|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions, except per share amounts)
|
2020
|
|
2019
|
|
$ change
|
|
% change
|
Revenue:
|
|
|
|
|
|
|
|
US and Utilities SBU
|
$
|
971
|
|
|
$
|
1,019
|
|
|
$
|
(48
|
)
|
|
-5
|
%
|
South America SBU
|
712
|
|
|
845
|
|
|
(133
|
)
|
|
-16
|
%
|
MCAC SBU
|
432
|
|
|
450
|
|
|
(18
|
)
|
|
-4
|
%
|
Eurasia SBU
|
225
|
|
|
339
|
|
|
(114
|
)
|
|
-34
|
%
|
Corporate and Other
|
28
|
|
|
9
|
|
|
19
|
|
|
NM
|
|
Eliminations
|
(30
|
)
|
|
(12
|
)
|
|
(18
|
)
|
|
NM
|
|
Total Revenue
|
2,338
|
|
|
2,650
|
|
|
(312
|
)
|
|
-12
|
%
|
Operating Margin:
|
|
|
|
|
|
|
|
|
US and Utilities SBU
|
120
|
|
|
212
|
|
|
(92
|
)
|
|
-43
|
%
|
South America SBU
|
177
|
|
|
216
|
|
|
(39
|
)
|
|
-18
|
%
|
MCAC SBU
|
140
|
|
|
75
|
|
|
65
|
|
|
87
|
%
|
Eurasia SBU
|
51
|
|
|
63
|
|
|
(12
|
)
|
|
-19
|
%
|
Corporate and Other
|
32
|
|
|
20
|
|
|
12
|
|
|
60
|
%
|
Eliminations
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
|
NM
|
|
Total Operating Margin
|
507
|
|
|
586
|
|
|
(79
|
)
|
|
-13
|
%
|
General and administrative expenses
|
(38
|
)
|
|
(46
|
)
|
|
8
|
|
|
-17
|
%
|
Interest expense
|
(233
|
)
|
|
(265
|
)
|
|
32
|
|
|
-12
|
%
|
Interest income
|
70
|
|
|
79
|
|
|
(9
|
)
|
|
-11
|
%
|
Loss on extinguishment of debt
|
(1
|
)
|
|
(10
|
)
|
|
9
|
|
|
-90
|
%
|
Other expense
|
(4
|
)
|
|
(12
|
)
|
|
8
|
|
|
-67
|
%
|
Other income
|
45
|
|
|
30
|
|
|
15
|
|
|
50
|
%
|
Loss on disposal and sale of business interests
|
—
|
|
|
(4
|
)
|
|
4
|
|
|
-100
|
%
|
Asset impairment expense
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
NM
|
|
Foreign currency transaction gains (losses)
|
24
|
|
|
(4
|
)
|
|
28
|
|
|
NM
|
|
Other non-operating expense
|
(44
|
)
|
|
—
|
|
|
(44
|
)
|
|
NM
|
|
Income tax expense
|
(89
|
)
|
|
(115
|
)
|
|
26
|
|
|
-23
|
%
|
Net equity in losses of affiliates
|
(2
|
)
|
|
(6
|
)
|
|
4
|
|
|
-67
|
%
|
NET INCOME
|
229
|
|
|
233
|
|
|
(4
|
)
|
|
-2
|
%
|
Less: Net income attributable to noncontrolling interests and redeemable stock of subsidiaries
|
(85
|
)
|
|
(79
|
)
|
|
(6
|
)
|
|
8
|
%
|
NET INCOME ATTRIBUTABLE TO THE AES CORPORATION
|
$
|
144
|
|
|
$
|
154
|
|
|
$
|
(10
|
)
|
|
-6
|
%
|
Net cash provided by operating activities
|
$
|
373
|
|
|
$
|
690
|
|
|
$
|
(317
|
)
|
|
-46
|
%
|
Components of Revenue, Cost of Sales, and Operating Margin — 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 expenses, 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.
27 | The AES Corporation | March 31, 2020 Form 10-Q
Consolidated Revenue and Operating Margin
Three Months Ended March 31, 2020
Revenue
(in millions)
Consolidated Revenue — Revenue decreased $312 million, or 12%, for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. Excluding the unfavorable FX impact of $36 million, primarily in South America, this decrease was driven by:
|
|
•
|
$111 million in Eurasia mainly driven by the sale of the Northern Ireland businesses in June 2019;
|
|
|
•
|
$103 million in South America mainly driven by lower generation in Colombia due to a life extension project being performed at the Chivor hydro plant, and lower pass-through coal prices in Chile;
|
|
|
•
|
$48 million in US and Utilities mainly driven by lower regulated rates at DPL due to the changes in DPL’s ESP, lower retail sales demand at both IPL and DPL primarily due to milder weather, and a decrease in energy pass-through rates in El Salvador. These decreases were partially offset by increased unrealized gains on derivatives at Southland Energy.
|
|
|
•
|
$15 million in MCAC mainly driven by lower pass-through fuel prices in Mexico, lower PPA prices driven by lower LNG index prices at the Colon plant in Panama, and lower spot sales at Itabo.
|
Operating Margin
(in millions)
Consolidated Operating Margin — Operating margin decreased $79 million, or 13%, for the three months ended March 31, 2020, compared to the three months ended March 31, 2019. Excluding the unfavorable FX impact of $4 million, primarily in South America, this decrease was driven by:
|
|
•
|
$92 million in US and Utilities mostly due to a favorable revision to the ARO at DPL in 2019, lower regulated rates at DPL due to the changes in DPL’s ESP, lower retail sales demand at both IPL and DPL primarily due to milder weather, and increased rock ash disposal at Puerto Rico;
|
|
|
•
|
$37 million in South America mostly due to the drivers discussed above; and
|
|
|
•
|
$11 million in Eurasia primarily due to the drivers discussed above.
|
28 | The AES Corporation | March 31, 2020 Form 10-Q
These unfavorable impacts were partially offset by an increase of $66 million in MCAC due to lower LNG prices and higher availability at Itabo, and in Panama due to lower outage at Changuinola as a result of the tunnel upgrade compared to prior year as well as higher spot sales and availability driven by hydrology.
See Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations—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 decreased $8 million, or 17%, to $38 million for the three months ended March 31, 2020, compared to $46 million for the three months ended March 31, 2019, primarily due to reduced people costs, lower professional fees and a higher reallocation of information technology costs to the SBUs as cost of sales, partially offset by higher business development expenses.
Interest expense
Interest expense decreased $32 million, or 12%, to $233 million for the three months ended March 31, 2020, compared to $265 million for the three months ended March 31, 2019. This decrease is primarily due to incremental capitalized interest in Chile, partially offset by lower capitalized interest due to the commencement of operations at the Alamitos and Huntington Beach facilities in February 2020.
Interest income
Interest income decreased $9 million, or 11%, to $70 million for the three months ended March 31, 2020, compared to $79 million for the three months ended March 31, 2019. This decrease is primarily due to the decrease of the CAMMESA interest rate on receivables in Argentina and a lower loan receivable balance at Mong Duong.
Loss on extinguishment of debt
Loss on extinguishment of debt decreased $9 million, or 90%, to $1 million for the three months ended March 31, 2020, compared to $10 million for the three months ended March 31, 2019. This decrease was primarily due to losses of $10 million at Gener in 2019.
