AD!Dheeraj,!FRM! The AES Corporation HIGH YIELD CREDIT RESEARCH. 8 May!2015!

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1 ADDheeraj,FRM The AES Corporation HIGH YIELD CREDIT RESEARCH 8 May215

2 Investment Summary We expect group leverage to increase modestly in 216, reflecting a tough operating environment at key overseas subsidiaries and higher debt during construction phase of projects, with some improvement in 217 due to cost cutting and some improvement overseas. AES parent company standalone credit metrics are expected to improve, reflecting higher subsidiary distributions and debt repayment. led to significant depreciation in the currencies of the countries and correspondingly weak results. High leverage: AES typically funds expansion investment with non-recourse debt at subsidiaries, which results in high overall leverage of ~5x, especially during the construction phase of the projects. Structurally subordinate to operating company debt: AES Corporation notes do not have guarantees from the operating subsidiaries and are structurally subordinate to ~$15bn of subsidiary debt and other trade liabilities. Latest results: AES reported weak 215 operating results, with 215 revenues down 13% yoy to $15.bn, primarily reflecting a negative currency impact in Brazil ($2.2bn) and Colombia ($179m), and a decline in volumes at AES US utilities. Consolidated operating margin fell 9% yoy to 2.9bn, reflecting lower revenues, lower demand and hydel generation in Brazil, and weak commodity prices in the Dominican Republic. Credit Positives Stable business: AES derives most of its revenues from regulated utility and long term contracted generation assets which provides relatively stable cash flows to the parent. Portfolio rebalancing: We view AES s management portfolio strategy to be good as AES has exited riskier markets including Ukraine, Nigeria and Cameroon and Sri Lanka. Diversified business: AES has a presence in 17 countries, which provides a cushion against weakness in one or two countries. Credit Negatives Weak overseas operating environment: AES has been significantly affected by adverse economic conditions in Brazil, Chile and other Latin American counties which has Projections: We expect AES s financial performance to be muted in the near term, reflecting debt financed expansion, and weak overseas operating results due to a weak economic environment and continued US dollar strength, with some recovery in 217. Consolidated net leverage is projected to increase marginally to 5.4x in 216 (5.3x in 215) and then fall to 5.1x in 217. Major risks to our outlook include a large debt financed acquisition which would weaken credit metrics, and a sustained economic slump in AES Latin American markets, including Brazil, Argentina, Chile, and Mexico. The Company Arlington, Virginia-based AES Corporation (AES) is a leading global power producer and utility group, with eight regulated utilities (two in the US) and 35.9GW power generation capacity in 17 countries. AES operates it power and utility businesses through six regional strategic business units (SBU): US, Andes, Brazil, Mexico Central America and the Caribbean (MCAC), Europe and Asia. 2

3 Background Cash Flow (PFCF), which also excludes non-controlling AES was established in 1981 by Roger Sant and Dennis Bakke as Applied Energy Services, an energy consultancy firm. In 1986, AES started operating its first power plant, and by 1988 was the largest independent power producer in the US with three power plants. The company went public in 1991, using proceeds to expand in the US and overseas (primarily Latin America). Major acquisitions were: AES Sul for BRL 1bn in 1997, Eletropaulo for BRL 1bn in 1998, Tiete for BRl 938m in 1999, Indianapolis Power & Light (IPL) for $2.2bn in 21, Ohio-based utility Dayton Power and Light (DPL) for $3.5bn in 211. interests. Strategy In the last five years, AES has focused on rebalancing its portfolio, selling assets in non-core markets and businesses, reducing its geographic footprint from 28 to 17 countries, and on expanding in core markets, with 2.1GW of commissioned new generation capacity, and $7bn of power and upgrade projects currently being implemented. AES relies on non-recourse project financing to fund much of its capex. AES also continues its cost reduction program ($2m in ), with $15m planned in Asset Sales in US SBU Comprises 5.6GW of merchant generation capacity and two integrated utilities: IPL and DPL. Generation: AES principal US generation business is AES Southland (3.9GW; 5% of California s installed capacity) which has a PPA with South California Edison (SCE) until 218. Other generation resources include 773MW of wind capacity and AES Hawaii (26MW). AES plans to start construction on a 1.3GW gas power plant ($1.9bn cost) in 217, which will supply power to SCE. IPL: IPL delivers electricity to ~.48m customers in the Indianapolis region. Regulated generated capacity is 3.5GW. Ongoing projects include a 67MW gas fired plant, expected to be operational in 217, and 41MW coal to gas conversion projects. IPL has filed for a 5% base rate increase with a decision expected in 216. DPL: DPL, through its principal subsidiary DP&L, delivers electricity to ~52, customers in the West Central Ohio region. Generation capacity is 3.1GW. Ohio is currently in the process of deregulating generation, and DP&L has to move its generation business into a separate company in 217. DP&L filed for a 4% base rate increase in November 215. Ohio s decision to deregulate generation is impacting DPL s capacity to upstream dividends. The Business Units AES monitors the performance of its business units primarily through Adjusted Pre-Tax Contribution (APTC), which excludes non-controlling interests and certain onetime items; Parent Only Free Cash Flow (POCF), which comprises subsidiary distributions less parent operating costs, including dividends and interest; Proportional Free US SBU performance drivers are primarily: investmentdriven growth in the regulated rate base, increases in commercial and residential energy consumption, PJM capacity payments, wholesale prices for DPL generation, plant availability at AES Southland. 3

