AES 3Q2017: We expect strengthening global economy to provide strong tailwind

As expected, AES looks to complete Alto Maipo
We believe improving global economy will provide strong tailwind
We continue to feel AEPS guidance through 2020 is conservative: We feel it’s closer to 11%, given organic growth should be some 4% and with 1% inflation, AES is already at 5% CAGR
Then new projects totaling some 6.6GW (up from 4.6GW at 2/2017) on base of some 27.0 net GW, about a 25% increase, should boost growth above 8%-10% guidance
But, AES is trading as if growth prospects are negative
Gas-to-power could be major LT growth source, particularly in Asia – reentry into China?
Philippines exit is a surprise
AES pointing towards its MCAC LNG strategy and energy storage projects to boost MT-to-LT growth
Issues surrounding AES, include, but are not limited to: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) growth trajectory isn’t at potential, in our view

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AES 2Q2017 Earnings: We feel the upside coming, but now we have to see it

AES 2Q2017 Earnings: We feel the upside coming, but now we have to see it || Except Alto Maipo, things seem to be turning, and AES sees economies finally improving. We continue to think AEPS guidance through 2020 is conservative: We feel it’s closer to 11.6%, given organic growth should be some 4% and with 1% inflation, AES is already at 5% CAGR. Then new projects totaling some 4.6GW on base of some 27.0 net GW, about a 17.0% increase, should boost growth above 8%-10% guidance. But, AES is trading as if growth prospects are negative. We continue to look for Alto Maipo to be completed. Gas-to-power could be major LT growth source, particularly in Asia – reentry into China? AES seems close to reducing its risk profile to target levels, but look for more exits in Europe. And, to us, Asia/Europe combo signals exit from Europe. AES pointing towards its MCAC LNG strategy and energy storage projects to boost MT-to-LT growth. Focus on getting investment-grade-credit-equivalent is a telling and good strategy. Issues surrounding AES, include, but are not limited to: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) growth trajectory isn’t at potential, in our view. But, it appears that AES’s hurdle rates are moving towards a more rational level, which we believe should drive growth. Thus, we look for AES to reach our $19/share ST-Target.

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The Logic NY Fed Court Decision to Uphold ZECs is Spurious

The US District Court of the Southern District of New York (Fed District Court) yesterday ruled through New York Southern District Judge Valerie Caproni dismissed all challenges to New York’s Zero Emissions Credit (ZEC) program
The decision by Judge Caproni, though seemingly logical, is actually spurious, in our opinion. The decision was based on the following logic and comparison:
While we do appreciate Judge Caproni’s position and interpretation of the law, we note several inconsistencies in the Judge’s arguments

By acknowledging that financial subsidies do allow otherwise uncompetitive sources of generation to be built, Judge Caproni is acknowledging that financial subsidies do distort market pricing because it increase supply into the market relative to demand, which by definition, ALWAYS NEGATIVELY affects pricing

Conclusion: Therefore, we continue to believe that as the case is appealed to higher judicial authority, we maintain that the most rational outcome is the reversal of both NY and IL subsidies for nuclear power. However,

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AES 1Q2017 Earnings Note

We feel AES is being conservative but given history not a bad idea ||

We’re more convinced AES is conservative with guidance through 2020. We estimate closer to 11.5%, given organic growth ought to be some 4% and with 1% inflation, AES is already at 5% CAGR. Then growth projects (including pending acquisitions) totaling some 4.1GW on base of some 27.0 net GW, an increase of some 15.2%, should boost growth over guidance of 8%-10%. However, AES is trading as if growth prospects are some minus-3.5%. Kazakhstan exit is in-line with expectations and sale or closure of OH coal plants doesn’t surprise us. We believe AES is close to reducing its risk profile to target levels, but look for further risk mitigation action in Bulgaria, Netherlands, and the UK. AES pointing towards its MCAC LNG strategy and energy storage projects to boost MT-to-LT growth trajectory. And, focus on attaining investment-grade-credit-equivalent is a telling and good strategy. This isn’t to say there aren’t issues, AES: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) growth trajectory isn’t at potential, in our opinion. However, it appears that AES’s hurdle rates are moving towards a more rational level, which we believe should drive growth. Thus, we look for AES to reach our $19/share ST-Target and move towards our NIV of $45/share in MT-to-LT.