Other income and expense
Other income increased $15 million, or 50%, to $45 million for the three months ended March 31, 2020, compared to $30 million for the three months ended March 31, 2019. This increase was primarily due to the gain on sale of Redondo Beach land at Southland, partially offset by the prior year gain on insurance recoveries associated with property damage at the Andres facility.
Other expense decreased $8 million, or 67%, to $4 million for the three months ended March 31, 2020, compared to $12 million for the three months ended March 31, 2019, with no material drivers.
See Note 15—Other Income and Expense included in Item 1.—Financial Statements of this Form 10-Q for further information.
Asset impairment expense
Asset impairment expense was $6 million for the three months ended March 31, 2020 due to the abandonment of certain development projects no longer being pursued in Chile. There was no asset impairment expense during the three months ended March 31, 2019.
Foreign currency transaction gains (losses)
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(in millions)
|
2020
|
|
2019
|
Chile
|
$
|
22
|
|
|
$
|
2
|
|
Corporate
|
1
|
|
|
(8
|
)
|
Other
|
1
|
|
|
2
|
|
Total (1)
|
$
|
24
|
|
|
$
|
(4
|
)
|
___________________________________________
|
|
(1)
|
Includes gains of $39 million and $4 million on foreign currency derivative contracts for the three months ended March 31, 2020 and 2019, respectively.
|
29 | The AES Corporation | March 31, 2020 Form 10-Q
The Company recognized net foreign currency transaction gains of $24 million for the three months ended March 31, 2020 primarily due to gains on foreign currency derivatives in South America due to the depreciating Colombian peso.
The Company recognized net foreign currency transaction losses of $4 million for the three months ended March 31, 2019, primarily due to losses at the Parent Company resulting from the depreciation of intercompany receivables denominated in Euro.
Other non-operating expense
Other non-operating expense was $44 million for the three months ended March 31, 2020 primarily due to the other-than-temporary impairment of the OPGC equity method investment due to the current economic slowdown. There were no other non-operating expenses during the three months ended March 31, 2019.
Income tax expense
Income tax expense decreased $26 million, or 23%, to $89 million for the three months ended March 31, 2020, compared to $115 million for the three months ended March 31, 2019. The Company’s effective tax rates were 28% and 32% for the three months ended March 31, 2020 and 2019, respectively. This net decrease in the effective tax rate was primarily due to the recognition of tax benefit related to a depreciating Peso in certain of our Mexican subsidiaries, partially offset by the impact of the other-than-temporary impairment of the OPGC equity method investment.
See Note 7—Investments In and Advances to Affiliates included in Item 1.—Financial Statements of this Form 10-Q for details of the impairment.
Our effective tax rate reflects the tax effect of significant operations outside the U.S., which are generally taxed at rates different than the U.S. statutory rate of 21%. Furthermore, our foreign earnings may be subjected to incremental U.S. taxation under the GILTI rules. 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 losses of affiliates
Net equity in losses of affiliates decreased $4 million, or 67%, to $2 million for the three months ended March 31, 2020, compared to $6 million for the three months ended March 31, 2019. This decrease in losses was primarily due to earnings on the Eólica Mesa La Paz project, which achieved commercial operations in December 2019.
Net income attributable to noncontrolling interests and redeemable stock of subsidiaries
Net income attributable to noncontrolling interests and redeemable stock of subsidiaries increased $6 million, or 8%, to $85 million for the three months ended March 31, 2020, compared to $79 million for the three months ended March 31, 2019. This increase was primarily due to:
|
|
•
|
Lower interest expense due to incremental capitalized interest in Chile;
|
|
|
•
|
Gains on foreign currency derivatives in South America; and
|
|
|
•
|
Higher earnings in Panama primarily due to improved hydrology in 2020 and higher spot sales, higher availability and lower fixed costs at Colon.
|
These increases were partially offset by:
|
|
•
|
Lower earnings in Colombia due to a life extension project at the Chivor hydroelectric plant.
|
Net income attributable to The AES Corporation
Net income attributable to The AES Corporation decreased $10 million, or 6%, to $144 million for the three months ended March 31, 2020, compared to $154 million for the three months ended March 31, 2019. This decrease was primarily due to:
|
|
•
|
Lower margins at our US and Utilities, South America, and Eurasia SBUs;
|
|
|
•
|
Other-than-temporary impairment of OPGC; and
|
|
|
•
|
Prior period gains on insurance proceeds associated with the lightning incident at the Andres facility in 2018.
|
30 | The AES Corporation | March 31, 2020 Form 10-Q
These decreases were partially offset by:
|
|
•
|
Higher margins at our MCAC SBU;
|
|
|
•
|
Gain on sale of land held by AES Redondo Beach at Southland;
|
|
|
•
|
Lower interest expense due to incremental capitalized interest in Chile;
|
|
|
•
|
Gains on foreign currency derivatives in South America; and
|
|
|
•
|
Lower income tax expense.
|
SBU Performance Analysis
Non-GAAP Measures
Adjusted Operating Margin, Adjusted PTC and Adjusted EPS are non-GAAP supplemental measures that are used by management and external users of our condensed consolidated financial statements such as investors, industry analysts and lenders.
During the year ended December 31, 2019, the Company changed the definitions of Adjusted PTC and Adjusted EPS to exclude gains and losses recognized at commencement of sales-type leases. We believe these transactions are economically similar to sales of business interests and excluding these gains or losses better reflects the underlying business performance of the Company.
Adjusted Operating Margin
We define Adjusted Operating Margin as Operating Margin, adjusted for the impact of NCI, excluding (a) unrealized gains or losses related to derivative transactions; (b) benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures; and (c) costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation. The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin. See Review of Consolidated Results of Operations for the definition of Operating Margin.
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 gains or losses related to derivative transactions and strategic decisions to dispose of or acquire business interests. Adjusted Operating Margin should not be construed as an alternative to Operating Margin, which is determined in accordance with GAAP.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Reconciliation of Adjusted Operating Margin (in millions)
|
2020
|
|
2019
|
Operating Margin
|
$
|
507
|
|
|
$
|
586
|
|
Noncontrolling interests adjustment (1)
|
(169
|
)
|
|
(161
|
)
|
Unrealized derivative gains
|
(12
|
)
|
|
—
|
|
Disposition/acquisition losses
|
2
|
|
|
5
|
|
Total Adjusted Operating Margin
|
$
|
328
|
|
|
$
|
430
|
|
_______________________
|
|
(1)
|
The allocation of HLBV earnings to noncontrolling interests is not adjusted out of Adjusted Operating Margin.
|
31 | The AES Corporation | March 31, 2020 Form 10-Q
Adjusted PTC
We define Adjusted PTC as pre-tax 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 and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; and (f) costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation. 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 expenses 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 the most relevant measure considered in the Company’s internal evaluation of the financial performance of its segments. Factors in this determination include the variability due to unrealized gains or losses related to derivative transactions or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments and strategic decisions to dispose of or acquire business interests, retire debt or implement restructuring initiatives, 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. Given its large number of businesses and complexity, the Company concluded that Adjusted PTC is a more transparent measure that better assists investors in determining which businesses have the greatest impact on the Company’s results.
Adjusted PTC should not be construed as an alternative to income from continuing operations attributable to The AES Corporation, which is determined in accordance with GAAP.
