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The AES Corporation Q2 2010 Earnings Call Transcript

The AES Corporation Q2 2010 Earnings Call Transcript

The AES Corporation. (AES)

Q2 2010 Earnings Call

August 6, 2010; 10:00 am ET


Paul Hanrahan - President & Chief Executive Officer

Victoria Harker - Chief Financial Officer

Andres Gluski - Chief Operating Officer

Edward Hall - Executive Vice President - Regional President for NA & Chairman of Global Wind Generation and Energy Storage

Ahmed Pasha - Vice President of Investor Relations


Lasan Johong - RBC Capital Markets

Brian Russo - Ladenburg Thalmann & Co.

Ali Agha - Suntrust Robinson Humphrey

Gregg Orrill - Lehman Brothers

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Welcome and thank you for standing by. At this time, all participants are in the listen-only mode until the question-and-answer session of today’s conference. (Operator Instructions)

I’d now like to turn the call over to Mr. Paul Hanrahan. Thank you. You may begin.

Paul Hanrahan

Okay thanks, thanks operator. Ahmed, why don’t you open up the call?

Ahmed Pasha

Thank you, Paul. Thank you and welcome to AES Corporation’s second 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; Andres Gluski, our Chief Operating Officer, and other senior members of our management.

Before we begin our presentation, let me you remind you that our comments today will include forwarding-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 slides are available on our website, which you can access at under Investor Relations.

With that, I would like to turn the call over to Paul Hanrahan, our President and CEO.

Paul Hanrahan

Okay, thanks Ahmed, and good morning to all of you joining us for our call today. This morning, I would like to focus my comments in three areas. First, the performance for the quarter; second, an update on our construction program; and third, an update on our growth opportunities and a discussion about our general approach to capital allocation, which I want to be sure we continue to communicate to investors on a regular basis.

First, our operating performance for the quarter, in line with our performance last quarter, our focus on operations resulted in improvements in nearly all of our financial metrics. For example, our proportional gross margin increased 19% while proportional operating cash flow also increased 14%.

These improvements were reflected in our adjusted earnings per share of $0.23 despite a $0.04 impact of a higher share count associated with raising capital to invest in value accretive opportunities.

This quarter, we benefited from stronger economic growth and increased demand for electrical power in Asia and parts of Latin America such as Brazil. This was partially offset, however. In the US, we saw moderate demand growth and lower pricing and dark spreads for the merchant portion of our generating plea.

Now, I will turn the call over to Victoria to provide a more detailed review of our financial performance, and I will talk about the construction and development, which will be driving our future earnings growth. Victoria.

Victoria Harker

Thanks Paul and good morning everyone. As you have already heard, the second quarter of 2010 continues to reflect the favorable operating results and higher demand in several key markets. Proportional gross margin improved quarter-over-quarter on higher volume and rates in Latin America and Asia, as well as favorable foreign exchange primarily in Brazil.

This growth in gross margin translated into higher proportional operating cash flow, which increased by 14% compared to the second quarter of 2009. Adjusted EPS of $0.23 while down a penny compared to the same quarter last year is actually relatively strong reflecting the strength of business operations, particularly in light of this quarter’s higher share account and higher effective tax rate, as well as a fact that there was a $0.05 one-time gain in the same quarter of 2009 due to a construction claim settlement that contributed to earnings then.

Now, let’s discuss results for the second quarter in greater detail. From a macroeconomic perspective, our trends this quarter are similar to what we saw in first quarter. Volume growth continued unabated in key markets in Asia and Latin America. For example, demand in the Philippines as well as Brazil continued their upward trajectory with 12% and 5% year-over-year improvements respectively, with GDP growth driving both power demand and new construction starts in these markets.

Volume also increased in Columbia due to higher water inflows at [Tubos] Reservoir, while Panama experienced higher dispatch volumes as water conservation measures there eased during the same period. In addition, higher prices due to the final tariff settlement in July 2009 continued to increase earnings at our Latin American utility.

Our generation plants and other geographies also benefited from higher prices due to factors such as system-wise supply constraints in the Philippines and Panama and the dry season in Columbia. These beneficial trends more than offset challenges from the compressed margins in North America where our coal-fired merchant plants were impacted by lower gas prices again this quarter leading to a 36% decrease in energy margins there.

Foreign currency exchange rates, while somewhat mixed also moved overall in our favor when compared to the second quarter of 2009. For example, the Brazil Real and Columbian Peso appreciated 16% and 15% respectively, while the Euro and the Argentine Peso declined 6% and 5% respectively.

Our consolidated gross margin was $982 million, an increase of $179 million or 22% relative to 2009, with favorable foreign currency exchange rates accounting for $54 million of the uptake. Even excluding foreign exchange impact, these results were considerably higher than the second quarter of 2009 by $125 million driven by favorable volume and rate in both Asia and Latin America.

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