Environment

AES stock on slow return: But share price of IPALCO's parent company still off 75 percent from electrifying peak

July 11, 2005

A volatile utility stock that shorted retirement savings and generated lawsuits against former IPALCO Enterprises insiders is lighting up on Wall Street.

AES Corp. shares have risen 60 percent over the last year. Analysts point to debt reduction and moves to rein in what some viewed as an absurdly decentralized management structure at the Arlington, Va.-based energy giant with operations in 27 countries.

Even with the stock and analyst projections looking brighter, AES shares remain a pariah to many local investors and to IPALCO employees who hold them in their 401(k) accounts.

AES used its stock as currency to purchase the Indianapolis Power & Light Co. parent in 2001. IPALCO investors accustomed to slow-butsteady returns tendered their shares for those in AES. When the merger closed, AES shares were worth $49.60.

But just over a year later, AES stock fell like Lucifer-out-of-heaven to $1.56 a share.

Former IPALCO worker Marjorie Young, whose $200,000 in retirement savings was entirely in IPALCO-turned-AES shares, saw her savings virtually evaporate. One of her retired counterparts tried to make up for his smashed nest egg by mowing lawns for a living.

Lately, those AES shares have been trading around $16. That's a long way to go from the 2001 merger price and from a ceiling around $70 in 2000. And it's little comfort to investors who ran screaming from AES.

"A lot of people sold once the stock started plummeting. And those people aren't going to get their money back no matter how much it goes up," said John Price, an Indianapolis attorney representing Young and three other former workers who filed suit against IPALCO and insiders in 2002.

Both sides have sought a summary judgment, or a court decision without a trial, of the suit that seeks $100 million on behalf of IPALCO's thrift plan participants. U.S. District Court Judge David Hamilton is expected to make a ruling later this year, Price said.

Market watchers have made their own rulings regarding AES.

Last month, Fitch Ratings upgraded its senior secured rating to BB+ from BB, related to a $450 million credit line. Fitch said AES has made "significant progress" in retiring debt and improving liquidity.

The ratio of debt-to-earnings before interest, taxes and amortization of 5.42 percent at the end of last year contrasts with 7.46 percent at year-end 2000, according to Bloomberg data.

But the utility's debt level is still high industry-wide. Using different markers, data firm Capital IQ calculated AES' debt/equity ratio this spring at nearly 10.5 percent, based on revenue for the 12 months ended March 31 of $9.9 billion and $18.4 billion of debt.

In contrast, Charlotte, N.C.-based Duke Energy Corp. has a debt/equity ratio of 1.1 percent. Merrillville-based utility NiSource is at 1.24 percent and PSI parent Cinergy Corp., based in Cincinnati, is at 1.09 percent.

In his latest report on AES, Caylon Securities analyst Craig Shere forecast 16-percent average annual earnings-per-share growth through 2008. Shere sees a number of positive trends, including the refinancing of Brazilian debt that could free up $50 million to $100 million in annual cash flow.

Shere also sees progress recasting the 38,000-employee company's management structure. Its decentralized system gave field staff authority over acquisition decisions that helped the company's "phenomenal" growth in previous years. Shere said that structure later became a disadvantage by allowing for uncontrolled growth. There was no central currency risk management control, for example. He said a new, centralized structure should help the company better manage risk.

While AES' turnaround "will continue unfolding positively," according to Smith Barney analyst Brian Chin, he earlier this year downgraded his outlook "because the stock price assumes a benign interest rate and regulatory environment."

Last month, AES boasted that it had amended its $650 million in credit lines to lower its borrowing costs, which "demonstrates that the financial markets continue to recognize AES' improving credit quality," President and Chief Financial Officer Barry Sharp said in a statement.

It's unclear whether AES' rising stock can indirectly benefit subsidiary IPALCO. The city's electric utility has its own credit lines for making capital improvements such as pollution-control upgrades. IPL plans $111 million in capital projects this year.

AES and IPALCO officials declined comment.

AES shares are a part of a long-term compensation plan for non-union IPALCO employees, along with cash and options to buy shares of AES common stock.

It was stock cashed in by insiders that helped invite the lawsuits against IPALCO officers and directors three years ago.

Unknown to other shareholders at the time, officers and directors allegedly sold IPALCO shares worth $72 million in the months before the AES merger was completed in 2001.

The mass dumping brought accusations by thrift plan members that insiders knew AES stock was too volatile to hold in their own portfolios yet they publicly indicated that AES shares had greater earnings potential in the new world of deregulated, global energy companies.

Insiders responded that they cashed in IPALCO shares for reasons ranging from anticipated job loss after the merger to a way to boost their severance pay under terms of a 1993 change-in-control agreement.

Gov. Mitch Daniels, then an IPALCO director who had just been named White House budget director by President Bush, said federal ethics officials advised he sell his $1.45 million in shares as a way to avoid potential conflicts of interest.

Former IPALCO Senior Vice President Ralph Canter said at the time that he sold the shares in part because he was uncomfortable with sharp price fluctuations of AES shares.
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