The AES Corporation CEO Discusses Q3 2010 Results – Earnings Call Transcript
The AES Corporation (
)
Q3 2010 Earnings Conference Call
November 4, 2010 10:00 AM
Executives
Ahmed Pasha – VP, IR
Paul Hanrahan – President and CEO
Victoria Harker – EVP and CFO
Andrés Gluski – EVP, COO and Acting President, Europe, Middle East and Asia
Ned Hall – EVP, Regional President for North America and Chairman Global Wind Generation and Energy Storage
Prabu Natarajan – VP, Tax
Analysts
Lasan Johong – RBC Capital Markets
Brian Russo – Ladenburg Thalmann
Ali Agha – SunTrust Robinson Humphrey
Maura Shaughnessy – MFS
Edwin Shen – Ivory Capital
Neil Stein – Levin Capital Strategies
Presentation
Operator
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Welcome to the AES Corporation third quarter earnings call, and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today's conference.
(Operator Instructions)
Also, at this time, I would like to inform all parties that today's conference is being recorded. If you have any objections, you may disconnect at this time.
I would now like to turn the call over to Ahmed Pasha. Thank you, sir. You may begin.
Ahmed Pasha
Thank you, Catharine, and welcome to AES Corporation's third quarter earnings call. We appreciate you being with us this morning. Joining me today are Paul Hanrahan, our President and CEO; Victoria Harker, our Chief Financial Officer; and Andrés Gluski, our Chief Operating Officer and other senior members of our management.
Before we begin our presentation, let me remind you that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. For a complete discussion of these risks, we encourage you to read our documents on file with the SEC. Our presentation is being webcast and the slides are available on our website, which you can access at www.aes.com, under Investor Relations.
With that, I would like to turn the call over to Paul Hanrahan, our CEO.
Paul Hanrahan
Thanks, Ahmed, and good morning to all of you joining us today. Today, I'll briefly comment on our financial performance for the year-to-date numbers. I'll then give an update on our construction pipeline which will be delivering additional cash flow in earnings next year. In addition, both Victoria and I will comment on how we're thinking about allocating capital between our various investment opportunities including our own stock and debt securities.
First, our year-to-date operating performance. Overall we earned $0.68 of adjusted EPS in the first three quarters of 2010. At the same time last year, we earned $0.85 a share, although this included $0.17 a share of one-time payments in 2009. These included earn-out payment associated with the sale of our Kazakhstan asset and a settlement of our gas powered plant in Spain. So excluding those one-time payments, our performance was essentially constant on a year-to-year comparison basis.
The reality is that the underlying performance of our business improved a lot in 2010 and those improvements were needed to overcome the significant negative effects of lower dark spreads in the U.S. as well as a higher book income tax rate. In order to understand the underlying performance of our business better, it's useful to think about all big categories that have impacted our performance to date relative to last year.
These being, one, operations and FX primarily resulting from the strong performance of businesses in Latin America and Asia; two, commodity prices which includes the impacts of lower dark spreads in the U.S.; three, a higher share count associated with building up a cash balance for new investment opportunities; and four, a higher book tax rate.
We compared 2010 to 2009; there was an improvement of $0.17 from our underlying operations and FX, which by the way I netted out the increased BD expenses if you look at slide 17. This positive performance completely overcame the negative variances we experienced, those being $0.07 from commodities, lower dark spreads, $0.08 from higher share count and $0.02 from a tax rate. And even with the negative impacts of lower margins in our U.S. merchant businesses, our strong operating performance did result in increased proportional free cash flow on year-to-date basis allowing us to deliver $970 million of proportional free cash flow to date, which is $127 million or 15% higher than the same period last year.
So despite the compression in U.S. dark spreads, we've been able to meet our targets for both earnings and cash flow.
Now, I'll turn over the call to Victoria who will discuss our performance for the financials in more detail.
Victoria Harker
Thanks, Paul, and good morning, everyone. As you've heard, the third quarter was in line with our expectations. Proportional gross margin rose 2% attributable to higher volume in North America, high volume and rates in Asia, as well as favorable foreign exchange, primarily in Brazil.
Cash flow is relatively flat this quarter versus the same period in 2009, but has increased when you consider the businesses sold earlier this year. Adjusted EPS of $0.20, declined by $0.04, mostly driven by a higher share count. Adjusting to this, adjusted EPS is in line with last year, which is no small feat given commodity price moves and slower than expected economic recovery in some global markets.
Now, let's discuss the results for the third quarter in greater detail, starting with the most significant drivers affecting gross margins.
Our trends this quarter are similar to what we've seen in the prior two quarters. Economic expansion in Asia and Latin America continued to spur power demand growth as both manufacturing and construction in these markets surged. In the US, demand also increased during the warm weather this summer, which is especially evident in IPLs result, showing a 12% increase in retail volume.
Market prices also remained above prior year levels at certain businesses, most notably in the Philippines and in Argentina. Our generation plants in Argentina benefited from higher market prices while the Philippines saw both higher spot and contracted rates for generation. These beneficial price trends were offset by challenges from the compressed margins in North America, where our coal and pet coke fired merchant plants were impacted by lower gas prices again this quarter. We expect this trend to continue into the fourth quarter and beyond.
The favorable year-over-year trends in foreign currency exchange rates have slowed compared to earlier this year, but are still favorable when compared to the third quarter of 2009. For example, quarter-over-quarter, the Brazilian real and Columbian peso appreciated 7% and 10%, respectively.
Our consolidated gross margin was $985 million, an increase of $18 million or 2% relative to 2009 with favorable foreign currency exchange rates accounting for $32 million of the uptick. Excluding foreign exchange impacts, gross margin is down by $14 million versus the third quarter of 2009. This decrease is driven primarily by the recovery of $57 million receivable in 2009 at our Brazilian utility Eletropaulo that had been previously written off.
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