|
Increases in:
|
(in millions)
|
Growth expenditures at the MCAC SBU, primarily due to the timing of construction activities related to the natural gas-fired generation plant in Panama and the LNG terminal at Andres
|
$
|
(67
|
)
|
Growth expenditures at the Asia SBU, primarily related to investments at Masinloc related to the construction of a coal-fired plant and battery storage projects
|
(36
|
)
|
Maintenance and environmental expenditures at the Brazil SBU, primarily due to expenditures related to the quality indicators recovery plan at Eletropaulo
|
(18
|
)
|
Decreases in:
|
|
Growth expenditures at the US SBU, primarily due to lower spending related to the CCGT and Transmission & Distribution projects at IPALCO
|
70
|
|
Growth expenditures at the Andes SBU, primarily due to lower spending related to Cochrane, the Andes solar plant, and the Angamos desalinization plant; partially offset by higher investments in the Alto Maipo construction project
|
50
|
|
Other capital expenditures
|
5
|
|
Total decrease in net cash used for capital expenditures
|
$
|
4
|
|
Cash used for capital expenditures
increased
by
$83 million
for the
nine months ended September 30, 2016
, compared to the
nine months ended September 30, 2015
, which was primarily driven by:
|
|
|
|
|
Increases in:
|
(in millions)
|
Growth expenditures at the MCAC SBU, primarily due to the timing of construction activities related to the natural gas-fired generation plant in Panama and construction activities related to the Combined Cycle project at Los Mina
|
$
|
(171
|
)
|
Growth expenditures at the Asia SBU, primarily related to investments at Masinloc related to the construction of a coal-fired plant and battery storage projects
|
(64
|
)
|
Growth expenditures at the US SBU, primarily due to additional spending related to the CCGT and battery storage projects at IPALCO
|
(48
|
)
|
Maintenance and environmental expenditures at the Brazil SBU, primarily due to expenditures related to the quality indicators recovery plan and system modernization at Eletropaulo
|
(33
|
)
|
Decreases in:
|
|
Growth expenditures at the Andes SBU, primarily due to lower spending related to Cochrane, the Andes solar plant, and the Angamos desalinization plant; partially offset by higher investments in the Alto Maipo construction project
|
244
|
|
Other capital expenditures
|
(11
|
)
|
Total increase in net cash used for capital expenditures
|
$
|
(83
|
)
|
Financing Activities
Net cash used in financing activities increased
$312 million
for the
three months ended September 30, 2016
, compared to the
three months ended September 30, 2015
, which was primarily driven by:
|
|
|
|
|
|
(in millions)
|
Increase in net borrowing under the revolving credit facilities, primarily at the Parent Company, partially offset by a decrease in net repayments under the revolving credit facilities at the US SBU
|
$
|
209
|
|
Increase in repayment of recourse debt at Parent Company
(1)
|
(197
|
)
|
Decrease in net issuance of non-recourse debt, primarily at the Andes, Brazil and US SBUs
|
(412
|
)
|
Decrease in purchases of treasury stock by the Parent Company
|
101
|
|
Other financing activities
|
(13
|
)
|
Total increase in net cash used in financing activities
|
$
|
(312
|
)
|
|
|
(1)
|
See Note
7
—
Debt
in Item 1—
Financial Statements
of this Form 10-Q for more information regarding significant recourse debt transactions.
|
Net cash used in financing activities increased
$344 million
for the
nine months ended September 30, 2016
, compared to the
nine months ended September 30, 2015
, which was primarily driven by:
|
|
|
|
|
|
(in millions)
|
Decrease in purchases of treasury stock by the Parent Company
|
$
|
329
|
|
Decrease in net repayments of recourse debt at the Parent Company
(1)
|
32
|
|
Decrease in net issuance of non-recourse debt, primarily at the Andes and Asia SBUs
|
(415
|
)
|
Decrease in proceeds from the sale of redeemable stock of subsidiaries at IPALCO
|
(327
|
)
|
Increase in net borrowing under the revolving credit facilities, primarily at the Parent Company
|
190
|
|
Increase in distributions to noncontrolling interests, primarily at the Brazil SBU
|
(174
|
)
|
Other financing activities
|
21
|
|
Total increase in net cash used in financing activities
|
$
|
(344
|
)
|
|
|
(1)
|
See Note
7
—
Debt
in Item 1—
Financial Statements
of this Form 10-Q for more information regarding significant recourse debt transactions.
|
Reconciliation of Proportional Free Cash Flow (a non-GAAP measure)
We define Proportional Free Cash Flow as cash flows from operating activities (adjusted for service concession asset capital expenditures), less maintenance capital expenditures (including non-recoverable environmental capital expenditures and net of reinsurance proceeds), adjusted for the estimated impact of NCI. The proportionate share of cash flows and related adjustments attributable to NCI in our subsidiaries comprise the proportional adjustment factor presented in the reconciliation below. Upon the Company’s adoption of the accounting guidance for service concession arrangements effective January 1, 2015, capital expenditures related to service concession assets that would have been classified as investing activities on the Condensed Consolidated Statement of Cash Flows are now classified as operating activities. See Note 1
—Financial Statement Presentation
included in Item 1.—
Financial Statements
of this Form 10-Q for further information on the adoption of this guidance.
Beginning in the quarter ended March 31, 2015, the Company changed the definition of Proportional Free Cash Flow to exclude the cash flows for capital expenditures related to service concession assets that are now classified within net cash provided by operating activities on the Condensed Consolidated Statement of Cash Flows. The proportional adjustment factor for these capital expenditures is presented in the reconciliation below.
