May 9, 2011
Executives
Paul Hanrahan - Chief Executive Officer, President, Executive Director and Chairman of Finance & Investment Committee Joel Abramson - Vice President of Investor Relations Brian Miller - Acting Chief Compliance Officer, Executive Vice President, Secretary, General Counsel and Co-Chair of Development Steering Committee Andres Gluski - Chief Operating Officer and Executive Vice President Victoria Harker - Chief Financial Officer and Executive Vice President
Analysts
Brian Russo - Ladenburg Thalmann & Co. Inc.
Brian Taddeo - Broadpoint Capital Ali Agha - SunTrust Robinson Humphrey, Inc. Gregg Orrill - Barclays Capital
Operator
Welcome and I'd like to thank you all for holding. [Operator Instructions] Today's call is also being recorded.
If we have any objections, you may disconnect. I'd now like to turn the call over to Joel Abramson, Vice President of Investor Relations.
Sir, you may begin.
Joel Abramson
Thank you, operator. Welcome, everyone, to the AES Corporation's First Quarter Earnings Call.
We appreciate your 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 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?
Paul Hanrahan
Thanks, Joel, and good morning to you, all of you joining us today. Today, I'll briefly comment on our financial performance during the first quarter of 2011 and also recap key highlights of our recent announcement regarding our acquisition of DPL.
After Victoria reviews the first quarter results in more detail, I'll give an update on our project center construction, as well as progress on the advanced development pipeline beyond DPL. The results for the first quarter of 2011 were in line with our expectations.
We earned $0.22 of adjusted EPS during the quarter and proportional free cash flow of $159 million. These results were driven by the demand growth in Latin America, which helped to offset some of the negative variances that we had anticipated.
There are 2 material ones which I'd like to highlight. One was our Generation business in the Philippines, where volumes declined due to the market returning to a more normal environment with more capacity being available to the market.
As you may recall, we benefited significantly last year by having our plant available when many of our competitors were suffering from outages. 2010 was an exceptional year in that regard.
Another factor related to one of our Northern Ireland plants, Kilroot, where the PPA was terminated in late 2010 in accordance with its terms. So we saw lower prices as a result of the plant selling on a merchant basis, and neither of these results was unexpected.
Looking forward to the remainder of the year, as you can see on Page 19 of the investor presentation, both earnings and cash projections will increase throughout the year as our 1,700 megawatts of construction projects come online during the latter part of the year. So we are on track and continue to expect a strong balance of the year and to achieve all of our 2011 guidance metrics.
Also, as we discussed a few weeks ago, on April 20, we signed an agreement to acquire all of the outstanding shares of DPL Inc., a public holding company of Dayton Power & Light. Assuming a closing by year end, the acquisition is expected to be accretive to our earnings by $0.05 to $0.07 per share in 2012, excluding acquisition costs.
This acquisition will be funded by a combination of new debt and cash-on-hand. As we also discussed during our prior call, we are strategically focused in key geographies where we have both a competitive advantage, as well as adequate opportunities to achieve attractive returns.
We've chosen these markets, one of which is the U.S., based on a combination of attractive fundamentals and AES' skill sets. This acquisition is in alignment with our refined approach to new investments, which focuses on a smaller number of select markets that we believe will offer the greatest potential for long-term value creation.
The acquisition of DPL presents us with opportunities to complement our existing utility platform in the Midwest at IPL, and to leverage the skill of our North American footprint. It also allows us to utilize our U.S.
tax position efficiently. That combination has allowed us to structure a transaction that provides immediate benefits to both the AES and to the DPL shareholders.
Now I'll turn the call over to Victoria, who will discuss the first quarter financial results in greater detail. Victoria?
Victoria Harker
Thanks, Paul, and good morning, everyone. As Paul mentioned, the first quarter results are in line with our expectations and consistent with operating trends and construction timelines we have previously incorporated in our 2011 guidance.
We expect a strong rest-of-year, driven primarily by new construction coming online in Chile adjusted EPS by year end. This includes $0.02 from Maritza, with staged commissioning over the rest of this year.
