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AES AT A GLANCE

P/E ► 8.66 LOW EV/EBITDA ► 6.93 AVG ROA ► 6.2% AVG ROE ► 14.3% AVG Debt to Equity ► 7.52 VERY HIGH Current Ratio ► 1.49 AVG Interest Coverage Ratio ► 2.31 AVG

 

 

 

 

 

 

AES Trust (NYSE: AES) is an electric utility; by megawatts generated, AES is the ninth-largest electricity generator in Brazil and the second-largest in Chile.^[1] The company also distributes electricity to about 80% of Brazil's population through its utilities operations.^[2] Though AES is based in the U.S., its Latin American businesses brought in half of its $34 billion in 2007 revenue.

Despite its strong position in South America, rising fuel prices (especially the price of coal, which rose 34% in 2007) increased AES' operating costs by 13% in 2007.^[3][4] Additionally, the 2007 nationalization of Venezuelan electrical utilities resulted in a $680 million loss on AES' businesses in Venezuela.^[5] On the other hand, over two thirds of AES' 2007 revenue came from outside the U.S. As such, the weak dollar gave AES' revenue a $636 million boost in 2007.^[6]

Business Segments

2007 Revenues by Segment^[7]

Generation (55%)

The Generation segment is responsible for running electricity generation plants powered by either coal, natural gas, water, biomass, or wind, and selling electricity to wholesale customers in 26 countries. In Latin America, the company's main source of revenue, AES generates 21% of the total electrical capacity in the state of São Paulo, Brazil making it the ninth-largest generator in Brazil.^[8] AES also produces 12% of Argentina's total electricity and is the second-largest generator of power in Chile.^[9] AES also owns 17 power plants in the northeastern and western U.S.^[10] In 2007, about 62% of this segment's contracts were for five years or longer.

Utilities (37%)

The Utilities segment is responsible for transporting electricity directly to over 11 million consumers.^[11] The company's Utilities operations range in structure from simple distribution systems to fully integrated utilities that generate, transmit, and distribute power. AES is part owner of Brazil's largest electricity distribution company in terms of revenue and electricity distributed, AES Electropaulo.^[12] In El Salvador, AES provides electricity to over 80% of the country's population.^[13] In North America, AES owns IPL, a utilities company that supplies energy to roughly 465,000 customers in Indianapolis.^[14] The Utilities businesses do not face as much competition as AES' Generation segment because of the government regulation of utilities that prevents competitors from freely entering the market.^[15]

Other (7%)

The Other segment consists mostly of AES' alternative energy products and services. AES's alternative energy business includes wind-powered electricity generation stations and products designed to reduce the output of greenhouse gases from fossil fuel generators.^[16]

Business Financials

AES 2007 Revenues by Geography^[17]

AES' Revenue, Operating Income and Net Income^[18] (in millions USD)

Key Trends and Forces

Natural Gas Electric Power Prices 2002-2007^[19]

Rising coal and natural gas prices increase AES' cost of sales

Between 2006 and 2007, the average yearly price of coal, used to power plants that produce about 33% of AES' total electrical output, rose from $49.09 to $65.73 per metric ton.^[20][21] These rising prices led to an increase in AES' cost of sales from about 70% of revenue to about 75% of revenue between 2006 and 2007.^[22] This trend continued into 2008 as the average price of coal between January 2008 and May 2008 reached nearly $120 per metric ton.^[23] During the same period of time, the price of natural gas used to generate electricity rose from $7.11 to $7.30 per thousand cubic feet.^[24] AES is especially exposed to rising commodities prices because its long-term contracts with customers give it few opportunities to pass on increased costs.^[25]

Nationalization in Latin America threatens AES' operations

On January 8, 2007, Hugo Chavez, president of Venezuela, announced a plan to nationalize Venezuela's electrical energy industry.^[26] As part of Chavez's plan, AES was forced to sell its Venezuelan electric utilities company EDC to the Venezuelan government for $739 million.^[27] The transaction resulted in a $680 million loss on the value of AES's assets in Venezuela.^[28] Venezuela is not the only Latin American country to move toward nationalization; Bolivian president Evo Morales nationalized the country's oil and natural gas industries, even going so far as to send in troops to enforce the government's policies.^[29]

