AES Q1 2022 Earnings Call Transcript

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Provided by Quartr
May 6, 2022

Key Takeaways

  • Moody’s upgraded AES to investment grade from all three major rating agencies, validating a decade-long business transformation and strengthening the company’s balance sheet.
  • AES reaffirmed its 2022 financial guidance and its goal of delivering 7%–9% annualized earnings and cash flow growth through 2025, citing robust contracted generation and utility contributions.
  • For 2022, AES expects to complete over 2 GW of new renewables—including 800 MW of U.S. solar—with all project panels secured domestically to mitigate potential tariff delays from the Department of Commerce solar import probe.
  • At quarter end, AES had signed or been awarded 1.1 GW of renewables PPAs year-to-date, bringing its backlog to 10.3 GW, and has seen strong demand for structured green energy deals with clients like Microsoft and Amazon.
  • AES’s U.S. utility platforms plan $4 billion of investments through 2025, driving a projected 9% average annual rate base growth and advancing the goal of over 50% U.S. earnings by 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
AES Q1 2022
00:00 / 00:00

There are 10 speakers on the call.

Operator

Good morning. Thank you for attending today's EES First Quarter 2022 Financial Review Call. My name is Amber, and I will be your 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. I now have the pleasure of handing the conference over to our host, Susan Harcourt, Vice President of Investor Relations with AES.

Operator

Susan, Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to our Q1 2022 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. There are many factors that may cause future results to differ materially from these statements, which are discussed in our most recent 10 ks and 10 Q filed with the SEC.

Speaker 1

Reconciliations between GAAP and non GAAP financial measures can be found on our website along with the presentation. Joining me this morning are Andres Gluski, our President and Chief Executive Officer Steve Kauflin, our Chief Financial Officer and other senior members of our management team. With that, I will turn the call over to Andres.

Speaker 2

Good morning, everyone, and thank you for joining Q1 2022 financial review call. I am very happy to report that we have attained an investment grade rating for Moody's. We are now investment grade rated by all 3 major agencies, which is an important milestone for our company and reflects a decade worth of work to transform our business. We're also reaffirming our 2022 guidance and annualized growth of 7% to 9% through 2025. Our business model continues to demonstrate its resilience and predictability even in the face of market volatility.

Speaker 2

Steve will cover our expectations for the remainder of the year in more detail, including the seasonality of our earnings profile. Today, I will discuss Our 2022 construction program and the Department of Commerce's investigation into solar panel imports The diverse drivers of our growth including signed renewable energy PPAs and our U. S. Utilities, AS Next and Fluence and our strategic outlook for the sector. Beginning with our 2022 construction program on Slide 4, we are laser focused on ensuring timely completion of projects as we see our ability to execute on our commitments as a key source of competitive advantage.

Speaker 2

This year we expect to complete more than 2 gigawatts of new renewables including over 800 megawatts of solar in the U. S. In late March, the U. S. Department of Commerce launched an investigation into solar imports from 4 Southeast Asian countries, which collectively supply approximately 80% of solar panels for the US market.

Speaker 2

The Department of Commerce is expected to make a preliminary determination on this case by no later than August. The resulting uncertainty around tariff levels has led to a drop in imports and project delays across the industry. However, due to our supply chain strategy, all of the panels for our 8 30 megawatts of projects to be completed in 2022 in the U. S. Are already in country, and we do not anticipate any delays to those projects.

Speaker 2

I'd also note that 1 third of our 2022 renewable projects are international and the remaining 683 megawatts in the U. S. Are wind and energy storage. Moving to the diverse drivers of future growth beginning on Slide 5. Our strategy is to provide differentiated products that allow us to work with our customers on a bilateral basis.

Speaker 2

As a result, last year we signed a total of 5 gigawatts of PPAs for renewable energy, including more contracts with C and I customers than anyone else in the world. For full year 2022, we continue to expect to sign 4.5 to 5.5 gigawatts of renewables under long term contracts with a roughly fifty-fifty split between the U. S. And international markets. We do expect PPA signings in the U.

