AES Corporation 2012 Q3 Form 10-Q Summary
Business context and reporting period
AES Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. AES is a global power company operating Generation and Utilities businesses across North America, Latin America, Europe, Asia and Africa. For the nine months, Generation contributed approximately 45% of consolidated revenue and Utilities approximately 55%.
Prior-period amounts were reclassified for discontinued operations and held-for-sale businesses, and the December 31, 2011 balance sheet was revised for final purchase-price allocation adjustments related to the 2011 DPL acquisition.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $4.587 billion | $4.307 billion | $13.519 billion | $12.898 billion |
| Gross margin | $1.004 billion | $1.010 billion | $2.774 billion | $2.995 billion |
| Net income attributable to AES | $(1.568) billion | $(131) million | $(1.087) billion | $267 million |
| Diluted EPS from continuing operations | $(2.10) | $(0.09) | $(1.52) | $0.46 |
| Adjusted EPS, non-GAAP | $0.36 | $0.28 | $0.91 | $0.81 |
| Cash flow from operating activities | $1.015 billion | $1.136 billion | $2.129 billion | $2.313 billion |
Q3 gross margin was approximately 21.9% of revenue versus 23.4% in the prior-year quarter. Nine-month gross margin was approximately 20.5% versus 23.2% in the prior-year period. The filing attributes the margin pressure primarily to foreign-currency effects, lower Eletropaulo tariffs and higher Latin American fixed costs.
- September 30, 2012 cash and cash equivalents were $1.943 billion, including approximately $444 million at the Parent Company and qualified holding companies. Restricted cash and debt-service reserves totaled approximately $1.3 billion.
- Parent Company liquidity was $1.239 billion, consisting of $444 million of Parent and qualified holding-company cash plus $795 million of available borrowings under Parent credit facilities.
- Aggregate principal debt was approximately $21.6 billion: $15.4 billion of non-recourse debt and $6.2 billion of recourse debt.
- Of approximately $2.3 billion of current non-recourse debt, $947 million was due within twelve months and $1.4 billion was classified as current because of covenant defaults at five subsidiaries.
- Capital expenditures were $1.581 billion during the first nine months, compared with $1.832 billion in the prior-year period. Financing activities used $1.343 billion of cash, including $741 million of distributions to noncontrolling interests and $301 million of share repurchases.
- AES declared a quarterly dividend of $0.04 per share and completed its $680 million authorized stock-repurchase program, repurchasing 24.8 million shares for $301 million during the nine months.
Material changes versus the prior comparable period
- Revenue increased 7% in Q3 and 5% for the nine months, principally from the DPL acquisition and other new businesses, partially offset by adverse foreign-currency translation.
- Utilities–North America revenue increased 148% for both Q3 and the nine months, primarily reflecting DPL, acquired in November 2011. The segment’s gross margin increased 144% in Q3 and 123% for the nine months.
- Utilities–Latin America gross margin declined 71% in Q3 and 79% for the nine months, primarily due to Eletropaulo tariff resets, higher fixed costs, bad debt expense, pension costs and contingencies.
- Generation–Europe revenue declined 38% in Q3 and 18% for the nine months, mainly due to the Cartagena disposition, cessation of operations at a Hungary plant and lower pass-through revenue. Nine-month gross margin nevertheless increased 45%, aided by the new Maritza business and a Cartagena arbitration settlement.
- General and administrative expense declined 29% in Q3 and 20% for the nine months, while nine-month interest expense increased 6% because of DPL debt, additional Parent borrowings and lower capitalized interest.
- Operating cash flow declined 11% in Q3 and 8% for the nine months, primarily because of higher regulatory assets, operating expenses and weaker collections in Latin American utilities.
Guidance, outlook, risks and unusual items
- AES recorded a preliminary $1.85 billion goodwill impairment for the DPL/DP&L reporting unit. Management estimated the final charge could range from $1.7 billion to $2.0 billion and expected to complete the impairment testing in the fourth quarter. The charge was not tax deductible and produced no cash tax benefit.
- Management stated that, excluding the DPL goodwill impairment, Q3 net income attributable to AES would have been $282 million and nine-month net income would have been $763 million; these are non-GAAP analytical figures presented by management.
- Management expected continued exposure to low U.S. natural-gas and power prices, foreign-exchange volatility, possible additional impairment charges, uncertainty over U.S. taxation of foreign earnings and regulatory outcomes affecting DPL.
- DP&L’s Ohio Electric Security Plan filing sought a nonbypassable charge of $120 million annually for five years, a switching tracker and a transition toward competitive wholesale bidding. The PUCO review was pending and could materially affect DPL’s earnings, liquidity, financing access and goodwill value.
- Five subsidiaries had technical covenant defaults totaling $1.377 billion of debt. The defaults were generally not payment defaults, and none triggered a Parent-level cross-default as of September 30, 2012; however, future changes in subsidiary materiality could create acceleration or liquidity risks.
- Parent guarantees, letters of credit and cash-collateralized letters of credit totaled $789 million, with an additional $9 million of construction and equipment investment commitments.
- Recorded litigation and claims reserves were approximately $334 million. Reasonably possible material contingencies, excluding reserved amounts and uncertain tax positions, were estimated at $230 million to $1.5 billion where estimable.
- Other significant risks included environmental compliance costs, potential coal-plant retirements, regulatory and tariff changes, counterparty and offtaker credit risk, Argentine and European sovereign risks, and exposure to electricity, fuel, currency and interest-rate volatility.
- Subsequent events included planned sales of hydro projects and Tisza II, for which management expected an approximately $91 million pretax loss, subject to closing conditions. AES also announced a corporate restructuring that could change its segment reporting structure.
Most important facts for an investor to verify
- Final fourth-quarter 2012 goodwill impairment for DP&L versus the preliminary $1.85 billion charge.
- Status and economic terms of DP&L’s Ohio regulatory proceeding, customer switching trends and refinancing needs.
- Resolution, refinancing or repayment plans for the $1.4 billion of non-recourse debt in covenant default.
- Cash accessibility at subsidiaries versus Parent-level liquidity, including the expected repayment of approximately $482 million advanced to non-operating subsidiaries after quarter-end.
- Actual recovery of Eletropaulo regulatory assets and liabilities, including its $536 million regulatory liability.
- Potential outcomes and cash requirements for the $230 million to $1.5 billion range of reasonably possible material contingencies and major environmental proceedings.
- Execution of announced asset sales, including Tisza II, and the effect of related gains or losses on liquidity and leverage.
- Sustainability of the $0.04 per-share dividend and any future capital returns given Parent-level debt, guarantees and subsidiary cash restrictions.