32 | The AES Corporation | March 31, 2020 Form 10-Q
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Reconciliation of Adjusted PTC (in millions)
|
2020
|
|
2019
|
Income from continuing operations, net of tax, attributable to The AES Corporation
|
$
|
144
|
|
|
$
|
154
|
|
Income tax expense from continuing operations attributable to The AES Corporation
|
55
|
|
|
85
|
|
Pre-tax contribution
|
199
|
|
|
239
|
|
Unrealized derivative and equity securities losses (gains)
|
(16
|
)
|
|
3
|
|
Unrealized foreign currency losses
|
9
|
|
|
11
|
|
Disposition/acquisition losses
|
1
|
|
|
9
|
|
Impairment expense
|
53
|
|
|
2
|
|
Loss on extinguishment of debt
|
4
|
|
|
8
|
|
Total Adjusted PTC
|
$
|
250
|
|
|
$
|
272
|
|
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 and equity securities; (b) unrealized foreign currency gains or losses; (c) gains, losses, benefits and costs associated with dispositions and acquisitions of business interests, including early plant closures, and the tax impact from the repatriation of sales proceeds, and gains and losses recognized at commencement of sales-type leases; (d) losses due to impairments; (e) gains, losses and costs due to the early retirement of debt; (f) costs directly associated with a major restructuring program, including, but not limited to, workforce reduction efforts, relocations, and office consolidation; and (g) tax benefit or expense related to the enactment effects of 2017 U.S. tax law reform and related regulations and any subsequent period adjustments related to enactment effects.
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 or equity securities remeasurement, unrealized foreign currency gains or losses, losses due to impairments and strategic decisions to dispose of or acquire business interests, retire debt or implement restructuring activities, which affect results in a given period or periods.
Adjusted EPS should not be construed as an alternative to diluted earnings per share from continuing operations, which is determined in accordance with GAAP.
33 | The AES Corporation | March 31, 2020 Form 10-Q
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Reconciliation of Adjusted EPS
|
2020
|
|
2019
|
Diluted earnings per share from continuing operations
|
$
|
0.22
|
|
|
$
|
0.23
|
|
Unrealized derivative and equity securities losses (gains)
|
(0.02
|
)
|
|
0.01
|
|
Unrealized foreign currency losses
|
0.01
|
|
|
0.02
|
|
Disposition/acquisition losses
|
—
|
|
|
0.01
|
|
Impairment expense
|
0.08
|
|
(1)
|
—
|
|
Loss on extinguishment of debt
|
—
|
|
|
0.01
|
|
U.S. Tax Law Reform Impact
|
—
|
|
|
0.01
|
|
Less: Net income tax benefit
|
—
|
|
|
(0.01
|
)
|
Adjusted EPS
|
$
|
0.29
|
|
|
$
|
0.28
|
|
_____________________________
|
|
(1)
|
Amount primarily relates to other-than-temporary impairment of OPGC of $43 million, or $0.06 per share.
|
US and Utilities SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
120
|
|
|
$
|
212
|
|
|
$
|
(92
|
)
|
|
-43
|
%
|
Adjusted Operating Margin (1)
|
84
|
|
|
182
|
|
|
(98
|
)
|
|
-54
|
%
|
Adjusted PTC (1)
|
71
|
|
|
122
|
|
|
(51
|
)
|
|
-42
|
%
|
_____________________________
|
|
(1)
|
A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis—Non-GAAP Measures for definition and Item 1.—Business included in our 2019 Form 10-K for the respective ownership interest for key businesses.
|
Operating Margin for the three months ended March 31, 2020 decreased $92 million, or 43%, which was driven primarily by the following (in millions):
|
|
|
|
|
Decrease at DPL due to a credit to depreciation expense in 2019 as a result of a reduction in the ARO liability at DPL's closed plants, Stuart and Killen
|
$
|
(23
|
)
|
Decrease in DPL’s regulated retail margin primarily due to changes to DPL’s ESP and lower volumes as a result of milder weather
|
(19
|
)
|
Increase of rock ash disposal in Puerto Rico
|
(14
|
)
|
Decrease at IPL due to lower retail margin primarily driven by lower volumes from milder weather
|
(11
|
)
|
Decrease at DPL due to lower PJM capacity prices on remaining generation capacity contracts
|
(7
|
)
|
Decrease at Southland Energy due to depreciation expense and fixed costs after the CCGT units began commercial operations during Q1 in advance of the upcoming PPA periods in May and June 2020
|
(7
|
)
|
Other
|
(11
|
)
|
Total US and Utilities SBU Operating Margin Decrease
|
$
|
(92
|
)
|
Adjusted Operating Margin decreased $98 million primarily due to the drivers above, adjusted for NCI and excluding unrealized gains and losses on derivatives.
Adjusted PTC decreased $51 million, primarily driven by the decrease in Adjusted Operating Margin described above, partially offset by a $41 million gain on sale of land held by AES Redondo Beach at Southland.
South America SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
177
|
|
|
$
|
216
|
|
|
$
|
(39
|
)
|
|
-18
|
%
|
Adjusted Operating Margin (1)
|
95
|
|
|
120
|
|
|
(25
|
)
|
|
-21
|
%
|
Adjusted PTC (1)
|
119
|
|
|
115
|
|
|
4
|
|
|
3
|
%
|
_____________________________
|
|
(1)
|
A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis—Non-GAAP Measures for definition and Item 1.—Business included in our 2019 Form 10-K for the respective ownership interest for key businesses.
|
34 | The AES Corporation | March 31, 2020 Form 10-Q
Operating Margin for the three months ended March 31, 2020 decreased $39 million, or 18%, which was driven primarily by the following (in millions):
|
|
|
|
|
Lower reservoir levels and lower generation at Chivor as a result of the life extension project during Q1 2020
|
$
|
(36
|
)
|
Other
|
(3
|
)
|
Total South America SBU Operating Margin Decrease
|
$
|
(39
|
)
|
Adjusted Operating Margin decreased $25 million due to the drivers above, adjusted for NCI.
Adjusted PTC increased $4 million, mainly driven by a decrease in interest expense due to incremental capitalized interest at Alto Maipo, higher realized foreign currency gains in Chile associated with the unwinding of forward contracts denominated in the Colombian peso, and an increase in equity earnings at Guacolda as a result of lower depreciation expense. These positive impacts were partially offset by the decrease in Adjusted Operating Margin described above.
MCAC SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
140
|
|
|
$
|
75
|
|
|
$
|
65
|
|
|
87
|
%
|
Adjusted Operating Margin (1)
|
93
|
|
|
54
|
|
|
39
|
|
|
72
|
%
|
Adjusted PTC (1)
|
78
|
|
|
50
|
|
|
28
|
|
|
56
|
%
|
_____________________________
|
|
(1)
|
A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis—Non-GAAP Measures for definition and Item 1.—Business included in our 2019 Form 10-K for the respective ownership interest for key businesses.
|
Operating Margin for the three months ended March 31, 2020 increased $65 million, or 87%, which was driven primarily by the following (in millions):
|
|
|
|
|
Increase in Dominican Republic mainly driven by lower LNG prices and higher availability at Itabo
|
$
|
19
|
|
Higher availability in Panama mainly due to the outage in 2019 related to Changuinola's tunnel lining upgrade
|
15
|
|
Increase in Panama driven by higher spot sales, higher availability and lower fixed costs at the Colon combined cycle plant
|
15
|
|
Higher availability in Panama driven by better hydrology
|
13
|
|
Other
|
3
|
|
Total MCAC SBU Operating Margin Increase
|
$
|
65
|
|
Adjusted Operating Margin increased $39 million due to the drivers above, adjusted for NCI.
Adjusted PTC increased $28 million, mainly driven by the increase in Adjusted Operating Margin described above, partially offset by 2019 gains on insurance proceeds due to the lightning incident at the Andres facility in September 2018.
