Corporate Credit Profile September 2013

Transcription

1 Corporate Credit Profile September 2013 AES Corp. (AES) Business Profile AES, headquartered in Arlington, Virginia, is a global power company that owns a portfolio of electricity generation and distribution businesses in 29 countries on five continents. AES assets are largely financed on a non-recourse basis. The company has a portfolio of more than 100 power plants and its current construction program will increase its net generating capacity to more than 40 GW. Moody s: Ba3/Stable S&P: BB-/Stable AES also has ownership interests in 13 electric utilities. These businesses, located in six countries, range from utilities providing only electric distribution to fully integrated ones with generation, transmission and distribution. The bulk of AES capacity is derived from North America generation (34%), followed by South America (28%), EMEA (24%), MCAC (10%), and Asia (4%). Founding management was replaced in the post-enron crisis, and current management seems to be much better at central control, especially with the addition of new CFO Tom O Flynn in August AES portfolio was divided into six strategic business units and portfolio rationalization appears to have accelerated since the new CEO took over in September AES has exited seven non-core markets since 2011, raising $1.1 billion in proceeds. Although growth is almost exclusively outside the U.S., the backbone of revenue and payments up to the parent continues to be the U.S. and Latin American projects (refer to Annex). FY12 Pre-tax Profit by Business Unit Asia, 10% FY12 Generation portfolio by Fuel Type Other, 4% * EMEA, 19% U.S., 20% Renewables, 25% Coal, 36% MCAC, 18% Brazil, 15% Andes, 18% Natural Gas, 35% * Oil, diesel, petroleum coke Source: Company Reports. Note: MCAC includes Mexico, Central America and the Caribbean 1 First Principles Capital Management, LLC AES Corp Credit Profile

2 Recent Events AES has been shedding its non-core assets - $1.1 billion in asset sales proceeds since and is focused on the U.S., Chile and Brazil markets. Turkey and Southeast Asia are other areas it has targeted for growth. AES plans more asset sales, and indicated a potential $500 million of additional non-core asset sales in FY2013 and up to $2 billion through the end of FY2014. AES continues to consider strategic alternatives for its solar JV with Riverstone (55% based in the U.S., and 45% in Europe). The attempted IPO in early 2013 was pulled due to market conditions, however AES is still considering an IPO or sale of all or part of its wind or solar businesses. In 2Q13, AES reduced its recourse debt by $304 million, lowering annual interest expense by ~$50 million while extending its debt maturity profile. AES also issued $750 million of 4.875% senior notes due 2023 and repurchased $1,050 million senior notes due between Subsequent to 2Q13, AES extended the maturity of its $800 million revolving credit facility by three-and-a-half years to July 2018, reducing its borrowing margin by 75 bps to L+225 bps. AES has experienced difficulties in restructuring its Ohio-based utility business which represents 6% of AES pre-tax profit, and filed a rate case with the Public Utilities Commissions of Ohio (PUCO) for relief. PUCO recently approved a three-and-a-half years electric security plan (ESP) for Dayton Power and Light Co (DPL). The ESP will provide some financial cushion while the utility transitions to market-based pricing by June 1, Moody s downgraded DPL Inc. in September 2013 from Ba1 to Ba2, and it subsidiary Dayton Power & Light from Baa3 to Baa2, given deteriorating performance and financial metrics. Interim Results FY2012: In 2012, AES experienced several setbacks DPL customers switching caused by low natural gas prices, a negative rate case for Eletropaulo in Brazil (a 9% reduction to the regulatory-approved average rates charged by Eletropaulo, an electric distribution business in Brazil), poor operating performance at AES Gener S.A., and Brazilian electricity market reforms. Also, AES Eastern Energy filed for Chapter 11 in January 2012 after struggling with high coal costs and declining power prices. 2 First Principles Capital Management, LLC AES Corp Credit Profile

