AES Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 25, 2022

Key Takeaways

  • Confirmed accelerated intention to exit coal by end of 2025 while reaffirming a 7%–9% annual growth target in earnings and cash flow through 2025.
  • Reported 2021 adjusted EPS of $1.52 and parent free cash flow of $839 million, exceeding guidance.
  • Secured 5 gigawatts of new renewable PPAs in 2021—including 24/7 deals with Google and Microsoft—above the 3–4 GW target.
  • Increased ownership of AES Andes from 67% to 99%, a transaction that is immediately earnings and cash flow accretive.
  • Noted that Fluence completed its IPO and now has 4.2 GW deployed with a $1.9 billion backlog, though it faces short-term supply chain challenges.
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Earnings Conference Call
AES Q4 2021
00:00 / 00:00

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Operator

Hello, and welcome to today's AES Corporation Q4 2021 Financial Review. My name is Bailey, and I will be the moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to Ahmed Pasha, Global Treasurer and Vice President of Investor Relations. Ahmed, please go ahead.

Ahmed Pasha
Ahmed Pasha
Global Treasurer and VP of Investor Relations at The AES Corporation

Thank you, operator. Good morning, and welcome to our Fourth Quarter and Full Year 2021 Financial Review Call. Our press release, presentation, and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements during the call. There are many factors that may cause future results to differ materially from these statements, which are discussed in our most recent 10-K and 10-Q filed with the SEC. Reconciliations between GAAP and non-GAAP financial measures can be found on our website along with the presentation. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer, Steve Coughlin, our Chief Financial Officer, and other senior members of our management team. With that, I will turn the call over to Andrés. Andrés?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Good morning, everyone, and thank you for joining our Fourth Quarter and Full Year 2021 Financial Review Call. Today, I will cover our full year results and discuss our strategy and areas of focus for this year. Before discussing our 2021 results and future plans, I want to state that we do not see any significant impact on our portfolio from the outbreak of hostilities in the Ukraine. Nonetheless, our thoughts and prayers go out to the Ukrainian people and government, and we hope for a speedy return to peace. Now turning our focus back to our business. Today marks an important and exciting milestone for AES with the announcement of our intention to fully exit coal by year-end 2025. This accelerated goal is a result of our success in growing our renewables portfolio, and our backlog gives us the confidence to take this step.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

As a leader in the global energy transition, we are committed to the goals of the Paris Agreement and achieving a net zero economy. We will work with our stakeholders to ensure a smooth transition while meeting our regulatory obligations. Our exit from coal will be modestly dilutive, but we feel comfortable with our growth trajectory, and accordingly, we are reaffirming our annualized growth target of 7%-9% in earnings and cash flow through 2025. Now moving on to our 2021 results and accomplishments. First, I am pleased to report our financial results, including adjusted earnings per share of $1.52, which was in line with our expectations. Our 2021 parent free cash flow of $839 million exceeded our expected range of $775 million-$825 million.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Second, we signed contracts for 5 GW of new renewable projects, significantly above our target of 3 GW-4 GWthat we set last year. In fact, according to Bloomberg New Energy Finance, AES signed more renewable deals with corporate customers in 2021 than anyone else in the world. Included in these deals were two groundbreaking arrangements to provide renewable energy on an hour-by-hour basis, 24 hours a day, seven days a week, signed with Google and Microsoft. Third, Fluence successfully completed their IPO in November and have no foreseeable need for external funding to achieve their strategic and financial objectives. Furthermore, Fluence has made progress towards mitigating the supply chain challenges they have faced, which I shall discuss shortly. Finally, safety is our most important value.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

I am very proud to report that our safety performance in 2021 was the best in our 40-year history, with no major incidents recorded among roughly 25,000 AES people, contractors, and construction workers. Today, I will be discussing two things. First, executing today, and second, investing for the future. Beginning with executing today on slide four. Even as we are transitioning to a carbon-free future, we are laser focused on delivering on our commitments. Our business model has proven itself to be resilient and enables us to deliver predictable results. For example, 85% of our adjusted PTC is from long-term contracted generation and utilities, and 88% is in U.S. dollars, with the remaining 12% split between euros and various Latin American currencies. Similarly, we are largely insulated from macroeconomic headwinds such as rising inflation and interest rates.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

As shown on slide five, 83% of our revenue is from businesses that have indexation clauses or are hedged to limit the impact from inflation. At the same time, almost 90% of our interest rate exposure is fixed or hedged, protecting us from the impact of rising interest rates. Next, turning to slide six. In January, we completed a tender to acquire the publicly traded shares of AES Andes, bringing our ownership from 67% to 99% today. This was motivated by our conviction in the underlying strength of the business, which is highly contracted, predominantly in U.S. dollars, and transitioning to low carbon generation. This transaction is immediately earnings and cash flow accretive. Moving to slide seven. We now have a backlog of 9.2 GW, including the 5 GW we signed in 2021.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

About 3/4 of the 5 GW is in the U.S., with the vast majority signed with C&I customers and to grow the rate base at our AES Indiana utility. We have secured supply arrangements for the bulk of our current backlog. In 2021, we successfully added 2.1 GW to our portfolio without any material delays or cost overrun. This execution demonstrates the robust nature of our supply chain and the strength of our relationships with our suppliers. For example, we secured Samsung battery for many of our new energy storage facilities to alleviate some of the supply chain challenges faced by Fluence. Being able to switch to different battery suppliers shows the inherent flexibility of their Gen 6 product.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

