AES Corporation 2010 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, the Middle East, Asia and Africa. The filing covers the three and six months ended June 30, 2010, with comparisons to the corresponding 2009 periods. Generation represented approximately 45% of first-half revenue and Utilities approximately 55%.
The financial statements are unaudited and reflect the prospective adoption of new variable-interest-entity consolidation guidance. Cartagena in Spain and Cili in China were consolidated beginning January 1, 2010; Cartagena contributed $85 million of second-quarter revenue and $187 million of first-half revenue.
Key financial metrics
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
|---|---|---|---|---|
| Revenue | $4,021 million | $3,291 million | $8,092 million | $6,526 million |
| Gross margin | $982 million | $803 million | $1,968 million | $1,652 million |
| Income from continuing operations | $411 million | $503 million | $803 million | $986 million |
| Net income attributable to AES | $144 million | $303 million | $331 million | $521 million |
| Diluted EPS from continuing operations | $0.17 | $0.43 | $0.42 | $0.74 |
| Adjusted EPS | $0.23 | $0.24 | $0.48 | $0.61 |
| Cash provided by operating activities | $747 million | $537 million | $1,416 million | $874 million |
Gross margin was approximately 24.4% of revenue in the second quarter and 24.3% year to date, compared with approximately 24.4% and 25.3%, respectively, in the prior-year periods. Management notes that gross-margin percentages are less informative for businesses with fuel-cost and tariff pass-through arrangements.
- As of June 30, 2010, cash and cash equivalents were $2.891 billion, short-term investments were $1.716 billion, and restricted cash and debt-service reserves totaled approximately $1.175 billion.
- Total debt was $19.672 billion, consisting of $14.564 billion of non-recourse debt and $5.108 billion of recourse debt. Approximately $4.7 billion of debt bore variable rates not fixed through derivatives.
- Total assets were $40.701 billion and total equity was $10.654 billion.
- Capital expenditures were $1.002 billion in the first half, compared with $1.193 billion in 2009.
- Parent Company Liquidity, a non-GAAP measure, was $2.234 billion, including $1.776 billion of parent and qualified holding-company cash and $458 million of available borrowings.
Material changes versus the prior comparable period
- Revenue increased 22% in the quarter and 24% year to date, driven by favorable foreign-currency translation, higher Latin American utility tariffs and demand, improved Latin American generation volume and pricing, Masinloc performance in the Philippines, and the consolidation of Cartagena.
- Gross margin increased 22% in the quarter and 19% year to date. Latin American Utilities, Europe Generation and Asia Generation showed particularly strong improvement.
- North America Generation weakened: second-quarter gross margin declined 38% and first-half gross margin declined 13%, primarily because of lower power rates, higher coal prices, forced-outage impacts and derivative mark-to-market losses.
- Net income attributable to AES declined 52% in the quarter and 36% year to date. The principal factors were higher income taxes, foreign-currency transaction losses, and the absence of 2009 gains related to Kazakhstan dispositions and other favorable items.
- The effective tax rate on continuing operations increased to 48% in the quarter from 19% and to 41% year to date from 23%. Factors included the CEMIG transaction, expiration of a favorable U.S. tax provision and the absence of certain prior-year tax benefits.
- Operating cash flow increased 39% in the quarter and 62% year to date, primarily due to improved working capital, collections and operating performance in Latin America and Asia.
- AES issued 125.5 million shares to a wholly owned subsidiary of China Investment Corporation for $1.58 billion, representing approximately 15% ownership. A portion of the proceeds funded the redemption of $400 million principal amount of 8.75% senior secured notes due 2013.
- AES sold its interests in the Lal Pir and Pak Gen facilities in Pakistan for approximately $117 million of total consideration, recognizing a $22 million pretax disposal and impairment loss year to date. Barka in Oman and Ras Laffan in Qatar remained classified as held for sale.
- The company recognized a $115 million pretax gain from the transfer of its CEMIG investment and associated debt settlement, substantially offset by $70 million of related tax expense.
Guidance, outlook, risks and unusual items
- Management did not provide a formal consolidated earnings or revenue guidance range. It expects continued challenges in North American generation through the end of 2010, while improved operations and new projects may offset some pressure.
- AES had approximately 1,600 MW of projects under construction in six countries. Maritza in Bulgaria had experienced delays but was expected, at the filing date, to enter service in the second half of 2010.
- Campiche in Chile remained subject to permitting and construction uncertainty. Failure to complete the project could result in an impairment of approximately $188 million based on investments and potential termination costs through June 30, 2010.
- Six subsidiaries had non-recourse debt in default or subject to acceleration totaling $602 million. The filing states that none was then a material subsidiary under the parent debt agreements, but future asset reductions or other changes could create parent-level default or acceleration consequences.
- Environmental and regulatory risks include potential greenhouse-gas, sulfur-dioxide, nitrogen-oxide and coal-combustion-byproduct rules. Estimated RGGI compliance costs were approximately $17.5 million annually for 2010 and 2011; the effect of other proposed rules was not estimable and could be material.
- Recorded environmental remediation liabilities were $43 million, while reasonably possible additional costs could be material but could not be estimated.
- Parent-level guarantees totaled $422 million and letters of credit totaled $147 million. Net investment commitments to subsidiaries and equipment purchases were $81 million, expected to be funded with $41 million in 2010 and $40 million in 2011.
- Other unusual items included a $62 million gain from extinguishment of a Brazilian swap liability, a $22 million write-off of Wind Generation transaction costs after a China Investment Corporation letter of intent expired, and a $9 million loss on debt retirement.
- Subsequent events included a proposed $150 million acquisition of Ballylumford in Northern Ireland, authorization to repurchase up to $500 million of common stock, and a credit-agreement amendment increasing the revolving facility to $800 million and extending maturity to January 29, 2015.
Important facts for investors to verify
- Whether the substantial increase in operating cash flow is sustainable or primarily reflects timing of collections, payables and other working-capital changes.
- The refinancing, cure and potential acceleration status of the $602 million of defaulted or accelerated subsidiary debt.
- The effect of higher tax rates, foreign-currency losses and North American power and coal-price conditions on full-year earnings.
- The outcome and financial exposure associated with Campiche, AES Cartagena carbon allowances, IPL environmental proceedings, AES Kelanitissa licensing and other regulatory matters.
- The timing and proceeds of the Barka and Ras Laffan asset sales and the proposed Ballylumford acquisition.
- The availability of parent-level liquidity after potential stock repurchases, acquisitions, construction commitments, debt maturities and guarantees.
- The effects of VIE consolidation, discontinued-operations reclassification and other accounting changes when comparing 2010 results with prior periods.