Eurasia SBU
The following table summarizes Operating Margin, Adjusted Operating Margin and Adjusted PTC (in millions) for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
|
$ Change
|
|
% Change
|
Operating Margin
|
$
|
51
|
|
|
$
|
63
|
|
|
$
|
(12
|
)
|
|
-19
|
%
|
Adjusted Operating Margin (1)
|
38
|
|
|
52
|
|
|
(14
|
)
|
|
-27
|
%
|
Adjusted PTC (1)
|
44
|
|
|
56
|
|
|
(12
|
)
|
|
-21
|
%
|
_____________________________
|
|
(1)
|
A non-GAAP financial measure, adjusted for the impact of NCI. See SBU Performance Analysis—Non-GAAP Measures for definition and Item 1.—Business included in our 2019 Form 10-K for the respective ownership interest for key businesses.
|
Operating Margin for the three months ended March 31, 2020 decreased $12 million, or 19%, which was driven primarily by the following (in millions):
|
|
|
|
|
Impact of the sale of Kilroot and Ballylumford businesses in June 2019
|
$
|
(11
|
)
|
Other
|
(1
|
)
|
Total Eurasia SBU Operating Margin Decrease
|
$
|
(12
|
)
|
Adjusted Operating Margin decreased $14 million due to the drivers above, adjusted for NCI.
35 | The AES Corporation | March 31, 2020 Form 10-Q
Adjusted PTC decreased $12 million, driven primarily by the decrease in the Adjusted Operating Margin described above.
Key Trends and Uncertainties
During the remainder of 2020 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 (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. For the risk factors related to our business, see Item 1.—Business and Item 1A.—Risk Factors of our 2019 Form 10-K.
COVID-19 Pandemic
Since December 2019, the COVID-19 pandemic has impacted over 150 countries, including every state in the United States. The outbreak of COVID-19 has severely impacted global economic activity, including electricity and energy consumption, and caused significant volatility and negative pressure in financial markets. The global impact of the pandemic has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures, and restricting travel.
For the quarter ending March 31, 2020, COVID-19 had a limited impact on the financial results and operations of the Company, as the full extent of the economic impact of the pandemic only started to materialize in the geographies in which we operate in the second half of March. We expect further impacts in the second quarter of 2020. The following discussion highlights our assessment of the impacts of the pandemic on our current financial and operating status, and our financial and operational outlook based on information known as of this filing. Also see Part II, Item 1A—Risk Factors of this Form 10-Q.
Business Continuity — As the COVID-19 pandemic progresses, we are taking a variety of measures to ensure our ability to generate, transmit, distribute and sell electric energy, to ensure the health and safety of our employees, contractors, customers and communities and to provide essential services to the communities in which we operate. We continue to respond to this global crisis through comprehensive measures to protect our employees while fulfilling our vital role in providing our customers with electric energy. While there are stay-at-home restrictions in place in most of the locations where we operate, our operations are considered essential and have been running without significant disruption. Most of our management and administrative personnel are able to work remotely, and we have not experienced significant issues affecting our operations or ability to maintain effective internal controls and produce reliable financial information.
Demand — We derive approximately 85% of our total revenues from our regulated utilities and long-term sales and supply contracts or PPAs at our generation businesses, which contributes to a relatively stable revenue and cost structure at most of our businesses. The economic impact of the pandemic only started to materialize in the geographies in which we operate in the second half of March. Our utilities businesses experienced a slight decrease in demand toward the end of March and in April, our preliminary numbers indicate commercial and industrial customer demand decreased by mid-teen percentages, with a partial offset of about 6% from increased residential demand as stay-at-home orders began to take effect. Internationally, demand has decreased 5 to 15% in our key markets; however, our business model in those markets is primarily based on take-or-pay contracts or tolling agreements, with limited exposure to demand. Additionally, the uncontracted portion of our generation business is exposed to increased price risk resulting from materially lower demand associated with the pandemic. We are also experiencing a decline in electricity spot prices in some of our markets due to lower system demand. While we cannot predict the length and magnitude of the pandemic or how it could impact global economic conditions, continuous and/or further declines in future demand have the potential to adversely impact our financial results for 2020.
Liquidity — Our liquidity position remains strong. As of March 31, 2020 we had $2.2 billion in cash and restricted cash deposits and $328 million in short-term investments. Total Parent Company Liquidity was $527 million at March 31, 2020, with no recourse debt due for repayment in 2020. We took additional precautionary measures to further enhance our liquidity position by drawing $250 million on revolving lines of credit at the Parent Company and drawing approximately $300 million on revolving lines of credit at several of our subsidiaries, in aggregate. We expect a modest increase in interest expense as a result of these drawings. Subsequent to the three
36 | The AES Corporation | March 31, 2020 Form 10-Q
months ended March 31, 2020, we accessed the capital markets to issue $475 million in principal amount of 4.25%, ten-year notes at IPALCO, the proceeds of which will repay approximately 60% of the debt due to mature at our subsidiaries in 2020. Further, we have secured financing for most of our most significant construction projects that are planned for completion in 2020. We have made all required payments, including payments for salaries and wages owed to our employees. Our subsidiaries have continued to remit dividends to the Parent Company as expected. We have paid all declared dividends on AES stock and have made no changes to our dividend expectations. Also see Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity of this Form 10-Q.
Credit Exposures — We continue to monitor and manage our credit exposures in a prudent manner. We experienced only minor credit-related impacts from utility customers in the U.S. and El Salvador in the first quarter of 2020 but expect further disruptions in the second quarter, including the impact of the El Salvadorian government’s announcement to provide its citizens a three-month moratorium on paying their utility bills. We have not experienced credit-related impacts from our PPA offtakers in the first quarter of 2020; however, we may be exposed to heightened credit-related risks that develop in the second quarter due to some of our offtakers experiencing challenges from COVID-19 impacts. We expect significant economic disruptions from the COVID-19 in the second quarter of 2020 and extending, potentially for the remainder of 2020. If these disruptions continue beyond 2020, further deterioration in our credit exposures and customer collections could result.
Supply Chain — Our supply chain management has remained robust during this challenging time and we continue to closely manage and monitor developments. We currently have an adequate supply of solar panels and lithium-ion batteries in our inventory to fulfill the majority of our current project needs for 2020. Due to delays in receiving certain materials from China, however, certain battery storage and solar projects could be impacted.
CARES Act — The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by the U.S. Congress and signed into law on March 27, 2020. While we currently expect a limited impact from this legislation on our business, certain elements such as changes in the deductibility of interest may provide some cash benefits in the near term.
Income Taxes — The demands placed on the U.S. Government to respond to the pandemic may cause delays to the expected issuance of regulations pursuant to the Tax Cuts and Jobs Act (“TCJA”) enacted in 2017. Our interpretation of the TCJA may change as the U.S. Treasury and the Internal Revenue Service issue additional guidance. Such changes may be material. For example, the Company anticipates that regulations proposed in 2019 related to the GILTI high-tax exception will be finalized in and made effective for 2020. Our 2020 tax rate will be materially impacted if such final regulations are not issued in 2020. Our interim tax rates may also be impacted if such regulations are finalized later in 2020. The Company also continues to monitor the potential COVID-19 impact on our financial results and operations, which may result in the need to record a valuation allowance against deferred tax assets in the jurisdictions where we operate.
