AES CORP annual report, FY2010

AES Corporation: Fiscal 2010 Form 10-K Summary

Business context and reporting period

The filing is AES Corporation’s annual report for the fiscal year ended December 31, 2010. AES is a global electricity generation and utility company operating in 28 countries across five continents. It reported approximately 40,500 MW of generation capacity, more than 2,000 MW under construction, distribution networks serving over 12 million people, and approximately 29,000 employees.

AES operates through Generation and Utilities businesses. Reportable segments are Latin America Generation, Latin America Utilities, North America Generation, North America Utilities, Europe Generation, and Asia Generation. Generation represented approximately 45% of 2010 revenue and Utilities approximately 55%.

Financial performance and key metrics

Metric	2010	2009	Change
Revenue	$16.647 billion	$13.954 billion	+19%
Gross margin	$3.964 billion	$3.433 billion	+15%
Income from continuing operations	$920 million	$1.809 billion	-49%
Net income attributable to AES	$9 million	$658 million	-99%
Diluted EPS from continuing operations	$(0.11)	$1.06	Declined
Adjusted EPS	$0.94	$1.06	-11%
Cash flow from operations	$3.510 billion	$2.202 billion	+59%
Capital expenditures	$2.310 billion	$2.520 billion	-8%

Gross margin was approximately 23.8% of revenue, compared with approximately 24.6% in 2009. The lower reported margin percentage largely reflects revenue increases from fuel and energy costs that are passed through to customers. Interest expense was $1.526 billion, general and administrative expense was $392 million, and income tax expense was $307 million, implying an effective tax rate of 29% on continuing operations.

Fourth-quarter 2010 revenue was $4.404 billion and gross margin was $1.011 billion. The quarter included $927 million of pretax impairment expense, contributing to a fourth-quarter net loss attributable to AES of $436 million.

Liquidity, debt and capital resources

Unrestricted cash and cash equivalents were $2.554 billion, including approximately $1.1 billion at the Parent Company and qualified holding companies.
Short-term investments were $1.730 billion; restricted cash and debt-service reserves totaled approximately $1.3 billion.
Total debt was approximately $19.7 billion, consisting of $15.1 billion of non-recourse debt and $4.6 billion of recourse debt.
Debt classified as current totaled approximately $3.0 billion, including $1.4 billion related to subsidiary defaults.
Parent Company liquidity was $1.837 billion, comprising $1.122 billion of Parent and qualified holding-company cash and $715 million of available borrowings under Parent credit facilities.
The Parent revolving credit facility was increased to $800 million and extended to January 2015; pricing was LIBOR plus 3.00% at year-end.
Approximately $5.0 billion of consolidated debt bore variable interest rates without an interest-rate derivative fixing the rate.
The Parent Company had $415 million of guarantees and $85 million of outstanding letters of credit.
Contractual obligations totaled approximately $113.7 billion, including $19.7 billion of debt, $52.2 billion of electricity purchase obligations, $8.9 billion of fuel obligations, and $21.0 billion of other purchase obligations.

Management stated that available liquidity was expected to meet foreseeable Parent Company obligations, but emphasized dependence on subsidiary distributions, asset sales, refinancing, capital-market access, operating performance, exchange rates, and compliance with debt covenants.

Material changes versus prior comparable period

Revenue and gross margin increased primarily because of favorable foreign-currency translation, stronger Brazilian utility demand and tariffs, improved Masinloc performance in the Philippines, consolidation of Cartagena in Spain, acquisition of Ballylumford in Northern Ireland, and higher demand in several Latin American markets.
North America Generation gross margin declined 9% because of lower power prices, high coal prices relative to natural gas, and weaker merchant-market economics.
Asia Generation gross margin increased substantially, principally because of improved availability, higher demand, and favorable market prices at Masinloc.
Cash flow from operations benefited from improved collections and working capital in Latin America, higher operating results at Masinloc, and the initial contribution from Cartagena and Ballylumford. Management stated that some of these benefits were nonrecurring and that the 2010 cash-flow growth rate was not expected to continue in 2011.
AES raised approximately $1.58 billion through the March 2010 sale of 125.5 million common shares to a subsidiary of China Investment Corporation, representing approximately 15% ownership on a fully diluted basis.
AES repurchased 8.4 million shares for $99 million during 2010, with $401 million remaining under the authorized $500 million program at year-end.
AES sold its interests in Lal Pir and Pak Gen in Pakistan, Barka in Oman, and Ras Laffan in Qatar. Discontinued operations generated $95 million attributable to AES, including gains on the Barka and Ras Laffan sales.
Effective January 1, 2010, new variable-interest-entity accounting resulted in consolidation of Cartagena and Cili, adding approximately $416 million of revenue from those entities in 2010 and increasing reported assets and liabilities.