3 [$mm] [$mm] In an effort to streamline its portfolio, AES sold assets and announced plans to exit seven countries (China, Czech Republic, France, Hungary, Ukraine, Spain and Trinidad) where it lacked a competitive advantage or where its returns were poor, generating ~$1.1 billion in proceeds. LTM 6/30/13: Revenue and performance declines were driven by drought primarily in the Andes, and MCAC, as well as Brazil and EMEA, lower capacity rates in the U.S. with unfavorable impact of mild weather, and lower rates at the Brazilian subsidiaries from lower demand. Customer switching remained a trend in the DPL service territory, as ~60% of DPL s customers have switched to competitive retailers, including 100% of large commercial customers. AES expects additional switching of 1-1.5% per month. Revenues [$mm] and EBITDA YTD 6/30/12 YTD 6/30/13 LTM 6/30/13 Revenue 13,588 16,070 13,931 16,568 17,344 18,133 8,932 8,342 17,543 % Growth 10.5% 18.3% -13.3% 18.9% 4.7% 4.5% -6.6% -3.3% EBITDA 3,972 4,337 4,049 4,678 5,094 4,818 2,332 2,213 4,699 EBITDA growth -6.7% 9.2% -6.6% 15.5% 8.9% -5.4% -5.1% -2.5% EBITDA margin 29.2% 27.0% 29.1% 28.2% 29.4% 26.6% 26.1% 26.5% 26.8% Net Income 495 1, (86) 458 (915) (1,059) Source: Company Reports 19,000 18,000 17,000 16,000 15,000 14,000 13,000 AES Corp Historical Revenue & Revenue Growth 25% 18.3% 18.9% 20% 15% 4.7% 10% 4.5% 5% -3.3% 0% -13.3% -5% -10% -15% LTM Revenue % Growth 6/30/13 5,500 5,000 4,500 4,000 3,500 3,000 AES Corp Historical EBITDA & EBITDA Margin 29.4% 29.1% 28.2% 26.8% 27.0% 26.6% LTM EBITDA EBITDA Margin 6/30/ % 29.5% 29.0% 28.5% 28.0% 27.5% 27.0% 26.5% 26.0% 25.5% 25.0% Source: Company Reports 3 First Principles Capital Management, LLC AES Corp Credit Profile

4 Capital Structure and Liquidity AES Corp is a holding company with many subsidiaries around the globe, with $1 billion+ in cash paid up to the parent annually. Most of the subsidiaries are levered at least once, and many have financing structures that limit their ability to pay cash up to the parent. Overall debt/capital was 73% as of 6/30/13, down from 74% in FY2012. Debt/EBITDA of 4.5x is higher than industry average of 3.9x, partly resulting from the DPL acquisition in November 2011 for $4.7 billion. About 73% of total debt is non-recourse debt at the operating subsidiary level secured by project assets and revenue at various operating subsidiaries, and the remaining 27% is recourse debt at the parent level. Near term debt maturities are manageable, with no significant maturity before As of 6/30/12, AES had $2.4 billion in liquidity, including $1.6 billion in cash ($111 million at the parent level), and full availability under its $800 million revolving credit facility. AES generated $271 million in LTM free cash flow, with 88% of capex dedicated to growth or environmental purposes vs. 57% in FY2012. AES liquidity was reduced to fund the DPL acquisition but remains solid, and has varied over time from subsidiary to subsidiary and region to region. Total distributions to the parent totaled $1,291 million in LTM 6/30/13. The most reliable source of cash flow is the U.S. and Latin American generation and distribution businesses, but recently the U.S. contribution has been declining. AES initiated a $120 million annual dividend, with the first quarterly payment in 4Q 12. The new policy is 30-40% of parent free cash flow. 4 First Principles Capital Management, LLC AES Corp Credit Profile

5 Capital Structure and Liquidity Capitalization [$mm] 6/30/2013 Debt/LTM EBITDA $800mn revolver L+225 due 7/18 - Sr. Sec. Term Loan % AES Corp % AES Corp % AES Corp % AES Corp , % AES Corp % AES Corp , % AES Corp % AES Trust III Other (13) Total Debt at AES Corp (Parent) 5, x Various Notes at AES Corp subsidiaries 15,399 Total Debt 21, x Cash 1,611 Net Leverage 4.1x LTM 6/30/13 EBITDA 4,699 Source: Factset Debt Maturity Schedule [$mm] , , , , ,614 >2023 9,976 Total 21,070 Debt maturity Schedule at the Parent Level [$mm] 1,500 1,250 1, >2023 Source: Factset 5 First Principles Capital Management, LLC AES Corp Credit Profile