Macroeconomic and Political
During the past few years, some countries where our subsidiaries conduct business have experienced macroeconomic and political changes. In the event these trends continue, there could be an adverse impact on our businesses.
Argentina — In the run up to the 2019 Presidential elections, the Argentine peso devalued significantly and the government of Argentina imposed capital controls and announced a restructuring of Argentina’s debt payments. Restrictions on the flow of capital have limited the availability of international credit, and economic conditions in Argentina have further deteriorated, triggering additional devaluation of the Argentine peso and a deterioration of the country’s risk profile.
On October 27, 2019, Alberto Fernández was elected president. The new administration has been evaluating solutions to the Argentine economic crisis. On February 27, 2020, the Secretariat of Energy passed Resolution No. 31/2020 that includes the denomination of tariffs in local currency indexed by local inflation (currently delayed due to the COVID-19 pandemic), and reductions in capacity payments received by generators. These regulatory changes are expected to have a negative impact on our financial results.
On April 17, 2020, the government of Argentina presented a debt restructuring proposal to international creditors, involving a three-year grace period, large coupon cuts and a smaller reduction in principal. Economy Minister Martin Guzman laid out the framework of the proposal, which would involve approximately $40 billion of financial relief, mostly in the form of reduced interest payments. Under the proposal, Argentina would make no payments from 2020 to 2022, then start with an average 0.5% coupon in 2023, which would increase over time.
37 | The AES Corporation | March 31, 2020 Form 10-Q
Argentina's proposal, which was initially expected to be made by mid-March, was delayed by the COVID-19 pandemic. Creditors have until May 8, 2020 to accept or reject the proposal. In this context, the Economy Ministry of Argentina confirmed that Argentina’s government did not pay interest payments due on April 22, 2020. There is a 30-day cure period to remediate this non-payment that expires May 22, 2020.
Although the situation remains unresolved, it has not had a material impact on our current exposures to date, and payments on the long-term receivables for the FONINVEMEM Agreements are current. For further information, see Note 7—Financing Receivables in Item 8—Financial Statements and Supplementary Data of the 2019 Form 10-K.
Chile — In October 2019, Chile saw significant protests associated with economic conditions resulting in the declaration of a state of emergency in several major cities.
In November 2019, the Chilean government enacted Law 21,185 that establishes a Stabilization Fund for regulated energy prices. Historically, the government updated the prices for regulated energy contracts every six months to reflect the indexation the contracts have to exchange rates and commodities prices. The new law freezes regulated prices and does not allow the pass-through of these contractual indexation updates to customers beyond the pricing in effect at July 1, 2019, until new lower-cost renewable contracts are incorporated into pricing in 2023. Consequently, costs incurred in excess of the July 1, 2019 price will be accumulated and borne by generators. AES Gener has deferred collection of $39 million of revenue as of March 31, 2020. It is expected such amounts deferred will be fully repaid to generators prior to December 31, 2027.
Other initiatives to address the concerns of the protesters, including potential constitutional amendments, are under consideration by Congress and could result in regulatory changes that may affect our results of operations in Chile.
Puerto Rico — As discussed in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Trends and Uncertainties of the 2019 Form 10-K, our subsidiaries in Puerto Rico have a long-term PPA with state-owned PREPA, which has been facing economic challenges that could result in a material adverse effect on our business in Puerto Rico.
AES Puerto Rico and AES Ilumina’s non-recourse debt of $278 million and $32 million, respectively, continue to be in technical default and are classified as current as of March 31, 2020 as a result of PREPA’s bankruptcy filing in July 2017. The Company is in compliance with its debt payment obligations as of March 31, 2020.
The Company's receivable balances in Puerto Rico as of March 31, 2020 totaled $78 million, of which $20 million was overdue. Despite the Title III protection, PREPA has been making substantially all of its payments to the generators in line with historical payment patterns.
Considering the information available as of the filing date, management believes the carrying amount of our long-lived assets in Puerto Rico of $533 million is recoverable as of March 31, 2020.
Reference Rate Reform — As discussed in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Trends and Uncertainties of the 2019 Form 10-K, in July 2017, the UK Financial Conduct Authority announced that it intends to phase out LIBOR by the end of 2021. In the U.S., the Alternative Reference Rate Committee at the Federal Reserve identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR; alternative reference rates in other key markets are under development. AES holds a substantial amount of debt and derivative contracts referencing LIBOR as an interest rate benchmark. Although the full impact of the reform remains unknown, we have begun to engage with AES counterparties to discuss specific action items to be undertaken in order to prepare for amendments when they become due.
Decarbonization Initiatives
Several initiatives have been announced by regulators and offtakers in recent years, with the intention of reducing GHG emissions generated by the energy industry. Our strategy of shifting towards clean energy platforms, including renewable energy, energy storage, LNG and modernized grids is designed to position us for continued growth while reducing our carbon intensity. The shift to renewables has caused certain customers to migrate to other low-carbon energy solutions and this trend may continue. Certain of our contracts contain clauses designed to compensate for early contract terminations, but we cannot guarantee full recovery. Although the Company cannot currently estimate the financial impact of these decarbonization initiatives, new legislative or regulatory programs further restricting carbon emissions could require material capital expenditures, result in a reduction of the
38 | The AES Corporation | March 31, 2020 Form 10-Q
estimated useful life of certain coal facilities, or have other material adverse effects on our financial results. For further discussion of our strategy of shifting towards clean energy platforms see Overview of Strategic Performance.
Chilean Decarbonization Plan — The Chilean government has announced an initiative to phase out coal power plants by 2040 and achieve carbon neutrality by 2050. On June 4, 2019, AES Gener signed an agreement with the Chilean government to cease the operation of two coal units for a total of 322 MW as part of the phase-out. Under the agreement, Ventanas 1 (114 MW) will cease operation in November 2022 and Ventanas 2 (208 MW) in May 2024. These units will remain connected to the grid as “strategic operating reserve” for up to five years after ceasing operations, will receive a reduced capacity payment and will be dispatched, if necessary, to ensure the electric system’s reliability. Considering the information available as of the filing date, management believes the carrying amount of our coal-fired long-lived assets in Chile of $2.7 billion is recoverable as of March 31, 2020.
Puerto Rico Energy Public Policy Act — On April 11, 2019, the Governor of Puerto Rico signed the Puerto Rico Energy Public Policy Act (“the Act”) establishing guidelines for grid efficiency and eliminating coal as a source for electricity generation by January 1, 2028. The Act supports the accelerated deployment of renewables through the Renewable Portfolio Standard and the conversion of coal generating facilities to other fuel sources, with compliance targets of 40% by 2025, 60% by 2040, and 100% by 2050. AES Puerto Rico’s long-term PPA with PREPA expires November 30, 2027. Unless the Act is amended or a waiver from its provisions is obtained, AES Puerto Rico will need to convert fuel sources to continue operating. PREPA and AES Puerto Rico have begun discussing conversion options, but any plan would be subject to lender and regulatory approval, including that of the Oversight Board that filed for bankruptcy on behalf of PREPA.
For further information about the risks associated with decarbonization initiatives, see Item 1A.—Risk Factors—Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in the 2019 Form 10-K.
