AES Corporation 2009 Q3 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, Asia, Africa and the Middle East. The filing covers the unaudited three and nine months ended September 30, 2009, compared with the same periods in 2008. Results were retrospectively presented for revised segment reporting and the adoption of noncontrolling-interest accounting.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | Change | 9M 2009 | 9M 2008 | Change |
|---|---|---|---|---|---|---|
| Revenue | $3.838 billion | $4.319 billion | -11% | $10.711 billion | $12.526 billion | -14% |
| Gross margin | $1.008 billion | $962 million | +5% | $2.738 billion | $3.033 billion | -10% |
| Gross margin percentage | 26.3% | 22.3% | +4.0 pts | 25.6% | 24.2% | +1.4 pts |
| Net income | $440 million | $359 million | +23% | $1.472 billion | $1.927 billion | -24% |
| Net income attributable to AES | $185 million | $145 million | +28% | $706 million | $1.281 billion | -45% |
| Basic EPS | $0.28 | $0.22 | +27% | $1.06 | $1.91 | -45% |
| Cash flow from operations | $1.028 billion | $803 million | +28% | $1.899 billion | $1.587 billion | +20% |
Q3 attributable net margin was approximately 4.8%, versus 3.4% in the prior-year quarter. Nine-month attributable net margin was approximately 6.6%, versus 10.2% in 2008.
- Interest expense was $421 million in Q3 and $1.195 billion for nine months, down 8% and 12%, respectively, primarily due to lower interest rates, lower debt balances and favorable currency translation.
- Income tax expense was $205 million in Q3 and $485 million for nine months; effective tax rates were approximately 33% and 26%, respectively.
- At September 30, 2009, cash and cash equivalents were $2.020 billion, short-term investments were $1.357 billion, and restricted cash plus debt-service reserves were approximately $1.165 billion.
- Total debt was $19.660 billion, consisting of $14.148 billion of non-recourse debt and $5.512 billion of recourse debt. Approximately $3.7 billion of debt carried variable rates without interest-rate derivatives fixing the rate.
- Capital expenditures were $1.765 billion for the first nine months, and the company had approximately 2,727 MW of projects under construction in nine countries.
Material changes versus the prior comparable period
- Revenue declined primarily because of unfavorable foreign-currency translation, lower power and fuel prices, lower generation volumes, reduced dispatch and mark-to-market derivative adjustments. Currency translation reduced revenue by approximately $367 million in Q3 and $1.5 billion for nine months.
- Gross margin increased in Q3 despite lower revenue, supported by improved operations in Chile and the Philippines, bad-debt recoveries in Brazil and Cameroon, and lower operating costs. These benefits were partly offset by approximately $79 million of adverse currency effects.
- Nine-month gross margin declined by $295 million, including an estimated $316 million adverse currency impact. Excluding currency effects, gross margin increased modestly.
- Nine-month attributable earnings were substantially lower because 2008 included an approximately $908 million gain from the sale of the Kazakhstan businesses. In 2009, AES recorded an $80 million management-performance bonus and approximately $98.5 million from termination of the related management agreement.
- Operating cash flow improved due largely to working-capital management, receivable collections, improved performance and lower regulatory assets.
- Segment reporting changed to six reportable segments: Latin America Generation, Latin America Utilities, North America Generation, North America Utilities, Europe Generation and Asia Generation.
- AES completed or commenced operations at several projects during 2009, including Amman East, Guacolda, Huanghua, Kilroot, Innovent and Santa Lidia.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide formal earnings guidance. It stated that unfavorable currency movements, commodity and power-price volatility, regulatory developments and project execution risks could continue to affect results.
- Management believed available liquidity, operating cash flow, financings and potential borrowings were sufficient for foreseeable needs, but this depended on capital-market access, subsidiary performance, exchange rates, power prices and subsidiary dividend capacity.
- Parent Company liquidity was $1.408 billion at September 30, 2009, comprising $707 million of cash at the parent and qualified holding companies and $701 million of available credit commitments. The senior unsecured credit facility was terminated on October 7, 2009, with outstanding letters of credit transferred to the senior secured facility.
- Approximately $214 million of recourse debt and $1.3 billion of non-recourse debt were due within the following twelve months. Non-recourse debt totaling $53 million was classified as current because of subsidiary covenant defaults or acceleration status.
- Parent-level guarantees and other credit-support commitments totaled approximately $446 million, with $192 million of letters of credit outstanding. Net investment commitments for projects under construction were $140 million, scheduled approximately as $45 million in 2009, $39 million in 2010 and $56 million in 2011.
- Construction at the Campiche power project in Chile remained stopped following permitting decisions. AES disclosed potential impairment exposure of approximately $186 million if the project could not be completed.
- Maritza in Bulgaria, a 670 MW project, experienced delays but management expected completion in the second half of 2010; further delays could lead to higher costs and disputes.
- Environmental remediation liabilities were $30 million. Potential greenhouse-gas, air-emissions, water, coal-ash and other environmental regulation could require material additional capital or compliance costs.
- Material legal and regulatory matters included Brazilian tax and financing disputes, Spanish CO2 allowance invoices of approximately $29.8 million for 2007 and 2008, the IPL EPA Clean Air Act notice, Kazakhstan antimonopoly matters, and various environmental and tariff proceedings. Management stated that some unfavorable outcomes could be material but could not be reasonably estimated.
- The company identified the adoption of FAS No. 167, effective January 1, 2010, as potentially material because it could change the consolidation or deconsolidation of variable-interest entities.
- Market-risk sensitivities included approximately $5 million of remaining-2009 interest expense exposure from a 100-basis-point rate increase, approximately $14 million of pre-tax earnings exposure from a 10% U.S. dollar appreciation, and approximately $2 million of gross-margin exposure from a 10% decline in U.S. electricity prices.
Most important facts for investors to verify
- Whether the improvement in Q3 gross margin and operating cash flow is sustainable after excluding receivable recoveries, bad-debt benefits, derivative effects and currency movements.
- The refinancing plan and cash sources for near-term recourse and non-recourse debt maturities, including the effect of terminating the senior unsecured credit facility.
- The status, potential impairment and contractual disputes related to the Campiche project and the timing and cost of completing Maritza.
- The ultimate exposure from environmental, greenhouse-gas, tariff, tax, antimonopoly and litigation matters, including the Spanish CO2 invoices and Brazilian proceedings.
- The effect of FAS No. 167 on consolidated assets, liabilities, earnings, debt and noncontrolling interests beginning in 2010.
- The extent to which currency, power-price, fuel-price and interest-rate movements could reverse the reported quarter’s margin and cash-flow improvements.