Although both adjusted earnings and cash flow during the first quarter of 2011 are lower than during the same period last year, this is a result of several drivers, some of which we've previously outlined. For example, this is the first year of our Northern Ireland business, Kilroot, operating without a PPA, as Paul mentioned.
Also, while the Philippines has continued to show demand growth of 3% to 4%, system-wide capacity has recovered from 2010 levels as other market generators have increased their availability, which dampens Masinloc's beneficial impact on the portfolio this year when compared to last. In addition, as has been the case with many companies during this earnings cycle, we continued to be exposed to commodity price fluctuations, as certain businesses, such as Yangcheng, our coal fire plant in China, had significant increase to coal prices with no commensurate increase to tariff rates has put pressure on our earnings there.
To that end, this is not a new trend, and unfortunately, but we're co-managing those carefully. In the first quarter of 2011, we've moved our Eastern Energy business into discontinued operations, as we had anticipated in our 2011 guidance.
Outside of these factors, our operating performance has been quite solid. In Chile, we saw higher volumes driven by market demand.
In addition, we were able to procure Liquefied Natural Gas for our Esso plant [ph], which last year had run with diesel. As a result, we have been able to capture higher energy margins.
In addition, we've realized higher volume at our Brazilian utilities, Eletropaulo and Sul, where demand grew by 6% and 7%, respectively. The quarter also benefited from contributions from Ballylumford in Northern Island, which we acquired during the third quarter of 2010.
Finally, foreign exchange rates provide some tail winds to our gross margin. In particular, the Brazilian real appreciated nearly 9%, and the Chilean peso appreciated 11%.
These factors have contributed to a consolidated gross margin of just over $1 billion, an increase of $55 million or 6% compared to 2010. On a proportional basis, we earned $620 million of gross margin, about the same as in the same quarter of 2010.
For the first quarter of 2011, adjusted EPS was $0.22 or $0.06 less than the first quarter of 2010. While we experienced higher volumes in Latin America, as well as contributions from new businesses, these were offset by higher fixed costs, higher share count and lower prices, mostly in Europe.
The higher fixed costs stemmed from a variety of sources, some of which are timing-related or non-recurring. For example, we had outage-related costs from scheduled maintenance in Indianapolis and Argentina, maintenance in Panama and off-taker penalties from delays at Maritza.
Diluted EPS from continuing operations was $0.30, an increase of $0.06 from the first quarter of 2010. In addition to the factors I just described for adjusted EPS, diluted EPS was also impacted by a significant increase in unrealized foreign currency transaction gains in the first quarter of 2011.
These noncash gains are primarily due to an increase in the valuation of foreign-denominated receivables and cash balances, given the strengthening of the euro and British pound since the end of 2010. Now let's discuss cash flow.
As discussed on our fourth quarter call, 2010 was an especially good year for cash flow, driven by several non-recurring events. Specifically, the first quarter of 2010 included favorable collections of past-due receivables in the Dominican Republic, as well as higher collections of VAT receivables in Chile.
In addition, lower operating income and higher working capital in the Philippines relative to last year, combined with a loss of contributions from the businesses in Oman, Pakistan and Qatar, sold last year, further dampened the year-over-year comparison. The first quarter of 2011, when compared to the first quarter of 2010, reflects a more normalized cash level.
As a result, our operating cash flow of $505 million was $163 million lower year-over-year on a consolidated basis and lower by $101 million to $322 million on a proportional basis. Likewise, consolidated free cash flow decreased by $249 million to $263 million for the quarter, driven by lower operating cash flow, as well as higher maintenance CapEx, primarily in Latin American utilities and North American utilities.
On a proportional basis, our free cash flow decreased to $159 million. Now turning to Parent liquidity.
During the quarter, Parent Company Liquidity benefited by $78 million from subsidiaries distribution, net of corporate overhead and interest expense. Since December 31, 2010, we retired $268 million of unsecured notes and repurchased $63 million of AES stock at an average price of $12.68.