4 215 APTC fell 19% yoy to $36m (-19% yoy) and PFCF declined 9% to $591m, reflecting pressure on DP&L generation margins due to deregulation, lower wind output and power prices, and lower wholesale margins at IPL. AES projects 216 APTC of $38-$45m, reflecting better availability at AES Hawai and lower fixed costs, partly offset by lower commodity prices and expiration of the Buffalo Gap PPA. Andes SBU Comprises 8.1GW (6GW share) of generation assets at 33 facilities in Argentina (44% of segment capacity), Chile (44%), and Columbia (12%). Key subsidiaries are: AES Gener (67% stake) is the second largest generator in Chile with an 18% market share generally has long term supply contracts (13-16yrs). Chivor (an AES Gener subsidiary) in Colombia operates with short term to medium contracts (1-3yrs). TermoAndes (Argentina). AES SBU holds 1.5% capacity share in Argentina and a 5.7% in Colombia. Fuel sources for the business unit include Coal (2.8GW) and Hydel (2.3GW), and generation capacity under construction is 1.1GW, primarily in Chile, with.5gw expected to be operational in 216 and.5gw in 218. capex. AES projects 216 APTC of $375-$45m, reflecting reversal of the Guacolda restructuring, and a negative currency impact. Brazil SBU Brazil SBU primarily operates through Eletropaulo (16% economic interest) and Tiete (24% economic interest) which are consolidated by AES because it maintains control of the operations. Brazilian Development Bank (BNDES), which is AES partner, owns 28% in Tiete and 19% in Eletropaulo. Generation: Generation primarily comprises Tiete s 2.7GW hydro-based power plants and AES Uruguaiana s 64MW gas power plant. Tiete, which is the third largest private generator in Brazil, sold power to Electropaolo under a long term PPA up to December 215, but now sells through medium term contracts (3-5yrs). Utility: Comprises Electropaulo, which serves ~6.9m customers in the Sao Paulo metro area, and Sul ( stake) which delivers electricity to ~1.3m customers in the Porto Alegre metro area on the Uruguay Brazil border. Electropaulo is the largest power distributor in Latin America (by revenues). Andes SBU performance drivers are primarily: weather, which impacts hydel generation, energy demand, commodity prices, regulatory changes and currency fluctuations. 215 APTC grew 14% yoy to $482m, reflecting higher margins and volumes at AES Gener, higher energy prices at Chivor due to El Nino weather impact, a gain on restructuring at Guacolda, partly offset by the impact of a weak Colombian Peso. PFCF grew 27% yoy to $224m, reflecting higher VAT refunds and lower environmental Brazil SBU performance drivers are primarily weather conditions, re-contracting prices, energy demand, and regulated tariff changes. 215 APTC fell 62% yoy to $91m and PFCF declined to a loss of $29m, primarily reflecting lower volumes due to economic weakness, higher interest expense, higher fixed costs (a bad debt expense), and a negative currency impact, partly offset by higher tariffs at Electropaulo and lower energy purchase prices at Tiete. AES projects 216 APTC of $2-$5m, primarily reflecting a Tiete contract stepdown, reversal of a onetime regulatory liability, and lower demand. 4

