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AES Corporation (AES) reported third quarter results with adjusted earnings per share (EPS) of 27 cents, 3 cents above the Zacks Consensus Estimate of 24 cents. Earnings also comfortably surpassed the year-ago earnings of 20 cents per share. The upside in earnings came from strong operational performance, contributions from new businesses, and a lower effective tax rate.

On a reported basis the company clocked a net loss of 17 cents per share versus earnings of 14 cents per share in the prior-year quarter.

The variance of 44 cents between reported and adjusted earnings in the reported quarter stems from impairment losses (27 cents), currency transaction losses (10 cents), debt retirement losses (3 cents), derivative mark-to-market losses (2 cents) and discontinued operations (2 cents).

Quarterly Operational Results

In the reported quarter, consolidated revenue increased $391 million to approximately $4.4 billion. However this fell short of the Zacks Consensus Estimate of $4.5 billion. The results were driven by the favorable impact of foreign currency; contributions from new businesses; higher prices in Chile and Argentina; and increased demand at its Brazilian utilities.

These gains were partially offset by lower prices at Eletropaulo, its subsidiary in Brazil; and the unfavorable impact of an unrealized mark-to-market derivative loss at Sonel in Cameroon.

During the quarter, gross profit increased by $53 million to approximately $1 billion driven by favorable impacts of foreign currency; contributions from new businesses; higher volumes in Chile; and decreased fixed costs at its Brazilian utilities.

These were partially offset by the unrealized mark-to-market derivative loss at Sonel; generation outage in Panama related to tunnel repairs; lower prices at Eletropaulo in Brazil; and higher fuel prices at Gener in Chile. Overall, the company reported a net loss of $131 million versus a net income of $114 million in the prior-year quarter.

Financial Condition

AES Corp. ended the quarter with cash and cash equivalents of $3.4 billion compared with $2.6 billion at fiscal 2010 end. Total long-term liabilities increased to $23.7 billion from approximately $22.0 billion at fiscal 2010 end.

Consolidated free cash flow in the quarter increased $127 million year over year to $1.1 billion. This increase was primarily due to higher collection of account receivables in Chile and commencement of commercial operations at Maritza, in Bulgaria.

Outlook

For fiscal 2011, AES Corp. reaffirmed its adjusted EPS guidance range of 97 cents–$1.03 and net earnings between 93 cents and 99 cents.

Cash from operations is expected in the band of $2.7 billion to $2.9 billion. Consolidated free cash flow is expected to be in the range of $1.8–$2.0 billion in fiscal 2011.

For 2012, AES Corp. reaffirmed adjusted EPS in a range of $1.27 to 1.37 and net earnings in a $1.15 to 1.25 band.

Cash from operations is guided to a range of $3.3 billion to $3.5 billion. Consolidated free cash flow is expected to be in the range of $2.2–$2.4 billion in fiscal 2012.

Acquisition

In April this year, AES Corp. entered into a definitive agreement to acquire DPL Inc. (DPL), the parent company of Dayton Power & Light Company, for a total value of $4.7 billion. It had agreed to pay $30 per share in cash to DPL shareholders.

It will pay a total of $3.5 billion in cash for the equity and $1.2 billion in net debt for the total transaction. Upon closing of the transaction, DPL will become a wholly owned subsidiary of the company. AES Corp. expects to complete the transaction around the fourth quarter of 2011 or the first quarter of 2012.

Our Take

AES Corp. has a diversified business exposure that insulates it from any region-specific risk. It is also investing a substantial chunk of its funds for capacity expansion in the power hungry regions of Latin America and Asia. Also AES’ ongoing merger transaction with DPL Inc., seen as a boost for its regulated electricity business, is expected to be a strategic fit.

Over the long term, we suggest investors to wait for a favorable entry point. The company presently retains a short-term Zacks #2 Rank (Buy). Over the longer run we maintain our long-term Neutral recommendation on the stock.

AES Corp. is a global power company spread over 28 countries in five continents. It operates in two lines of business – Generation and Utilities.

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