AES Sees Mixed Results in 2010 as Impairment Losses Eat Away at Steady Gains

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Researched by Industrial Info Resources (Sugar Land, Texas)--Thermal and renewable energy provider AES Corporation (NYSE:AES) (Arlington, Virginia) saw mixed results in fourth-quarter and full-year 2010 as the company benefited from higher volumes and rates in Latin America and Asia, as well as favorable currency exchange rates. However, AES suffered $1.2 billion in asset impairment losses from declines in commodity fuel prices in North America and Hungary, causing net income for the year to be reported at $1.06 billion, a 39.66% decline from 2009. For the quarter, net income was reported at a loss of $169 million, compared with a gain of $283 million in fourth-quarter 2009.

The impairment losses negatively affected the company's stock price, which was reported at a loss of $0.56 per share, compared to a gain of $0.07 per share in fourth-quarter 2009. When adjusted for the impairment losses, as well as debt retirement losses and effects from currency transactions, earnings per share were a gain of $0.23, compared with a gain of $0.21 in fourth-quarter 2009.

AES officials pointed to the company's consolidated gross margin numbers, which exclude the effects of the impairment losses, as well as income tax, general, administrative, interest and other expenses; interest and other income; gains on sales of investments; losses on sales of stock; goodwill impairments; and gains and losses on foreign currency transactions. The gross margin stood at $1.01 billion for the quarter, a 24.2% increase from the same period in 2009, and $3.96 billion for the year, a 15.47% increase from 2009.

Total consolidated revenue was reported to be $4.4 billion for the quarter, a 16.63% increase from fourth-quarter 2009, and $16.65 billion for the year, a 19.3% increase from 2009. In addition to the strong results in Latin America, AES benefited from lower fixed costs at its Brazilian utilities; lower rates at merchant generation plants in North America; and contributions from the Ballylumford plant in Northern Ireland, which was acquired by AES in August 2010. Businesses in Latin America and the Philippines benefited from a significant boost in demand.

For additional information, see August 18, 2010, article - AES Buys Northern Ireland's Ballylumford Power Plant. Businesses in Latin America and the Philippines benefited from a significant boost in demand.

During the year, the company added 1,625 megawatts (MW) of generation capacity in Northern Ireland and China; completed 77 MW of construction projects in Latin America, Asia and Europe; repurchased $99 million worth of stock; invested about $1 billion in construction and development projects; and paid down almost $1 billion in corporate debt.

"I think our results very simply reflect the fact that economic growth and power demand increases in some of the emerging markets in which we operate were stronger than anticipated, particularly in Asia and Latin America," said Paul Hanrahan, the president and chief executive officer of AES, in a conference call. "Higher demand and improved operations in these two markets helped to offset the continued erosion of our profitability in North America, primarily driven by continued low gas-based electricity prices and high coal costs."

Of the company's six major segments, the North American Generation segment was the only one to see declines in gross margin for both the quarter and the year, or see a revenue decline for either the quarter or the year:

• The Latin American Generation segment reported $1.1 billion in revenue for the quarter, a 28.7% increase from fourth-quarter 2009, and a $352 million gross margin, a 35.91% increase. The segment saw $4.28 billion in revenue for the year, a 17.26% increase from 2009, and a $1.5 billion gross margin, a 10.32% increase.
• The Latin American Utilities segment reported $1.9 billion in revenue for the quarter, a 3.32% increase from the same period in 2009, and a $314 million gross margin, a 13.36% increase. The segment saw $7.22 billion in revenue for the year, an 18.55% increase from 2009, and a $1.5 billion gross margin, a 16.78% increase.
• The North American Generation segment reported $453 million in revenue for the quarter, a 5.03% decrease from fourth-quarter 2009, and a $105 million gross margin, an 18.6% decrease. The segment saw $1.97 billion in revenue for the year, a 1.65% increase from 2009, and a $435 million gross margin, an 8.81% decrease.
• The North American Utilities segment reported $276 million in revenue for the quarter, a 9.96% increase from the same period in 2009, and a $43 million gross margin, an 18.87% decrease. The segment saw $1.15 billion in revenue for the year, a 7.21% increase from 2009, and a $249 million gross margin, a 4.18% increase.
• The European Generation segment reported $464 million in revenue for the quarter, compared with $234 million in fourth-quarter 2009, and a $69 million gross margin, a 7.81% increase. The segment saw $1.36 billion in revenue for the year, a 66.1% increase from 2009, and a $268 million gross margin, a 26.42% increase.
• The Asian Generation segment reported $127 million in revenue for the quarter, an 18.69% increase from the same period in 2009, and a $43 million gross margin, a 16.22% increase. The segment saw $618 million in revenue for the year, compared with $375 million in 2009, and a $240 million gross margin, compared with $93 million.

In 2011, AES officials expect the company to benefit from further contributions from recently added businesses, as well as operational improvements and lower interest expenses from paid-down debt. However, the company is expecting higher tax expenses and unfavorable foreign exchange rates--particularly in Brazil, where the rates proved beneficial in 2010.

"Operations continue to execute well, and market demand in increasing in select markets, positioning us well to deliver earnings growth in 2011," said Victoria Harker, the executive vice president and chief executive officer of AES, in the conference call. "In addition, our balance sheet remains strong, allowing us to invest in the best available options, ranging from stock repurchasing, debt retirement, investments in mergers and acquisitions, and greenfield development."

Industrial Info is tracking 54 active AES projects worldwide that are worth a total of more than $7 billion, including the $850 million construction of a liquefied natural gas receiving terminal in Sparrows Point, Maryland. The terminal will have a re-gas capacity of 1.5 billion cubic feet per day. Construction is scheduled to kick off in April 2014 and be completed in June 2016. For more information, visit Industrial Info's North American Oil & Gas Terminals Project Database.

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