We exclude environmental capital expenditures that are expected to be recovered through regulatory, contractual or other mechanisms. An example of recoverable environmental capital expenditures is IPALCO’s investment in MATS-related environmental upgrades that are recovered through a tracker. See Item 1.
—Business—US SBU—IPALCO—Environmental Matters
included in our 2015 Form 10-K for details of these investments.
The GAAP measure most comparable to proportional free cash flow is cash flows from operating activities. We believe that proportional free cash flow better reflects the underlying business performance of the Company, as it measures the cash generated by the business, after the funding of maintenance capital expenditures, that may be available for investing or repaying debt or other purposes. Factors in this determination include the impact of NCI, where AES consolidates the results of a subsidiary that is not wholly owned by the Company.
The presentation of free cash flow has material limitations. Proportional free cash flow should not be construed as an alternative to cash from operating activities, which is determined in accordance with GAAP. Proportional free cash flow does not represent our cash flow available for discretionary payments because it excludes certain payments that are required or to which we have committed, such as debt service requirements and dividend payments. Our definition of proportional free cash flow may not be comparable to similarly titled measures presented by other companies.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash provided by operating activities
|
|
$
|
819
|
|
|
915
|
|
|
$
|
(96
|
)
|
|
$
|
2,182
|
|
|
$
|
1,505
|
|
|
$
|
677
|
|
Add: capital expenditures related to service concession assets
(1)
|
|
1
|
|
|
77
|
|
|
(76
|
)
|
|
27
|
|
|
148
|
|
|
(121
|
)
|
Adjusted Operating Cash Flow
|
|
$
|
820
|
|
|
$
|
992
|
|
|
$
|
(172
|
)
|
|
$
|
2,209
|
|
|
$
|
1,653
|
|
|
$
|
556
|
|
Less: proportional adjustment factor - operating cash activities
(2) (3)
|
|
(313
|
)
|
|
(276
|
)
|
|
(37
|
)
|
|
(787
|
)
|
|
(361
|
)
|
|
(426
|
)
|
Proportional Adjusted Operating Cash Flow
|
|
$
|
507
|
|
|
$
|
716
|
|
|
$
|
(209
|
)
|
|
$
|
1,422
|
|
|
$
|
1,292
|
|
|
$
|
130
|
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
(2)
|
|
(96
|
)
|
|
(80
|
)
|
|
(16
|
)
|
|
(322
|
)
|
|
(310
|
)
|
|
(12
|
)
|
Less: proportional non-recoverable environmental capital expenditures
(2) (4)
|
|
(11
|
)
|
|
(15
|
)
|
|
4
|
|
|
(30
|
)
|
|
(34
|
)
|
|
4
|
|
Proportional Free Cash Flow
|
|
$
|
400
|
|
|
$
|
621
|
|
|
$
|
(221
|
)
|
|
$
|
1,070
|
|
|
$
|
948
|
|
|
$
|
122
|
|
____________________________
|
|
(1)
|
Service concession asset expenditures excluded from proportional free cash flow non-GAAP metric.
|
|
|
(2)
|
The proportional adjustment factor, proportional maintenance capital expenditures (net of reinsurance proceeds) and proportional non-recoverable environmental capital expenditures are calculated by multiplying the percentage owned by noncontrolling interests for each entity by its corresponding consolidated cash flow metric and are totaled to the resulting figures. For example, Parent Company A owns 80% of Subsidiary Company B, a consolidated subsidiary. Thus, Subsidiary Company B has a 20% noncontrolling interest. Assuming a consolidated net cash flow from operating activities of $100 from Subsidiary B, the proportional adjustment factor for Subsidiary B would equal ($20), or $100 x (20%). The Company calculates the proportional adjustment factor for each consolidated business in this manner and then sums these amounts to determine the total proportional adjustment factor used in the reconciliation. The proportional adjustment factor may differ from the proportion of income attributable to noncontrolling interests as a result of (a) non-cash items which impact income but not cash and (b) AES' ownership interest in the subsidiary where such items occur.
|
|
|
(3)
|
Includes proportional adjustment amount for service concession asset expenditures of
$1 million
and
$39 million
for the three months ended September 30, 2016
and
2015
, as well as,
$14 million
and
$76 million
for the
nine months ended
September 30, 2016
and
2015
, respectively.
|
|
|
(4)
|
Excludes IPALCO's proportional recoverable environmental capital expenditures of
$22 million
and
$35 million
for the three months ended September 30, 2016
and
2015
, as well as,
$116 million
and
$121 million
for the
nine months ended September 30, 2016
and
2015
, respectively.