During the first quarter, we also invested $300 million in several construction and development projects, such as Drone Hill, Laurel Mountain and Mong Duong, as well as in our partnership with Koç in Turkey, positioning as well to participate in the power market privatization there. Our Parent Company Liquidity at quarter end now stands at $1.3 billion.
Before I turn the call back to Paul, I just want to comment briefly on several of the efficiency efforts we have underway, as mentioned in our year-end call. Although we're in the early stages of sizing the potential cost reduction impacts of these initiatives, they include significantly leverage-able efforts, such as additional global sourcing opportunities, outsourcing of lower-value financial transaction processing and adding further automation to our financial reporting platform, now that over 70% of our businesses are on an ERP system.
We are also anticipating some additional support cost opportunities, as we realign geographically as part of our new go-to-market strategy. We'll be providing additional color on these efforts during our May 19 Investor Day.
With that, let me turn it back over to Paul who will provide an update on our construction projects and development pipeline. Paul?
Paul Hanrahan
Thanks, Victoria. Now what I'll do is I'll just give you a quick update on the construction and those development projects that are in advanced stages of development.
Our construction pipeline showed good progress during the first quarter with approximately 1,700 megawatts expected to come online by the end of 2011. And over 95% of our current construction pipeline will be under long-term contract.
Maritza, which is our 670 megawatt coal-fired plant in Bulgaria, remains our priority in 2011, and we've taken significant steps to resolve the issues there. Commissioning is underway, with plans to obtain full design capacity by year end.
AES has assumed control of the construction process, while the disputes with our contractor have been submitted to arbitration. Commercial operation, initially at a reduced capacity, is anticipated during the second quarter.
Additionally, last week, we successfully concluded the final 1-unit, 72-hour capacity test at 210 megawatts net. This follows a similarly successful 2-unit, 72-hour test at 420 megawatts net.
Turning to Latin America. We continue to make strong progress towards our schedule to commission approximately 720 megawatts of capacity in 2011.
Our 518-megawatt Angamos coal-fired plant in Northern Chile, which is located in the copper mining region, has fully commissioned Unit 1 ahead of schedule, with Unit 2 on schedule for the second half of 2011. In Panama, our 223-megawatt Changuinola hydroelectric project is nearing completion, with the dam and powerhouse at approximately 95% complete.
Commissioning and commercial operation are expected in the second half of 2011. Campiche, our 270-megawatt coal-fired project in Chile, has restarted construction since obtaining the favorable ruling from the Supreme Court of Chile regarding the construction permits in January.
There are currently over 1,200 workers on site, all major pieces of equipment are on site as well, and the project is scheduled for completion in early 2013. Finally, we have 147 megawatts of wind-generation capacity in the California and PJM markets that will be completed by the end of 2011.
These projects under construction, all of which benefit from long-term power purchase agreements, will deliver meaningful earnings in 2012. When combined with PPL, these additions make for a very attractive growth trajectory off of our 2010 results.
Now let me turn to development. Projects in our advanced development pipeline will deliver growth beyond 2012, and I'd like to remind you of just a few of our key areas of focus.
In Europe, we continue to pursue renewable energy projects. In the U.K., we reached financial close and started construction on our 30-megawatt wind project, Drone Hill.
This is the first of several projects resulting from our 2010 acquisition of a U.K.-based wind developer. As a reminder, between the acquisition of the U.K.
developer and 2 other Poland-based wind developers, we have a development pipeline totaling more than 300 megawatts in the U.K. and 775 megawatts in Poland.
From these pipelines, we expect 175 megawatts of projects to begin construction within the next 12 to 18 months, which will require approximately $120 million of AES equity. In India, we recently signed a 25-year power purchase agreement with a state grid company for 50% of the output from our 1,300-megawatt, coal-fired OPGC II project expansion in the state of Orissa, which is a major coal-producing state in India.
