AES Corp. 10-Q Summary: Period Ended September 30, 2007
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for The AES Corporation for the period ended September 30, 2007. The Company is a global power company operating generation and utility businesses in 28 countries. Crucially, the financial statements for the three and nine months ended September 30, 2006, have been restated to correct errors related to derivative instruments, leases, income taxes, and share-based compensation, as well as to reflect segment realignment and discontinued operations. The Company is currently cooperating with an informal SEC inquiry regarding these restatements.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Sep 30, 2007 | 3 Months Ended Sep 30, 2006 (Restated) | 9 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2006 (Restated) |
|---|---|---|---|---|
| Total Revenues | $3,471 | $2,947 | $9,924 | $8,615 |
| Gross Margin | $840 | $826 | $2,584 | $2,598 |
| Net Income (Loss) | $103 | $(327) | $(112) | $190 |
| Diluted EPS (Continuing Ops) | $0.14 | $(0.56) | $0.71 | $0.22 |
| Cash from Operating Activities | $741 | $928 | $1,848 | $1,879 |
| Total Debt (Recourse + Non-Recourse) | As of Sep 30, 2007: $17.2 billion total ($4.9B Recourse, $12.3B Non-Recourse) | |||
| Cash and Equivalents |
Note: Net Income for the nine months ended Sep 30, 2007, includes a $665 million loss from the disposal of discontinued businesses (primarily the sale of EDC in Venezuela).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 18% ($524 million) for the quarter and 15% ($1.3 billion) for the nine months, driven by higher rates/volumes, favorable foreign currency translation, and acquisitions (TEG/TEP in Mexico, Itabo in Dominican Republic).
- Profitability Volatility: While Q3 2007 showed a net income of $103 million compared to a loss of $327 million in Q3 2006, the year-to-date 2007 result was a net loss of $112 million compared to income of $190 million in 2006. The YTD loss is primarily due to a $676 million impairment charge on the sale of EDC (discontinued operations).
- Operating Margins: Gross margin remained relatively flat for the quarter (+2%) but declined slightly for the nine months (-1%). This was due to increased costs from gas supply curtailments and low hydrology in Latin America, offset by favorable currency trends and rate increases in North America.
- Restatement Impact: The restatement of 2006 figures resulted in a decrease of previously reported net income by $57 million for the full year 2006. For the nine months ended Sep 30, 2006, the restatement increased net income by $10 million.
Guidance, Outlook, Risks, and Unusual Items
- Discontinued Operations: The Company sold its Venezuelan utility EDC in May 2007 for $739 million, recognizing a total impairment charge of $676 million. It also sold Central Valley biomass plants in California for a $12 million gain.
- Legal and Regulatory Risks:
- Kazakhstan: The Competition Committee has ordered subsidiaries (Hydros, UKT, Nurenergoservice) to pay damages and fines totaling over $170 million for alleged antimonopoly violations. Bank accounts for some entities have been frozen pending appeals.
- Brazil: Ongoing litigation with Eletrobras (potential $420 million exposure) and BNDES regarding financing and asset sales. Environmental penalties and inquiries are also active.
- India: Arbitration with Gridco regarding CESCO was won by AES in June 2007, but Gridco has challenged the award in local courts.
- Internal Controls: The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2007, due to material weaknesses in intercompany loan accounting, contract accounting, and share-based compensation reporting. Remediation is ongoing.
- Subsequent Events: In October 2007, the Company issued $2 billion in senior unsecured notes and commenced a tender offer to repurchase up to $1.24 billion of senior notes.
Investor Verification Checklist
- Restatement Accuracy: Verify the full impact of the 2006 restatements on historical comparability and the status of the SEC inquiry.
- Kazakhstan Litigation: Monitor the outcome of the antimonopoly appeals and the potential for asset seizures or significant cash outflows in Kazakhstan.
- Internal Control Remediation: Assess the timeline and effectiveness of the remediation plan for material weaknesses in financial reporting.
- Latin America Operations: Evaluate the ongoing impact of gas supply curtailments and hydrology issues on margins in Argentina, Chile, and Brazil.
- Debt Structure: Review the $514 million in subsidiary non-recourse debt currently in default and the risk of these subsidiaries becoming "material" under parent debt covenants.