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North America Equity Research
15 December 2014

Neutral

AES Corp.

AES, AES US
Price: $13.01

Bigger-than-Expected Dividend Hike Pushes Yield to

3.1%

Price Target: $15.00

AES today announced a doubling of its dividend to $0.40 annually, the equivalent
of a 3.1% yield, a significantly higher return of cash through the dividend than we
had expected. Additionally, the company struck a deal to sell 30% of its IPL
utility in Indiana for $593MM to a Canadian pension fund. The announcements
represent a successful and aggressive execution of managements strategy of
monetizing assets and aggressively returning cash to shareholders. However, we
remain cautious over developing market and hydrological risk for near-term EPS
and are maintaining our Neutral rating.
Dividend increase significantly larger than expected: AES declared a
$0.10/share quarterly dividend today, doubling the prior level and bringing the
current yield to 3.1%. The new rate is equivalent to a 48% parent free cash
flow payout ratio, significantly higher than our 30% payout and 25% annual
increase assumption for next year. Additionally, the prior 30-40% parent free
cash flow guided payout ratio is being replaced by a 10% annual increase target
through 2018 beginning next year, driven by guided 2016-2018 cash flow
growth of 10-15%. The move is an aggressive one by management as they
seek to lure yield-driven investors and strike a balance between dividends and
share buybacks in returning their robust cash flow to shareholders.
Asset sale strategy continues to plow ahead: Consistent with the companys
long-term plan to shed assets and engage in select sell-downs, a 30% stake in
the companys Indianapolis Power & Light utility is being sold over
approximately the next 2 years. AES has no prior relationship with the buyer,
Canadian pension fund manager CDPQ, but the 2 entities have indicated they
may enter into more transactions in select Latin American countries in the
future. The implied $2.0Bn deal value is encouraging and represents an
approximate 26x forward P/E multiple, according to our estimates, for one of the
companys fastest growing segments.

Electric Utilities
Christopher Turnure

AC

(1-212) 622-5696
[email protected]
Bloomberg JPMA TURNURE <GO>
J.P. Morgan Securities LLC

Nazia Sheikh
(1-212) 622 5403
[email protected]
J.P. Morgan Securities LLC

Anant Kapur
(91-22) 6157 5013
[email protected]
J.P. Morgan India Private Limited
Price Performance
16.5
15.5
$ 14.5
13.5
12.5
Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

AES share price ($)

S&P500 (rebased)

Abs
Rel

YTD
-8.8%
-17.4%

1m
-3.4%
-0.9%

3m
-9.7%
-10.0%

12m
-6.8%
-18.2%

Total return potential maintained, but shifts toward yield-driven growth:

The IPL deal will result in modest 2015 EPS accretion, according to the
company. On the other hand the higher deployment of cash into the dividend
will lower the 2017-2018 EPS growth rate to 6-8% from the prior 8-10% range
with less cash now available for share buybacks.

AES Corporation (AES;AES US)

FYE Dec
2014E
EPS ($)
Q1 (Mar)
Q2 (Jun)
Q3 (Sep)
Q4 (Dec)
FY
Bloomberg EPS FY ($)

0.24A
0.28A
0.37A
0.38
1.28
1.28

2015E

(Prev)

1.38
-

2015E

(Curr)

1.37
1.36

2016E

(Prev)

1.43
-

2016E

(Curr)

1.42
1.41

2017E

(Prev)

1.55
-

2017E

(Curr)

1.52
-

Company Data
Price ($)
Date Of Price
52-week Range ($)
Market Cap ($ mn)
Fiscal Year End
Shares O/S (mn)
Price Target ($)
Price Target End Date

13.01
15 Dec 14
15.65-12.38
9,432.25
Dec
725
15.00
31-Dec-15

Source: Company data, Bloomberg, J.P. Morgan estimates.

See page 4 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com

This document is being provided for the exclusive use of TIMOTHY KEELING at BRITISH COLUMBIA INV.
MGMT. CORP.
Christopher Turnure
(1-212) 622-5696
[email protected]

