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Will AES’s Unstable Earnings Even out Soon?

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Dec. 4 2020, Updated 3:52 p.m. ET

AES’s earnings

AES Corporation (AES) does not foresee that its challenges will ease anytime soon. Its management forecasts an 18% fall in EPS (earnings per share) this year due to currency fluctuations and weaker power prices globally. In fact, management estimates that the US will be the only region to report earnings growth in 2016, given the macroeconomic headwinds in the company’s other regions of operation.

Notably, all of AES’s regions witnessed an earnings fall in 1Q16—except Asia. Almost 16 countries in which AES operates suffered from currency depreciation and lower power prices.

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AES’s multiyear contracts

Unlike US independent power players, AES sells its power under multiyear contracts. According to its management, approximately 78% of earnings are expected to come from contracts that are two years or longer. The company has an average contract period of seven years, which provides cash flow predictability and earnings stability. Remember, US merchant power players generally sell their generated power in wholesale markets.

Meanwhile, the Latin American arm of AES Corporation has been struggling the past couple of years due to economic slowdowns and depreciating currencies. The management is thus looking to reduce its Brazil exposure by cutting 16% of its stake in ElectroPaulo (AES’s Brazilian utility).

Long-term optimism?

AES management is optimistic about earnings growth in 2017–2018 after an expected fall in 2016. This earnings growth is expected to be triggered by new capacities of about 4 gigawatts coming online in the next three years.

AES is more geographically diversified than any other US utility, with more than 70% of its total earnings coming from outside the US. Otherwise put, AES’s earnings profile is more unstable than that of Sempra Energy (SRE) or Duke Energy (DUK) due to its huge exposure to currency risks and commodity prices. Notably, more than 80% of AES’s consolidated earnings come from unregulated operations.

In the next part, we’ll discuss AES’s return on equity.

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