5 MCAC SBU Comprises 3.2GW (2.5GW proportional share) generation capacity in Mexico (1.1GW capacity), the Dominican Republic (85MW), El Salvador (9MW), Panama (777MW), and Puerto Rico (548MW), and four regulated utilities which deliver electricity to ~1.3m customers in El Salvador. output in Bulgaria and Jordan is sold under long term contracts expiring in and respectively. AES supplies ~42% of energy demand in Dominican Republic, and accounts for 25% of installed capacity in Panama. Power output is primarily contracted under long term PPA s. Europe SBU performance drivers are primarily commodity prices and electricity demand in Northern Ireland, weather conditions, regulated tariff levels and commodity prices in Kazakhstan, and currency fluctuations. 215 APTC fell 32% yoy to $235m (-32% yoy), reflecting the sale of Ebute (Nigeria) in 214, a negative currency impact, and lower UK generation margins due to an unfavourable coal-gas spread. PFCF grew 1 yoy to $238m, reflecting working capital inflows in Bulgaria and Jordan. AES projects 216 APTC of $13-$175m, reflecting a negative currency impact and unfavourable commodities price moves. MCAC SBU performance drivers are primarily weather conditions, commodity prices which impact spot prices and fuel costs, and currency fluctuations. Asia SBU 215 APTC fell 7% yoy to $327m, primarily reflecting lower ownership due to the sale of non-controlling interests, and lower spot prices, partly offset by higher hydro generation in Panama. PFCF benefited from working capital inflows. AES projects 216 APTC of $3-$33M, reflecting adverse commodity price moves, and lower ancillary service earnings in Dominican Republic, partly offset by full year contribution from a Panama oil-fired barge. Comprises 2.3GW (1.2GW share) of generation capacity across three coal-based power plants in India (42MW; 49% stake, equity accounted), the Philippines (63MW), and Vietnam (1.2GW). AES is developing a 1.3GW plant in India which is expected to be operational in 218. Output from the Asian business is primarily sold under long term PPA s with state utilities. Europe SBU Comprises 6.8GW (5GW share) of generation capacity in Bulgaria (846MW), Jordan (627MW), Kazakhstan (2.8GW), Netherlands (64MW) and the United Kingdom (Northern Ireland; 1.9GW). AES accounts for ~7% of Northern Ireland s installed capacity, and ~6% of generation in Kazakhstan. AES sells power in Northern Ireland primarily into the merchant power market (except for a 6MW PPA) and in Kazakhstan under short term contracts with regulated price caps. Power Performance drivers are primarily plant availability, changes in spot and contracted sales mix, cost cuts and currency fluctuations. 215 APTC grew 19% yoy to $96m and PFCF grew 6% yoy to $87m, reflecting commencement of operations at the Mong Duong plant in Vietnam and higher plant availability at the Masinloc plant (Philippines), partly offset 5

6 by lower equity ownership at Masinloc. AES projects 216 APTC of $85-$15m, reflecting inclusion of a full year s results for Mong Duong. Capital Structure AES use non-recourse debt at subsidiaries to fund expansion. Recourse debt at the parent is subordinated to debt at subsidiaries as there are no guarantees. Recourse debt at the parent comprises $4.5bn senior unsecured notes and $517m preferred debt. Debt issuers include: DPL $2.bn, IPL $2.3bn, AES Gener $3.7bn, Eletropaulo $932m, AES Corp $5.bn. Financial Strategy AES targets reaching strong BB metrics by 218, and investment grade credit metrics at the parent company metrics by AES has repaid $1.5bn of holding company debt over the last four years, and targets an additional $1-$2m annually, with ~$2m planned in 216. From September 211 to December 215, AES used $4.9bn discretionary cash for: debt prepayment and refinancing $1.95bn, share buyback $1.5bn, dividends $569m, investments in subsidiaries $941m. Cash usage September 211 to December 215 AES projects 216 discretionary cash of $1.1-$1.2bn which it plans to use primarily for: debt prepayment $2m, share buyback $79m, dividends $29m, investment in subsidiaries $33m. Dividend payments were $3m in 212, $119m in 213, $144m in 214 and $276m in 215. AES announced a dividend increase in 216, and has a long term annual dividend growth target of. Capex was $2.6bn in 213, $2.5bn in 214, and $2.5bn in 215. We estimate capex of ~$2.4bn in 216 and capex breakdown was: operations $612m, environmental $322m, growth $1.5bn. Leverage AES Adjusted Net Debt/EBITDA increased from 4.3x in 212 to 5.3x in 215, primarily reflecting increase debt for under construction projects. We expect adjusted net leverage to increase to 5.4x in 216, reflecting lower EBITDA, followed by some improvement in 217 to 5.1x as EBITDA is projected to benefit from cost cutting and some improvement in overseas markets. POCF/recourse debt improved from 8% in 212 to 1 in 215 reflecting a reduction in parent company recourse debt and higher subsidiary distributions. We expect POCF/recourse debt to improve to 12% in