|
Operating Cash Flow and Proportional Free Cash Flow Analysis
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Cash Flow by Segment
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in millions)
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
US
|
|
$
|
291
|
|
|
$
|
277
|
|
|
$
|
14
|
|
|
$
|
691
|
|
|
$
|
655
|
|
|
$
|
36
|
|
Andes
|
|
157
|
|
|
225
|
|
|
(68
|
)
|
|
300
|
|
|
281
|
|
|
19
|
|
Brazil
|
|
173
|
|
|
73
|
|
|
100
|
|
|
582
|
|
|
36
|
|
|
546
|
|
MCAC
|
|
142
|
|
|
361
|
|
|
(219
|
)
|
|
202
|
|
|
559
|
|
|
(357
|
)
|
Europe
|
|
68
|
|
|
57
|
|
|
11
|
|
|
523
|
|
|
269
|
|
|
254
|
|
Asia
|
|
103
|
|
|
23
|
|
|
80
|
|
|
206
|
|
|
(19
|
)
|
|
225
|
|
Corporate
|
|
(115
|
)
|
|
(101
|
)
|
|
(14
|
)
|
|
(322
|
)
|
|
(276
|
)
|
|
(46
|
)
|
Total
|
|
$
|
819
|
|
|
$
|
915
|
|
|
$
|
(96
|
)
|
|
$
|
2,182
|
|
|
$
|
1,505
|
|
|
$
|
677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proportional Free Cash Flow by Segment
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(in millions)
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
US
|
|
$
|
219
|
|
|
$
|
218
|
|
|
$
|
1
|
|
|
$
|
469
|
|
|
$
|
477
|
|
|
$
|
(8
|
)
|
Andes
|
|
92
|
|
|
134
|
|
|
(42
|
)
|
|
152
|
|
|
131
|
|
|
21
|
|
Brazil
|
|
24
|
|
|
31
|
|
|
(7
|
)
|
|
106
|
|
|
(36
|
)
|
|
142
|
|
MCAC
|
|
91
|
|
|
259
|
|
|
(168
|
)
|
|
98
|
|
|
391
|
|
|
(293
|
)
|
Europe
|
|
43
|
|
|
33
|
|
|
10
|
|
|
462
|
|
|
207
|
|
|
255
|
|
Asia
|
|
48
|
|
|
50
|
|
|
(2
|
)
|
|
110
|
|
|
59
|
|
|
51
|
|
Corporate
|
|
(117
|
)
|
|
(104
|
)
|
|
(13
|
)
|
|
(327
|
)
|
|
(281
|
)
|
|
(46
|
)
|
Total
|
|
$
|
400
|
|
|
$
|
621
|
|
|
$
|
(221
|
)
|
|
$
|
1,070
|
|
|
$
|
948
|
|
|
$
|
122
|
|
____________________________
|
|
(1)
|
Operating cash flow and proportional free cash flow as presented above include the effects of intercompany transactions with other segments except for interest, tax sharing, charges for management fees and transfer pricing.
|
US SBU
The following table summarizes Operating Cash Flow and Proportional Free Cash Flow for our US SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash Provided by Operating Activities
|
|
$
|
291
|
|
|
$
|
277
|
|
|
$
|
14
|
|
|
$
|
691
|
|
|
$
|
655
|
|
|
$
|
36
|
|
Less: proportional adjustment factor on operating cash activities
|
|
(35
|
)
|
|
(26
|
)
|
|
(9
|
)
|
|
(72
|
)
|
|
(33
|
)
|
|
(39
|
)
|
Proportional Adjusted Operating Cash Flow
|
|
256
|
|
|
251
|
|
|
5
|
|
|
619
|
|
|
622
|
|
|
(3
|
)
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
|
|
(35
|
)
|
|
(31
|
)
|
|
(4
|
)
|
|
(146
|
)
|
|
(142
|
)
|
|
(4
|
)
|
Less: proportional non-recoverable environmental capital expenditures
(1)
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
(4
|
)
|
|
(3
|
)
|
|
(1
|
)
|
Proportional Free Cash Flow
|
|
$
|
219
|
|
|
$
|
218
|
|
|
$
|
1
|
|
|
$
|
469
|
|
|
$
|
477
|
|
|
$
|
(8
|
)
|
____________________________
|
|
(1)
|
Excludes IPALCO's proportional recoverable environmental capital expenditures of
$22 million
and
$35 million
for the three months ended September 30, 2016
and
2015
, as well as
$116 million
and
$121 million
for the
nine months ended September 30, 2016
and
2015
, respectively.
|
Three months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$14 million
was driven primarily by the following:
|
|
|
|
|
|
US SBU Quarter-over-Quarter
|
|
(in millions)
|
Higher operating margin, net of non-cash items (primarily depreciation of $5)
|
|
$
|
37
|
|
Timing of payments for accounts payable and consumption of inventory, primarily due to lower fuel inventory purchases from inventory optimization efforts
|
|
34
|
|
Lower payments for interest expense, primarily due to debt repayments at DPL, and lower interest rates
|
|
5
|
|
Timing of receivables collections, primarily due to higher rates at IPL, favorable weather in Q3 2016, and the impact of DPLER’s declining customer base in 2015
|
|
(37
|
)
|
Impact of competitive bid deposits received from suppliers in 2015 to participate in DP&L’s auction
|
|
(20
|
)
|
Other
|
|
(5
|
)
|
Total US SBU Operating Cash Increase
|
|
$
|
14
|
|
Proportional Free Cash Flow
increased
by
$1 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests and reflective of an increase in the proportional adjustment factor as a result of the additional sell-down of IPL in 2016.
Nine months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$36 million
was driven primarily by the following:
|
|
|
|
|
|
US SBU Year-over-Year
|
|
(in millions)
|
Consumption of inventory, primarily due to lower fuel inventory purchases from inventory optimization efforts
|
|
$
|
90
|
|
Lower payments for interest expense, primarily due to debt repayments at DPL, and lower interest rates
|
|
27
|
|
Net impact of receivable settlements related to the 2016 sale of DPLER and the 2015 sale of MC
2
|
|
17
|
|
Timing of receivables collections, primarily due to higher rates at IPL, favorable weather in Q3 2016, and the impact of DPLER’s declining customer base in 2015
|
|
(68
|
)
|
Impact of competitive bid deposits received from suppliers in 2015 to participate in DP&L’s auction
|
|
(20
|
)
|
Lower operating margin, net of non-cash items (primarily depreciation of $28 and $18 impact of IPL’s new rates)
|
|
(9
|
)
|
Other
|
|
(1
|
)
|
Total US SBU Operating Cash Increase
|
|
$
|
36
|
|
Proportional Free Cash Flow
decreased
by
$8 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests and reflective of an increase in the proportional adjustment factor as a result of the additional sell-down of IPL in 2016.
