The AES Corporation (AES - Analyst Report) reported first quarter 2012 adjusted earnings per share (EPS) of 37 cents, 9 cents above the Zacks Consensus Estimate of 28 cents. Earnings also comfortably surpassed the year-ago figure of 24 cents per share.

The results were driven by a favorable one-time arbitration settlement at Cartagena partially offset by financing costs related to the acquisition of DP&L.

On a GAAP basis, the company clocked net earnings per share of 44 cents versus 30 cents per share in the prior-year quarter.

The variance of 7 cents between GAAP and adjusted earnings in the reported quarter stems from currency transaction gains of 2 cents, gains from disposition/acquisition of 14 cents partially offset by impairment losses of 6 cents and derivative mark-to-market losses of 3 cents.

Quarterly Operational Results

In the reported quarter, consolidated revenue increased $584 million year over year to approximately $4.7 billion. However, this fell short of the Zacks Consensus Estimate by $60 million. The top-line increase was driven by new businesses including DP&L in the United States, Maritza in Bulgaria, Angamos in Chile, and Changuinola in Panama.

Moreover, increased volume at its utility and generation businesses in Latin America, the impact of a non-recurring arbitration settlement at Cartagena in Spain, and increased prices at Sul in Brazil and its utility businesses in El Salvador also added to the revenue.

However, these positive contributions were partially offset by an unfavorable impact of foreign currency, lower prices at Eletropaulo in Brazil, decreased spot prices at AES Gener in Chile, and the impact of the sale of 80% of its interest in Cartagena in February 2012.

During the quarter, gross profit increased by 8.6% year over year to $1.1 billion. General and administrative expenses in the quarter were $0.087 billion, down 8.4% year over year.

Financial Condition

AES Corp. ended the quarter with cash and cash equivalents of $1.7 billion compared with $2 billion at the end of the first quarter of 2011.

Consolidated cash flow from operating activities was up $32 million to $534 million boosted by the DP&L acquisition in the United States and the non-recurring arbitration settlement at Cartagena, Spain.

However, the positives were partially offset by a decrease at its utility businesses in Latin America primarily in Brazil due to higher working capital requirements and an increase in interest payments due to the financing of the DP&L acquisition. Consolidated free cash flow in the quarter was also up $32 million year over year to $292 million.

Total capital expenditures including growth capital expenditures were $585 million, up 17.9% year over year.

Guidance

After a 6-cent cut to the GAAP forecast due to non-cash impairments, the company expects pro forma and GAAP EPS to remain in the same range of $1.22 to $1.30.

For fiscal 2012, the company expects consolidated cash flow from operating activities to be in the range of $3.1 billion to $3.3 billion and consolidated free cash flow in the range of $1.9 billion to $2.1 billion.

To deliver a three-year total return CAGR of 8% to 10% by 2015, the company has increased the outstanding authorization for share repurchases by $180 million from $122 million to $302 million.

The company is looking forward to initiating dividend payment in the third quarter of 2012 with the first payment in the fourth quarter of the year.

At the Peer

Yesterday, Edison International (EIX - Analyst Report) reported adjusted earnings of 35 cents per share for the first quarter of 2012, missing both the Zacks Consensus Estimate of 44 cents and the year-ago quarterly earnings of 65 cents per share. Edison International's revenue rose $74 million year over year to $2,856 million in the reported quarter. Revenues comprehensively beat the Zacks Consensus Estimate of $2,793 million.

Our Take

As expected, the acquisition of DPL Inc. boosted the company’s businesses in the North American market. Moreover, with the divestiture of Ironwood and Red Oak, sale of its interests in hydro assets in China and strong cash flow, the company is confident that it will reach its three-year CAGR target easily.

Meanwhile, we believe that the company’s geographic diversification makes it well-positioned for capitalizing on regional differences in power prices and weather-driven demand and therefore protects it from specific risks in any single region or country.

However, we are concerned about volatility in commodity prices and exchange rates. 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.