7 $1.35bn, POCF $525-$625m AES guidance is for average annual PFCF growth. Relative Value Liquidity At December 31, 215, AES had parent company liquidity of $1.1bn (cash equivalents $4m and RCF $738m) against $181m of parent company debt due in 217. On a consolidated basis, AES had $1.3bn cash, $484m investments, and $86m debt service reserves against $2.5bn (of current non-recourse debt obligations (includes ~$1bn technical default). RCF availability was not disclosed. AES closest peers are First Energy Corp and Calpine Corporation. AES bonds trade at higher spreads despite similar leverage of First Energy and Calpine. We believe this is due to higher risk of AES s significant overseas exposure and in Calpine s case, the secured natured of the obligations. Given our forecast for relatively stable leverage over the next two years, and tough overseas operating conditions at least in the near term, we see limited scope for AES bonds to outperform. AES primary source of cash flows is distributions from subsidiaries. Bond%Description Recourse Debt Maturity Schedule Issue%Size% S&P/Mdys $MM Price YTW OAS DUR 215%Net% Debt/% EBITDA 5.3x AES%Corp%8.%%Sr%Unsec%1/2 116 BB/Ba3%+ve% AES%Corp%4.875%%Sr%Unsec%3/ BB/Ba3+ve% x AES%Corp%5.5%%Sr%Unsec%3/ BB/Ba3+ve% x AES%Corp%5.5%%Sr%Unsec%3/ BB/Ba3+ve% x Calpine%6.%%%Sr%Sec%1/ BB/Ba x Calpine%7.875%%Sr%Sec%1/23 75 BB/Ba x Calpine%5.875%%Sr%Sec%1/25 49 BB/Ba x First%Energy%Corp%4.25%%Sr%Unsec%3/23 85 BB+/Baa3%neg x First%Energy%Corp%4.25%%Sr%Unsec%3/24 6 BB+/Baa3%neg x Covenants Senior RCF Covenants Free Cash flows Post dividend annual free cash flows were negative $54m in 213, negative $1.4bn in 214, negative $926m in 215, and are forecast at negative $276m for 216 and negative $289m for 217. Reported parent free cash flows increased from $5m in 212 to $531m in 215, primarily reflecting higher subsidiary distributions. AES 216 guidance includes: parent free cash flow $525$625m, consolidated OCF $2.-$2.9bn, PFCF of $1.- AES parent senior secured RCF financial covenants include: adj. operating cash flow/cash interest on recourse debt 1.3x, total recourse debt/adj. operating cash flow 7.5x. Technical defaults At December 31, 215, $1bn debt at some of AES s project subsidiaries were in technical default due to failure to meet covenants. Since the subsidiaries are considered to be nonmaterial (<2% of parent s cash distributions) these did not trigger cross default provisions on AES s senior notes or RCF. Defaults include Maritza (Bulgaria; $559m debt), Sul (Brazil, $333m), Kavarna (Bulgaria, $14m) and Sogrinsk (Kazakhstan, $6m). 7

8 Cash%Flows 212 net%income 9357 Depreciation%and%amortization 1,394 Loss%(gain)%on%sale%of%assets 9174 impairment%expenses 1,94 Deferred%income%taxes 162 Provision%for%contigencies 47 Loss%on%the%extinguishment%of%debt 8 Loss%(gain)%on%disposals%(discontinued%operations)984 Other 33 Change%in%Working%Capital 968 Cash%Flow%From%Operations 2,91 Capex 2,27 Free%cash%flow%before%dividends 631 Dividends%to%non%controlling%interests 895 Dividends 3 Free%cash%flows%after%dividends 9294 Net%(acquistions)/dispositions 619 Net%investments 53 Sales%to/contributions%from%non%controlling%interest43 Net%stock%issuance/%(repayment) 931 net%cash%change%before%debt%repayment/issuance 597 RCF%borrowings 9321 Net%recourse%debt%issuance 9235 Net%non%recourse%debt%issuance 66 other%items 169 Net%Change%in%Cash , ,715 2, ,147 1, ,22 1,791 2, ,382 1, , ,134 2, E 854 1, ,474 2, E 1,1 1, ,511 2, Adjusted Pre Tax Contribution by SBU Appendix Consolidated+Income+Statement Revenues Revenue+growth Cost+of+Sales operating+profit Operating+margin General+&+administrative+expenses+(holdco) G+&+A+margin EBIT EBIT+margin Interest+expense Interest+Income net+interest+expense Other+Income/(Expense) Profit+before+tax Taxes Tax+% Equity+in+earnings+of+affliates Income+from+continuing+operations Income+from+discontinued+operations+ Net+income Non+controlling+interest Net+Income+attributable+to+AES+Corporation ,164 6% 13,581 3, % 274 2% % 1, ,196 D1, % 35 D42 63 D D ,891 D7% 12,644 3, % % 1, ,27 D772 1, % D ,146 8% 14,58 3,88 18.% % 1, ,16 D219 1, % 19 1,176 D29 1, ,963 D13% 12,97 2, % % 1, D636 1, E 14,634 D2% 11,942 2, % % 1,4 3 1,1 D22 1, % E 15,236 4% 12,392 2, % % 1,4 3 1,1 D16 1, % 5 1,1 1, Proportional Free cash Flow by SBU 8

9 215 Debt by SBU 9