AES Corporation: Q1 2010 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 unaudited three months ended March 31, 2010, compared with the three months ended March 31, 2009. Generation represented approximately 46% of consolidated revenue and Utilities approximately 54%.
The company reported six principal segments: Latin America Generation, Latin America Utilities, North America Generation, North America Utilities, Europe Generation and Asia Generation. Results were reclassified for businesses held for sale and discontinued operations.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Revenue | $4.112 billion | $3.269 billion | +26% |
| Gross margin | $1.000 billion | $856 million | +17% |
| Income from continuing operations | $398 million | $482 million | -17% |
| Net income | $402 million | $501 million | -20% |
| Net income attributable to AES | $187 million | $218 million | -14% |
| Diluted EPS from continuing operations | $0.27 | $0.31 | -13% |
| Adjusted EPS | $0.26 | $0.37 | -30% |
| Net cash provided by operating activities | $684 million | $357 million | +92% |
Gross margin was approximately 24.3% of revenue versus 26.2% in the prior-year quarter. The filing cautions that gross-margin percentages are less meaningful in businesses that pass fuel and purchased-power costs through to customers.
Cash flow, liquidity and debt
- Cash and cash equivalents were $3.392 billion at March 31, 2010, compared with $1.809 billion at December 31, 2009. Restricted cash was $565 million and short-term investments were $1.731 billion.
- Operating cash flow was $684 million. Investing cash flow was negative $595 million, including $493 million of capital expenditures, $34 million of acquisitions and $96 million of net purchases of short-term investments. Financing cash flow was positive $1.515 billion.
- Total debt carrying value was $20.642 billion, comprising $15.134 billion of non-recourse debt and $5.508 billion of recourse debt. Approximately $4.3 billion of total debt bore variable rates without an interest-rate derivative fixing the rate.
- Current liabilities included $1.863 billion of non-recourse debt and $473 million of recourse debt. Parent Company Liquidity was $2.763 billion, including $2.153 billion of parent and qualified holding-company cash and $610 million of available borrowings.
- The company had $464 million of guarantees and $175 million of letters of credit outstanding. Net investment commitments were $47 million, expected to be funded with $30 million in 2010 and $17 million in 2011.
- Management stated that near-term liquidity requirements were expected to be met through cash, operating cash flow, financings and the secured credit facility. Parent-level debt covenants were reported as compliant.
Material changes versus the prior comparable period
- Revenue growth was driven by favorable foreign-currency translation of approximately $427 million, higher Latin American utility tariffs and volumes, consolidation of Cartagena in Spain, and stronger availability and pricing at Masinloc in the Philippines.
- Gross margin benefited from foreign-currency translation, Latin American utility volume, Masinloc, and a favorable mark-to-market adjustment on New York natural-gas hedges. These gains were partly offset by lower Chilean generation, higher fixed costs and unfavorable North American power prices.
- Net income attributable to AES declined because the prior-year period included $222 million of other income, primarily a $129 million Eletropaulo tax-credit gain and an $80 million performance incentive fee. Q1 2010 other income was only $9 million.
- The effective tax rate increased to 34% from 27%, partly because a favorable U.S. tax provision expired at December 31, 2009 and because the prior-year performance fee was not taxable.
- Operating cash flow increased primarily from improved collections, payables management and Latin American utility cash generation, although cash flows can vary materially by quarter.
- AES issued 125.5 million shares to China Investment Corporation for $1.58 billion. CIC held approximately 15% of fully diluted shares and received board nomination, standstill, lock-up and registration rights under the stockholder agreement.
- Adoption of new variable-interest-entity guidance resulted in consolidation of Cartagena and Cili, a $47 million cumulative reduction to retained earnings, and $102 million of Q1 2010 revenue from the newly consolidated entities.
- Adoption of new financial-asset transfer guidance added $50 million of accounts receivable and secured borrowing related to IPL receivables securitization.
Guidance, outlook, risks and unusual items
- Management expected continued pressure on North American coal-fired businesses because of low gas and power prices relative to coal. These challenges were expected to continue through the balance of 2010.
- Management expected improved operations and new projects entering service to partially offset market pressures, but stated that unfavorable currency movements or weaker operating performance could reduce gross margin, earnings and operating cash flow.
- AES had approximately 1,600 MW of projects under construction. About 635 MW commenced commercial operations during the quarter, including Guacolda 4, Nueva Ventanas, North Rhins, St. Nikola and St. Patrick. Maritza, a 670 MW project in Bulgaria, experienced delays but was expected to enter service in the second half of 2010.
- Campiche in Chile remained subject to permitting and litigation issues. If the project cannot be completed, AES estimated a potential impairment of approximately $188 million based on investments through March 31, 2010 and potential termination costs.
- Businesses in Pakistan and Oman were held for sale, with expected aggregate proceeds of approximately $200 million before adjustments. AES recorded a $13 million impairment, or $7 million net of tax and noncontrolling interests, related to the Pakistan businesses.
- After quarter-end, AES agreed to sell its 55% interest in Ras Laffan in Qatar for approximately $190 million, subject to approvals. The business was expected to become a discontinued operation in Q2 2010.
- Four subsidiaries had $580 million of non-recourse debt in default or accelerated status: Sonel, Jordan, Kelanitissa and Ebute. Ebute had a waiver through December 31, 2010, but the debt was classified as current because the probability of cure could not be determined. None was a material subsidiary under parent debt agreements at March 31, 2010, although future asset reductions or other events could change that conclusion.
- Environmental remediation liabilities were $44 million. Potential greenhouse-gas, coal-combustion-byproduct, air-emissions and water-discharge regulations could materially increase costs; estimated RGGI compliance costs were approximately $17.5 million annually for 2010 and 2011.
- Material contingencies included Brazilian tax and financing disputes, environmental and regulatory proceedings, Kazakhstan antimonopoly matters, power-purchase and gas-supply arbitrations, and litigation involving greenhouse-gas emissions. Several potential exposures were unquantified or could not be reasonably estimated.
- Management estimated remaining 2010 pre-tax earnings sensitivity of approximately $20 million for a $10-per-barrel oil-price move, $40 million for a $1/MMBTU natural-gas move and $20 million for a $10-per-ton coal-price move. A 100-basis-point increase in relevant interest rates was estimated to affect remaining 2010 pre-tax earnings by approximately $20 million.
Most important facts for investors to verify
- Whether the $580 million of defaulted or accelerated subsidiary debt is cured, refinanced or becomes subject to acceleration, and whether any subsidiary becomes a material subsidiary under parent debt agreements.
- Completion, proceeds and final accounting for the Pakistan, Oman and Ras Laffan asset sales.
- Resolution of Campiche permitting and construction issues and whether the potential $188 million impairment becomes necessary.
- Sustainability of Q1 operating cash flow and Masinloc’s unusually strong performance, particularly amid volatile power, fuel and currency markets.
- Impact of the higher effective tax rate and the absence of prior-year one-time other-income items on full-year earnings.
- Exposure from environmental regulation, IPL’s EPA proceedings, Brazilian litigation, Kazakhstan claims and other unquantified legal contingencies.
- Availability of parent-level liquidity after the planned $400 million redemption of AES’s 8.75% Second Priority Senior Secured Notes in May 2010.