AES Corporation — Fiscal 2011 Form 10-K Summary
Business context and reporting period
AES reported for the fiscal year ended December 31, 2011; the filing is an annual Form 10-K rather than a standalone fourth-quarter filing. AES operates global Generation and Utilities businesses across 27 countries, with approximately 44,200 MW of capacity, 12 million utility customers, and approximately 2,400 MW under construction at year-end.
Generation represented approximately 45% of 2011 revenue and Utilities approximately 55%. Latin America generated approximately 65% of consolidated revenue. AES completed its acquisition of DPL Inc., the parent of Dayton Power & Light, on November 28, 2011.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $17.274 billion | $15.828 billion | +9% |
| Gross margin | $4.134 billion | $3.936 billion | +5% |
| Income from continuing operations | $1.541 billion | $1.470 billion | +5% |
| Income from continuing operations attributable to AES | $458 million | $484 million | -5% |
| Net income attributable to AES | $58 million | $9 million | +$49 million |
| Diluted EPS from continuing operations | $0.59 | $0.63 | Down |
| Adjusted EPS | $1.04 | $0.98 | +6% |
| Cash flow from operations | $2.884 billion | $3.465 billion | -17% |
| Capital expenditures | $2.430 billion | $2.310 billion | +$120 million |
Consolidated gross margin was approximately 24% of revenue. Management cautions that gross margin percentage is less meaningful where fuel and purchased-power costs are passed through to customers.
At December 31, 2011, AES had $1.710 billion of unrestricted cash and cash equivalents, $1.356 billion of short-term investments, and $1.4 billion of restricted cash and debt-service reserves. Parent Company liquidity was $693 million, comprising $200 million of parent and qualified-holding-company cash and $493 million of available borrowings.
Total debt was $22.573 billion, consisting of $16.088 billion of non-recourse debt and $6.485 billion of recourse debt. Approximately $1.3 billion of current non-recourse debt related to subsidiary defaults, principally Maritza, Sonel, and Kelanitissa. AES stated that it remained in compliance with Parent Company debt covenants at year-end.
Material changes versus prior comparable period
- Revenue growth reflected favorable foreign-exchange effects, new operations at Angamos and Maritza, a full year of Ballylumford, higher generation in Chile and Latin America, and the late-November DPL acquisition.
- Gross margin benefited from Latin American generation, Gener, Tietê, new operations, and foreign-exchange translation, but was reduced by Eletropaulo’s expected tariff reset, higher fixed costs, weaker Hungary and Kilroot performance, and lower Asia margins.
- Cash flow from operations declined despite higher reported net income, primarily because of higher taxes, weaker collections at Eletropaulo, increased operating and energy-purchase payments, pension contributions, and lower North American generation cash flow.
- Net income attributable to AES improved largely because 2011 impairment and discontinued-operation losses were lower than in 2010. Continuing-operations EPS declined, reflecting higher interest expense, lower equity earnings, and other non-operating items.
- AES acquired DPL for approximately $3.5 billion, funded with new Parent Company debt, revolver borrowings, and DPL-level notes. The transaction added approximately $2.5 billion of provisional goodwill and contributed $154 million of revenue and a $6 million net loss for the post-acquisition period.
- AES repurchased 25.5 million shares for $279 million during 2011. The company did not pay a common-stock dividend but announced an intention to begin dividends in the fourth quarter of 2012, subject to Board approval and debt restrictions.
- Discontinued and held-for-sale activities included the Argentina distribution businesses, Brazil Telecom, carbon-reduction projects, wind projects, Eastern Energy, Borsod, and Thames. Brazil Telecom generated a $446 million after-tax disposal gain, while the Argentina distribution businesses generated a $338 million after-tax loss.
Guidance, outlook, management commentary, risks and unusual items
Management’s priorities were geographic concentration in Brazil, Chile, Colombia, and the United States; development in Turkey, Poland, and the United Kingdom; corporate debt reduction; selective asset sales; DPL integration; operating-cost reduction; and completion of projects under construction.
- Management expected continued pressure in 2012 from Eletropaulo’s unresolved tariff reset, lower Chilean spot margins, relatively low gas and power prices versus coal, higher potential taxes on foreign earnings, and volatile currencies and commodities.
- Management expected improved operations, DPL growth, and cost-reduction initiatives to offset some pressures, but provided no assurance that operating cash flow would not decline further.
- Estimated 2012 pre-tax earnings sensitivity was approximately $40 million for a $10-per-ton change in coal, $30 million for a $10-per-barrel change in oil, and $40 million for a $1/MMBtu change in natural gas.
- Significant 2011 impairment charges included $116 million for wind turbines and deposits, $52 million for Tisza II, $42 million for Kelanitissa, $74 million for the Yangcheng equity investment, and $17 million of Chigen goodwill impairment.
- Major regulatory and environmental exposures included Eletropaulo tariff refunds, potential U.S. Utility MACT and CSAPR compliance costs, IPL’s EPA New Source Review matter, potential cooling-water compliance costs, Chilean emissions-control investments estimated at approximately $280 million through 2015, and IPL Utility MACT expenditures estimated at $500 million to $900 million through approximately 2016.
- Material contingencies included litigation and regulatory matters in Brazil, India, Kazakhstan, Panama, the United States, the Dominican Republic, and elsewhere. Reserves for claims totaled approximately $363 million; reasonably possible losses for specified material contingencies were estimated at $355 million to $1.7 billion, excluding recorded reserves and uncertain tax positions.
- AES continued to face substantial leverage, refinancing, counterparty, foreign-exchange, commodity, hydrology, weather, operational, political, regulatory, environmental, and information-security risks. The company had a below-investment-grade Standard & Poor’s rating of BB-.
- The SEC’s informal inquiry concerning prior restatements remained open, although management reported effective disclosure controls and internal control over financial reporting. DPL was excluded from the 2011 internal-control evaluation because of the timing of the acquisition.
Most important facts for an investor to verify
- Whether Eletropaulo’s final tariff reset and related $190 million regulatory liability are adequate, and the impact on future cash flow and earnings.
- The refinancing and resolution of the $1.3 billion of defaulted subsidiary debt, including whether defaults could become cross-defaults under Parent Company agreements.
- Post-acquisition DPL performance, Ohio regulatory outcomes, customer switching, integration costs, and the recoverability of the $2.5 billion of provisional goodwill.
- The availability of Parent Company liquidity after debt service, construction funding, asset sales, guarantees, letters of credit, share repurchases, and any proposed dividend.
- Actual environmental compliance spending and cost recovery for U.S. coal facilities, Chilean generation, European emissions rules, and cooling-water requirements.
- The final outcomes and cash exposure from disclosed litigation, tax assessments, regulatory proceedings, and performance or financial guarantees.
- Whether operating cash flow improves from the 2011 level of $2.884 billion and whether the company can fund its approximately 2,400 MW construction program without materially increasing leverage.