Guidance, outlook, management commentary and unusual items

Management expected continued pressure in North American merchant generation, including Eastern Energy, Deepwater, and other coal-fired operations, because of compressed dark spreads and limited economic hedging opportunities for 2011.
Management expected foreign-exchange and commodity-price volatility to continue affecting results. It also did not expect 2010’s increase in operating cash flow to recur at the same rate.
AES continued to prioritize operational improvement, deleveraging, value-accretive investments, stock repurchases, strategic asset sales, completion of approximately 1,300 MW under construction, and achieving commercial operation at Maritza in Bulgaria.
2010 pretax asset impairment expense was $1.221 billion, primarily comprising $827 million for Eastern Energy, $200 million for Huntington Beach, $85 million for Tisza II, and $79 million for Deepwater. Goodwill impairment was $21 million.
The Eastern Energy impairment reflected projected continuing losses and negative operating cash flow through 2034; management estimated the asset group’s fair value at zero.
Maritza’s 670 MW Bulgarian project experienced construction and commissioning delays, project debt was in default, and AES was pursuing claims under a performance bond while defending contractor arbitration. Management expected at least partial commercial operation in the second half of 2011, but disclosed no assurance that the project would be completed or that additional funding would not be required.
On February 1, 2011, AES Thames, a 208 MW Connecticut coal plant, filed for Chapter 11 bankruptcy protection due partly to increased energy-production costs. Management did not expect a material consolidated impact.
Key risks include high leverage, subsidiary debt defaults, refinancing and liquidity requirements, commodity and power-price volatility, foreign-exchange exposure, counterparty credit risk, regulatory and tariff changes, environmental compliance costs, political and sovereign risks, weather and hydrology, construction delays, pension obligations, litigation, and potential additional impairments.
Aggregate reserves for litigation and claims were approximately $450 million at December 31, 2010. The filing also disclosed material unresolved proceedings involving Eletropaulo, AES Sul, IPL, AES Cartagena, Maritza, and other subsidiaries.
AES continued to cooperate with an informal SEC inquiry concerning historical restatements and related matters; the filing stated that the inquiry had not been closed.

Most important facts for an investor to verify

Whether subsidiary defaults totaling approximately $1.4 billion could become material under Parent Company debt agreements or restrict subsidiary cash distributions.
The maturity and refinancing plan for approximately $3.0 billion of current debt, including $463 million of Parent recourse debt due within one year.
The sustainability of 2010 operating cash flow after excluding working-capital benefits, tax-related items, discontinued operations, and new consolidations.
The operating and financing outcome of the delayed Maritza project and the related performance-bond and contractor arbitration claims.
The effect of continued North American merchant-market weakness, limited 2011 hedging, and potential additional asset impairments.
Potential environmental compliance costs, including U.S. emissions and cooling-water rules, coal-combustion byproduct requirements, and Chilean emissions regulations.
The status and potential exposure from major litigation, including Eletrobras-Eletropaulo, AES Sul tariff-tax claims, IPL’s EPA enforcement matter, and AES Cartagena’s carbon-cost arbitration.
Whether the SEC informal inquiry into prior restatements could result in further restatements, penalties, litigation, or financing restrictions.
The ability of regulated utilities to obtain expected tariff resets and recover regulatory assets and environmental expenditures.