ANDES SBU
The following table summarizes Operating Cash Flow and Proportional Free Cash Flow for our Andes SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash Provided by Operating Activities
|
|
$
|
157
|
|
|
$
|
225
|
|
|
$
|
(68
|
)
|
|
$
|
300
|
|
|
$
|
281
|
|
|
$
|
19
|
|
Less: proportional adjustment factor on operating cash activities
|
|
(50
|
)
|
|
(74
|
)
|
|
24
|
|
|
(97
|
)
|
|
(85
|
)
|
|
(12
|
)
|
Proportional Adjusted Operating Cash Flow
|
|
107
|
|
|
151
|
|
|
(44
|
)
|
|
203
|
|
|
196
|
|
|
7
|
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
|
|
(13
|
)
|
|
(13
|
)
|
|
—
|
|
|
(45
|
)
|
|
(45
|
)
|
|
—
|
|
Less: proportional non-recoverable environmental capital expenditures
|
|
(2
|
)
|
|
(4
|
)
|
|
2
|
|
|
(6
|
)
|
|
(20
|
)
|
|
14
|
|
Proportional Free Cash Flow
|
|
$
|
92
|
|
|
$
|
134
|
|
|
$
|
(42
|
)
|
|
$
|
152
|
|
|
$
|
131
|
|
|
$
|
21
|
|
Three months ended September 30, 2016
:
The
decrease
in Operating Cash Flow of
$68 million
was driven primarily by the following:
|
|
|
|
|
|
Andes SBU Quarter-over-Quarter
|
|
(in millions)
|
Higher operating margin, net of non-cash impacts (primarily depreciation of $5)
|
|
$
|
43
|
|
Lower VAT refunds due to projects entering COD at Cochrane
|
|
(73
|
)
|
Higher payments to fuel suppliers in Chile
|
|
(29
|
)
|
Lower collections at the CTSN plant in Argentina
|
|
(11
|
)
|
Other
|
|
2
|
|
Total Andes SBU Operating Cash Decrease
|
|
$
|
(68
|
)
|
Proportional Free Cash Flow
decreased
by
$42 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests.
Nine months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$19 million
was driven primarily by the following:
|
|
|
|
|
|
Andes SBU Year-over-Year
|
|
(in millions)
|
Higher operating margin, net of non-cash impacts (primarily depreciation of $8)
|
|
$
|
67
|
|
Impact from a prior year payment to unwind an interest rate swap as part of the Ventanas refinancing in July 2015
|
|
38
|
|
Higher collections at Chivor related to increased sales from Q4 2015
|
|
27
|
|
Increase in collections from CAMMESA in Argentina associated with remuneration of major maintenance costs
|
|
12
|
|
Lower interest expense due primarily to Ventanas refinancing
|
|
6
|
|
Lower VAT refunds due to projects entering COD at Cochrane
|
|
(85
|
)
|
Higher tax payments in Chile, primarily withholding taxes paid on Chilean distributions to AES affiliates
|
|
(29
|
)
|
Increase in income tax payments due to higher taxable income in Colombia
|
|
(29
|
)
|
Other
|
|
12
|
|
Total Andes SBU Operating Cash Increase
|
|
$
|
19
|
|
Proportional Free Cash Flow
increased
$21 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests, as well as a
$14 million
net
decrease
in proportional maintenance and non-recoverable environmental capital expenditures primarily from lower payments for emissions reduction equipment at the Tocopilla and Ventanas Plants.
BRAZIL SBU
The following table summarizes Operating Cash Flow and Proportional Free Cash Flow for our Brazil SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash Provided by Operating Activities
|
|
$
|
173
|
|
|
$
|
73
|
|
|
$
|
100
|
|
|
$
|
582
|
|
|
$
|
36
|
|
|
$
|
546
|
|
Less: proportional adjustment factor on operating cash activities
|
|
(131
|
)
|
|
(31
|
)
|
|
(100
|
)
|
|
(422
|
)
|
|
(32
|
)
|
|
(390
|
)
|
Proportional Adjusted Operating Cash Flow
|
|
42
|
|
|
42
|
|
|
—
|
|
|
160
|
|
|
4
|
|
|
156
|
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
|
|
(18
|
)
|
|
(11
|
)
|
|
(7
|
)
|
|
(54
|
)
|
|
(40
|
)
|
|
(14
|
)
|
Proportional Free Cash Flow
|
|
$
|
24
|
|
|
$
|
31
|
|
|
$
|
(7
|
)
|
|
$
|
106
|
|
|
$
|
(36
|
)
|
|
$
|
142
|
|
Three months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$100 million
was driven primarily by the following:
|
|
|
|
|
|
Brazil SBU Quarter-over-Quarter
|
|
(in millions)
|
Lower operating margin
(1)
, net of non-cash items (primarily depreciation of $5 and $28 of contingency items at Eletropaulo)
|
|
$
|
(62
|
)
|
Timing of non-income tax payments
|
|
(78
|
)
|
Timing of collections on energy sales in the current year
|
|
146
|
|
Collections of higher costs deferred in net regulatory assets in the prior year at Eletropaulo and Sul as a result of unfavorable hydrology in prior periods
|
|
118
|
|
Other
|
|
(24
|
)
|
Total Brazil SBU Operating Cash Increase
|
|
$
|
100
|
|
____________________________
(1)
Includes the results of AES Sul, which is excluded from continuing operations in the Condensed Consolidated Statements of Operations but is included within operating cash flow on the Condensed Consolidated Statements of Cash Flows. See Note
16
of Item 1.—
Notes to Condensed Consolidated Financial Statements
within this Form 10-Q for further information.
