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Is Diversification a Boon or Bane for AES Corporation?

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Jun. 20 2016, Published 11:12 a.m. ET

AES’s global presence exposes it to currency risks

The seven-billion-dollar AES Corporation (AES) could be an apt example of a geographically diversified utility. AES’s power distribution operations span over 17 countries, with more than 35,000 megawatts of generating capacity.

While most of AES’s earnings come from unregulated operations, its extensive global presence comes with immense currency risks. In 2015, more than 70% of its earnings came from outside the US. This brought its earnings severely under pressure from currency fluctuation risks.

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AES’s woes

In its portfolio, AES has the most exposure to Latin America after the US. But struggling economies like Brazil, Argentina, and Columbia have created a bleaker picture for AES in recent years. Weaker energy prices across the globe added to AES’s worries, and this could continue to have a negative impact on the company’s earnings. However, AES has exited from ten countries, including China and Nigeria, in the past five years to minimize risks.

Peers Duke Energy (DUK) and Sempra Energy (SRE) also have a presence in Latin America. Duke has also been struggling with its Latin American arm and looking to exit.

Meanwhile, AES’s earnings stress shown up in its volatile stock price movement. It has lost more than 20% of its investor capital in the past year. On a positive note, however, the stock has rallied by more than 15% since the beginning of 2016.

But can this recovery last? Will AES’s large presence help boost earnings? Let’s explore these questions in the next parts of this series.

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