6 Capital Structure and Liquidity Liquidity [$mm] LTM 6/30/13 CFO 2,165 2,213 3,510 2,884 2,901 2,972 Total Capex (2,840) (2,520) (2,310) (2,430) (2,236) (2,523) FCF (675) (307) 1, Dividends (30) (90) Share Repurchases (143) 0 (99) (279) (301) (88) Net FCF (818) (307) 1, $800mn Revolving Bank Facility due 7/ Cash (*) 1,611 Liquidity 2,411 (*) Excludes $765mn of restricted cash Metrics LTM 6/30/13 Capex as % sales 17.7% 18.1% 13.9% 14.0% 12.3% 14.4% Recourse Debt 5,148 5,515 4,612 6,485 5,962 5,671 Non-Recourse Debt 12,542 14,022 15,121 15,535 15,411 15,399 Total Debt 17,690 19,537 19,733 22,020 21,373 21,070 Capitalization 24,717 28,417 30,146 31,749 28,887 28,877 Total Debt/Capitalization 72% 69% 65% 69% 74% 73% Total FCF as % Debt -4.6% -1.6% 5.6% 0.8% 1.6% 1.3% Total Debt/EBITDA 4.1x 4.8x 4.2x 4.3x 4.4x 4.5x Interest Expense 1,844 1,386 1,410 1,464 1,420 1,376 EBITDA/Interest 2.4x 2.9x 3.3x 3.5x 3.4x 3.4x Market Capitalization 9,922 Enterprise Value 31,049 EV/LTM EBITDA 6.6x Source: Company Reports 6 First Principles Capital Management, LLC AES Corp Credit Profile

7 Strengths & Opportunities Rationalization of portfolio by exiting noncore markets and businesses. AES strategy has shifted away from portfolio development and more toward portfolio rationalization and cost control. AES is committed to exiting markets where it does not have either a competitive advantage or strong platform for expansion. This has resulted in AES selling its ownership in gas-fired assets in Spain, generating assets in China, wind assets in France and other markets, with proceeds partly used to reduce parent debt. AES is also focused on cost control and indicated its target of $145 million in overhead expenses reduction by Large portfolio of projects, including a sizeable contracted project in Vietnam expected to start contributing to growth in ,191 MW is currently under construction with various in-service dates spread over the period. ~60% of projects are concentrated in coal-fired generation, 21% gas-fired generation, 12% renewable energy and 7% oil/diesel generation. AES estimated $1.4 billion in costs for these projects through 2014, and ~$5 billion in total through While AES could incur cost overruns given the significant ongoing development program, it has a good track record of staying in line with targeted project costs. Emerging market power demand growth, offsetting lower growth in the U.S.. Latin America (over 56% of revenue) helped AES weather the recent contraction in the U.S. power markets. Strong and stable cash flow generation ranging between $2.2-$2.9 billion since 2007, partly offset by significant capex needs. Weaknesses & Threats Complex capital structure, high leverage and low visibility on contract renewals. The new management team has improved the disclosure on major contract renewals, however the global diversity of AES business makes it difficult to have visibility on the consolidated business. One sizeable contract roll-off in Brazil (Tiete) could weigh on 2016 results. Tiete sells 100% of its capacity to Eletropaulo through a long term power purchase agreement (PPA) which is set to expire in December Forward power prices indicate Tiete will have to sell its power at a ~32% discount to its current PPA price (estimated ~$57 million negative impact on revenue). Leverage is high vs. peers (4.5x vs. 3.9x for peers), and ~73% of total debt is non-recourse debt at the operating subsidiary level vs. 27% of structurally subordinated debt at the parent level. 7 First Principles Capital Management, LLC AES Corp Credit Profile

8 Reliance on substantial distributions. The cash flows which AES depends upon to service the $5.7 billion in recourse debt at the parent level consist entirely of distributions upstreamed from subsidiaries located in jurisdictions with considerable regulatory and operating uncertainty. Structural constraints are somewhat mitigated by the diversification provided by AES large number of subsidiaries and wide geographic distribution. In addition, foreign exchange volatility has impacted the level of subsidiary distributions in the past. Tightening environmental compliance regulations could require significant capital investment, especially for coal-fired plants (37% of AES generation capacity). AES estimated $511 million of total cost to comply with Mercury & Air Toxic Standard (MATS) rule at IPL through Although markets have rebounded, there are lingering concerns of potential economic slowdowns in major emerging economies, such as in Brazil, Chile, and Eastern Europe. Exposure to commodity market volatility. About 78% of total capacity represents generation assets of mostly gas-fired, with some coal, wind and petroleum coke fired assets. Over 94% of its generation is contracted with an average of 6.5 years remaining term and many of its plants have fuel pass-through contracts limiting fuel risk as well as hedges in place. 8 First Principles Capital Management, LLC AES Corp Credit Profile