As we look towards our 2.3 GW of new projects coming online in 2022, two-thirds of which is in the U.S., we do not expect any significant delays or supply chain disruptions. We remain confident in our ability to complete our projects under construction on time and on budget. Moving to our second theme, investing for the future on slide eight. Our actions today ensure that we will be able to take full advantage of the unprecedented transformation of our sector. One clear example is the 5 GW of new PPAs that we signed last year, an increase of 65% from 2020. For full year 2022, we expect to sign 4.5 GW-5.5 GW of new renewables under long-term contracts.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

We are seeing strong demand for renewables, and so far this year, we have already signed more than 600 MW of new contracts. We expect our portfolio of operating renewable assets to more than double from approximately 13 GW to 26 GW by 2026. Despite any current headwinds for our sector, such as delays in legislation and supply chain issues, we see very strong demand for low carbon energy, especially for tailored products, such as our 24/7 renewable offering. That is why we have been investing in growing our pipeline of future projects to ensure that we're able to meet our customers' growing demand for AES services. As you can see on slide nine, we now have a development pipeline of 59 GW, which we believe is the second-largest among U.S. renewable developers. Our pipeline includes almost 10 GW in the U.S. that are ready to bid.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

This robust pipeline provides us with the projects we need to deliver on our backlog and to continue to build on our competitive position in the U.S. As a result, we're accelerating our goal of increasing the proportion of earnings coming from our U.S. businesses to 50% by two years from 2025 to 2023. We are also investing for the future by growing the rate base at our U.S. utilities by 9% annually while delivering safe, reliable, and affordable services to our customers. As you can see on slide 10, AES Indiana is executing on the approved plan to retire two coal units, which we will replace with nearly 500 MW of new renewable generation. We have already started our next integrated resource plan process, which could include additional retirement or fuel conversion for the remaining 1 GW of coal generation.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

At AES Ohio, we're executing on our smart grid and transmission investment programs approved in 2021. AES Ohio is also in the midst of a distribution rate case and recently completed a hearing. AES Ohio's base distribution rates have been the lowest in the state for the past five years. In fact, as of the end of 2021, AES Ohio's rates were 16% lower than the next lowest utility in the state, and even with the requested rate increase, would remain the lowest. Turning to slide 11. Another way we're investing for the future is by developing and incubating new products and businesses platforms through AES Next. Our investment in AES Next help our core businesses be more innovative and competitive and drive value for our customers and shareholders. Turning to slide 12.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

The most mature initiative under AES Next today is Fluence, the leading energy storage technology company. In 2021, Fluence completed their IPO with $1 billion in capital raised to invest in developing their products and supply chain, as well as their digital platform. As of December 31, Fluence had 4.2 GW of energy storage products deployed and contracted and a signed backlog of $1.9 billion. Additionally, Fluence's digital platform, Fluence IQ, now has 6 GW contracted, of which more than 80% is with third-party customers. Over the past several months, Fluence has been dealing with short-term challenges stemming from COVID-19 related supply chain issues. Their management team has taken proactive actions to address these challenges, including diversifying battery suppliers, signing new shipping agreements, and building out their in-house supply chain team.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Overall, demand for energy storage remains robust, and Fluence is well-positioned as a market leader. We see significant opportunity for them to continue to grow and remain confident that they will execute on their long-term plan, which will deliver value to their shareholders. AES Next is also working to develop and incubate other technologies that help accelerate the deployment of renewables, as shown on slide 13. One example is our investment in 5B, which has a prefabricated solar solution called MAVERICK that is hurricane wind resistant and allows projects to be built in one-third of the time and on half as much land. This innovative product is currently being rolled out in Australia, Chile, the Dominican Republic, India, Panama, and the U.S. Turning to slide 14.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

We're one of a small number of companies in our sector with targets that are fully aligned with the Paris Agreement according to the Transition Pathway Initiative. We already have a goal to have net zero emissions from electricity by 2040. As I mentioned earlier, we're excited to announce our intent to exit coal completely by the end of 2025, subject to receiving necessary approvals. We expect to achieve this objective through a combination of retirement, fuel conversions, and asset sales. In summary, we have consolidated our position as a leader of innovation in the industry and accelerated the decarbonization of our portfolio while delivering attractive returns to our shareholders. With that, I now turn the call over to our CFO, Steve Coughlin.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Thank you, Andrés, and good morning, everyone. Today, I will cover the following key topics. Our financial performance during 2021, our parent capital allocation, and our 2022 guidance and expectations through 2025. As Andrés mentioned, our results for 2021 show our continued progress in leading the energy transition while achieving our financial goals. We delivered strong financial results even while absorbing the previously discussed impact from the share count adjustment related to the equity units issued last year. Overall, the strong growth of our core energy business, which includes generation and utilities, gives us confidence that we will continue to achieve our earnings and cash flow targets. Turning to slide 16. Full year 2021 adjusted EPS was $1.52, $0.08 higher than 2020.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

