AES Corporation: Q2 2012 Form 10-Q Summary
Business context and reporting period
AES is a global power company operating through Generation and Utilities businesses. The filing covers the three and six months ended June 30, 2012, with comparative periods ended June 30, 2011. Generation and Utilities represented approximately 46% and 54% of six-month consolidated revenue, respectively. The interim financial statements are unaudited and prior periods were reclassified for discontinued operations, segment changes and purchase-price-allocation revisions related to DPL.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $4.192 billion | $4.435 billion | $8.932 billion | $8.591 billion |
| Gross margin | $692 million | $992 million | $1.770 billion | $1.985 billion |
| Income from continuing operations | $136 million | $436 million | $655 million | $926 million |
| Net income attributable to AES | $140 million | $174 million | $481 million | $398 million |
| Diluted EPS from continuing operations | $0.09 | $0.24 | $0.54 | $0.53 |
| Adjusted EPS | $0.18 | $0.29 | $0.55 | $0.53 |
| Cash flow from operating activities | $580 million | $675 million | $1.114 billion | $1.177 billion |
Q2 gross margin was approximately 16.5% of revenue versus approximately 22.4% in the prior-year quarter. Six-month gross margin was approximately 19.8% versus approximately 23.1% in the prior-year period. These percentages are calculated from reported revenue and gross margin.
- At June 30, 2012, cash and cash equivalents were $1.727 billion, restricted cash was $574 million, and short-term investments were $883 million.
- Parent Company liquidity was $1.035 billion, consisting of $240 million of parent and qualified holding-company cash and $795 million of available borrowings under parent credit facilities.
- Aggregate principal amounts of non-recourse and recourse debt were approximately $15.5 billion and $6.2 billion, respectively.
- Approximately $2.3 billion of non-recourse debt was classified as current, including $1.4 billion related to subsidiary covenant or payment defaults.
- Capital expenditures were $1.071 billion in the first six months, compared with $1.019 billion in the prior-year period.
Material changes versus the prior comparable period
- Q2 revenue declined 5%, gross margin declined 30%, and AES-attributable net income declined 20%. Management attributed the deterioration primarily to foreign-currency effects, the Eletropaulo tariff reset, and lower plant availability at Gener in Chile.
- Six-month revenue increased 4%, but gross margin declined 11%. Six-month AES-attributable net income increased 21%, principally because of gains on the Cartagena, Red Oak and Ironwood dispositions, despite weaker operating performance.
- Foreign-currency transaction losses were $101 million in Q2 and $102 million for the six months, compared with gains of $37 million and $70 million, respectively, in the prior-year periods.
- Eletropaulo’s tariff reset reduced Q2 revenue by approximately $221 million and resulted in a $536 million regulatory liability at June 30, 2012. The lower tariff will be reflected in customer invoices from July 2012 through June 2015.
- Utilities—North America benefited from the November 2011 DPL acquisition, increasing six-month revenue by $816 million and gross margin by $104 million versus the prior-year period.
- Six-month interest expense increased $82 million to $801 million, primarily due to DPL debt and additional parent-company borrowing used to finance the acquisition.
- AES repurchased 18.744 million shares for $231 million during the first six months. The repurchase authorization was increased to $680 million, and cumulative purchases reached $608 million through June 30.
- Discontinued operations included $65 million and $71 million pretax gains from the Red Oak and Ironwood sales, respectively. AES also recognized a $178 million pretax gain on the sale of 80% of its Cartagena interest during the first quarter.
Guidance, outlook, commentary and unusual items
- No formal numerical full-year earnings or revenue guidance is presented in the provided filing text.
- Management expected continued pressure during the remainder of 2012 from lower U.S. gas and power prices relative to coal, foreign-exchange volatility, potential higher taxation of foreign earnings, Eletropaulo’s tariff reset and operating challenges at selected generation businesses.
- Management expected improved performance at certain businesses, contributions from new projects and cost-reduction initiatives to partly offset these pressures.
- AES had approximately 2,200 MW of projects under construction in six countries. Successful completion on time and within budget was identified as important to future operating results and cash flows.
- Asset impairment expense was $29 million for the first six months, including $12 million for the Kelanitissa plant and $11 million for the St. Patrick wind business. Management stated that further Kelanitissa impairment charges were likely in 2012.
- AES recorded $50 million of other non-operating expense in the first six months, primarily from other-than-temporary impairments of equity-method investments in China and France.
- The Parent Company was in compliance with its debt covenants at June 30, 2012. However, defaults at six subsidiaries could create cross-default or acceleration risk if those subsidiaries become material under AES’s corporate debt agreements.
- Parent-level guarantees, letters of credit and cash-collateralized letters of credit totaled $779 million. Additional construction and equipment investment commitments were $9 million.
- Recorded litigation reserves were approximately $342 million. Material reasonably possible contingencies, excluding reserved amounts, were estimated at $227 million to $1.4 billion where estimable.
- Key market exposures included commodity prices, foreign exchange and interest rates. For the remainder of 2012, management estimated pretax earnings sensitivities of approximately $10 million for a $10-per-ton coal-price move, $5 million for a $10-per-barrel oil-price move, and $20 million for a $1/MMBTU natural-gas-price move.
- After quarter-end, the board declared a quarterly dividend of $0.04 per share and appointed Thomas O’Flynn as Executive Vice President and Chief Financial Officer effective September 4, 2012.
Most important facts for an investor to verify
- Whether Eletropaulo can manage the $536 million regulatory liability and the three-year tariff reductions without sustained cash-flow or earnings pressure.
- The refinancing and resolution plans for the $1.4 billion of non-recourse debt in default and the potential for cross-defaults at the parent level.
- The recoverability of DPL’s approximately $2.6 billion of provisional goodwill amid customer switching, low power prices and Ohio regulatory changes.
- Expected capital requirements and operating consequences from U.S. environmental rules, including Utility MACT, CSAPR, NSR and cooling-water requirements.
- Collection risk on Latin American receivables, including Argentina and Bulgaria, and the effect of foreign-exchange restrictions or economic deterioration.
- The outcome of material litigation, tax, regulatory and environmental matters, including the stated $227 million to $1.4 billion range of reasonably possible losses.
- Whether the approximately 2,200 MW construction program remains on schedule and within budget, and whether additional impairments are required at Kelanitissa or other assets.
- The sustainability of reported six-month EPS growth, which was supported materially by asset-disposition gains despite lower gross margin and operating cash flow.