The remaining output will be available for bilateral contracts, which will further enhance the project fundamentals. In addition, AES Solar signed a PPA and closed on debt financing for our 5-megawatt solar PV project in the state of Rajasthan.
And finally, we achieved financial close and commenced construction of our 39-megawatt Saurashtra wind project in Gujarat. Commercial operations for Saurashtra is expected by the end of second quarter 2011.
Each of these projects is a testament of not only the market potential in India, but also AES' ability to develop and execute across diverse technologies and regions. In Vietnam, our 1,200-megawatt greenfield coal plant, Mong Duong, also achieved this significant milestone.
In February, we signed a turnkey EPC agreement with Doosan, and we executed documentation for the sale of 49% interest in the project to POSCO and to CIC. The sale will take effect in about 60 days once approval for the transfer is received from the Vietnamese government.
It will not only add strategic partners with significant presence in Asia, but it will also increase AES' return on our investment, as well as confirming the value that AES creates to greenfield development. In Turkey, where we recently closed on a joint venture with Koç Holding, the upcoming privatization process affords us the valuable opportunity to develop a pipeline of projects.
This partnership is anchored by Koç's 300-megawatt natural gas facilities, which have been transferred to the joint venture. We see a lot of potential in the Turkish power market, where GDP is expected to grow between 4.5% and 5%.
To help meet this growth in what is currently an underserved market, system capacity is projected to increase from its current 46 gigawatts to approximately 59 gigawatts, a 5% CAGR by 2015. In addition, the privatization process would put 15 gigawatts of generation capacity on the market over 2 phases.
This could be a very interesting market for us, and we think we are well-positioned with Koç as our partner. As you can see, we still have a fairly robust pipeline of development projects.
And the natural question is how can we obtain the required capital for these investments, given the equity going forward into the acquisition of DPL. In addition to our existing liquidity and cash distributions from our businesses, one of the other ways that we anticipate funding is through continued portfolio management activities.
And as you have seen with the past asset sales in the Middle East and Kazakhstan, we have been able to achieve attractive prices through these sales. This is one way that we can raise new capital, while, at the same time, creating NPV for our equity folders.
And the other option as evidenced in our Vietnam businesses is that working with partners is another way to fund opportunities and doing so in a manner that captures a premium for development and enhances returns to AES. With that, I'll turn the call back to the operator who will open up the call for your questions.
Ed, could you please open up the call for questions?
Operator
[Operator Instructions] Our first question comes from Gregg Orrill from Barclays Capital.
Gregg Orrill - Barclays Capital
I was wondering if you could comment a little more on the cost reduction initiatives that you were going to talk about at the conference, maybe what kind of information we should be looking for? Will it be very far enough along on the work to provide some targets at that point?
Victoria Harker
This is Victoria. Gregg, I think some of the efforts that I had outlined in my comments, I think, are far enough along.
We've been looking at them, particularly on the transaction processing piece, as well as some of the automation efforts on the financial platform. We can likely give some ranges of potential opportunities there.
Others are certainly newer to the system, and we'll probably have more color in terms of where they might be applicable, so you can figure out how to model that what the opportunity might be. But I'm not sure over the next 10 days we'll have it exactly boiled into our long-term forecast.
But there, as I mentioned, in the color commentary, there are bigger areas of opportunity like procurement, sourcing, non-commodity purchases across the entire platform. So it's a fairly pervasive effort.
Andres Gluski
This is Andres. There are a lot of efforts which are already underway, though this is really an acceleration.
So for example, global sourcing, we've chosen those items, which are really big-ticket items like solid fuel, et cetera, and we have had rolled that out. We also have cost savings projects on each individual business, and this includes, for example, a major effort which we call creating value in Brazil.
This is a large program, which is underway now.
Operator
Our next question comes from Brian Russo from Ladenburg Thalmann.
Brian Russo - Ladenburg Thalmann & Co. Inc.
Just a follow-up on the last question on the cost reductions. Are those cost reduction initiatives excluded from your current '11 and '12 financial guidance?