Proportional Free Cash Flow
decreased
by
$7 million
primarily due to an increase in proportional maintenance capital expenditures.
Nine months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$546 million
was driven primarily by the following:
|
|
|
|
|
|
Brazil SBU Year-over-Year
|
|
(in millions)
|
Lower operating margin
(1)
, net of non-cash items (primarily lower depreciation of $10 and a net $63 impact from contingency items at Eletropaulo)
|
|
$
|
(254
|
)
|
Timing of payments at Eletropaulo and Sul related to regulatory charges and tariff flags due to improved hydrology in 2016
|
|
(603
|
)
|
Timing of non-income tax payments
|
|
(19
|
)
|
Collections of higher costs deferred in net regulatory assets in the prior year at Eletropaulo and Sul as a result of unfavorable hydrology in prior periods
|
|
980
|
|
Timing of collections on energy sales in the current year
|
|
406
|
|
Lower energy purchases at Tietê in the current year as result of favorable hydrology
|
|
92
|
|
Other
|
|
(56
|
)
|
Total Brazil SBU Operating Cash Increase
|
|
$
|
546
|
|
____________________________
(1)
Includes the results of AES Sul, which is excluded from continuing operations in the Condensed Consolidated Statements of Operations but is included within operating cash flow on the Condensed Consolidated Statements of Cash Flows. See Note
16
of Item 1.—
Notes to Condensed Consolidated Financial Statements
within this Form 10-Q for further information.
Proportional Free Cash Flow
increased
by
$142 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests.
MCAC SBU
The following table summarizes Operating Cash Flow and Proportional Free Cash Flow for our MCAC SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash Provided by Operating Activities
|
|
$
|
142
|
|
|
$
|
361
|
|
|
$
|
(219
|
)
|
|
$
|
202
|
|
|
$
|
559
|
|
|
$
|
(357
|
)
|
Less: proportional adjustment factor on operating cash activities
|
|
(33
|
)
|
|
(89
|
)
|
|
56
|
|
|
(51
|
)
|
|
(121
|
)
|
|
70
|
|
Proportional Adjusted Operating Cash Flow
|
|
109
|
|
|
272
|
|
|
(163
|
)
|
|
151
|
|
|
438
|
|
|
(287
|
)
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
|
|
(18
|
)
|
|
(12
|
)
|
|
(6
|
)
|
|
(51
|
)
|
|
(45
|
)
|
|
(6
|
)
|
Less: proportional non-recoverable environmental capital expenditures
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
Proportional Free Cash Flow
|
|
$
|
91
|
|
|
$
|
259
|
|
|
$
|
(168
|
)
|
|
$
|
98
|
|
|
$
|
391
|
|
|
$
|
(293
|
)
|
Three months ended September 30, 2016
:
The
decrease
in Operating Cash Flow of
$219 million
was driven primarily by the following:
|
|
|
|
|
|
MCAC SBU Quarter-over-Quarter
|
|
(in millions)
|
Collection over overdue receivables in September 2015 from distribution companies in the Dominican Republic
|
|
$
|
(243
|
)
|
Favorable changes in working capital at Puerto Rico, primarily driven by the timing of collections
|
|
17
|
|
Other
|
|
7
|
|
Total MCAC SBU Operating Cash Decrease
|
|
$
|
(219
|
)
|
Proportional Free Cash Flow
decreased
by
$168 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests.
Nine months ended September 30, 2016
:
The
decrease
in Operating Cash Flow of
$357 million
was driven primarily by the following:
|
|
|
|
|
|
MCAC SBU Year-over-Year
|
|
(in millions)
|
Collection over overdue receivables in September 2015 from distribution companies in the Dominican Republic
|
|
$
|
(243
|
)
|
Lower collections from the off-taker in Puerto Rico, primarily due to lower sales from Q4 2015
|
|
(40
|
)
|
Lower operating margin, net of non-cash items (primarily depreciation of $8)
|
|
(41
|
)
|
Higher income tax payment as a result of higher taxable income in 2015 vs. 2014 in El Salvador
|
|
(17
|
)
|
Higher withholding taxes paid on dividend distributions to AES affiliates in the Dominican Republic
|
|
(16
|
)
|
Total MCAC SBU Operating Cash Decrease
|
|
$
|
(357
|
)
|
Proportional Free Cash Flow
decreased
by
$293 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests.
