The AES 公司

AES reported earnings per share of $0.60, compared with a $0.15 loss in the same year-ago quarter. Adjusted EBITDA increased to $898 million from $681 million.

Why it matters: Earnings benefited from favorable energy derivative contracts, increased contributions mainly from its utilities in Ohio and Indiana, higher energy and capacity prices, and lower income taxes.

The bottom line: We are maintaining our $15 per share fair value estimate. Our no moat and High Uncertainty Rating for AES remain unchanged. Our fair value estimate is a function of the proposed take-private transaction.

Long view: In March, AES agreed to be acquired by a consortium including Global Infrastructure Partners and EQT for $33.4 billion, including debt. The transaction is expected to close by early next year. The transaction will require approvals by numerous local, state and federal authorities, including state regulators and FERC, which remain on track. Shareholders approved the transaction in June. While the deal faces regulatory approval risk, we ultimately think all stakeholders will view ownership in the hands of the acquiring consortium to be in everyone's best interests.

Our fair value estimate is $15 per share.

Our valuation is driven by the terms of the proposed acquisition by a consortium including Global Infrastructure Partners and EQT, which is an all-cash offer of $15 per share.

The transaction will require approvals by numerous local, state, and federal authorities, including Ohio and Indiana regulators and the Federal Energy Regulatory Commission.

While regulatory requirements increase the risk that the deal will close, we ultimately think all stakeholders will benefit from the company being owned by the acquiring consortium. This leads us to assign a 100% probability that the deal closes.

Our stand-alone fair value estimate is $11 per share. We expect 6% average annual earnings per share growth during the next few years, below management's 7%-9% target.

Our estimated costs of debt and equity result in a 7.7% weighted average cost of capital.

We do not think AES has an economic moat.

We believe AES has no low-cost advantage and thus no economic moat in its power generation businesses. Although most of AES' utilities and power plants have fuel pass-throughs and long-term contracts, a significant portion of power is sold in emerging markets with counterparty risk.

AES' regulated utilities in the US own difficult-to-replicate networks of power generation, transmission, and distribution assets and provide an essential energy source: electricity. In exchange for a mostly monopolistic position, regulators set the utilities' rates. For the most part, regulators have recognized the need for shareholders to earn an adequate return on investment.

In exchange for earning a fair return for its shareholders, AES' utilities are expected to provide safe and reliable service at the lowest possible rates. This implicit contract between regulators and the utilities should, in the long run, allow the utilities to earn their cost of capital. The result is that we assign these businesses a narrow economic moat. However, AES' domestic utilities earn less than half of consolidated earnings, not enough to provide the company with an economic moat.

AES has utility and generation assets in many countries. This diversification helps reduce country- and region-specific risk.

AES has increased its focus on US renewable energy with long-term power purchase agreement and its two domestic utilities. These narrow-moat businesses should provide more stable earnings and cash flow.

AES' focus on solar and wind projects should be a tailwind for energy growth over the next decade.

AES faces above-average political risk with a significant portion of earnings from businesses or projects in developing countries.

Changes in currency could have an impact on AES' dollar-denominated earnings and cash flow because of international exposure.

Large development projects in foreign countries have higher execution risk.