2020 adjusted EPS of $1.44 included $0.03 of dilution from AES Next, implying that our core business generated adjusted EPS of $1.47. In 2021, our core business grew by $0.21 to $1.68, primarily as a result of higher contributions from new renewables businesses, improved operations at both U.S. Generation and MCAC, and lower parent interest. Our 2021 results of $1.52 include the $0.07 impact due to a higher share count as a result of the accounting adjustment for the equity unit and the dilution from AES Next, where we are investing in expanding our high-growth technology businesses. The impact from AES Next was $0.03 higher than our prior expectation due to the non-recurring COVID-related supply chain issues at Fluence.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Going forward, we plan to manage the AES Next portfolio such that these businesses will yield a neutral to positive contribution to AES earnings by 2024. Turning to slide 17. Adjusted pretax contribution, or PTC, was $1.4 billion for the year, an increase of $171 million and 14% growth over 2020. I'll cover our results in more detail over the next four slides, beginning with the U.S. and Utilities SBU on slide 18. Our increased investments in the U.S. show PTC growth of $155 million, a 31% increase over 2020. As of year-end 2021, the U.S. represented 41% of our adjusted PTC, up from 34% in 2020. About half of this growth was driven by new businesses at AES Clean Energy that came online in 2021.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

The rest of the increase was from our legacy Southland units, which remained a key contributor to the stability of the California grid during the peak summer season and delivered solid growth from increased dispatch and attractive market prices. We continue to see the potential for some of our legacy Southland units to support the energy transition in California for several years to come. Lower PTC at our South America SBU was primarily driven by regulatory adjustments and recovery of expenses from customers that were recorded in 2020. Hydrology was not a major driver as we benefited from the increased diversity of our generation portfolio and favorable hydrological conditions in Colombia offset drier conditions in Brazil.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Higher PTC at our MCAC SBU reflects higher LNG sales in both Panama and the Dominican Republic as we benefited from higher contract levels at our LNG terminals. We now have roughly 80% of our LNG capacity contracted, leaving approximately $20 million-$30 million of potential annual upside to our longer-term expectations. Finally, in Eurasia, higher PTC was primarily driven by higher contributions from Bulgaria due to improved operating performance at Maritza and increased revenue at our wind farm, which benefited from favorable market prices. Now let's turn to a view of how we allocated our capital in 2021 on slide 22. Beginning on the left-hand side, sources reflect $2.3 billion of total discretionary cash. I'm pleased to report that this includes parent free cash flow of $839 million, which exceeded the top end of our guidance expectations.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

The remaining sources are largely in line with our prior disclosures, except the $295 million in temporary drawings under our revolver, which we utilized to fund our accelerating growth in clean energy. Moving to the uses on the right-hand side. We allocated $450 million of our discretionary cash to our dividend. We invested nearly $1.8 billion in our subsidiaries, of which approximately two-thirds was in the U.S. As Andrés mentioned, we expect the relative share of our allocation to the U.S. to continue to grow. I'm glad to report that we now expect to reach our goal of 50% of our earnings coming from the U.S. in 2023, two years earlier than our previous target in 2025. Now turning to our credit profile on slide 23.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

As a result of the successful execution of our strategy over the last few years, our balance sheet continues to be in a much stronger position. We significantly reduced debt while growing our parent free cash flow. At the end of 2021, our parent free cash flow to net debt ratio was approximately 23%, which is well above the 20% threshold required for an investment-grade rating. We expect this ratio to continue to improve over time, putting us in BBB territory by 2025. We are in active discussions with Moody's and remain optimistic that we will be upgraded this year. Turning to our guidance and expectations beginning on slide 24. We are reaffirming our annualized growth target of 7%-9% in both adjusted EPS and parent free cash flow through 2025 off a base year of 2020.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Today, we are initiating guidance for 2022 adjusted EPS of $1.55-$1.65. Key drivers of our expected growth include the approximate $0.09 benefit from our higher ownership of AES Andes, which we increased to 99%, as Andrés mentioned earlier. This transaction is immediately significantly accretive on both an earnings and cash flow basis, and with a simplified shareholder base, AES Andes will be able to more efficiently execute on its substantial renewables pipeline. Our 2022 adjusted EPS will also benefit from continued growth in renewables and higher contributions from existing operations, adding $0.10.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

This growth is expected to be partially offset by $0.11 of impacts from a higher adjusted tax rate, a full year of a higher share count due to the accounting adjustment for the equity units issued in 2021, and assumed dilution from planned asset sales. Our target for this year has increased to reflect our efforts to further decarbonize and fully exit coal by the end of 2025. I would also note that we previously expected the pending distribution rate case at DPL to be resolved earlier in the year. However, we now expect resolution later this year and therefore have assumed only a small contribution in 2022. Turning to slide 25. Parent free cash flow for 2022 is expected to be $860 million-$910 million in line with our annualized growth target of 7%-9%.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Now turning to our 2022 parent capital allocation plan on slide 26. Beginning with approximately $1.5 billion of sources on the left-hand side, in addition to parent free cash flow, we expect to generate $500 million-$700 million in asset sale proceeds. Roughly half of this is from already announced sales in Vietnam and Jordan, and the remaining portion is expected to come from additional asset sales that have not yet been announced. Recycling of capital is an integral part of our capital allocation framework. As we have done in the past, we will deploy asset sale proceeds to achieve our strategic objectives and maximize shareholder value. Now to the uses on the right-hand side. We expect to allocate $494 million to our shareholder dividend, which reflects our announced 5% increase.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