Regulatory
DP&L Rate Case — Ohio law requires utilities to file either an ESP or MRO plan to establish SSO rates. From November 1, 2017 through December 18, 2019, DP&L operated pursuant to an approved ESP plan, which was initially filed on March 13, 2017 (“ESP 3”). On November 21, 2019, the PUCO issued a supplemental order modifying ESP 3, and as a result DP&L filed a Notice of Withdrawal of its ESP 3 Application and requested to revert to the ESP rates that were in effect prior to ESP 3 (“ESP 1 Rates”). The Notice of Withdrawal was approved by the PUCO on December 18, 2019. The PUCO order required, among other things, DP&L to conduct both an ESP v. MRO Test to validate that the ESP is more favorable in the aggregate than what would be experienced under an MRO, and a prospective SEET, both of which were filed with the PUCO on April 1, 2020. DP&L is also subject to an annual retrospective SEET. The ultimate outcome of the ESP v. MRO and SEET proceedings could have a material adverse effect on DP&L’s results of operations, financial condition and cash flows.
On January 23, 2020, DP&L filed with the PUCO requesting approval to defer its decoupling costs consistent with the methodology approved in its Distribution Rate Case. If approved, deferral would be effective December 18, 2019 and going forward would reduce impacts of weather, energy efficiency programs, and economic changes in customer demand.
TDSIC — On March 4, 2020, the IURC issued an order approving projects under IPL's TDSIC Plan, which is a seven-year plan for eligible transmission, distribution and storage system improvements totaling $1.2 billion from 2020 through 2027. There will be no revenues and/or cost recovery until approval of the TDSIC rider, which is not expected to occur until later in 2020.
U.S. Executive Order Regarding Power Equipment — On May 1, 2020, President Trump issued an executive order banning transactions involving the acquisition, importation, transfer, or installation of certain equipment to be used in connection with the operation of the U.S. interconnected transmission network and electric generation facilities needed to maintain transmission reliability. The ban would apply if such equipment is designed, manufactured or supplied by any company that is subject to, or controlled by, the jurisdiction of a country considered by the U.S. to be a foreign adversary and such transaction would pose an unacceptable risk to the national security of the U.S. (the “Executive Order”). We are reviewing the Executive Order and will consider the rules and regulations to be issued pursuant to this Executive Order when they become available, including rules and regulations that may define foreign adversaries, such as China, under the Executive Order or identify equipment or vendors that are exempt from any restrictions under the Executive Order. At this time, the impact of this Executive Order on our U.S. utilities, renewables or other businesses is uncertain.
39 | The AES Corporation | March 31, 2020 Form 10-Q
Foreign Exchange Rates
We operate in multiple countries and as such are subject to volatility in exchange rates at varying degrees at the subsidiary level and between our functional currency, the USD, and currencies of the countries in which we operate. For additional information, refer to Item 3.—Quantitative and Qualitative Disclosures About Market Risk.
Impairments
Long-lived Assets and Equity Affiliates — During the three months ended March 31, 2020, the Company recognized asset and other-than-temporary impairment expenses of $49 million. See Note 7—Investments In and Advances To Affiliates and Note 16—Asset Impairment Expense included in Item 1.—Financial Statements of this Form 10-Q for further information. After recognizing these impairment expenses, the carrying value of long-lived assets that were assessed for impairment totaled $335 million at March 31, 2020.
Goodwill — The Company considers a reporting unit at risk of impairment when its fair value does not exceed its carrying amount by 10%. In 2019, the Company determined that the fair value of its Gener reporting unit exceeded its carrying value by 3% at the October 1st measurement date. Therefore, the goodwill at Gener is considered “at risk” largely due to the Chilean government’s announcement to phase out coal generation by 2040, and a decline in long-term energy prices.
Given the uncertainties in the global market caused by the COVID-19 pandemic, the Company assessed whether current events or circumstances indicated it was more likely than not the fair value of the Gener reporting unit was reduced below its carrying amount during the first quarter of 2020. After assessing the relevant factors, the Company determined there was no triggering event requiring a reassessment of goodwill impairment as of March 31, 2020. While the duration and severity of the impacts of the COVID-19 pandemic remain unknown, further deterioration in the global market could result in changes to assumptions utilized in the goodwill assessment.
The Gener goodwill balance was $868 million as of March 31, 2020. Sustained downward pressure on long-term power prices in Chile could also potentially be an indicator of other than temporary impairment of certain equity method investments in future periods. Impairments would negatively impact our consolidated results of operations and net worth. See Item 1A.—Risk Factors of the 2019 Form 10-K for further information.
Events or changes in circumstances that may necessitate recoverability tests and potential impairments of long-lived assets or goodwill 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, evolving industry expectations to transition away from fossil fuel sources for generation, or an expectation it is more likely than not the asset will be disposed of before the end of its estimated useful life.
Environmental
The Company is subject to numerous environmental laws and regulations in the jurisdictions in which it operates. 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 residuals) and certain air emissions, such as SO2, NOx, particulate matter, mercury and other hazardous air pollutants. 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 operations are subject to significant government regulation and our business and results of operations could be adversely affected by changes in the law or regulatory schemes; Several of our businesses are subject to potentially significant remediation expenses, enforcement initiatives, private party lawsuits and reputational risk associated with CCR; Our businesses are subject to stringent environmental laws, rules and regulations; and Concerns about GHG emissions and the potential risks associated with climate change have led to increased regulation and other actions that could impact our businesses included in the 2019 Form 10-K.
Climate Change Regulation — On July 8, 2019, the EPA published the final Affordable Clean Energy (“ACE”) Rule, along with associated revisions to implementing regulations, in addition to final revocation of the Clean Power Plan. The ACE Rule determines that heat rate improvement measures are the Best System of Emissions Reductions for existing coal-fired electric generating units. The final rule requires states with existing coal-fired electric generating units to develop state plans to establish CO2 emission limits for designated facilities. IPL Petersburg and AES Warrior Run have coal-fired electric generating units that may be impacted by this
40 | The AES Corporation | March 31, 2020 Form 10-Q
regulation. On February 19, 2020, Indiana published a First Notice for the Indiana ACE Rule indicating that IDEM intends to determine the best system of emissions reductions and CO2 standards for affected units. However, the impact remains largely uncertain because state plans have not yet been developed.
Waste Management — On October 19, 2015, an EPA rule regulating CCR under the Resource Conservation and Recovery Act as nonhazardous solid waste became effective. The rule established nationally applicable minimum criteria for the disposal of CCR in new and currently operating landfills and surface impoundments, including location restrictions, design and operating criteria, groundwater monitoring, corrective action and closure requirements and post-closure care. The primary enforcement mechanisms under this regulation would be actions commenced by the states and private lawsuits. On December 16, 2016, the Water Infrastructure Improvements for the Nation Act ("WIN Act") was signed into law. This includes provisions to implement the CCR rule through a state permitting program, or if the state chooses not to participate, a possible federal permit program. The EPA has indicated that it will implement a phased approach to amending the CCR Rule. On August 14, 2019, the EPA published proposed amendments to the CCR rule relating to the CCR rule’s criteria for determining beneficial use and the regulation of CCR piles, among other revisions. On December 2, 2019, the EPA published additional amendments to the CCR Rule titled “A Holistic Approach To Closure Part A: Deadline To Initiate Closure.” On March 3, 2020, the EPA published proposed amendments to the CCR rule titled “A Holistic Approach to Closure Part B” which would address the beneficial use of CCR for closure of ash ponds subject to forced closure per the CCR Rule. This could impact IPL Petersburg’s ability to use CCR for closure of ash ponds. The CCR rule, current or proposed amendments to the CCR rule, the results of groundwater monitoring data or the outcome of CCR-related litigation could have a material impact on our business, financial condition and results of operations.
