AES 1Q2018 Earnings Note (05/08/2018): Strategy & tactics are clear but vision’s cloudy; regardless undervalued

We understand what AES is doing, but we don’t know where it’s going. We can’t answer what AES wants to be when it’s done restructuring?It used to be that AES wanted to be global IPP player.
AES reached agreement to complete troubled Alto Maipo hydro-plant in Panama
We believe improving global economy will provide strong tailwind
AES means to focus on renewables and gas plants in US, so we look for sale of DPL&IPL to fund 10GW of utility-scale solar
We continue to feel AEPS guidance through 2021 is conservative: We feel it’s closer to 13%
AES is trading as if growth is negative
Gas-to-power could be major LT growth source, particularly in Asia – reentry into China?
AES trusts its MCAC LNG strategy and energy storage projects may boost MT-to-LT growth
Achieving investment-grade-credit may be a good strategy
Issues surrounding AES, include, but aren’t limited to: 1) paying more than nominal dividend, 2) hasn’t disavowed share buybacks, 3) growth trajectory isn’t at potential, and 4) we can’t say what AES is anymore, in our view

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AES (02/27/2018): 2018 AEPS guidance surprises but LT guidance conservative in our view

AES provided robust 2018E AEPS guidance of $1.15-$1.25 vs. our $1.13 estimate and $1.15 consensus
Robust guidance comes from continued growth projects, corporate tax changes, cost savings, asset sales, and debt reduction
AES looks to complete its troubled Alto Maipo hydro plant in Panama
AES means to focus on renewables and gas plants in US, so we look for sale of DPL&IPL to fund 10GW of utility-scale solar
We continue to feel AEPS guidance through 2021 is conservative: We feel it’s closer to 13%
Gas-to-power could be major LT growth source, particularly in Asia – reentry into China?
Issues surrounding AES, include, but aren’t limited to: 1) paying more than nominal dividend, 2) hasn’t disavowed share buybacks, and 3) growth trajectory isn’t at potential, in our view
Raised our NIV/share to $49 from $48 & ST-Target/share to $22 from $19.

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be better than expectations:
Similarly, we’d expect natural gas infrastructure businesses to perform well for 4Q2017 and 1Q2018:
We expect economic growth to surpass 4% for 2018:
Strong economic performance should lead to strong power sector performance:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to creep up throughout 2018 and, given normal weather, we’d expect natural gas prices to average at or just below $3.50 for 2018 with an exit price of some $3.65-$3.75:
Conclusion: Going into 2018, we believe that natural gas prices will stage a moderate recovery, but power margins should do better benefiting from accelerating economic activity. Individually, we continue to like… . However, the real star may be … . Among the utility names, we like … due to their growth prospects. We also look for … to outperform as … .

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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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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