We are also projecting investment of roughly $1 billion in our subsidiaries for growth, of which about three-quarters will be allocated to the U.S. to renewables and utilities. Finally, turning to our four-year capital allocation plan through 2025, beginning on slide 27. Our financial strategy is centered around maintaining a strong investment grade-rated balance sheet while investing in our growth to achieve our strategic and financial objectives. Our total growth investments for 2022 through 2025 have increased to $3.8 billion. We expect to continue to increase our dividend 4%-6% annually in line with our prior guidance. As you can see on slide 28, we plan to fund this $6 billion with 60% parent free cash flow and the remaining 40% will be from asset sale proceeds and future parent debt issuances.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Relative to our prior plan, you may notice that we have increased asset sale proceeds by $500 million and future parent debt by $300 million, which will be utilized to fund our future growth and repay drawings on our revolver that funded the higher growth from 2021. In summary, we accelerated AES growth in 2021 and executed on our financial and strategic commitment. Going forward, we will continue to deliver on our strategy, including executing on asset sales to decarbonize and exit coal, maintaining the strength of our balance sheet, and allocating capital to maximize per share value for our shareholders. With that, I'll turn the call back over to Andrés.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Thank you, Steve. As you can see, we're not only delivering on our commitments, but accelerating our transformation. Our near-term actions will enable us to achieve our three goals for creating additional shareholder value. First, attaining an investment grade rating from Moody's in 2022. Second, increasing the proportion of earnings from the U.S. to 50% by 2023. And third, exiting coal generation by the end of 2025. With that, I'd like to open up the call to questions.

Operator

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason, you would like to remove that question, please press star followed by two. We do have questions lined up. Our first question today comes from Angie Storozynski from Seaport. Angie, please go ahead. Your line is now open.

Angie Storozynski
Angie Storozynski
Managing Director and Senior Equity Research Analyst at Seaport

Thank you. My first question, and I see your disclosures and sensitivities, but I'm just wondering if you could describe the impact of the higher power price environment that we're seeing pretty much everywhere in the world on your both existing assets and growth prospects. I mean any sort of increased economic dispatch and how the appeal of renewables and how those are embedded in your 2022 guidance and long-term growth.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Well, good morning, Angie, and thank you. Basically, as you know, we're highly contracted, but what we're seeing in terms of higher prices for, you know, oil-based generation in many of our markets, that favors us because we're much more hydro, renewables, and even coal. In places like where we have a big plant in Europe, in Bulgaria, you know, our plant is now very much cheaper than the other generations in the country. We're seeing, you know, improved prospects for a lot of our generation because we are not a big generator using international price gas. Most of our gas units are running on Henry Hub, or almost all. We're basically competing against those very high prices.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Even though we're highly contracted, there's always some margin, so that's positive. It's also positive on the renewable front and on the innovative front because I think people are seeing that renewables in an environment where gas prices can be more volatile is favorable. In the net-net, you know, overall it's positive for us, you know, in the short run and, you know, certainly even more so in the long run because as I said, you know, we're highly contracted.

Angie Storozynski
Angie Storozynski
Managing Director and Senior Equity Research Analyst at Seaport

Okay, just one follow-up. How about your LNG business? Is there any near-term or longer-term impact?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Well, you know, we are contracted now in Panama and the Dominican Republic. Basically it has Henry Hub plus, of course. You know, it's favorable to us in that prospect. Now, you know, when those contracts burn off in a couple of years, then we have to see when the recontracting levels will be. Hopefully there will be more supply of gas at that point in time.

Angie Storozynski
Angie Storozynski
Managing Director and Senior Equity Research Analyst at Seaport

Okay. Just one other question. You show the impact on the drag on earnings from asset sales. If you could comment a little bit, does that include any of those accelerated coal plants shutdowns or sales? Again, I'm just trying to reconcile the earnings impact with the transactions you've already announced.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah. Go ahead, Steve.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Hey, Angie, this is Steve. Yes, I mean, we are, you know, consistent with the announcement to exit coal, we are increasing our total asset sale plan to $1 billion, and then have increased the sale target this year to $500 million-$700 million. Yes, it does reflect in part the announcement that we made today. We had prior announcements in the past about Vietnam and Jordan, so that's a portion of it. The additional portion reflects the updated strategy to accelerate our exit.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Just to be clear, it's fully reflected. Some of it had been included in the past. It reflects 100% of the additional.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Yeah.

Angie Storozynski
Angie Storozynski
Managing Director and Senior Equity Research Analyst at Seaport

Okay. My last question on Ohio, a delay in a resolution of your rate case. I mean, is there something that we should be concerned about? Or is this just that the process takes longer?

Ahmed Pasha
Ahmed Pasha
Global Treasurer and VP of Investor Relations at The AES Corporation

Sure. Hey, Angie, this is Ahmed. I don't think there is. It's a process because previously we were hoping to settle, and now we are going through because we could not reach a settlement, although the staff had recommended a reasonable increase in response to our request. One of the interveners, OCC, subsequently argued that the rate freeze should remain intact. Now we are going through the litigation process. We think our request is fair and is driven by the costs which are out of our control. Frankly, primarily to deliver the more reliable and economic power to our customers. We think we will get through this by mid this year with the approval from the commission.