Water Discharges — On November 3, 2015, the EPA published its final ELG rule to reduce toxic pollutants discharged into waters of the U.S. by power plants. These effluent limitations for existing and new sources include dry handling of fly ash, closed-loop or dry handling of bottom ash and more stringent effluent limitations for flue gas de-sulfurization wastewater. The required compliance time lines for existing sources was to be established between November 1, 2018 and December 31, 2023. On September 18, 2017, the EPA published a final rule delaying certain compliance dates of the ELG rule for two years while it administratively reconsiders the rule. On April 12, 2019, the U.S. Court of Appeals for the Fifth Circuit vacated and remanded portions of EPA’s 2015 ELG Rule related to legacy wastewaters and combustion residual leachate. On November 4, 2019, the EPA signed proposed revisions to the 2015 ELG rule. It is too early to determine whether this proposal or future revisions to the ELG rule will have a material impact on our business or results of operations.
On April 23, 2020, the U.S. Supreme Court issued a decision in the Hawaii Wildlife Fund v. County of Maui case related to whether a Clean Water Act permit is required when pollutants originate from a point source but are conveyed to navigable waters through a nonpoint source such as groundwater. The Court held that discharges to groundwater require a permit if the addition of the pollutants through groundwater is the functional equivalent of a direct discharge from the point source into navigable waters. We are reviewing this decision and it is too early to determine whether this decision may have a material impact on our business, financial condition or results of operations.
Capital Resources and Liquidity
Overview
As of March 31, 2020, the Company had unrestricted cash and cash equivalents of $1.5 billion, of which $346 million was held at the Parent Company and qualified holding companies. The Company also had $328 million in short-term investments, held primarily at subsidiaries, and restricted cash and debt service reserves of $666 million. The Company also had non-recourse and recourse aggregate principal amounts of debt outstanding of $17.1 billion and $4.0 billion, respectively. Of the approximately $1.7 billion of our current non-recourse debt, $1.4 billion was presented as such because it is due in the next twelve months and $310 million relates to debt considered in default due to covenant violations. None of the defaults are payment defaults, but are instead technical defaults triggered by failure to comply with covenants or other requirements contained in the non-recourse debt documents due to the bankruptcy of the offtaker.
We expect current maturities of non-recourse debt to 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. We have $498 million of recourse debt which 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
41 | The AES Corporation | March 31, 2020 Form 10-Q
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. 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 drawings of $805 million under its senior secured credit facility. On a consolidated basis, of the Company’s $21.4 billion of total gross debt outstanding as of March 31, 2020, approximately $5 billion bore interest at variable rates that were not subject to a derivative instrument which fixed the interest rate. Brazil holds $824 million 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 March 31, 2020, the Parent Company had provided outstanding financial and performance-related guarantees or other credit support commitments to or for the benefit of our businesses, which were limited by the terms of the agreements, of approximately $918 million in aggregate (excluding those collateralized by letters of credit and other obligations discussed below).
As a result of the Parent Company’s split rating, some 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 March 31, 2020, we had $343 million in letters of credit outstanding provided under our unsecured credit facility and $14 million in letters of credit outstanding provided under our senior secured credit facility. These letters of credit operate to guarantee performance relating to certain project development and construction activities and business operations. During the quarter ended March 31, 2020, the Company paid letter of credit fees ranging from 1% to 3% 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.
42 | The AES Corporation | March 31, 2020 Form 10-Q
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 March 31, 2020, the Company had approximately $126 million of accounts receivable classified as Other noncurrent assets. These noncurrent receivables mostly consist of accounts receivable in Argentina and Chile that, pursuant to amended agreements or government resolutions, have collection periods that extend beyond March 31, 2021, or one year from the latest balance sheet date. The majority of Argentine receivables have been converted into long-term financing for the construction of power plants. Noncurrent receivables in Chile pertain to revenues recognized on regulated energy contracts that were impacted by the Stabilization Fund created by the Chilean government. See Note 6—Financing Receivables in Item 1.—Financial Statements and Key Trends and Uncertainties—Macroeconomic and Political—Chile in Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operation of this Form 10-Q and Item 1.—Business—South America SBU—Argentina—Regulatory Framework and Market Structure included in our 2019 Form 10-K for further information.
As of March 31, 2020, the Company had approximately $1.3 billion of loans receivable primarily related to a facility constructed under a build, operate, and transfer contract in Vietnam. This loan receivable represents contract consideration related to the construction of the facility, which was substantially completed in 2015, and will be collected over the 25 year term of the plant’s PPA. See Note 14—Revenue in Item 1.—Financial Statements of this Form 10-Q for further information.
Cash Sources and Uses
The primary sources of cash for the Company in the three months ended March 31, 2020 were debt financings, cash flow from operating activities, and sales of short-term investments. The primary uses of cash in the three months ended March 31, 2020 were capital expenditures, repayments of debt, and purchases of short-term investments.
The primary sources of cash for the Company in the three months ended March 31, 2019 were debt financings, cash flow from operating activities, and sales of short-term investments. The primary uses of cash in the three months ended March 31, 2019 were repayments of debt, capital expenditures, and purchases of short-term investments.
A summary of cash-based activities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Cash Sources:
|
|
2020
|
|
2019
|
Borrowings under the revolving credit facilities
|
|
$
|
1,194
|
|
|
$
|
504
|
|
Issuance of non-recourse debt
|
|
406
|
|
|
866
|
|
Net cash provided by operating activities
|
|
373
|
|
|
690
|
|
Sale of short-term investments
|
|
254
|
|
|
150
|
|
Other
|
|
17
|
|
|
11
|
|
Total Cash Sources
|
|
$
|
2,244
|
|
|
$
|
2,221
|
|
|
|
|
|
|
Cash Uses:
|
|
|
|
|
Capital expenditures
|
|
$
|
(576
|
)
|
|
$
|
(504
|
)
|
Repayments under the revolving credit facilities
|
|
(315
|
)
|
|
(274
|
)
|
Purchase of short-term investments
|
|
(277
|
)
|
|
(220
|
)
|
Contributions and loans to equity affiliates
|
|
(115
|
)
|
|
(90
|
)
|
Dividends paid on AES common stock
|
|
(95
|
)
|
|
(90
|
)
|
Repayments of non-recourse debt
|
|
(92
|
)
|
|
(428
|
)
|
Distributions to noncontrolling interests
|
|
(22
|
)
|
|
(50
|
)
|
Repayments of recourse debt
|
|
(18
|
)
|
|
(1
|
)
|
Payments for financed capital expenditures
|
|
(10
|
)
|
|
(96
|
)
|
Other
|
|
(86
|
)
|
|
(96
|
)
|
Total Cash Uses
|
|
$
|
(1,606
|
)
|
|
$
|
(1,849
|
)
|
Net increase in Cash, Cash Equivalents, and Restricted Cash
|
|
$
|
638
|
|
|
$
|
372
|
|
43 | The AES Corporation | March 31, 2020 Form 10-Q
Consolidated Cash Flows
The following table reflects the changes in operating, investing, and financing cash flows for the comparative three month period (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Cash flows provided by (used in):
|
2020
|
|
2019
|
|
$ Change
|
Operating activities
|
$
|
373
|
|
|
$
|
690
|
|
|
$
|
(317
|
)
|
Investing activities
|
(735
|
)
|
|
(663
|
)
|
|
(72
|
)
|
Financing activities
|
1,030
|
|
|
402
|
|
|
628
|
|
Operating Activities
Net cash provided by operating activities decreased $317 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019.
