AES Progress on Italian Projects - Analyst Blog

AES Solar, a joint venture between The AES Corporation (AES) and private equity firm Riverstone Holdings LLC, closed on long-term non-recourse financing facilities of 103 million euros or approximately $134.9 million for 24 MW of solar photovoltaic (PV) projects, named ”Il Terzo.” The Il Terzo portfolio of seven projects is located throughout the Lazio, Puglia and Sicilia regions of Italy.

The abovementioned seven projects are expected to reach commercial operation by the end of the first quarter of 2011. AES Solar was formed to develop, own and operate utility-scale photovoltaic solar installations around the world. AES Solar currently has 37 MW operational in Spain, Greece and France, with substantial development activity in other countries.

Riverstone Holdings LLC, an energy and power-focused private equity firm founded in 2000, has approximately $17 billion under management across six investment funds. Riverstone conducts buyout and growth capital investments in the midstream, exploration & production, oilfield services, power and renewable sectors of the energy industry.

Arlington, Virginia-based AES Corporation 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 Corporation's businesses are spread across 5 continents in 31 countries, representing a geographically diverse earnings base. Geographic disparity in the target markets of AES Corporation 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 any region specific risk.

By fuel type, AES's 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 Corporation's 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 the 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 is likely to face the impact of cost over-runs.

AES Corporation is a non-dividend paying stock in an industry (utilities and energy merchants), which has a high average dividend yield. Business exposure to 26 countries around the globe insulates AES Corporation from any region-specific risk. With a base of fossil fuel plants, the company is predominantly involved in long-term contracts, which do not allow for any rate base growth in the near term for its regulated utilities. The company is investing a substantial chunk of funds for capacity expansion in the Latin American and Asian markets, looking for growth in these power hungry regions.

Over the long term, we remain positive on the company and advice investors to wait for a favorable entry point. We currently maintain our ‘Neutral' recommendation on the Zacks #3 (Hold) Rank stock. In the near-term, AES Corporation's Zacks #1 Rank peers who have a ‘Strong Buy' recommendation, like El Paso Electric Company (EE) and Alliant Pampa Energia SA (PAM) look attractive.

 
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