Ahmed Pasha
Ahmed Pasha
Global Treasurer and VP of Investor Relations at The AES Corporation

Net net, our rates are the lowest in the state and will remain lowest with this requested increase. We feel pretty good that commission will approve our request by mid to late 2022.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah.

Ahmed Pasha
Ahmed Pasha
Global Treasurer and VP of Investor Relations at The AES Corporation

In summary, it's just a timing issue.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah. Yeah, it's a timing. In fact, the PUCO staff did support an increase as part of the process already.

Ahmed Pasha
Ahmed Pasha
Global Treasurer and VP of Investor Relations at The AES Corporation

Did recommend. Yep.

Angie Storozynski
Angie Storozynski
Managing Director and Senior Equity Research Analyst at Seaport

Okay. Thank you. Thanks.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Thank you.

Operator

Thank you, Angie. The next question today comes from Richard Sunderland from JPMorgan. Rich, please go ahead. Your line is now open.

Richard Sunderland
Richard Sunderland
Equity Research Analyst at JPMorgan Chase

Hi, good morning. Thanks for the time today. Maybe starting on 2022 guidance, could you walk from the outlook a year ago at the investor day to now in terms of AES Next, the rate case, and other factors separate from the, you know, the equity units issue you called out, in terms of changes from the 7%-9% growth rate versus the growth embedded in the current guidance?

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Yeah, sure. Hey, this is Steve. Really the two primary drivers, you know. Well, a couple. Our growth is faster, so we've accelerated our renewables growth. Now, that's been offset by the additional share count, of course, which we talked about last year. Now again, we took advantage of the value opportunity with Andes. We've largely offset the share count dilution with our acquisition of the additional shares in Andes. Really what's then changed on a net basis is more on the asset sale program, which we just talked about, and how we are accelerating our decarbonization and our exit of coal.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

The other real driver is what we also just talked about, which is the DPL rates, which we previously assumed would be in effect early this year and now are assuming late this year. Those are really the two primary drivers. There is an uptick in the tax rate from the past. At this point, we're guiding to 26%-28% on the tax rate. That's a piece of the story as well.

Richard Sunderland
Richard Sunderland
Equity Research Analyst at JPMorgan Chase

Understood. Just kind of walking forward in terms of regaining the 7%-9% trajectory, you know, in the second half of the plan. You know, I guess you called out the rate case as a timing factor. Could you just speak a little bit more to how you see the growth coming in to kind of regain the 7%-9% earnings trajectory?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Sure. This is Andrés. I'll give a sort of high level. Look, we have a backlog of 9.2 GW of projects. This year we'll be commissioning 2.3 GW. Obviously in a steady state, these two have to be about equal. What you're going to have is a real pickup in commissionings 2023, 2024 going forward. We feel very confident about that because those are already signed projects. We already have you know the sites. You know, it's a question of executing on building them. The other one is that we expect AES Next, as Steve mentioned, is going to be neutral to positive by 2024. That's a driver as well.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

The, you know, the drivers are our growth, which, you know, is part of our backlog, what we're talking about. Then we're also talking about, you know, the other things you mentioned, you know, DPL, rate case in IPL. Again, when we build all the wind and rate base that as well, you have the smart grid in DPL. Our growth projections are based on things that we have in the bag.

Richard Sunderland
Richard Sunderland
Equity Research Analyst at JPMorgan Chase

Got it. Understood. Just one more for me. The unannounced asset sales, the incremental portion versus the prior plan, is that solely related to the coal exit? Or is there anything else you're looking at, you know, maybe LNG or elsewhere?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Look, we tend not to talk about exact assets that we're gonna sell. You know, as you know, we've been always churning capital. We've made a major transformation of our portfolio. You know, I can think back, you know, we peaked at probably 22,000 MW of coal. We're down to 7,000 MW. We have basically sales for three of those. We're down to four. Yes, part of it is selling those coal assets, but also the continual churn that we have. It might include other assets. We don't like to comment on them. But you know, we will be hitting our, you know, 50% U.S., 50% renewables on an accelerated basis. You know, those sales help us achieve those goals.

Richard Sunderland
Richard Sunderland
Equity Research Analyst at JPMorgan Chase

Great. Thank you for the time today.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah, thank you.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Thanks.

Operator

Thank you, Rich. The next question today comes from Insoo Kim from Goldman Sachs. Insoo, please go ahead. Your line is now open.