Operating Cash Flows
(in millions)
|
|
(1)
|
The change in adjusted net income is defined as the variance in net income, net of the total adjustments to net income as shown on the Condensed Consolidated Statements of Cash Flows in Item 1—Financial Statements of this Form 10-Q.
|
|
|
(2)
|
The change in working capital is defined as the variance in total changes in operating assets and liabilities as shown on the Condensed Consolidated Statements of Cash Flows in Item 1—Financial Statements of this Form 10-Q.
|
|
|
•
|
Adjusted net income decreased $145 million primarily due to lower margins at our US and Utilities, South America and Eurasia SBUs, and prior year gains on insurance proceeds associated with the lightning incident at the Andres facility in 2018. These impacts were partially offset by higher margin at our MCAC SBUs.
|
|
|
•
|
Working capital requirements increased $172 million, primarily due to prior year collections of overdue receivables from distribution companies in the Dominican Republic, deposits made for the purchase of wind projects in Panama, the timing of collections from customers at Gener, lower collections at Chivor due to the life extension project performed during the first quarter of 2020, and higher interest payments at Tietê. These impacts were partially offset by higher collections in Argentina.
|
44 | The AES Corporation | March 31, 2020 Form 10-Q
Investing Activities
Net cash used in investing activities increased $72 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019.
Investing Cash Flows
(in millions)
|
|
•
|
Cash used for short-term investing activities decreased $47 million, primarily at Tietê as a result of higher net short-term investment purchases in the prior year.
|
|
|
•
|
Contributions and loans to equity affiliates increased $25 million, primarily due to project funding requirements at sPower, partially offset by lower contributions to OPGC due to the completion of the expansion project in 2019.
|
|
|
•
|
Capital expenditures increased $72 million, discussed further below.
|
Capital Expenditures
(in millions)
|
|
•
|
Growth expenditures increased $72 million, primarily driven by higher investments in solar projects at Distributed Energy and Gener, and renewable energy projects in Argentina. These impacts were partially offset by the timing of payments for the Southland repowering project and the completion of solar projects at Tietê.
|
|
|
•
|
Maintenance and environmental expenditures were consistent compared to the prior year.
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45 | The AES Corporation | March 31, 2020 Form 10-Q
Financing Activities
Net cash provided by financing activities increased $628 million for the three months ended March 31, 2020, compared to the three months ended March 31, 2019.
Financing Cash Flows
(in millions)
See Note 8—Debt in Item 1—Financial Statements of this Form 10-Q for more information regarding significant debt transactions.
|
|
•
|
The $380 million impact from Parent Company revolver transactions is primarily due to higher net borrowings in 2020 for general corporate cash management activities, and precautionary measures taken to further enhance our liquidity position in response to the COVID-19 pandemic.
|
|
|
•
|
The $269 million impact from non-recourse revolver transactions is primarily due to prior year repayments at Gener and increased borrowings at DPL, Los Mina and Itabo.
|
|
|
•
|
The $86 million impact from financed capital expenditures is primarily due to higher prior year project spending at Colon and Southland.
|
|
|
•
|
The $124 million impact from non-recourse debt transactions is primarily due to prior year net borrowings at Gener and Colon and lower current year borrowings at Southland, which were partially offset by current year net borrowings at Argentina and Panama.
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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 is determined in accordance with GAAP. 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 to fund interest and principal repayments of debt, construction commitments, other equity commitments, common stock repurchases, acquisitions, taxes, Parent Company overhead and development costs, and dividends on common stock.
The Company defines Parent Company Liquidity as cash available to the Parent Company, including cash at qualified holding companies, plus available borrowings under our 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):
46 | The AES Corporation | March 31, 2020 Form 10-Q
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Consolidated cash and cash equivalents
|
$
|
1,544
|
|
|
$
|
1,029
|
|
Less: Cash and cash equivalents at subsidiaries
|
(1,198
|
)
|
|
(1,016
|
)
|
Parent Company and qualified holding companies’ cash and cash equivalents
|
346
|
|
|
13
|
|
Commitments under the Parent Company credit facility
|
1,000
|
|
|
1,000
|
|
Less: Letters of credit under the credit facility
|
(14
|
)
|
|
(19
|
)
|
Less: Borrowings under the credit facility
|
(805
|
)
|
|
(180
|
)
|
Borrowings available under the Parent Company credit facility
|
181
|
|
|
801
|
|
Total Parent Company Liquidity
|
$
|
527
|
|
|
$
|
814
|
|
The Company utilizes its Parent Company credit facility for short term cash needs to bridge the timing of distributions from its subsidiaries throughout the year. We expect that the Parent Company credit facilities’ borrowings will be repaid by the end of year.
The Parent Company paid dividends of $0.1433 per outstanding share to its common stockholders during the first quarter of 2020 for dividends declared in December 2019. 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 $4.0 billion and $3.4 billion as of March 31, 2020 and December 31, 2019, respectively. See Note 8—Debt in Item 1.—Financial Statements of this Form 10-Q and Note 11—Debt in Item 8.—Financial Statements and Supplementary Data of our 2019 Form 10-K for additional detail.
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, 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 is dependent upon the receipt of funds from its subsidiaries by way of dividends, fees, interest, loans or otherwise of the Company’s 2019 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, limitations on other indebtedness, liens, investments and guarantees; limitations on dividends, stock repurchases and other equity transactions; restrictions and limitations on mergers and acquisitions, sales of assets, leases, transactions with affiliates and off-balance sheet and derivative arrangements; maintenance of certain financial ratios; and financial and other reporting requirements. As of March 31, 2020, 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 revolving credit agreement at the Parent Company includes events of default related to payment defaults and accelerations of outstanding debt of material subsidiaries.
47 | The AES Corporation | March 31, 2020 Form 10-Q
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 $1.7 billion. The portion of current debt related to such defaults was $310 million at March 31, 2020, all of which was non-recourse debt related to two subsidiaries — AES Puerto Rico and AES Ilumina. An additional $5 million of debt in default exists at the subsidiary AES Jordan Solar which was classified as a current held-for-sale liability at March 31, 2020. None of the defaults are payment defaults, but are instead technical defaults triggered by failure to comply with other covenants or other conditions contained in the non-recourse debt documents due to the bankruptcy of the offtaker. See Note 8—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 the Parent Company’s debt agreements as of March 31, 2020, in order for such defaults to trigger an event of default or permit acceleration under the Parent Company’s 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 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 Parent 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 March 31, 2020, 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 Parent 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 2019 Form 10-K. The Company’s critical accounting estimates are described in Item 7.—Management’s Discussion and Analysis of Financial Condition and Results of Operations in the 2019 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 three months ended March 31, 2020.
On January 1, 2020, the Company adopted ASC 326 Financial Instruments — Credit Losses and its subsequent corresponding updates (“ASC 326”). The new standard updates the impairment model for financial assets measured at amortized cost, known as the Current Expected Credit Loss (“CECL”) model. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities are required to use a new forward-looking "expected loss" model that generally results in the earlier recognition of an allowance for credit losses. For available-for-sale debt securities with unrealized losses, entities measure credit losses as it was done under previous GAAP, except that unrealized losses due to credit-related factors are now recognized as an allowance on the balance sheet with a corresponding adjustment to earnings in the income statement.
The Company applied the modified retrospective method of adoption for ASC 326. Under this transition method, the Company applied the transition provisions starting at the date of adoption. Refer to Note 1 in Item 1—Financial Statements of this Form 10-Q for further information.