AES CORP annual report, FY2009

Business context and reporting period

The AES Corporation filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2009. AES is a global power company operating generation and utility businesses across 29 countries and five continents, with approximately 40,300 MW of capacity, more than 2,200 MW under construction, distribution networks serving over 11 million people, and approximately 27,000 employees.

The filing includes unaudited quarterly data for the fourth quarter of 2009. Consolidated annual results include continuing operations and separately presented discontinued operations for businesses held for sale.

Financial performance and key metrics

Metric	2009	2008	Change
Revenue	$14.119 billion	$15.358 billion	Down 8%
Gross margin	$3.495 billion	$3.632 billion	Down 4%
Gross margin percentage	24.8%	23.6%	Up approximately 1.2 percentage points
Income from continuing operations	$1.836 billion	$1.959 billion	Down $123 million
Net income attributable to AES	$658 million	$1.234 billion	Down $576 million
Diluted EPS from continuing operations	$1.09	$1.76	Down $0.67
Adjusted EPS	$1.08	$1.08	Flat
Net cash provided by operating activities	$2.213 billion	$2.161 billion	Up $52 million
Capital expenditures	$2.520 billion	$2.850 billion	Down $330 million

Revenue was approximately 55% from Utilities and 45% from Generation. Regulated revenue was $7.816 billion and non-regulated revenue was $6.303 billion. Latin America represented approximately 69% of consolidated revenue.

Net income attributable to AES was affected by discontinued-operation losses of $71 million, including a $105 million after-tax and noncontrolling-interest impairment related primarily to the Pakistan businesses held for sale. The company also recorded $122 million of goodwill impairment, primarily at the Kilroot business in the United Kingdom, and $25 million of asset impairment expense.

Liquidity, debt and capital resources

Unrestricted cash and cash equivalents were $1.809 billion at December 31, 2009, compared with $881 million at year-end 2008.
Short-term investments were $1.648 billion; restricted cash and debt-service reserves totaled approximately $1.0 billion.
Total debt was approximately $19.9 billion, consisting of $14.4 billion of non-recourse debt and $5.5 billion of recourse debt.
Current debt included $1.759 billion of non-recourse debt and $214 million of recourse debt. Approximately $612 million of current debt related to subsidiary defaults.
Parent Company liquidity, defined as parent and qualified-holding-company cash plus available parent borrowings, was $1.258 billion, including $677 million of cash and $581 million of available borrowing capacity.
Parent Company guarantees totaled approximately $410 million, and parent-level letters of credit totaled $204 million. Consolidated subsidiaries had approximately $1.8 billion of additional letters of credit outstanding.
Capital expenditures were primarily funded with non-recourse debt. AES had approximately $1.1 billion of available long-term non-recourse construction credit facilities at year-end.
The Parent Company issued $535 million of 9.75% senior unsecured notes due 2016 in April 2009 and terminated its senior unsecured credit facility in October 2009.

Material changes versus the prior comparable period

Revenue declined primarily because of unfavorable foreign currency translation, lower electricity prices and volumes, reduced Uruguaiana sales following PPA renegotiations, lower New York and European dispatch, and weaker Dominican Republic results.
Gross margin declined despite improved Latin American Utilities and Asia Generation performance. Foreign exchange translation reduced 2009 gross margin by approximately $218 million.
North America Generation gross margin declined 28%, reflecting lower New York spot-market volumes, higher coal costs, outages and unfavorable derivative effects.
Asia Generation revenue increased 16% and gross margin increased 167%, primarily due to improved Masinloc performance, new Amman East operations, higher contract sales and lower fuel prices.
Operating cash flow remained broadly stable despite lower earnings, supported by improved working-capital management in Latin America and Asia.
Investing cash usage decreased to $1.917 billion from $3.581 billion, reflecting lower capital spending, no acquisitions, and reduced restricted-cash requirements; 2008 included the $930 million Masinloc acquisition.
AES entered into an agreement to issue 125.5 million common shares to an affiliate of China Investment Corporation for $1.58 billion, representing approximately 15% of fully diluted shares. Closing was expected in the first half of 2010, subject to conditions and approvals.
AES agreed to sell its Pakistan and Oman interests for approximately $200 million before adjustments, with closing expected in the first half of 2010.
Campiche construction in Chile was halted following permitting litigation. A new environmental permit was approved in February 2010, but AES disclosed potential impairment exposure of approximately $189 million if the project cannot be completed.

Guidance, outlook, management commentary and risks

Management expected continued pressure on prices and demand in New York and certain European operations during 2010. Management also stated that gains and other income from the Kazakhstan transactions and the Brazilian tax-amnesty benefits were not expected to recur, and that the effective tax rate in 2010 was expected to be higher than in 2009 and 2008. Improved operations and new projects entering service were expected to partially offset these pressures.

Management expected Maritza East in Bulgaria, with 670 MW under construction, to reach commercial operation in the second half of 2010, although delays remained possible.
The company estimated 2010 RGGI compliance costs of approximately $17.5 million annually for 2010 and 2011, subject to significant uncertainty regarding allowance prices, pass-through recovery and regulatory implementation.
Key risks include high leverage, refinancing and capital-market access, subsidiary cash-distribution restrictions, defaults at certain subsidiaries, foreign-exchange volatility, electricity and fuel-price exposure, counterparty credit risk, regulatory tariff decisions, political risk in emerging markets, weather and hydrology, construction delays, and environmental compliance costs.
AES reported approximately 74.2 million metric tonnes of direct CO₂ emissions in 2009 on an ownership-adjusted basis, including approximately 39.7 million tonnes in the United States.
The company had $482 million of accrued litigation and claims reserves at December 31, 2009. Management stated that adverse outcomes in certain matters could still require material payments that cannot currently be estimated.
The filing states that all previously identified material weaknesses in internal control had been remediated. Management and Ernst & Young concluded that internal control over financial reporting and disclosure controls were effective as of December 31, 2009.
Adoption of new variable-interest-entity guidance on January 1, 2010 was expected to require consolidation of Cartagena in Spain, adding approximately $929 million of assets and $147 million of annual revenue based on 2009 amounts. The cumulative accounting impact was not yet quantified.

Most important facts an investor should verify

Whether the CIC share issuance closed on the disclosed terms and how the resulting dilution affected ownership, liquidity and leverage.
Whether the Pakistan and Oman asset sales closed and whether proceeds were received as expected.
The status, final cost, permitting and impairment exposure of Campiche and the completion timing and financing of Maritza.
The ability of AES and its subsidiaries to refinance or repay approximately $1.96 billion of debt obligations due within one year, including defaulted subsidiary debt.
Whether subsidiary defaults, restricted cash, covenant requirements and limits on subsidiary distributions could reduce Parent Company liquidity.
The outcome and potential financial exposure of major litigation and regulatory matters, including Eletropaulo, AES Sul, IPL, AES Cartagena, CEMIG-related claims and greenhouse-gas litigation.
The impact of future environmental, carbon, coal-ash and air-emission rules on plant economics, required capital expenditures and recoverability through tariffs or contracts.
The effect of currency movements, commodity prices, interest rates and changes in hedge positions on 2010 earnings and cash flow.
The accounting impact of consolidating Cartagena and any other entities under the new VIE standard.