Insoo Kim
Insoo Kim
Equity Research Analyst at Goldman Sachs

Yeah, thank you. My first question, going back to that 9.2 GW of backlog, it seems, you know, unchanged from the amounts you've set out in the third quarter earnings. Just wondering if there's any read-through in the current, you know, inflation environment, at least just for this year with, you know, any resistance or unwillingness for, you know, additional, you know, contracts to be signed for now.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

That's a good question. No, we're not seeing that at all. We're seeing strong demand. You know, of course, if the backlog remains constant, yeah, we commissioned quite a lot of projects between the third quarter and now. You know, already this year, we have 600 MW of new PPA signed in the U.S. under AES Clean Energy. We're seeing strong demand, especially for our tailored projects. No, I don't think there's, you know, what we're seeing in the market is, again, especially for differentiated products, there's a lot of demand. It's a matter of being able to have all the projects, let's say, in pipeline to be able to meet that demand, meet the structured project product that they want.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

I would say that, yes, PPA prices are going up, to reflect the increase in prices. But as you know, we've handled the supply constraints, you know, first, I would say the importing of solar panels from China, PV panels from China, that we were able to, first, move out of China, and then second, you know, we're diversifying the source of our polysilicon away from China as well. You know, we're not seeing that as a constraint. As we said, you know, we have an inventory of everything that we need to fulfill, certainly this year's construction and also already assigned a lot of the backlog. You know, we're in a good position.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

I would just also add on the numbers specifically. As you said, as Andrés alluded to, you know, there are subtractions coming from that backlog. As we're completing construction, completing acquisitions, there's about 1.5 GW that we actually pulled out of the backlog because of completion. The net, there's significant additions going in too.

Insoo Kim
Insoo Kim
Equity Research Analyst at Goldman Sachs

Okay. No, that's both good color there. Thanks. Maybe Andrés, just a broader question for you. You know, I think the three key points that you guys made on this call, the accelerated coal exit plan, the U.S., you know, earnings being 50% earlier, and then the IG plan. You know, those are all definitely good strategies. You know, but I guess when we think about, you know, your, the investor base and how over the past few years, the structure of, you know, growing EPS and having, you know, the consistent dividend, you know, all of that to mirror kind of a utility-like structure, you know, I think it's served you well, as you've consistently executed at least over the past, you know, few years.

Insoo Kim
Insoo Kim
Equity Research Analyst at Goldman Sachs

Just wondering, you know, when you think about strategy and the cost benefit of, you know, the actions you're taking on the asset sales and whatnot, maybe having a near-term dilutive impact, you know, I just wonder, just wondering your strategy on that going forward and whether, you know, that's worth, you know, taking, you know, the hit now versus, you know, kind of trying to make a more consistent or a predictable growth profile?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Well, that's a great question. Look, we are laser focused on delivering on our commitments. You know, we haven't changed our growth profile, maybe to some extent, a little bit back-end loaded because of the dilution that we're putting in for earlier sales. However, you know, I think the strategy has served us well. You know, we've gone from 22,000 MW of coal, you know, to completely exit by the end of 2025. We think that's what a lot of new investors will like, you know. We think we'll have a triple investment grade. We have a growing dividend. We are continually de-risking as we get out of coal. You know, we are more concentrated in the U.S. and more concentrated on renewables.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

We think this will be a company that will attract new additional shareholders and continue to serve our existing shareholders well.

Insoo Kim
Insoo Kim
Equity Research Analyst at Goldman Sachs

Understood. Thank you so much.

Operator

Thank you. Our next question today comes from Julien Dumoulin-Smith from Bank of America. Julien, please go ahead. Your line is now open.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America

Hey, good morning, team. Thanks for the time and the opportunity here.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Good morning, Julien.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Morning.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America

Yeah. Excellent. Perfect. Just as a couple follow-up items here, if you can. When you talk about asset sales, but more specifically driving to a neutral to positive outcome for AES Next, I mean, how does one do that? Are further divestments and sell downs of your stakes part of how you manage those earnings? Or is this really about managing it organically to make sure that whether it's through other pieces of the business, they ultimately all cohesively drive to an inflection in earnings contribution here in that 2024 time frame? Just want to clarify that.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yes. No, that is organic. You know, we expect the business to turn around. You know, a lot of what occurred this year, you know, is one-time related to COVID. Both on the supply chain and that, you know, of course, includes shipping as well. We expect the business to turn around. As they said on their call, you know, they expect to be at a gross margin run rate by the fourth quarter. We will hold them accountable for that, you know, through the board. You know, we continue to innovate together. Both the big companies are Fluence and Uplight, and we expect them both to execute on their plans and that is an organic.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Now, you know, again, what we're mentioning is that, you know, we always have many levers to pull. You know, what we're saying is by 2024 this will be positive or at, you know, neutral at worst and hopefully positive.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Yeah, I would just add, Julien, if you think about the stage of these businesses, they're investing in their product development and in their market expansion, the Fluence IQ for Fluence, for example. You'd expect them to be bottom line losses at this point of their life cycle. As Andrés said, they have a plan to get back to their gross margin targets by the fourth quarter. Then with the added volume, as that grows and the top line's been very successful, as the volume at the margin grows, then the bottom line of that business will overcome its R&D and G&A costs and get to, you know, a positive place.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America

Got it. If I can come back to one of the underlying points here, obviously you have a long-term earnings trajectory and growth in 2022 is a little bit slower than that trajectory would otherwise indicate. If you will, there's gotta be a pickup at some point here. You've talked about some of the timing-related issues, specifically in 2022. How do you think about that sort of inflection, that catch-up period? Is there a bigger step up in, say, 2023 or 2024? Just curious about the sort of profile against that average aggregate as you go out there.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Look, you know, of course, we can't guide to 2023, 2024 specifically. You know, obviously, if you look at the number of PPAs we have signed, which will come online in 2023, 2024, you know, that's a big driver behind that. If you also look at the rate cases we have in the utilities in the U.S., that's a big driver of that as well. That's the pickup. I mean, realize that, you know, for 2022, we're also making up for the change in the accounting issue that we had for the share count. You know, actually, we are more than delivering on what we had set out, say, two years ago.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

