Rocked by investor concerns that have led to a liquidity crunch — and a drop in share value of almost 88% in a year — AES Corp. has approved a plan to massively restructure its operations, including a 41% cut in capital expenditures, a move to distance its exposure in Latin America, and withdrawing from electricity trading. AES’s share price plunged from $10/share on Feb. 13 to just above $4 on Friday in reaction to its Venezuela exposure, which forced CEO Dennis W. Bakke to sell almost seven million of his 32 million shares of stock on a margin call to prop up a $36 million personal loan. Two other officers also sold 400,000 shares because of margin calls.

The AES board of directors last week approved the company’s restructuring plan, which also includes its departure from energy trading on the open market. Because of the high risks, AES said it will either shift those businesses into long-term contracts or sell them. AES produces electricity in 32 countries, and will withdraw from electricity trading in spot markets including New York, California and the UK.

Included in the restructuring are plans to sell Cilcorp, an integrated utility in Illinois, a minority stake in the Indiana-based utility Ipalco, a Dominican Republic power plant and “certain other AES plants,” the company said Tuesday. It also will delay construction of three U.S. power plants and two Latin American plants, but Bakke did not provide details on the locations.

Overall, the power company plans to sell $1 billion to $1.5 billion in assets, including assets in Venezuela, Argentina and Colombia to reduce its exposure in the volatile region. It is not clear how much the company will be able to realize on its South American unit sales because of the economic instability in the region. Excluding the asset sales, the capital expenditure cuts will leave AES with $374 million in cash and credit by the end of 2002, said CFO Barry Sharp.

AES now has about $265 million in cash and credit, Sharp said. Along with a capital expenditure reduction of almost $500 million, Bakke said the asset sales are key to the company’s future growth. “We have to put ourselves in the position that we’ll have no need to access the capital markets,” he said.

“Our clear priority is liquidity,” said Bakke during a conference call. Because of the fall in the company’s shares and bonds, he said it has “led us not to assume we have access to capital markets…at least anytime soon.”

Of his stock sales, Bakke said, “It’s just an unfortunate situation I put myself into,” noting that of the proceeds “a significant portion went to charity.” Sharp and Mark Fitzpatrick, an executive vice president, also sold just under 400,000 of their shares in the Arlington, VA-based company on Feb. 15,

Distancing itself from Enron Corp., Kenneth Woodcock, AES’ senior vice president, said, “One of the differences from Enron is we are a hard-asset company, with very solid cash flows. We’ve had this issue of perception that cash might be kind of short.”

Indeed, the restructuring is aimed at boosting liquidity and restoring sagging investor confidence in the power company after its stock and bond prices fell. Bond yields have widened, and investors are concerned about a decline in Venezuela’s bolivar currency. Argentina also recently allowed the peso to float and it has dropped to about half its former value.

Latin America is AES’ biggest concern in terms of assets at the moment — they accounted for about 51% of its pretax earnings in 2001 — and it will sell assets or minority stakes in its holdings there. Capital expenditures within the holding company will be cut to $710 billion from $1.2 billion by deferring two construction projects in Latin America, three of six U.S. projects, and some in Europe and Asia. Whether AES takes the option to cancel or sell all or only some of them is still to be decided.

“Too much of our portfolio is affected by Latin American currency risks, so we’re going to do something about that,” said AES Chairman Roger Sant. In the fourth quarter of 2001, AES’ profit fell 80% because of Latin American losses and the devaluation of the Argentine peso (see Power Market Today, Feb. 11).

Citing AES’ Venezuelan exposure, high leverage and liquidity problems, Fitch Ratings on Friday downgraded AES’ senior unsecured debt to BB from BB+, affecting about $7.3 billion in debt (see Power Market Today, Feb. 19). Standard & Poor’s Ratings Group also has placed several issues of AES debt on CreditWatch with negative implications, and is expected to downgrade it even more this week. S&P pointed to AES’ “strained liquidity” in Venezuela, and said the economic climate in Latin America exposes the company to the risk of more pressure on distributions from its operations there.

On Wednesday, Moody’s Investors Service placed the long-term debt ratings of AES on review for possible downgrade, reflecting the agency’s “concerns about the adequacy of cash flow relative to the large debt load of the company.” Moody’s said its review will focus on the company’s ability to repatriate cash from its international investments and its sensitivity to exchange rate fluctuations; the company’s “effective leverage”; the ability to reduce capital expenditures; the impact of changes in the business mix on the risk profile; and the impact of limited access to the capital markets in the near term as well as the longer term ability of AES to access funds.

Ronald Barone, energy analyst with UBS Warburg, lowered his AES rating to “Hold” from “Buy” last week based on the company’s liquidity position and “growing uncertainty surrounding its operations in South America.”

Barone said, “We believe the low power prices in the U.S. and the UK combined with the company’s large exposure to South America give rise to a potential shortfall in cash flows from other areas of this portfolio.” He said it would be “difficult for AES to command a fair value for any assets it puts up for sale in the near term. The markets in which AES operates are depressed and there are a number of other companies that are already looking to dispose of similar assets to shore up their balance sheet…the urgency in which AES will likely approach those sales will put them at a significant disadvantage at the negotiating table.”

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