North America Equity Research

15 December 2014

Investment Thesis, Valuation and Risks

AES Corp. (Neutral; Price Target: $15.00)
Investment Thesis
We see the long-term value proposition of the company as having increased since the
implementation of new management in late 2011. We believe efforts to cut costs, delever the balance sheet and simplify the story are steps in the right direction, but we
find the stock fairly valued given ongoing earnings risks inherent in the business.
We look for a stablization in Latin American economic and hydrological conditions
to before becoming more comfortable with near-term EPS growth potential as well.
Valuation
Our $15 Dec-15 price target is based on an equal weighting of a P/E, free cash flow
yield and sum-of-the-parts valuations. Our free cash flow valuation is based on a
discounted price-to-cash flow multiple for a comparable group of the U.S. hybrid
utilities and independent power producers. Our P/E valuation relies on a discounted
multiple of 12.4x on our 2017 EPS estimate versus the hybrid peer average to
account for the much higher percentage of generation businesses and general higher
risk profile of AES. The sum-of-the-parts calculations separate generation from the
utilities and parent overhead. We incorporate the current price target published by
our J.P. Morgan Latin American utility team adjusted for AESs ownership share for
Tiete and Eletropaulo (both covered by JPM analyst Marcos Severine).
Risks to Rating and Price Target
AES is exposed to several international business risks, including FX, changes in
macro-economic conditions and local political risks. Any change to the
underlying political and/or economic environments could cause earnings and cash
flows to differ significantly from our expectations.
Regulated electric utilities and generation businesses are subject to federal and
local state regulation, including determinations of allowed revenues. Positive or
negative changes to regulatory environments may cause future earnings power to
vary from our current expectations.
Fossil fuel-based generation assets could be subject to future emissions
restrictions in any of the countries in which they operate. Any change to the
regulatory framework regarding environmental compliance could require
significant cash investments and/or could pressure future earnings.

This document is being provided for the exclusive use of TIMOTHY KEELING at BRITISH COLUMBIA INV.
MGMT. CORP.
Christopher Turnure
(1-212) 622-5696
[email protected]

North America Equity Research

15 December 2014

AES Corp.: Summary of Financials

Income Statement - Annual
Sales
COGS
D&A
Operations and maintenance
Other expenses
Total operating expenses
Other income / (expense)
EBIT
EBITDA
Interest expense
Income tax provision
Tax rate
Discontinued operations and other
Preferred dividends
Net income
Total non-recurring items
Net income (Recurring)
Diluted shares outstanding
Diluted EPS
DPS ($)
Payout ratio

FY13A

FY16E

Income Statement - Quarterly

15,891
16,052 16,188
16,330
(11,350) (11,464) (11,578) (11,694)
(1,294) (1,310) (1,326) (1,342)
(220)
(180)
(163)
(163)
0
0
0
0
(12,864) (12,953) (13,067) (13,199)

FY14E

FY15E

1Q14A 2Q14A 3Q14A 4Q14E

3,027
4,321
(1,207)
(343)
22.8%
923
1,636
1,636
748
1.29
0.16
7.3%

3,098
4,408
(1,201)
(285)
17.4%
702
1,055
1,055
717
1.28
0.20
13.6%

3,120
4,447
(1,208)
(229)
13.4%
684
1,119
1,119
696
1.37
0.40
24.9%

3,131
4,473
(1,188)
(233)
13.4%
690
1,132
1,132
680
1.42
0.44
26.4%

Sales
COGS
D&A
Operations and maintenance
Other expenses
Total operating expenses
Other income / (expense)
EBIT
EBITDA
Interest expense
Income tax provision
Tax rate
Discontinued operations and other
Preferred dividends
Net income
Total non-recurring items
Net income (Recurring)
Diluted shares outstanding
Diluted EPS
DPS ($)
Payout ratio

0.24A
-

0.28A
-

0.37A
-

0.38
-

Balance Sheet and Cash Flow Data

FY13A

FY14E

FY15E

FY16E

Ratio Analysis

FY13A

Cash and cash equivalents

Current assets
PP&E
Non-current assets
Total assets
Current liabilities
Long-term Debt
Preferred stock
Other non-current liabilities
Common equity
Total liabilities & equity

1,642
7,739
25,112
7,560
40,411
7,653
18,869
78
9,481
4,330
40,411

0
6,921
24,988
7,560
39,469
6,245
18,170
78
9,481
5,496
39,469

0
7,421
25,620
7,560
40,601
7,008
17,354
78
9,481
6,680
40,601

0
7,821
26,019
7,560
41,400
7,034
16,935
78
9,481
7,872
41,400

Sales growth
EBITDA growth
EBIT growth
Net income (recurring) growth

(7.4%)
1.0%
(8.1%)
2.0%
(8.5%)
2.3%
(35.5%) (35.5%)

0.8%
0.9%
0.7%
6.1%

0.9%
0.6%
0.3%
1.1%

Diluted EPS growth

(34.5%) (32.8%)