You know, we're making up a $0.09 hit for this year based solely on, you know, how you account for the number of shares.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Yeah. I think in addition to that, you know, the opportunity to take advantage of the value in AES Andes and increasing the shares, that was, you know, significantly earnings and cash accretive immediately and will continue to be. So that's a big help to us too.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America

In fact, if I may, and again, I need in order to provide longer-term guidance, but you know, given what you just said a moment ago and you know, you offset some of the 2022 impacts you know, that are somewhat technical here. I mean, to what extent could we expect you know, an extension or acceleration, if you will, implicitly, given what your success is on renewables, the ability to drive that catch-up against your 7% and 9% in the later years, and what that means for sort of an exit rate trajectory subsequent to 2027 you know, in 2025 and beyond?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America

You get what I'm saying? If the plan is that, what does that mean about, you know, the longer term?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Well, again, we're very optimistic about the longer term. You know, we feel we're in the right place in the market, you know, that we have differentiated products. We have growing very fast in renewables. We're in the right markets. You know, we have upside potential from, you know, projects like in green hydrogen. We have a number of projects that we're progressing there. I think something that will give us additional juice is the passage of the climate plus plan, which, you know, will clarify what are the various subsidies or if you want tax percentages, you know, ITC, PTC, et cetera. Once that's clarified, you know, that could give us upside.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

As Steve mentioned in his speech, you know, a greater use of our facilities in Southern California, longer extension of it, which looks technically possible. There certainly are upsides from that. You know, what we're doing is saying, you know, based on the situation that we're in today, this is our plan.

Ahmed Pasha
Ahmed Pasha
Global Treasurer and VP of Investor Relations at The AES Corporation

The only thing I would add, Julien, this is Ahmed, is that back in March last year on Investor Day, we had already assumed significant dilution because we said our goal is to go below 10% coal by 2025. Our growth rate already had embedded at that time decent dilution. We showed that roughly $0.30 at that time. I think now we are saying we are down to zero. I think and the factors that we've discussed today, the positive things that go in our favor, like increased share in AES Andes, accelerated growth in renewables, things like that will help us offset that. We don't expect any hockey stick, if you wish, type profile, if that was your question.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

The share count change was baked in, Julien, to 2024 and 2025. That's relative to the near-term guidance that's having a disproportionate effect on 2022 and 2023. As of 2024, those shares were assumed to be converted anyway, so were already baked in.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America

Right. Clearly. Again, you give me no reason to be less confident here. Thank you, guys. Appreciate it.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Thank you.

Operator

Thank you, Julien. The next question today comes from Durgesh Chopra from Evercore ISI. Durgesh, please go ahead. Your line is now open.

Durgesh Chopra
Durgesh Chopra
Managing Director at Evercore ISI

Hey, good morning, team. Thank you for taking my question. I wanna go back to the renewable backlog. I think, Steve, you said, I mean, there are the projects that you know were completed and taken out and then a few new adds. So there's a fair bit of gas in that 9.2 GW number. Can you elaborate what those are, gas-fired plants? Those are LNG projects. What is that comprised of?

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

We have the project that we acquired in Panama in those numbers, the Gatún project, is included. Otherwise, it's renewables.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah. Just to, you know, we own 25% of the gas project in Panama. We actually, you know, own higher percentages of the renewables.

Steve Coughlin
Steve Coughlin
CFO at The AES Corporation

Yeah. The whole amount is reflected here. Yeah, from an economic standpoint, we own more of the renewables.

Durgesh Chopra
Durgesh Chopra
Managing Director at Evercore ISI

Okay. Maybe I could just follow up with Ahmed on that. Okay. Just can you talk about sort of, you know, how should we think about the financial impacts, if any, of the Community Energy acquisition, I mean, in terms of financing costs, and things like that on, you know, 2022 guidance and, you know, future earnings projections?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah. The Community, look, we've grown our AES Clean Energy, you know, very quickly. We've merged our sPower with distributed energy, and then we've also acquired Community Energy. Now, Community Energy comes with a pipeline of 10 GW and 70 seasoned professionals. It was very important at this time of rapid growth to have, first, the people, and second, the pipeline. That's gonna help our growth. Now, in terms of their projects, you know, when those will be offered to our customers and come online, you know, no backlog is coming from Community Energy. Certainly we think that we can get better financing terms and better costs for equipment and improve execution. You know, that's upside from that.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

I don't know if that answers your question, but basically, you know, that they're now part of that unit. You know, what they've done is help us accelerate that growth.

Durgesh Chopra
Durgesh Chopra
Managing Director at Evercore ISI

Got it. Okay, guys. Thank you for that comment. I appreciate the time.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Thank you.

Operator

Thank you. The next question today comes from Stephen Byrd from Morgan Stanley. Stephen, please go ahead. Your line is now open.

Stephen Byrd
Stephen Byrd
Head of North American Equity Research at Morgan Stanley

Hey, good morning.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Hey, good morning, Steve.

