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AES’s Q2 FY2025 saw a GAAP miss, but strong renewables growth and a robust PPA backlog underpin solid underlying performance and reaffirmed guidance.

# AES Q2 FY2025: Renewables Momentum Offsets GAAP Miss; Underlying Growth Remains Robust

---

## Executive Summary

- **AES reported Q2 FY2025 revenue of $2,855M, down 3% YoY, and a GAAP EPS loss of $(0.15), missing consensus due to one-off lease and tax impacts.** However, **non-GAAP Adjusted EPS surged 34% to $0.51** and Adjusted EBITDA rose 3.5% to $681M, reflecting strong operational execution, particularly in the renewables segment.
- **Margins compressed** as operating income fell to $453M (15.9% margin vs. 18.8% YoY), driven by non-recurring losses and higher tax expense. Cost discipline was evident, with G&A expenses trimmed by $17M and capital expenditures reduced by $353M YoY.
- **Management struck a bullish tone, emphasizing robust renewables growth (Adjusted EBITDA +56% YoY), a resilient 12 GW PPA backlog, and ongoing cost control.** Full-year guidance for Adjusted EBITDA ($2.65B–$2.85B) and Adjusted EPS ($2.10–$2.26) was reaffirmed, underpinned by strong data center PPA momentum and international expansion.
- **Risks include regulatory headwinds, macro volatility, and execution on cost savings,** but these are counterbalanced by opportunities in high-margin data center PPAs, international growth, and innovative solar technology (Maximo).
- **Catalyst watch:** Market may react with near-term caution on GAAP miss, but underlying renewables strength and backlog protection could drive a more constructive medium-term re-rating, especially as new PPAs ramp and cost savings materialize.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | $2,855M  | $2,900M   | -$45M    | -3%        |
| GAAP EPS       | $(0.15)  | $0.20     | -$0.35   | -138%      |
| Adjusted EPS   | $0.51    | $0.48     | +$0.03   | +34%       |
| Adjusted EBITDA| $681M    | $660M     | +$21M    | +3.5%      |
| Operating Margin| 15.9%   | —         | —        | -290 bps   |
| CapEx          | $1,332M  | —         | —        | -21%       |
| Renewables Adj. EBITDA | — | —        | —        | +56%       |

---

## Earnings Quality

- **Revenue mix continues to shift toward renewables,** with the segment delivering a 56% YoY increase in Adjusted EBITDA, offsetting declines in legacy businesses.
- **Margin compression** was evident, as operating margin fell to 15.9% (from 18.8% YoY), primarily due to non-recurring day-one lease losses and higher tax expense.
- **Cost structure improved:** G&A expenses were reduced by $17M YoY as part of a $150M cost savings initiative, and capital expenditures were tightly managed, down 21% YoY.
- **Profitability divergence:** While GAAP results were pressured by one-offs, underlying non-GAAP metrics (Adjusted EPS, Adjusted EBITDA) showed solid growth, highlighting the quality of core operations.

---

## Management Commentary & Guidance

- **Management was bullish on the call,** highlighting strong renewables execution, robust data center PPA growth, and a well-protected 12 GW PPA backlog.
- **Guidance reaffirmed:** Full-year Adjusted EBITDA of $2.65B–$2.85B and Adjusted EPS of $2.10–$2.26, supported by continued renewables momentum and disciplined cost control.
- **Assumptions:** Guidance is based on stable market demand, continued supply chain resilience, and successful execution of cost savings and new technology rollouts (e.g., Maximo AI-driven solar).

---

## Key Risks

- **Cost inflation and margin pressures** from non-recurring lease losses and higher tax expense.
- **Regulatory and macro risks,** including FX volatility, interest rate increases, and evolving policy environments.
- **Execution risk** on cost savings and international expansion.

---

## Expected Market Reaction

- **Mixed near-term sentiment** is likely, as the GAAP miss and margin compression may prompt caution.
- **Medium-term optimism** could build as investors focus on the strong renewables performance, robust backlog, and visible cost savings, with analysts likely to highlight the underlying growth trajectory and backlog protection.

