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AES Corp. to Sell Chinese Assets

Zacks Equity Research

The AES Corporation (AES) announced that it has signed two agreements to sell a substantial portion of its businesses in China for $134 million in total aggregate proceeds. Subject to local customary approvals, the transactions are expected to close in the second half of 2012.

The first agreement includes the sale of the company’s 25% equity interest in the 2,100 MW coal-fired Yangcheng plant and its 49% equity interest in the 248 MW China Wind venture to Sembcorp Utilities for a total of $86 million.

The second agreement includes the sale of the company’s 49% equity interest in Jianghe Rural Electrification Development Company Limited (“JHRH”) to its JV partner, China Three Gorges New Energy Corporation, for $48 million. JHRH includes seven small hydroelectric plants, one wind farm and one co-generation plant with a total gross capacity of 379 MW.

The total gross capacity of the plants to be sold is 2,727 MW, or 717 MW on an ownership-adjusted basis. Upon the close of the asset sales, AES' generation footprint in China would consist of one hydro and one gas-fired plant, which together have a total gross capacity of 75 MW, or 31 MW on an ownership-adjusted basis.

The company added that the use of proceeds from asset sales would be evaluated as per AES' capital allocation policy to maximize total shareholder returns. The proceeds would be used to pay down debt, invest in new businesses and/or repurchase shares.

The sale of these businesses is in line with the company’s strategy of exiting particular markets where it does not have a competitive advantage. The company believes narrowing its geographic focus and investing in core markets would better position it for long-term earnings growth. Going by this strategy, since September 2011, the company has announced eight asset sale transactions totaling $890 million. Six of those transactions, totaling $756 million, have already closed.

The AES Corporation is a global power company with generation and distribution businesses. Through a diverse portfolio of thermal and renewable fuel sources, the company provides affordable and sustainable energy to 27 countries. AES’s business exposure around the globe insulates it 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. Additionally, the company has a successful track record in the U.S. utility sector with its investment in Indianapolis Power & Light Company.

However, AES Corp’s focus on long-term supply contracts exposes the company to commodity price risk and its significant presence around the globe makes it vulnerable to foreign currency volatility. Taking these factors into account the company presently retains a short-term Zacks #3 Rank (Hold). Over the longer run we maintain our long-term Neutral recommendation on the stock. This is in line with its peers like Duke Energy Corporation (DUK) and Consolidated Edison Inc. (ED).

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