South American Exchange Rates^[30]

Exchange rates resulting in a weak U.S. dollar boost AES' international revenues

During 2007, the U.S. dollar depreciated in relation to the Brazilian real and the euro and appreciated relative to the Argentinean peso and the Chilean peso.^[31] Despite the slight appreciation of the dollar against the Argentinean and Chilean peso, AES reported that favorable exchange rates resulted in a $636 million revenue boost in 2007.^[32] When foreign currencies depreciate relative to the dollar (or when the dollar appreciates), the USD value of AES' international revenue decreases. On the other hand, a relatively weak USD boosts international revenue, as sales in other currencies convert to a larger number of dollars.

Key Competitors

• North America
  • Constellation Energy Group (CEG) is a U.S. company that offers electric and natural gas utilities services, though this is just one part of its entire business model. Its energy delivery services compete with AES' Utilities segment.^[33]
  • Dominion Resources (D) generates and distributes electricity and natural gas throughout North America. Dominion competes with both of AES' two main segments.^[34]
  • Duke Energy Corporation (DUK) distributes natural gas to customers in North America and electricity to both North American and international customers.^[35]
  • SEMPRA ENERGY (SRE) runs electric and natural gas utilities in North America, competing with AES' Utilities division.^[36]
• Latin and South America
  • Empresa Nacional de Electricidad S.A. (EOC) runs electricity generation plants in Chile, Argentina, Colombia, Peru, and Brazil.^[37]
  • Comp En De Mn Cemig ADS (CIG) generates and distributes electricity throughout Latin America.^[38]

References

1. ↑ AES 2007 10-K: Business, pgs 9
2. ↑ AES 2007 10-K: Business, pgs 9
3. ↑ Google Finance: AES
4. ↑ AES: Generation
5. ↑ AES 2007 10-K: Risks Associated with our Operations, pg 56
6. ↑ AES 2007 10-K 2007 Performance Highlights, pg 91
7. ↑ AES 2007 10-K: Notes to Consolidated Financial Statements, pg 204
8. ↑ AES 2007 10-K: Business, pg 7
9. ↑ AES 2007 10-K: Business, pg 7
10. ↑ AES 2007 10-K: Business, pg 10
11. ↑ AES 2007 10-K: Business, pg 5
12. ↑ AES 2007 10-K: Business, pg 5
13. ↑ AES 2007 10-K: Business, pg 5
14. ↑ AES 2007 10-K: Business, pg 11
15. ↑ AES 2007 10-K: Business, pg 5
16. ↑ AES 2007 10-K: Business, pgs 5
17. ↑ AES 2007 10-K: Notes to Consolidated Financial Statements, pg 204
18. ↑ AES 2007 10-K: Notes to Consolidated Financial Statements, pg 204
19. ↑ EIA: U.S. Natural Gas Electric Power Price (Dollars per Thousand Cubic Feet)
20. ↑ AES: Generation
21. ↑ World Bank: Commodity Price Data (Pink Sheet)
22. ↑ AES 2007 10-K: Consolidated Statements of Operations, pg 124
23. ↑ World Bank: Commodity Price Data (Pink Sheet)
24. ↑ EIA: U.S. Natural Gas Electric Power Price (Dollars per Thousand Cubic Feet)
25. ↑ AES 2007 10-K: Business, pg 4
26. ↑ Bureau of International Information Programs: Latin American Nationalization Trend Seen Hindering Progress
27. ↑ AES 2007 10-K: Business, pg 5
28. ↑ AES 2007 10-K: Risks Associated with our Operations, pg 56
29. ↑ PBS: Bolivia Moves to Nationalize Oil and Natural Gas Industries
30. ↑ Search: BRL to USD, ARS to USD, EUR to USD, and CLP to USD
31. ↑ Search: BRL to USD, ARS to USD, EUR to USD, and CLP to USD
32. ↑ AES 2007 10-K 2007 Performance Highlights, pg 91
33. ↑ Google Finance: CEG
34. ↑ Google Finance: D]
35. ↑ Google Finance: DUK]
36. ↑ Google Finance: SRE
37. ↑ Google Finance: EOC
38. ↑ Google Finance: CIG
39. ↑ Historical Currency Averages Search USD to CLP and USD to BRL