---

## Final Takeaway

- **AES delivered a fundamentally strong quarter beneath the GAAP headline miss,** with renewables and non-GAAP metrics pointing to robust underlying growth and margin improvement potential.
- **The market may be underpricing the strength of AES’s renewables business and the stability of its 12 GW PPA backlog,** while overemphasizing short-term GAAP challenges.
- **Upcoming catalysts:** Ramp-up of new high-margin data center PPAs (notably the 650 MW Meta deal) and further updates on Maximo’s AI-driven solar technology rollout.

---

AES: Renewables Strength Drives Underlying Growth

AES’s strategic focus on renewables and accelerated asset sales is driving stable margins, improved liquidity, and positions the company for resilient near-term growth despite infrastructure headwinds.

# AES Corporation: Strategic Realignment and Renewables Momentum Set the Stage for a Resilient Quarter

## Executive Summary: Bullish Outlook Anchored by Renewables and Strategic Asset Sales

We hold a **Bullish** view on The AES Corporation (NYSE: AES) for the upcoming quarter, driven by robust execution in Renewables and Utilities, and accelerated progress on asset sales. **Q1 2025 revenue of $2.93 billion** and a **15.5% YoY increase in Utilities revenue** signal that core segments are offsetting Energy Infrastructure softness. Management’s reaffirmed full-year guidance and early achievement of asset sale milestones (over **$450 million** realized in Q1) provide further confidence in near-term stability. The market may be underestimating the positive impact of AES’s pivot toward “fewer, larger, financially attractive projects,” which is already improving credit metrics and could drive a faster-than-expected EPS recovery.

## Recent Trends Signal What’s Next: Segment Divergence and Margin Stability

AES’s last two quarters reveal a clear divergence: Renewables and Utilities are delivering growth, while Energy Infrastructure remains a drag. **Renewables revenue grew 3.6% YoY** and **Utilities surged 15.5% YoY** in Q1, while Energy Infrastructure declined **18% YoY**. Margins have remained stable, with **Q1 operating margin at 18.2%** and **EPS at $0.50**. The following table summarizes the last four quarters:

### Quarterly Financial Trends

| Quarter   | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|-----------|--------------|------------------|---------------------|---------------|---------|
| Q2 2024   | 2.88         | 32.1             | 17.8                | 7.2           | 0.47    |
| Q3 2024   | 2.91         | 32.5             | 18.0                | 7.5           | 0.49    |
| Q4 2024   | 2.95         | 32.8             | 18.1                | 7.6           | 0.51    |
| Q1 2025   | 2.93         | 33.0             | 18.2                | 7.7           | 0.50    |

**Trend:** Revenue and margins are stable to slightly improving, with Renewables and Utilities offsetting Infrastructure headwinds.

## Management’s Forward Tone and Positioning: Cautious Optimism with Execution Focus

Management’s recent commentary reflects a **cautiously optimistic** stance, emphasizing execution and risk management. In the Q1 2025 call, CEO Andrés Gluski stated, **“We are fully on track to deliver on our 2025 targets, with robust growth in our core businesses.”** This is a shift from the more defensive tone in late 2024, when management highlighted macro headwinds. The current messaging underscores confidence in backlog conversion and asset sale progress, with CFO Steve Coughlin noting, **“Our liquidity position is strong, and we are ahead of schedule on our asset sale program.”** The absence of explicit next-quarter guidance is offset by a reaffirmed full-year Adjusted EBITDA target of **$2.65–$2.85 billion**.

## KPI Trends & Upcoming Quarter Drivers: Backlog, Project Completions, and Liquidity

Three KPIs will be pivotal for next quarter’s results:

- **PPA Backlog:** **11.7 GW** (up 8% YoY), supporting future revenue visibility.
- **New Solar/Storage PPAs:** **443 MW** signed in Q1, indicating continued demand.
- **Project Completions:** **643 MW** delivered in Q1, up from 510 MW in Q4 2024.

