AES Corporation 2010 Q3 Form 10-Q Summary
Business context and reporting period
The AES Corporation is a global power company operating generation and utility businesses across Latin America, North America, Europe, Asia and Africa. The filing covers the unaudited three and nine months ended September 30, 2010, with comparisons to the corresponding 2009 periods. Generation and Utilities represented approximately 45% and 55% of nine-month consolidated revenue, respectively.
AES adopted new variable-interest-entity consolidation guidance effective January 1, 2010, resulting primarily in consolidation of Cartagena in Spain and Cili in China. Prior periods were reclassified for discontinued and held-for-sale businesses and revised for segment presentation.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $4.151 billion, up 14% | $12.243 billion, up 20% |
| Gross margin | $985 million, up 2%; approximately 23.7% of revenue | $2.953 billion, up 13%; approximately 24.1% of revenue |
| Income from continuing operations | $296 million, down 29% | $1.099 billion, down 22% |
| Net income attributable to AES | $114 million, down 38% | $445 million, down 37% |
| Diluted EPS from continuing operations | $0.05, versus $0.26 | $0.47, versus $1.00 |
| Adjusted EPS | $0.20, versus $0.24 | $0.68, versus $0.85 |
| Net cash provided by operating activities | $996 million, down 1% | $2.412 billion, up 29% |
Revenue growth was driven by foreign-currency translation, higher Latin American utility tariffs and volumes, consolidation of Cartagena, improved Masinloc performance in the Philippines, higher Indianapolis Power and Light demand, and the acquisition of Ballylumford in Northern Ireland. Gross margin benefited from foreign currency, Latin American utilities demand, North American generation volumes and Masinloc, but was pressured by higher fuel and purchased-energy costs, lower New York rates, and unfavorable regulatory adjustments at Eletropaulo.
Income tax expense was $111 million for the quarter and $562 million year to date. The effective tax rate was 29% for the quarter and 38% year to date, compared with 34% and 27%, respectively, in 2009. The nine-month rate included approximately $70 million of tax expense related to the CEMIG transaction.
Financial position, debt and liquidity
- Cash and cash equivalents were $2.848 billion at September 30, 2010, compared with $1.782 billion at December 31, 2009.
- Short-term investments were $1.645 billion; restricted cash and debt-service reserves totaled approximately $1.215 billion.
- Total debt was $19.975 billion, comprising $15.073 billion of non-recourse debt and $4.902 billion of recourse debt. Total debt increased from $19.537 billion at year-end 2009.
- Approximately $4.9 billion of consolidated debt bore variable interest rates not fixed through derivatives.
- Parent Company Liquidity, a non-GAAP measure, was $2.097 billion, consisting of $1.418 billion of parent and qualified holding-company cash plus $679 million of available credit-facility borrowings.
- The amended revolving credit facility increased commitments to $800 million and extended maturity to January 29, 2015. Pricing was LIBOR plus 3.00% at the reporting date.
- Current debt included $674 million of non-recourse debt associated with subsidiary defaults and $917 million of other non-recourse debt due within twelve months.
Material changes versus the prior comparable period
- Revenue increased substantially, but attributable earnings declined because of $296 million of third-quarter asset impairments, including $200 million for Huntington Beach and $85 million for Tisza II, plus an $18 million goodwill impairment at Deepwater.
- Year-to-date results no longer included the prior-year $132 million gain on investment sales, including gains related to Kazakhstan and the Hefei plant.
- Cartagena and other VIEs were consolidated in 2010, adding revenue and debt but changing the comparability of operating results.
- Net cash from operations increased by $535 million year to date, primarily from improved collections and higher cash generation in Latin American utilities and generation businesses.
- AES issued 125.5 million shares to China Investment Corporation for approximately $1.58 billion, representing about 15% ownership on a fully diluted basis.
- The company repurchased 1.54 million shares for $15 million during the quarter under a $500 million authorization.
- AES completed the sales of its Pakistan businesses and its Oman business. The Qatar Ras Laffan sale closed on October 20, 2010 for approximately $190 million.
- AES sold its indirect CEMIG interest in Brazil, eliminating approximately $1.4 billion of assumed BNDES debt and recognizing a $115 million pretax equity-earnings gain, partly offset by approximately $70 million of tax expense.
Outlook, management commentary, risks and unusual items
Management expected continued challenges through the remainder of 2010 and into 2011 from North American merchant generation, commodity and foreign-exchange volatility, higher tax rates, and the July 2011 Brazilian tariff reset. Management also expected improved operations and contributions from acquired or newly operating businesses to partially offset these pressures. No specific consolidated earnings guidance was provided in the filing.
- Approximately 1,600 MW of projects were under construction in six countries. Maritza in Bulgaria faced delays but was expected, at the filing date, to be completed by year-end 2010.
- Campiche in Chile remained suspended despite renewed permitting progress. If the project cannot be completed, AES estimated a potential impairment of approximately $197 million.
- Five subsidiaries had non-recourse debt in default or acceleration status totaling $674 million. None was a material subsidiary under parent debt agreements at September 30, 2010, but future asset reductions or other events could change that assessment.
- Environmental regulation was a significant risk, including greenhouse-gas rules, the proposed U.S. Transport Rule, coal-combustion-byproduct regulation, and California cooling-water requirements. AES estimated RGGI compliance costs of approximately $17.5 million annually for 2010 and 2011.
- AES Cartagena disputed responsibility for European Union emissions allowances and related costs with GDF-Suez. An unfavorable outcome could materially affect results and asset values.
- Parent guarantees and letters of credit totaled $553 million, and net investment commitments for construction and equipment were $108 million, expected to be funded with $79 million in 2010 and $29 million in 2011.
- Environmental remediation liabilities were $28 million, although potential additional costs could be material and could not be estimated.
- Market-risk sensitivities included approximately $10 million of pretax earnings exposure for each $10-per-barrel oil move, each $1/MMBTU natural-gas move, and each $10-per-ton coal move for the remainder of 2010. A 100-basis-point increase in relevant interest rates was estimated to affect remaining 2010 pretax earnings by approximately $5 million.
- After quarter-end, AES redeemed the remaining $290 million of 2013 Notes, completed the Ras Laffan sale, and had repurchased 7.63 million shares for $90 million through November 3, 2010.
Most important facts for an investor to verify
- Whether subsidiary debt defaults, particularly the $674 million classified as current, could escalate or trigger parent-level covenant consequences.
- The sustainability of earnings excluding impairments, foreign-currency gains, derivative mark-to-market effects, asset-sale gains and other unusual items.
- The effect of lower power prices, high coal prices, fuel costs and limited 2011 hedging on Eastern Energy, Deepwater and other merchant assets.
- The final purchase-price allocation for Ballylumford and the ongoing accounting effects of VIE consolidation.
- The status, cost and potential impairment exposure of Campiche, Maritza, Huntington Beach and other development or environmentally affected projects.
- The outcome and financial exposure from major litigation, environmental proceedings, emissions-allowance disputes and regulatory matters.
- Parent-level cash availability, subsidiary dividend restrictions, credit-facility capacity and the funding requirements for construction commitments and share repurchases.