9.3%

3.5%

Net income
D&A
Change in working capital
Change in other assets
Net operating cash flow
Cash flow from investing activities
Net common equity issued/(repurchased)
Net debt issued/(repurchased)
Common dividends paid
Other financing activity
Cash flow from financing activities
Increase/(decrease) in cash
Cash at beginning of the period
Cash at end of the period

551
1,294
(76)
946
2,715
(1,774)
0
405
(119)
(1,422)
(1,136)
(258)
1,900
1,642

1,638
1,310
(824)
0
2,124
(1,186)
(332)
(699)
(140)
0
(1,171)
(234)
1,642
0

1,708
1,326
(500)
0
2,534
(1,958)
(250)
(816)
(273)
0
(1,339)
(763)
0
0

1,735
1,342
(400)
0
2,677
(1,741)
(250)
(419)
(294)
0
(963)
(26)
0
(0)

FY14E FY15E FY16E

Gross margin
Operating margin

28.6%
19.0%

28.6%
19.3%

28.5%
19.3%

28.4%
19.2%

Debt / Capital (book)

Times interest earned

81.3%
3.6

76.8%
3.7

72.2%
3.7

68.3%
3.8

ROE
Return on capital employed (ROCE)

36.8%
10.2%

21.5%
10.9%

18.4%
11.3%

15.6%
11.1%

Source: Company reports and J.P. Morgan estimates.

Note: $ in millions (except per-share data).Fiscal year ends Dec

This document is being provided for the exclusive use of TIMOTHY KEELING at BRITISH COLUMBIA INV.
MGMT. CORP.
Christopher Turnure
(1-212) 622-5696
[email protected]

North America Equity Research

15 December 2014

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analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
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intervention.

Important Disclosures

Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for AES Corp.
within the past 12 months.

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: AES Corp..

Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as investment
banking clients: AES Corp..

Client/Non-Investment Banking, Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following
company(ies) as clients, and the services provided were non-investment-banking, securities-related: AES Corp..

Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients,
and the services provided were non-securities-related: AES Corp..

Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation from investment banking AES
Corp..

Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from AES Corp..

Non-Investment Banking Compensation: J.P. Morgan has received compensation in the past 12 months for products or services
other than investment banking from AES Corp..
Company-Specific Disclosures: Important disclosures, including price charts, are available for compendium reports and all J.P. Morgan
covered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406, or e-mailing
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screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-0406 or e-mail
[email protected].
AES Corp. (AES, AES US) Price Chart
30
N $15
24
N $16
18

N $16

Date

N $17

Price($)
12

0
Feb
11

Nov
11

Aug
12

May
13

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
Initiated coverage Feb 24, 2014.

Feb
14

Nov
14

Rating Share Price Price Target

($)
($)

24-Feb-14 N

14.63

16.00

14-Jul-14

15.19

17.00

08-Aug-14 N

14.75

16.00

17-Oct-14

12.98

15.00

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Christopher Turnure
(1-212) 622-5696
[email protected]

North America Equity Research

15 December 2014

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
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in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Turnure, Christopher: AES Corp. (AES), Allete Inc. (ALE), American Electric Power (AEP), Atmos Energy
(ATO), Black Hills Corp. (BKH), Dominion Resources (D), Duke Energy Corp. (DUK), Entergy Corp. (ETR), Exelon Corp. (EXC),
Great Plains Energy (GXP), Hawaiian Electric Industries Inc. (HE), ITC Holdings (ITC), NextEra Energy Inc. (NEE), PG&E Corp.
(PCG), Pepco Holdings (POM), Piedmont Natural Gas Co. (PNY), Portland General Electric Co. (POR), Sempra Energy (SRE), The
Laclede Group, Inc. (LG), UIL Holdings Corporation (UIL), Westar Energy Inc (WR), Xcel Energy (XEL)
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2014
J.P. Morgan Global Equity Research Coverage
IB clients*
JPMS Equity Research Coverage
IB clients*

Overweight
(buy)
46%
57%
46%
76%

Neutral
(hold)
42%
49%
48%
67%

Underweight
(sell)
12%
34%
7%
51%

*Percentage of investment banking clients in each rating category.

For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table
above.

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North America Equity Research

15 December 2014

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6

This document is being provided for the exclusive use of TIMOTHY KEELING at BRITISH COLUMBIA INV.
MGMT. CORP.
Christopher Turnure
(1-212) 622-5696
[email protected]

North America Equity Research

15 December 2014

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