EUROPE SBU
The following table summarizes Operating Cash Flow and Proportional Free Cash Flow for our Europe SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash Provided by Operating Activities
|
|
$
|
68
|
|
|
$
|
57
|
|
|
$
|
11
|
|
|
$
|
523
|
|
|
$
|
269
|
|
|
$
|
254
|
|
Less: proportional adjustment factor on operating cash activities
|
|
(8
|
)
|
|
(6
|
)
|
|
(2
|
)
|
|
(24
|
)
|
|
(23
|
)
|
|
(1
|
)
|
Proportional Adjusted Operating Cash Flow
|
|
60
|
|
|
51
|
|
|
9
|
|
|
499
|
|
|
246
|
|
|
253
|
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
|
|
(10
|
)
|
|
(11
|
)
|
|
1
|
|
|
(19
|
)
|
|
(31
|
)
|
|
12
|
|
Less: proportional non-recoverable environmental capital expenditures
|
|
(7
|
)
|
|
(7
|
)
|
|
—
|
|
|
(18
|
)
|
|
(8
|
)
|
|
(10
|
)
|
Proportional Free Cash Flow
|
|
$
|
43
|
|
|
$
|
33
|
|
|
$
|
10
|
|
|
$
|
462
|
|
|
$
|
207
|
|
|
$
|
255
|
|
Three months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$11 million
was driven primarily by the following:
|
|
|
|
|
|
Europe SBU Quarter-over-Quarter
|
|
(in millions)
|
Increase in collections at Maritza from NEK (off-taker), net of payments to MMI (fuel supplier)
|
|
$
|
44
|
|
Lower operating margin, net of non-cash items (primarily unrealized gain on designated hedge of $10)
|
|
(28
|
)
|
Decrease in CO
2
allowances due to a price decrease
|
|
(8
|
)
|
Other
|
|
3
|
|
Total Europe SBU Operating Cash Increase
|
|
$
|
11
|
|
Proportional Free Cash Flow
increased
by
$10 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests.
Nine months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$254 million
was driven primarily by the following:
|
|
|
|
|
|
Europe SBU Year-over-Year
|
|
(in millions)
|
Increase in collections at Maritza from NEK (off-taker), net of payments to MMI (fuel supplier)
|
|
$
|
337
|
|
Lower operating margin, net of non cash items (primarily lower depreciation of $16)
|
|
(63
|
)
|
Decrease in CO2 allowances due to a price decrease
|
|
(25
|
)
|
Higher payments at Bulgaria Wind due to the settlement of overdue invoices to the national grid operator
|
|
(7
|
)
|
Other
|
|
12
|
|
Total Europe SBU Operating Cash Increase
|
|
$
|
254
|
|
Proportional Free Cash Flow
increased
$255 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests.
ASIA SBU
The following table summarizes Operating Cash Flow and Proportional Free Cash Flow for our Asia SBU for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash Provided by Operating Activities
|
|
$
|
103
|
|
|
$
|
23
|
|
|
$
|
80
|
|
|
$
|
206
|
|
|
$
|
(19
|
)
|
|
$
|
225
|
|
Add: capital expenditures related to service concession assets
(1)
|
|
1
|
|
|
77
|
|
|
(76
|
)
|
|
27
|
|
|
148
|
|
|
(121
|
)
|
Adjusted Operating Cash Flow
|
|
104
|
|
|
100
|
|
|
4
|
|
|
233
|
|
|
129
|
|
|
104
|
|
Less: proportional adjustment factor on operating cash activities
(2)
|
|
(56
|
)
|
|
(50
|
)
|
|
(6
|
)
|
|
(121
|
)
|
|
(67
|
)
|
|
(54
|
)
|
Proportional Adjusted Operating Cash Flow
|
|
48
|
|
|
50
|
|
|
(2
|
)
|
|
112
|
|
|
62
|
|
|
50
|
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(3
|
)
|
|
1
|
|
Proportional Free Cash Flow
|
|
$
|
48
|
|
|
$
|
50
|
|
|
$
|
(2
|
)
|
|
$
|
110
|
|
|
$
|
59
|
|
|
$
|
51
|
|
(1)
Service concession asset expenditures are included in operating cash flows but are excluded from the calculation of proportional free cash flows.
(2)
Includes proportional adjustment for service concession asset expenditures of
$1 million
and
$39 million
for the three months ended September 30,
2016
and 2015, as well as
$14 million
and
$76 million
for the nine months ended September 30, 2016 and
2015
, respectively.
Three months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$80 million
was driven primarily by the following:
|
|
|
|
|
|
Asia SBU Quarter-over-Quarter
|
|
(in millions)
|
Reduction in service concession asset expenditures at Mong Duong
|
|
$
|
76
|
|
Other
|
|
4
|
|
Total Asia SBU Operating Cash Increase
|
|
$
|
80
|
|
Proportional Free Cash Flow
decreased
by
$2 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests and exclusive of the
$76 million
favorable decrease in service concession asset expenditures, which are excluded from the calculation of proportional free cash flows.
Nine months ended September 30, 2016
:
The
increase
in Operating Cash Flow of
$225 million
was driven primarily by the following:
|
|
|
|
|
|
Asia SBU Year-over-Year
|
|
(in millions)
|
Decrease in working capital requirements at Mong Duong as the plant was fully operational in 2016
|
|
$
|
56
|
|
Higher operating margin, net of non-cash service concession expense
|
|
61
|
|
Reduction in service concession asset expenditures, net of previously capitalized interest payments
|
|
94
|
|
Higher interest income as a result of the financing component under service concession accounting
|
|
23
|
|
Other
|
|
(9
|
)
|
Total Asia SBU Operating Cash Increase
|
|
$
|
225
|
|
Proportional Free Cash Flow
increased
by
$51 million
primarily due to the drivers above, adjusted for the impact of noncontrolling interests and exclusive of the
$121 million
favorable decrease in service concession asset expenditures, which are excluded from the calculation of proportional free cash flows.
