AES Corporation 2009 Q2 Form 10-Q Summary
Business context and reporting period
AES is a global power company operating generation and utility businesses across Latin America, North America, Europe, Africa, Asia and the Middle East. The filing covers the three and six months ended June 30, 2009, and was filed August 6, 2009. The interim financial statements are unaudited and prepared under U.S. GAAP.
AES reorganized its segment reporting in 2009 into six reportable segments: Latin America Generation, Latin America Utilities, North America Generation, North America Utilities, Europe Generation and Asia Generation. Corporate and Other includes smaller operations, development activities and corporate costs.
Financial performance and key metrics
| Metric | Q2 2009 | Q2 2008 | Change | Six months 2009 | Six months 2008 |
|---|---|---|---|---|---|
| Revenue | $3.495 billion | $4.126 billion | Down 15% | $6.873 billion | $8.207 billion |
| Gross margin | $847 million | $1.029 billion | Down 18% | $1.730 billion | $2.071 billion |
| Gross margin percentage | 24% | 25% | Down 1 point | 25% | 25% |
| Net income | $531 million | $1.160 billion | Down 54% | $1.032 billion | $1.568 billion |
| Net income attributable to AES | $303 million | $903 million | Down 66% | $521 million | $1.136 billion |
| Diluted EPS | $0.45 | $1.31 | Down $0.86 | $0.78 | $1.65 |
| Operating cash flow | $495 million | $314 million | Up 58% | $871 million | $784 million |
Revenue and gross margin were pressured by foreign-currency translation, lower electricity and fuel-related prices, reduced demand, and lower wholesale prices. Approximately 73% of generation revenue in the first half of 2009 came from plants with power purchase agreements covering at least 75% of capacity for three years or longer.
Q2 segment results were mixed. Latin America Generation gross margin increased 5% to $335 million, while Latin America Utilities declined 31% to $175 million. North America Generation gross margin fell 50% to $122 million, primarily due to lower mark-to-market derivative gains and outages. Europe Generation gross margin declined 58% to $27 million. Asia Generation gross margin increased 93% to $77 million, reflecting improved Masinloc operations and Amman East.
Cash flow, liquidity, debt and balance sheet
- Cash and cash equivalents were $1.735 billion at June 30, 2009, compared with $903 million at December 31, 2008. Restricted cash was $444 million and short-term investments were $1.152 billion.
- Six-month operating cash flow was $871 million. Investing activities used $384 million, including $1.193 billion of capital expenditures. Financing activities provided $331 million.
- Total debt was $19.220 billion at carrying value: $13.705 billion of non-recourse debt and $5.515 billion of recourse debt. None of the recourse debt matured within the following twelve months.
- Approximately $3.5 billion of consolidated debt carried variable interest rates that were not fixed through derivative instruments. Management estimated that a 100-basis-point increase in relevant interest rates would increase remaining 2009 interest expense by approximately $9 million, after noncontrolling interests.
- Parent Company Liquidity was $1.316 billion at June 30, 2009, consisting of $603 million of cash at the Parent and qualified holding companies, $712 million available under the senior secured facility and $1 million under the senior unsecured facility.
- Parent Company guarantees and other credit support commitments totaled approximately $404 million. Letters of credit outstanding totaled $207 million. Net investment and equipment commitments totaled $185 million, expected to be funded with approximately $89 million in 2009, $39 million in 2010 and $57 million in 2011.
AES issued $535 million of 9.75% senior unsecured notes due 2016, with an effective yield of 11%, and used proceeds in part to reduce its senior unsecured credit facility by $465 million. Gener issued $196 million of 8% notes due 2019, priced to yield 8.5%. AES also repaid $154 million of 9.5% senior unsecured notes at maturity.
Material changes versus the prior comparable period
- Net income attributable to AES declined sharply because the prior-year period included a $908 million gain from the sale of the Kazakhstan businesses. In 2009, AES recognized a $98.5 million gain from terminating the related management agreement and an $80 million management performance incentive.
- Foreign-currency translation reduced Q2 revenue by approximately $520 million and gross margin by approximately $101 million; the six-month impacts were approximately $1.1 billion and $238 million, respectively.
- Interest expense declined 18% in Q2 and 14% for the six-month period, primarily from favorable currency effects and lower interest rates in Brazil.
- Capital expenditures declined 14% to $1.193 billion for the first six months, while operating cash flow increased 11%.
- AES received $35 million from a Cartagena, Spain affiliate settlement related to construction delays; the amount was recorded in equity earnings because AES’s investment balance had previously been reduced to zero.
- There were no discontinued operations in 2009. Prior-year discontinued operations related to the Jiaozuo business sold in December 2008.
- AES adopted FAS 160 for noncontrolling interests and interim fair-value disclosure guidance. Management stated that these changes did not materially affect the financial statements. The potential impact of FAS 167 could not yet be determined.
Guidance, outlook, management commentary and risks
Management did not provide a specific consolidated earnings or revenue forecast. It expected eight generation projects totaling 835 MW to enter service during the remainder of 2009, including Amman East, Guacolda 3, Dibamba, Armenia Mountain and wind projects in China, France and Scotland. Guacolda 3 began commercial operations on July 31, 2009. Management continued to prioritize liquidity, operating improvements, completion of more than 3,000 MW of projects under construction and the highest-value use of excess cash.
- Campiche, a 270 MW coal project in Chile, was halted after the Chilean Supreme Court invalidated its environmental permit. Management believed completion was probable, but estimated a potential impairment of approximately $186 million if the project could not be completed.
- The global recession created risks from currency volatility, lower power prices, reduced demand, counterparty credit risk, tighter financing markets and potential asset impairments. Management believed liquidity was sufficient based on cash, operating cash flow and financing availability, but noted that access to capital markets and lender commitments could not be assured.
- Potential U.S. greenhouse-gas legislation, EPA regulation, regional carbon programs and international climate agreements could increase capital and compliance costs. The filing stated that the potential impact of proposed legislation could not be reasonably estimated.
- Five subsidiaries had non-recourse debt in default or accelerated status totaling $97 million. None was then considered a material subsidiary under AES’s corporate debt agreements, but future asset reductions or other events could cause a default to trigger parent-level consequences.
- Environmental remediation liabilities totaled $29 million, while management stated that reasonably possible additional costs could be material but could not be estimated.
- Subsequent to quarter-end, AES Cartagena received notice that Spain’s energy regulator intended to invoice approximately $29 million for previously granted carbon allowances for 2007–2008, plus an undetermined amount for the first half of 2009. The ultimate impact was not determinable.
- Market-risk sensitivities included an estimated $26 million reduction in remaining 2009 pretax earnings from a 10% U.S. dollar appreciation, a $5 million gross-margin reduction from a 10% decline in U.S. power prices, and $1 million from a 10% increase in petroleum coke prices.
Important facts for investors to verify
- Whether Campiche construction resumes and whether any impairment is required.
- The status and potential financial impact of AES Cartagena’s carbon-allowance dispute with the Spanish regulator and GDF-Suez.
- The ability of subsidiaries in default to cure covenant and payment defaults without triggering broader debt or liquidity consequences.
- Actual cash generation, project-financing availability and funding needs for the construction portfolio.
- Exposure to foreign-currency movements, power and fuel prices, derivative mark-to-market changes and pension funding requirements.
- Potential liabilities from environmental, regulatory, antitrust and litigation matters, including the material Brazilian and Kazakh proceedings described in Note 8.
- The effect of proposed U.S. greenhouse-gas regulation and other regulatory changes on generation assets and utility cost recovery.