Victoria Harker
They are excluded right now from '11 and '12, because we're looking at what kind of severance might be applicable as well.
Brian Russo - Ladenburg Thalmann & Co. Inc.
And then could you just be a little bit more specific on the merger approval process with the DPL acquisition, and specifically, when do you expect the Utility Commission of Ohio to review and reach a decision?
Paul Hanrahan
Brian Miller, our General Counsel will address that question.
Brian Miller
Yes, we're on track, pursuant to our agreement, in the merger agreement to file all of our necessary filings by May 19 of this month, obviously. It may slip a few days.
We still expect to reach approval, end of this year or early in the first quarter of 2012.
Brian Russo - Ladenburg Thalmann & Co. Inc.
Any idea when you think the commission will review it? I think maybe on the day of the announcement, you mentioned that, that approval might come last.
Brian Miller
We fully expect that PUCO, which is the public commission there, to come last.
Brian Russo - Ladenburg Thalmann & Co. Inc.
So maybe fourth -- end of third, maybe fourth quarter type of review?
Brian Miller
End of fourth quarter, first quarter of next year, early first quarter of next year.
Brian Russo - Ladenburg Thalmann & Co. Inc.
Okay, great. And then lastly, I think you mentioned the 1,700 megawatts to come online throughout this year is about $0.06 to $0.08, but could you just quantify the absolute total EPS impact?
Because obviously, we're not getting a full year in 2011 for these assets.
Andres Gluski
Sorry, Brian, I think that the reference of the $0.06 to $0.08 is this year.
Victoria Harker
That is the --
Paul Hanrahan
That is not the one...
Victoria Harker
Right, that is the impact in 2011 of those, as they come up in the timing that we outlined.
Brian Russo - Ladenburg Thalmann & Co. Inc.
Right, could you be more specific in the timing then? Maritza, you said near your end.
Is this a fourth quarter event?
Andres Gluski
No, I mean, in the sense of Maritza, as Paul mentioned in his speech, we, shortly, we'll -- we have passed the capacity test for 420 megawatts net out of a potential of 600. So for Maritza, this is a Q2 event of this year in terms of getting up to 420, and then the plan is to take it up to 600 from now until the end of the year.
Brian Russo - Ladenburg Thalmann & Co. Inc.
I understand. Then Angamos and Changuinola, anything more specific than 2H 2011?
Andres Gluski
In the case of Angamos, we have one of the 2 units is already selling energy, and we expect the second one to come on by Q3 of this year for the full 518 megawatts. In the case of Changuinola, we are in the stage right now of putting in the stop logs.
We'll start flooding the reservoir next week, and we expect that to be online in the second half of this year.
Operator
The next question will come from Ali Agha from SunTrust.
Ali Agha - SunTrust Robinson Humphrey, Inc.
Could you provide an update on where you stand on the sale process with the New York coal plants? I see that they are a discontinued item, assuming they were the only item in that $0.02 discontinued loss.
And I think you have previously said by mid-year, you'd have a good read on that, and if the sale doesn't happen or the prices don't come in as expected, what would be the alternatives we should be looking at for those plants?
Paul Hanrahan
I think where we stand is we've put some bids out. We've gotten the indicative bids for now in discussions with a few of the parties.
That's probably going to go on for several more months during their due diligence phase. So I think the idea that we'll have a better feel for this sometime in the middle of the year is probably about right.
We, right now, believe it's very likely we're going to be able to sell these, sell the plants. In terms of what we do if for some reason we can't get that done, this would, I guess we could complete the settlement, flip back into continued operations.
But it's our intent to sell these, just because we think that, just from an earnings standpoint, it's much more attractive to us.
Ali Agha - SunTrust Robinson Humphrey, Inc.
And Paul, you mentioned and you reminded us that for DPL, you resumed the $0.05 to $0.07 of accretion in 2012. As you look beyond that, should we assume that's a good run rate to think about on an annual basis, 2013 and beyond?
Well, in your mind, what could be some of the positives or negatives that could move that number from that '12 base?