Speaker 2

S. To be more weighted towards the second half of the year. So far this year, we have signed or been awarded 1.1 Gigawatts, bringing our backlog to 10.3 Gigawatts. Despite current headwinds for the sector, such as delays in U. S.

Speaker 2

Climate legislation and the supply chain issues we just discussed, we continue to see very strong demand for low carbon energy and especially for structured products such as our 20 fourseven renewable offering. In fact, as you may have seen earlier this week, we announced 2 key agreements for our structured products. First, the expansion of our partnership with Microsoft into California, the 3rd market where we will supply renewable energy to match the load at their data centers and second, our agreement with Amazon under which we will provide 675 Megawatts of Renewable Energy TO Their Operations in California, Including AWS's data centers. With these agreements, we are helping both companies achieve their ambitious sustainability goals. As you can see on Slide 6, We believe our development pipeline of 59 gigawatts is the 2nd largest among U.

Speaker 2

S. Renewables developers. This robust pipeline provides us with the projects we need to deliver on our backlog and continue to build on our competitive position in the market. Now turning to our regulated U. S.

Speaker 2

Utility platforms beginning on Slide 7. These businesses represent one of the key contributors to our overall 7% to 9% annual growth in earnings and cash flow, as well as advancing our objective of increasing the proportion of earnings from the U. S. To 50%. In both markets, we have the lowest residential rates in the entire state, which provides a runway for growth and investment while keeping affordable rates for our customers.

Speaker 2

Moving to slide 8. In Indiana, we're benefiting from incentives to modernize the transmission and distribution network and transitioning to greener generation. Through 2025, we will be investing $2,700,000,000 which we will recover through already approved rate mechanisms. Additionally, we expect to finalize our next integrated resource plan by this fall, allowing us to further transform AES Indiana's generation fuel mix. In Ohio, we're capitalizing on formula rate based investments in the transmission network.

Speaker 2

At the same time, we are implementing our smart grid investment program, which is recovered through an existing rate mechanism. We also have a distribution rate case pending before the Public Utilities Commission of Ohio. Later this month, we will be presenting oral arguments directly to the commission and a favorable outcome in this case will bolster our ability to make the new investments needed to further strengthen AES Ohio's network. Turning to Slide 9. Through 2025, we expect to invest $4,000,000,000 to modernize our U.

Speaker 2

S. Utilities. These investments translate to average annual rate base growth of 9% through 2025, which is at the high end of growth projections for U. S. Utilities.

Speaker 2

We expect the earnings from these core businesses to grow in line with the rate base. Turning to Slide 10 for an update on AES Next. We are developing and incubating new products and business platforms through AES Next. Our investments in AES Next help our businesses to be more innovative and competitive and drive value for our customers and shareholders. We are proud that earlier this year, Fast company named AES is one of the 10 most innovative energy companies in the world and the only large publicly traded company to be included on that list.

Speaker 2

Turning to slide 11, the most mature initiative under AES Next today is Fluence, Which as of December 31st had 4.2 gigawatts of energy storage products deployed and contracted and assigned backlog of 1,900,000,000. Additionally, Fluence's digital platform, Fluence IQ, recently acquired Naspersa and now has a combined 15 gigawatts contracted or under management of which more than 80% is with 3rd party customers. Over the past several months, Fluence has been dealing with short term challenges, mostly stemming from COVID-nineteen related supply chain issues. Their management team has taken proactive steps to address these challenges, including diversifying battery suppliers, signing new shipping agreements, building out their in house supply chain team and regionalizing their manufacturing. Overall, demand for energy storage remains very robust and Fluence is well capitalized and positioned to grow as market leader.

Speaker 2

We see a pathway for them to improve their margins and grow as the global energy transition continues to progress. Finally, turning to our strategic outlook for the sector beginning on Slide 12. Our goal is to be the leader in providing low carbon energy solutions while delivering annualized earnings and cash flow growth of 7% to 9% through 2025. Today, there's an unprecedented transformation of sector underway with governments, utilities and companies working to shift to low carbon sources of power. For example, just looking at the public commitment of the RE100, a group of over 350 large corporations who have committed to 100% renewable energy, we expect their annual demand to more than double to almost 400 terawatt hours of renewable energy by 2,030.