Stephen Byrd
Stephen Byrd
Head of North American Equity Research at Morgan Stanley

I wanted to first just talk about Chile and just wondered if you could expand a bit on the dialogue you've had with the Chilean government in terms of helping the nation to decarbonize and, you know, pursuing green ammonia and just a little bit more color on the nature of that dialogue.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Sure. Well, let's see. We know the new president, Boric, you know, through the Council of the Americas, we know about him. I would say that it's very much aligned with our plans because he wants to continue to decarbonize the mining sector. You know, that would fit in well with our project to supply the mining sector with hydrogen fuel for their large machinery. Also, it fits in very well with our planned shutdowns of our coal plants and their replacement with our pipeline of renewables. I think we're very much aligned with that plan. I think he wants to increase and accelerate the carbon tax. You know, we don't see.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

You know, our contracts have pass-throughs for the higher carbon tax in most cases. You know, our renewables would benefit from it. You know, we felt that there was a tremendous opportunity at AES Andes. You know, we're rolling a lot of new technology out in Chile in terms of batteries, in terms of the MAVERICK product for 5B. You know, we have, we believe, the most efficient solar farm in the world at close to 38% in Chile. You know, a lot of good things happening in Chile which weren't reflected in the market price. In terms of the government, our plans are very much aligned with what they want to achieve.

Stephen Byrd
Stephen Byrd
Head of North American Equity Research at Morgan Stanley

Very good. Just another topic I've been getting some questions on is just El Salvador and the state of the economy. You know, I guess I've been seeing that there's been fairly good economic growth in El Salvador. It's an important country for you. There is some concern, though, about the linkage with Bitcoin and just sort of the overall sort of growth and stability potential there. I wonder if you could just expand a little bit on what you're seeing in El Salvador and sort of the outlook there for your business there.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Look, our business in El Salvador has been very stable. You know, the dollar is the currency of the country. You know, Bitcoin is not going to replace it. Certainly with the you know volatility that Bitcoin has had is not feasible. They did do one financing in Bitcoin that I'm aware of. I don't see a change there. You know, the biggest export of El Salvador is people, and especially if you live in the D.C. area. It's remittances that drive the economy. A big factor there is that the U.S. economy is doing well. I'd say the thing to watch in El Salvador, you know, is you know we always have to be on top of collections, and those are doing very well.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

I know there's some noise, there's some political noise. You know, there's been some announcements like Bitcoin, but, you know, we don't see anything that would substantially affect our business.

Stephen Byrd
Stephen Byrd
Head of North American Equity Research at Morgan Stanley

That's very clear and very helpful. Thank you so much.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Thanks, Steve.

Operator

Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. The next question today comes from Gregg Orrill from UBS. Gregg, please go ahead. Your line is now open.

Gregg Orrill
Gregg Orrill
Equity Research Analyst at UBS

Thank you. I'm sorry if you covered this, but what was the last 10% that relates to the exit of coal by 2025? What steps get you there?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Yeah. That was our previously stated goal. We're, you know, just above 20%, around 20% this year. Our previously stated goal was to get below 10% by 2025, and that is through a combination of asset sales, retirements, fuel conversion. What we talked about today is really just a full exit by the end of 2025. That's really the difference there.

Gregg Orrill
Gregg Orrill
Equity Research Analyst at UBS

Can you be any more specific plant-wise?

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Gregg, what I'd put it this way is, again, if you look over time, I mean, we've gone from 22,000 MW to 7,000 MW. We've already signed. Of that 7,000 MW, about half of it's already, you know, basically sold, and we have to just close the sales. You're left with a number of plants, and there's a combination of, you know, replacements, let's say for renewables. There's fuel conversions, you know, where we can start running those plants on gas. Those few cases where that does not work, then, you know, there's obviously the possibility of asset sales.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Just like we've been doing, we're just accelerating that and saying, "Look, rather than have, you know, 10% linger on for a couple of years, let's just go ahead and bite the bullet and say we're out of coal by end of 2025."

Gregg Orrill
Gregg Orrill
Equity Research Analyst at UBS

Got it. Thank you.

Andrés Gluski
Andrés Gluski
President and CEO at The AES Corporation

Thank you.

Operator

Thank you, Gregg. There are no additional questions registered at this time. I'll hand the call back to Ahmed Pasha for closing remarks. Ahmed, please go ahead.

Ahmed Pasha
Ahmed Pasha
Global Treasurer and VP of Investor Relations at The AES Corporation

Thanks, everyone, for joining us on today's call. As always, the IR team will be available to answer any questions you may have. Thank you, and have a great day.

Operator

This concludes today's conference call. You may now disconnect your line.

Executives
    • Ahmed Pasha
      Ahmed Pasha
      Global Treasurer and VP of Investor Relations
    • Andrés Gluski
      Andrés Gluski
      President and CEO
    • Steve Coughlin
      Steve Coughlin
      CFO
Analysts
    • Angie Storozynski
      Managing Director and Senior Equity Research Analyst at Seaport
    • Durgesh Chopra
      Managing Director at Evercore ISI
    • Gregg Orrill
      Equity Research Analyst at UBS
    • Insoo Kim
      Equity Research Analyst at Goldman Sachs
    • Julien Dumoulin-Smith
      Senior Research Analyst at Bank of America
    • Richard Sunderland
      Equity Research Analyst at JPMorgan Chase
    • Stephen Byrd
      Head of North American Equity Research at Morgan Stanley
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