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AES 3Q2016 Earnings Note

At precipice of demonstrating its LT potential || Despite promise of 12%-16% CAGR in AEPS thru 2018, AES is trading as if its growth prospects are next to none. But, based on existing construction projects, CAGR in net MW through 2021 is about 4%, plus 5% organic growth thru contract escalations would deliver CAGR of 9% through 2021. Add to this, cost cuts, and debt repayments, and 12% CAGR in AEPS through 2021 is achievable. From our view, 2016 is bottom and forward prospects look far better than before, AES: 1) is out of many of the riskier or no-growth-prospect countries, 2) has sold or vastly reduced its interests in non-performing plants, riskier businesses, or assets that have no growth potential, 3) has begun accelerating its investment program, 4) significantly reduced parent debt and continues to do so, 5) has businesses in stable countries or in stable regulatory regimes, and 6) even troubled assets such as Maritza in Bulgaria seem to have turned the corner. This isn’t to say there aren’t issues, AES: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) stubbornly clings to an inexplicably high investment hurdle rate. Regardless, given its investment program we look for it to overshadow our reduced $19/share ST-Target and march towards our reduced NIV of $39/share in the MT-to-LT.

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AES 2Q2016 Earnings Note

AES: Time to turn-up the growth volume || Despite promise of 12%-16% CAGR in AEPS thru 2018, AES is trading as if its growth prospects are next to none. We believe investors are skeptical and cynical and perhaps given up on promise of the future, and we can’t find fault with this argument, given past 15 years. However, we believe AES has turned the corner. From our view, 2016 is bottom and forward prospects look far better than before, AES: 1) is out of many of the riskier or no-growth-prospect countries, 2) has sold or vastly reduced its interests in non-performing plants, riskier businesses, or assets that have no growth potential, 3) has begun accelerating its investment program, 4) significantly reduced parent debt and continues to do so, 5) has businesses in stable countries or in stable regulatory regimes, and 6) even troubled assets such as Maritza in Bulgaria seem to have turned the corner. This isn’t to say there aren’t issues, AES: 1) continues to pay more than a nominal dividend, 2) hasn’t disavowed share buybacks, and 3) stubbornly clings to an inexplicably high investment hurdle rate. Regardless, given its investment program we look for it to overshadow our $20/share ST-Target and march towards our NIV of $41/share in the MT-to-LT.

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AES 1Q2016 Earnings Note

Time to turn-up the growth volume || Outside of mild weather, it seems to us AES is back on track and on its way to achieving its 2016E AEPS guidance of $0.95-$1.05. AES is turning corner from restructuring-and-stagnant Street to growth-and-prosperity Road, but investors need to hold their breath for 2016 due to murky economic outlook. We’d like AES to stop wasting money on share repurchases, and dedicate more to reducing recourse debt. We believe AES should lower its risk premium across the board when evaluating investments in an effort to boost investments and AEPS CAGR. In concert with lower recourse debt, we believe this to be a prudent strategy, something that could have been started in 2014 before all of the capital wasted on share buybacks. At least, we’d encourage AES to drastically reduce the dividend, if not eliminate it, and use it for equity portion of investments. We’d encourage AES to rid itself of US T&D in exchange for generation assets, and look to expand its core competencies in global generation, especially in Brazil, and in general, any free-market country, which demonstrates distress asset valuations. We also look for AES’ success in Mexico through participation in Mexico’s restructuring of its state-owned electric utility. However, we’re less than thrilled with Bulgarian settlement, which we fear sets bad precedent.

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AES Sells Sul in Brazil

· AES announced its agreement to sell Companhia Centro-Oeste de Distribuicao de Energia Electrica (Sul), a distribution company in the Brazilian state of Rio Grande do Sul, which has about 1.3MM metered customers.

· The sale price would be approximately $464MM based on expected currency exchange rates (or for REAL1,698) and some $335MM of non-recourse project finance debt would be assumed by the buyer. Therefore, the net benefit to AES shareholders is expected to be some $799MM.

· The buyer is CPFL Energia S.A. (NYSE: CPL) and the transaction is expected to close in 2H2016, subject to customary regulatory approvals and shareholder vote at CPL.

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AES 4Q2015 Earnings Note

Time to turn-up the growth volume || Finally, it feels like AES is turning the corner from restructuring-and-stagnant Street to growth-and-prosperity Boulevard, but investors to hold their breath for 2016. Much is likely to depend on global economic environment, which appear to be on shaky footing. We’d like AES to stop wasting money on share repurchases, and dedicate more of its efforts on reducing recourse debt. We believe that AES should lower its risk premium across the board when evaluating investments in an effort to boost investments and AEPS CAGR. In concert with lower recourse debt, we believe this to be a prudent strategy, something that could have been started in 2014 before all of the capital wasted on share repurchases. Also, at least, we’d encourage AES to drastically reduce the dividend, if not eliminate it, and use it for equity portion of investments. We’d encourage AES to rid itself of US T&D in exchange for generation assets, and look to expand its core competencies in global generation, especially in Brazil, and in general, any free-market country, which demonstrates distress asset valuations. We also look for AES’ success in Mexico through participation in Mexico’s restructuring of its state-owned electric utility.

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