CORPORATE AND OTHER
The following table summarizes Operating Cash Flow and Proportional Free Cash Flow for our Corporate and Other operations for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Calculation of Proportional Free Cash Flow
|
|
2016
|
|
2015
|
|
$ Change
|
|
2016
|
|
2015
|
|
$ Change
|
Net Cash Used by Operating Activities
|
|
$
|
(115
|
)
|
|
$
|
(101
|
)
|
|
$
|
(14
|
)
|
|
$
|
(322
|
)
|
|
$
|
(276
|
)
|
|
$
|
(46
|
)
|
Proportional Adjusted Operating Cash Flow
|
|
(115
|
)
|
|
(101
|
)
|
|
(14
|
)
|
|
(322
|
)
|
|
(276
|
)
|
|
(46
|
)
|
Less: proportional maintenance capital expenditures, net of reinsurance proceeds
|
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
(5
|
)
|
|
(4
|
)
|
|
(1
|
)
|
Less: proportional non-recoverable environmental capital expenditures
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
|
1
|
|
Proportional Free Cash Flow
|
|
$
|
(117
|
)
|
|
$
|
(104
|
)
|
|
$
|
(13
|
)
|
|
$
|
(327
|
)
|
|
$
|
(281
|
)
|
|
$
|
(46
|
)
|
Three months ended September 30, 2016
:
The
decrease
in Operating Cash Flow of
$14 million
was driven primarily by the following:
|
|
|
|
|
|
Corporate and Other Quarter-over-Quarter
|
|
(in millions)
|
Timing of annual property insurance premiums received from SBUs due to change in policy year to a calendar year basis
|
|
$
|
(24
|
)
|
Timing of payments for people-related costs
|
|
11
|
|
Other
|
|
(1
|
)
|
Total Corporate and Other Operating Cash Decrease
|
|
$
|
(14
|
)
|
Proportional Free Cash Flow
decreased
by
$13 million
primarily due to the drivers above.
Nine months ended September 30, 2016
:
The
decrease
in Operating Cash Flow of
$46 million
was driven primarily by the following:
|
|
|
|
|
|
Corporate and Other Year-over-Year
|
|
(in millions)
|
Timing of annual property insurance premiums received from SBUs
|
|
$
|
36
|
|
Lower interest payments due principal repayments on debt
|
|
17
|
|
Decrease in cash from net settlements of oil derivatives
|
|
(8
|
)
|
Timing of payments for reinsurance costs
|
|
(14
|
)
|
Timing of intercompany settlements with SBUs
|
|
(20
|
)
|
Higher payments for people-related costs, primarily due to inflation, health benefit costs, and severance
|
|
(26
|
)
|
Other
|
|
(31
|
)
|
Total Corporate and Other Operating Cash Decrease
|
|
$
|
(46
|
)
|
Proportional Free Cash Flow
decreased
by
$46 million
primarily due to the drivers above.
Parent Company Liquidity
The following discussion is included as a useful measure of the liquidity available to The AES Corporation, or the Parent Company, given the non-recourse nature of most of our indebtedness. Parent Company Liquidity as outlined below is a non-GAAP measure and should not be construed as an alternative to
cash and cash equivalents
which are determined in accordance with GAAP as a measure of liquidity, and are disclosed in the Condensed Consolidated Statements of Cash Flows. Parent Company Liquidity may differ from similarly titled measures used by other companies.
The principal sources of liquidity at the Parent Company level are dividends and other distributions from our subsidiaries, including refinancing proceeds; proceeds from debt and equity financings at the Parent Company level, including availability under our credit facility; and proceeds from asset sales.
Cash requirements at the Parent Company level are primarily (1) to fund interest; (2) principal repayments of debt; (3) acquisitions; (4) construction commitments; (5) other equity commitments; (6) common stock repurchases and dividends; (7) taxes; and (8) Parent Company overhead and development costs.
The Company defines Parent Company Liquidity as cash available to the Parent Company plus available borrowings under existing credit facility. The cash held at qualified holding companies represents cash sent to subsidiaries of the Company domiciled outside of the U.S. Such subsidiaries have no contractual restrictions on their ability to send cash to the Parent Company. Parent Company Liquidity is reconciled to its most directly comparable GAAP financial measure,
cash and cash equivalents
, at the periods indicated as follows (in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
Consolidated cash and cash equivalents
|
$
|
1,325
|
|
|
$
|
1,257
|
|
Less: Cash and cash equivalents at subsidiaries
|
(1,283
|
)
|
|
(857
|
)
|
Parent and qualified holding companies’ cash and cash equivalents
|
42
|
|
|
400
|
|
Commitments under Parent credit facilities
|
800
|
|
|
800
|
|
Less: Letters of credit under the credit facilities
|
(6
|
)
|
|
(62
|
)
|
Less: Borrowings under the credit facilities
|
(275
|
)
|
(1)
|
—
|
|
Borrowings available under Parent credit facilities
|
519
|
|
|
738
|
|
Total Parent Company Liquidity
|
$
|
561
|
|
|
$
|
1,138
|
|
_____________________________
|
|
(1)
|
The Company redeemed its
$181 million
senior unsecured notes due 2017 using proceeds from the borrowings under senior secured credit facility which it intends to repay in the fourth quarter of 2016.
|
The Company paid dividends of
$0.11
per share to its common stockholders during the first, second and third quarters of
2016
for dividends declared in December 2015, and February and July 2016, respectively. While we intend to continue payment of dividends, and believe we will have sufficient liquidity to do so, we can provide no assurance that we will continue to pay dividends, or if continued, the amount of such dividends.
