AES Corporation — Form 10-Q Summary
Business context and reporting period
AES is a global power company operating Generation and Utilities businesses across Latin America, North America, Europe, the Middle East, Africa and Asia. The filing covers the three and six months ended June 30, 2011, with prior periods reclassified for discontinued and held-for-sale businesses. The report was filed August 4, 2011.
Key financial metrics
| ($ in millions, except per-share data) | Q2 2011 | Q2 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Revenue | $4,544 | $3,923 | $8,808 | $7,843 |
| Gross margin | $1,019 | $1,002 | $2,035 | $1,963 |
| Income from continuing operations | $444 | $429 | $939 | $810 |
| Net income attributable to AES | $174 | $144 | $398 | $331 |
| Diluted EPS from continuing operations | $0.24 | $0.19 | $0.54 | $0.43 |
| Cash flow from operations | $675 | $747 | $1,180 | $1,415 |
- Revenue increased 16% in the quarter and 12% year to date, supported by foreign-exchange translation, Ballylumford, Angamos and Maritza, higher generation prices and volume in Latin America, and increased Brazilian utility demand.
- Gross margin increased 2% in the quarter and 4% year to date. Gross margin as a percentage of revenue declined to approximately 22.4% from 25.5% in Q2 2010 and to approximately 23.1% from 25.0% year to date, reflecting pass-through fuel costs, higher fixed costs, outages and weaker merchant-market performance.
- Net income attributable to AES rose 21% in Q2 and 20% year to date. Results benefited from foreign-currency gains and lower effective tax rates, partly offset by lower equity earnings, the Kelanitissa impairment and discontinued-operation losses.
- Operating cash flow declined 10% in Q2 and 17% year to date because of weaker North American and Asian generation results, businesses sold or held for sale, and increased working-capital requirements.
- Capital expenditures were $1.019 billion year to date; cash used in investing activities was $757 million.
- At June 30, 2011, cash and cash equivalents were $3.624 billion, short-term investments were $1.231 billion, restricted cash was $530 million, and debt-service reserves and other deposits were $797 million.
- Total debt was $21.435 billion, comprising $15.242 billion of non-recourse debt and $6.193 billion of recourse debt. Parent Company liquidity was $3.077 billion, including $2.303 billion of parent and qualified-holding-company cash and $774 million of available credit-facility borrowings.
Material changes versus the prior comparable period
- Foreign-currency gains of $38 million in Q2 2011 and $71 million year to date compared with losses of $71 million and $122 million, respectively, in the prior-year periods.
- Income tax expense decreased to $178 million from $261 million in Q2 and to $396 million from $447 million year to date; effective tax rates were approximately 28% and 30%, respectively, versus 47% and 40%.
- Net equity earnings of affiliates fell to a $3 million loss in Q2 and $7 million of income year to date, primarily because the 2010 periods included the CEMIG-related gain and because of AES Solar impairments and weaker affiliate performance.
- Asia Generation revenue and gross margin declined 9% and 33% in Q2, and 22% and 32% year to date, mainly due to lower spot prices and volume at Masinloc and reduced Kelanitissa activity.
- Europe Generation revenue increased because of Ballylumford and Maritza, but gross margin declined 11% in Q2 and 17% year to date because of weaker Hungary and Kilroot performance, regulatory costs and Maritza start-up delays.
- During the quarter, AES issued $1.05 billion of senior secured term debt and $1 billion of 7.375% senior unsecured notes due July 2021. The financing was intended in part to support the proposed acquisition of DPL.
- AES repurchased 7.7 million shares for $98 million during the first six months, bringing cumulative repurchases under the program to $198 million.
Guidance, outlook, risks and unusual items
- Management expected to obtain the remaining $1.25 billion of permanent financing and complete the proposed $3.5 billion cash acquisition of DPL, subject to shareholder, regulatory and other approvals. The transaction’s total enterprise value was approximately $4.7 billion.
- Management expected full commercial operation of the 670 MW Maritza project by year-end 2011, but the project was operating at only 494 MW at quarter-end, had defaulted project debt and remained subject to contractor litigation.
- The 120 MW Esti hydroelectric plant in Panama was offline because of tunnel damage and was projected to resume operations in the second quarter of 2012, subject to construction risks and insurance recovery.
- A $33 million impairment was recorded for the Kelanitissa plant in Sri Lanka, reducing its carrying value from $66 million to an estimated fair value of $33 million. Further impairment was possible.
- Management cited continued challenges at Brazilian utilities, merchant businesses in Northern Ireland and Hungary, Masinloc in the Philippines, and Eastern Energy in New York. The 2011 Brazilian tariff reset had been postponed and its effect remained uncertain.
- Non-recourse debt of approximately $1.5 billion was in default at Maritza, Sonel and Kelanitissa. Management stated these subsidiaries were not material subsidiaries under the parent debt agreements at June 30, 2011, but future events could create cross-default or acceleration risk.
- Environmental and regulatory risks included U.S. greenhouse-gas, air-emissions, cooling-water and coal-combustion-byproduct rules, as well as Chilean emissions requirements. Compliance costs could be material, although the filing does not provide a clear aggregate estimate.
- Litigation reserves were approximately $493 million. Management estimated reasonably possible losses from material contingencies, excluding recorded reserves, at up to $1.9 billion.
- Parent Company guarantees and other contingent obligations totaled $415 million, and additional construction and equipment investment commitments were $45 million.
- Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective as of June 30, 2011.
Investor verification checklist
- Verify the closing status, final financing and leverage impact of the DPL acquisition.
- Track resolution of the $1.5 billion of subsidiary debt defaults and any potential parent-level cross-default consequences.
- Assess Maritza’s progress to full capacity, project-debt restructuring and contractor arbitration outcomes.
- Monitor the Esti repair schedule, insurance proceeds and the impact of the prolonged outage.
- Evaluate whether further Kelanitissa or other asset impairments are required.
- Review cash conversion, working-capital trends and the availability of parent-level liquidity versus restricted or subsidiary-held cash.
- Assess the effects of tariff resets, merchant power prices, fuel costs, foreign-exchange movements and environmental compliance requirements.
- Follow material litigation and regulatory matters, including Eletropaulo assessments, environmental claims and the estimated $1.9 billion of reasonably possible contingency losses.