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| PPA Backlog (GW)           | 10.8    | 11.2    | 11.7    | +8%        | +4%        |
| New PPAs Signed (MW)       | 390     | 410     | 443     | +14%       | +8%        |
| Projects Completed (MW)    | 480     | 510     | 643     | +34%       | +26%       |
| Liquidity ($B)             | 1.45    | 1.62    | 1.68    | +16%       | +4%        |

**Implication:** Sustained backlog and project completions will likely support revenue and margin stability, while improved liquidity enhances financial flexibility.

## Missed by the Street: Strategic Project Realignment and Accelerated Asset Sales

A key overlooked signal is AES’s **strategic shift to “fewer, larger, financially attractive projects”** (Q1 2025 10-Q), which is already yielding improved credit metrics and operational focus. Additionally, the **early achievement of $450 million in asset sales** (Q1 2025) puts AES ahead of its $3.5 billion 2025 target, potentially enabling further deleveraging and capital redeployment. These factors are not fully reflected in consensus estimates, which remain fixated on Energy Infrastructure softness.

## Scenarios for the Upcoming Quarter: Bull, Base, and Bear Cases

### Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                      |
|----------|--------------|---------|----------------------|------------------------------------------------------|
| Bull     | 2.99         | 0.53    | 19.5                 | Renewables/utilities outpace, cost savings realized   |
| Base     | 2.93         | 0.50    | 18.2                 | Steady project completions, stable backlog            |
| Bear     | 2.87         | 0.47    | 17.5                 | Infrastructure weakness, FX/tariff headwinds persist  |

**Most Likely:** The **Base case** is most probable, given stable project execution, strong backlog, and management’s reaffirmed guidance. However, upside risk exists if renewables momentum accelerates or further asset sales close ahead of schedule.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter   | Revenue ($B) | EPS ($) | Operating Margin (%) |
|-----------|--------------|---------|----------------------|
| Q2 2024   | 2.88         | 0.47    | 17.8                 |
| Q3 2024   | 2.91         | 0.49    | 18.0                 |
| Q4 2024   | 2.95         | 0.51    | 18.1                 |
| Q1 2025   | 2.93         | 0.50    | 18.2                 |

### KPI Movement (YoY and QoQ)

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| PPA Backlog (GW)           | 10.8    | 11.2    | 11.7    | +8%        | +4%        |
| New PPAs Signed (MW)       | 390     | 410     | 443     | +14%       | +8%        |
| Projects Completed (MW)    | 480     | 510     | 643     | +34%       | +26%       |

### Key Management Quotes

1. **“We are fully on track to deliver on our 2025 targets, with robust growth in our core businesses.”**  
   *Source: Q1 2025 Earnings Call*  
   *Interpretation: Confirms confidence in execution and growth visibility.*

2. **“Our liquidity position is strong, and we are ahead of schedule on our asset sale program.”**  
   *Source: Q1 2025 Earnings Call*  
   *Interpretation: Enhanced financial flexibility and de-risking balance sheet.*

3. **“We continue to see strong demand for renewables, as evidenced by our growing PPA backlog.”**  
   *Source: Q1 2025 Earnings Call*  
   *Interpretation: Underpins revenue visibility for upcoming quarters.*

4. **“We are focusing on fewer, larger, and more financially attractive projects.”**  
   *Source: Q1 2025 10-Q*  
   *Interpretation: Strategic realignment to improve returns and operational focus.*

5. **“Cost savings initiatives are on track to deliver up to $150 million in 2025.”**  
   *Source: Q1 2025 Earnings Call*  
   *Interpretation: Margin support and potential EPS upside.*

6. **“We are monitoring FX and tariff risks closely and have hedging strategies in place.”**  
   *Source: Q1 2025 Earnings Call*  
   *Interpretation: Acknowledges external risks but signals proactive mitigation.*

7. **“Dividend remains a priority, supported by stable cash flows from Utilities.”**  
   *Source: Q1 2025 Earnings Call*  
   *Interpretation: Commitment to shareholder returns and cash flow stability.*

---

**Conclusion:** AES Corporation is positioned for a resilient quarter, with upside potential from renewables and asset sales, and a strategic focus that is not yet fully appreciated by the market. The base case scenario is most likely, but positive surprises are possible if execution remains strong.

AES: Renewables Growth and Asset Sales Drive Resilience