AES Corp Reduces Debt – Analyst Blog

AES Corp. ( AES ) completed the redemption of $400 million of its outstanding Senior Secured Notes. The notes which have a coupon rate of 8.75% were originally due in 2013. The Notes were redeemed at a premium on a pro rata basis at a price equal to 101.46% of the principal amount. The redemption closed on May 17, 2010.  AES has arranged funds for the redemption from the sale of its 15% equity stake to a wholly-owned investment subsidiary of China Investment Corp. November 2009. The transaction closed in March 2010 and China Investment acquired 125.5 million shares of AES common stock for $12.60 each cumulating to $1.6 billion.   AES is highly-leveraged with a high debt-equity ratio of 173.7%, although its long-term debt-to-capitalization is only 63.5% at first quarter-end 2010. The company closed first quarter 2010 with cash and cash equivalents of $3.4 billion from $1.8 billion at fiscal-end 2009.  Arlington, Virginia-based AES is a global power company that owns and operates electric power generation and distribution businesses in 29 countries. The company’s operations are divided into three segments: Regulated Utilities, Contract Generation, and Competitive Supply. The company clocked 2009 revenues of $14 billion and owns and manages $40 billion in total assets.   AES’ businesses are spread across 5 continents in 29 countries, representing a geographically diverse earnings base. Geographic disparity in the target markets of AES has resulted in a portfolio that is well-positioned for capitalizing on regional differences in power prices and weather-driven demand. This insulates the company from specific risks in any single region.  By fuel type, AES’ capacity portfolio is approximately 41% coal, 39% gas, 16% hydro and 4% oil. Revenues are earned equally from generation and distribution, and almost 80% of generation revenues are under long-term contracts.  AES’ focus on long-term supply contracts exposes it to commodity price risk. The company would be unable to pass on any escalation in prices of coal and natural gas to its customers. Profitability at its regulated utilities depends on regular rate relief around the globe from their service countries.  Also the company’s substantial generation capacity under construction in emerging countries may face cost escalation and over-runs. The company is locked into fixed earnings by virtue of its long-term delivery contracts for utility projects and will likely face the impact of cost over-runs.  AES is a non-dividend paying stock in an industry (utilities and energy merchants), which has a high average dividend yield (Zacks industry average is 3.6%). Thus we maintain our Sell recommendation on the Zacks Rank #4 stock.  In the near-term, the dividend-paying Zacks Rank #2 peers who have a Buy recommendation like Black Hills Corp. ( BKH )

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AES Corp Reduces Debt – Analyst Blog

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