Recourse Debt
Our total recourse debt was
$4.9 billion
and
$5.0 billion
as of
September 30, 2016
and
December 31, 2015
, respectively. See Note
7
—
Debt
in Item 1.—
Financial Statements
of this Form 10-Q and Note 12—
Debt
in Item 8.—
Financial Statements and Supplementary Data
of our
2015
Form 10-K for additional detail.
While we believe that our sources of liquidity will be adequate to meet our needs for the foreseeable future, this belief is based on a number of material assumptions, including, without limitation, assumptions about our ability to access the capital markets (see Item 2.—
Key Trends and Uncertainties
)
, the operating and financial performance of our subsidiaries, currency exchange rates, power market pool prices, and the ability of our subsidiaries to pay dividends. In addition, our subsidiaries’ ability to declare and pay cash dividends to us (at the Parent Company level) is subject to certain limitations contained in loans, governmental provisions and other agreements. We can provide no assurance that these sources will be available when needed or that the actual cash requirements will not be greater than anticipated. We have met our interim needs for shorter-term and working capital financing at the Parent Company level with our senior secured credit facility. See Item 1A.—
Risk Factors
—
The AES Corporation is a holding company and its ability to make payments on its outstanding indebtedness, including its public debt securities, is dependent upon the receipt of funds from its subsidiaries by way of dividends, fees, interest, loans or otherwise
of the Company’s
2015
Form 10-K for additional information.
Various debt instruments at the Parent Company level, including our senior secured credit facility, contain certain restrictive covenants. The covenants provide for — among other items — (1) limitations on other indebtedness; (2) liens, investments and guarantees, limitations on dividends, stock repurchases and other equity transactions; (3) restrictions and limitations on mergers and acquisitions, sales of assets, leases, transactions with affiliates and off-balance sheet and derivative arrangements; (4) maintenance of certain financial ratios; and (5) financial and other reporting requirements. As of
September 30, 2016
, we were in compliance with these covenants at the Parent Company level.
Non-Recourse Debt
While the lenders under our non-recourse debt financings generally do not have direct recourse to the Parent Company, defaults thereunder can still have important consequences for our results of operations and liquidity, including, without limitation:
|
|
•
|
Reducing our cash flows as the subsidiary will typically be prohibited from distributing cash to the Parent Company during the time period of any default;
|
|
|
•
|
Triggering our obligation to make payments under any financial guarantee, letter of credit or other credit support we have provided to or on behalf of such subsidiary;
|
|
|
•
|
Causing us to record a loss in the event the lender forecloses on the assets; and
|
|
|
•
|
Triggering defaults in our outstanding debt at the Parent Company.
|
For example, our senior secured credit facility and outstanding debt securities at the Parent Company include events of default for certain bankruptcy-related events involving material subsidiaries. In addition, our senior secured credit facility at the Parent Company includes events of default related to payment defaults and accelerations of outstanding debt of material subsidiaries.
Some of our subsidiaries are currently in default with respect to all or a portion of their outstanding indebtedness. The total non-recourse debt classified as current in the accompanying Condensed Consolidated Balance Sheets amounts to
$1.1 billion
. The portion of current debt related to such defaults was
$134 million
at
September 30, 2016
, all of which was non-recourse debt related to two subsidiaries — Kavarna and Sogrinsk. See Note
7
—
Debt
in Item 1.—
Financial Statements
of this Form 10-Q for additional detail.
None of the subsidiaries that are currently in default are subsidiaries that met the applicable definition of materiality under AES’ corporate debt agreements as of
September 30, 2016
, in order for such defaults to trigger an event of default or permit acceleration under AES’ indebtedness. However, as a result of additional dispositions of assets, other significant reductions in asset carrying values or other matters in the future that may impact our financial position and results of operations or the financial position of the individual subsidiary, it is possible that one or more of these subsidiaries could fall within the definition of a “material subsidiary” and thereby upon an acceleration trigger an event of default and possible acceleration of the indebtedness under the Parent Company’s outstanding debt securities. A material subsidiary is defined in the Company’s senior secured credit facility as any business that contributed 20% or more of the Parent Company’s total cash distributions from businesses for the four most recently ended fiscal quarters. As of
September 30, 2016
, none of the defaults listed above individually or in the aggregate results in or is at risk of triggering a cross-default under the recourse debt of the Company.
Critical Accounting Policies and Estimates
The condensed consolidated financial statements of AES are prepared in conformity with U.S. GAAP, which requires the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. The Company’s significant accounting policies are described in Note 1—
General and Summary of Significant Accounting Policies
of our
2015
Form 10-K. The Company’s critical accounting estimates are described in
Management’s Discussion and Analysis of Financial Condition and Results of Operations
in the
2015
Form 10-K. An accounting estimate is considered critical if the estimate requires management to make an assumption about matters that were highly uncertain at the time the estimate was made, different estimates reasonably could have been used, or if changes in the estimate that would have a material impact on the Company’s financial condition or results of operations are reasonably likely to occur from period to period. Management believes that the accounting estimates employed are appropriate and resulting balances are reasonable; however, actual results could differ from the original estimates, requiring adjustments to these balances in future periods. The Company has reviewed and determined that these remain as critical accounting policies as of and for the
nine months ended September 30, 2016
.