Paul Hanrahan
Well, we're not going to be able to provide a whole lot of detail on the out years, because it's -- we don't give that kind of forward-looking guidance. But I do think we expect to see those margins to expand, and it really comes, I think, from just if you look at the forward curves for gas in the merchant pricing, we see some upside there.
So we think -- we expect to see that number increase solely over time.
Ali Agha - SunTrust Robinson Humphrey, Inc.
Okay, and last question, more near term. Q1 on an adjusted basis, you were down about $0.06 year-over-year.
Your guidance still has you up for the year. You highlighted the contribution from the new plants and construction, the New York plants not being in there, obviously, helps.
Would you remind us are there other major deltas, positive or negative, to think about other than share count that drives the full year '11 versus '10 given how Q1 came out?
Andres Gluski
I think that there's -- one of the drivers is that we have a lot of major maintenance outages in the first half of the year. So as plants come fully online in the second half.
So we have the new plants, and we'll have more of the existing plants coming online as well in the second half of the year, and it's also in keeping with our seasonality.
Victoria Harker
The only other piece I would add in this, more in terms of the timing is the cash receipt for some of the insurance proceeds. For example, we have the impact of the repair work, which was a hit to earnings in the first quarter, but has not yet received the business interruption insurance.
So that will obviously flow through cash.
Ali Agha - SunTrust Robinson Humphrey, Inc.
Right, and the outages in the first half, even on planned outages, and these are greater this year than they were last year from a timing perspective?
Andres Gluski
Yes, they were. Basically, 2011, if you look at our maintenance CapEx, is a heavy year, and it's just when the plant came due.
Operator
Our next question will come from Brian Taddeo from Gleacher & Company.
Brian Taddeo - Broadpoint Capital
Just a quick follow-up question on your earlier comments on Eastern. Your comments on that you would likely sell this, do you -- would you think you're likely to be able to sell with this current structure in place, with the lease structure, or is it more likely to be sold having to sort of restructure that facility?
Paul Hanrahan
Yes, probably can't comment on that. We're having those discussions right now at the various parties, and we're having those conversations with our lenders.
So I really can't comment on that at this call.
Brian Taddeo - Broadpoint Capital
Then just on your comment on putting it back in continued ops? Should we read into that, that if it would have to be sold through some sort of restructuring, you'd rather put it back in operations and support it rather than to sell it through that fashion, or is that -- am I reading too much into that?
Victoria Harker
This is Victoria. I think Paul was just referring to the accounting treatment relative to our plants, if for some reason we run out of string on that.
But as long as we're continuing the dialogue, I think that's the expectation.
Paul Hanrahan
Yes.
Brian Taddeo - Broadpoint Capital
And just one other one. Can you give us kind of where the negotiations stand with the banks and renewing those 2 facilities?
And if there's anything borrowed under the facility including what the cash situation looks like there?
Paul Hanrahan
I just don't have the details on that, unfortunately.
Brian Taddeo - Broadpoint Capital
Do you know when the numbers will be published for Eastern? I think they're even lacking for fourth quarter.
Do you know when those will be out?
Paul Hanrahan
I don't think we have the specifics. They should be out soon, but no particular details on the dates.
Operator
[Operator Instructions] At this time, I show no further questions. I'd like to turn it over to Paul Hanrahan.
Paul Hanrahan
Thanks, operator. Before we end this call, I'd just like to reiterate a few of the key points we have discussed.
One, we're off to a good start to the year. The first quarter performed as expected.
Our targets for the year continue to look good. Two, our construction program is progressing well with 1,700 megawatts coming online this year.
And then third, liquidity remains strong. Even with the DPL transaction, we expect to be able to continue to grow in ways that our value will be accretive to our shareholders.
Thanks again for joining our call today. We look forward to seeing you at our Investor Day on May 19 in New York.
Goodbye, have a good day. Thanks.
Operator
At this time, I would conclude today's conference. You may disconnect, and thank you for your attendance.