9 Outlook Within the U.S., AES will be working to integrate DPL, invest in operational capex as its regulated facilities, and complete its 2,160 MW of generation assets under construction (refer to Annex). Within Latin America, AES plans to invest in its utilities in Brazil and generation assets in Chile. Within Southeast Asia and India, it is participating in the construction of a number of new generation projects. AES most important near-term growth investment is the Mong Duong project, a 1,200 MW greenfield coal plant in Vietnam which is expected to be operational in 2015 and already fully contracted. AES estimates 2013 free cash flow and subsidiary contributions will be down from AES forecasts parent free cash flow of $ million in FY2013, which is mostly targeted to debt reduction, $120 million to dividends, and $170 million invested in subsidiaries. Latin America is expected to be a positive cash flow contributor in FY2013, while the U.S., EMEA and Asia are expected to be lower contributors in In the U.S., negative drivers include continued DPL customer switching, and lower margins from Southland and California. Demand growth of 1% is expected in the U.S. EMEA and China contributions are expected to decline due to fewer assets; AES expects demand growth in the region to be 4-6% through AES indicated it is focused on improving the credit profile of the company in order to achieve strong BB credit metrics over time. Contact Information: Sandy Jephson Senior Credit Analyst sjephson@fpcmllc.com First Principles Capital Management, LLC AES Corp Credit Profile

10 Credit View AES has evolved significantly under the new management team, as it has gradually shed assets to conform to its new strategy of focusing on core businesses. We see as a credit positive that AES is narrowing its geographic focus to fewer markets (Brazil, Chile, and the U.S. being the main ones), simplifying the overall business. While AES leverage remains higher than peer average, it has good liquidity which is expected to be supported by additional asset sales. In addition, AES continues to be focused on reducing costs across the business. In the near term, growth should benefit from the completion of a significant projects, especially in Vietnam starting in AES faced some setbacks in 2012, and there is some uncertainty going forward regarding the renewal of the Tiete contract in 2016, cost overruns given a substantial pipeline of projects, and declining contributions to the parent. AES is also facing customer defection challenges in its DPL business, and is exposed to a significant amount of regulatory, political and FX uncertainty related to its sizeable exposure to Latin America. 10 First Principles Capital Management, LLC AES Corp Credit Profile

11 Data Annex Valuation Peer Analysis [$mm] S&P Rating Market Value Enterprise Value Sales EBITDA EBITDA Margin Ent. Value/EBITDA Total Debt Total Leverage Duke Energy Corporation BBB+/Stable 47,550 87,176 24,216 7, % 11x 41, x Edison International BBB-/Stable 14,994 26,991 11,768 4, % 7x 10, x Endesa SA BBB/Stable 27,677 45,038 40,703 6, % 6x 11, x EDP - Energias de Portugal SA BB+/W Neg. 13,402 40,789 20,998 4, % 10x 25, x PG&E Corporation BBB/Neg. 18,456 32,279 15,254 4, % 8x 14, x AES Corp BB-/Stable 9,922 31,049 17,543 4, % 7x 21, x Average 22,000 43,887 21,747 5, % 8x 20, x Source: Factset Stock Performance 25 AES Share Price [$] Source: Bloomberg 11 First Principles Capital Management, LLC AES Corp Credit Profile

12 Data Annex 2,191 MW of projects under construction Generation (Thermal) Generation (Renewables) Project Jordan Chile Vietnam Chile Columbia % Owned 60% 36% 51% 49% 71% Type Heavy Fuel Oil Coal Coal Coal Hydro Gross MW 247 MW 152 MW 1,240 MW 532 MW 20 MW Expected Commercial Operations Date 2H H H H 2014 FY12 Subsidiary Distributions by Business Unit EMEA, 13% Asia, 10% MCAC, 12% U.S., 29% Brazil, 19% Andes, 17% Source: Company report 12 First Principles Capital Management, LLC AES Corp Credit Profile

13 Disclosure Additional information is available upon request. Information has been obtained from sources believed to be reliable but First Principles Capital Management, LLC or its affiliates (collectively FPCM ) do not warrant its completeness or accuracy except with respect to any disclosures relative to FPCM and the analyst's involvement with the company that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Copyright FPCM First Principles Capital Management, LLC AES Corp Credit Profile