Speaker 2

Facing this immense opportunity, we're taking steps to ensure our continued competitive advantage in this once in a generation transformation of our sector. As you can see on Slide 13. This transformation is reflected in our own portfolio as we expect renewables to represent more than 3 quarters of our installed capacity by the end of 2025. During that same time period, we expect our renewables business to nearly triple from 13 gigawatts to approximately 38 gigawatts and our capacity from coal to go from 7 gigawatts to 0. With that, I will now turn the call over to our CFO, Steve Kaufmann.

Speaker 3

Thank you, Andres, and good morning, everyone. Today, I will discuss our Q1 results, 2022 parent capital allocation 2022 guidance. Beginning on Slide 15, as Andres highlighted, I'm very pleased to share that Moody's recently completed a thorough review of our consolidated debt and cash flow across our businesses and upgraded AES to investment grade. This conclusion further validates our years long effort to reduce risk and strengthen our balance sheet and will yield further benefits as we grow our business and attract new investors to AES. As an investment grade rated company, we will continue to lead the renewable sector while growing our U.

Speaker 3

S. Utility asset base and our long term contracted generation portfolio. Turning to Slide 16 and the resiliency of our business model. Today, 85% of our adjusted PTC is from long term contracted generation and utilities. We are largely insulated from the current macroeconomic volatility affecting commodity prices, inflation, interest rates and foreign currencies, with the vast majority of our portfolio benefiting from contractual indexation, fuel pass through or hedging programs that limit our exposure.

Speaker 3

Combined, these macroeconomic factors had an impact of less than $2,000,000 on our adjusted PTC in the Q1. For the full year, we currently expect a net positive contribution from these macroeconomic factors as a result of higher natural gas prices and higher power prices in some of our markets. Now turning to our financial results for the quarter, beginning on Slide 17. Adjusted EPS for the quarter was $0.21 versus $0.28 last year. Our core business segments grew by $0.04 over the Q1 of 2021.

Speaker 3

These positive contributions were offset by several negative drivers we had already in our 2022 guidance. 1st, higher losses at AES Next, primarily resulting from COVID related supply chain issues at Fluence in the Q4 of 2021. As a reminder, we report Fluence's results on a 1 quarter lag, so the Fluent's results relate to their December quarter end, which was disclosed in February and included in AES's full year guidance on our last call. Second, the higher share count as a result of the accounting adjustment we made for our equity units 3rd, a higher quarterly effective tax rate than our overall expectation for the full year due to timing. And finally, non recurring gains on interest rate hedges recorded last year, which skew the quarter over prior year quarter comparison.

Speaker 3

Turning to Slide 18, adjusted pretax contribution or PTC was $207,000,000 for the quarter, which was $40,000,000 lower than 2021, consistent with the drivers I just discussed. I'll cover the performance of our strategic business units or SBUs in more detail over the next four slides. In the U. S. And Utility Strategic Business Unit or SBU, higher PTC was driven primarily by earnings from new renewables coming online and higher contributions from Southland, partially offset by higher spend at AES Clean Energy due to an accelerated growth plan.

Speaker 3

Higher PTC at our South America SBU was mostly driven by our increased ownership of AAS Andes and higher contracted revenue in Colombia. Lower PTC at our Mexico, Central America and the Caribbean or MCAC SBU primarily reflects the sale of in the Dominican Republic in 2021 and lower availability at our generation facilities in Mexico. Finally, in Eurasia, higher PTC reflects higher revenue at our Mong Dong facility in Vietnam and higher power prices at our wind plant in Bulgaria driven by commodity price increases. Now to Slide 23. We are on track to achieve our full year 2022 adjusted EPS guidance range of $1.55 to $1.65 Our typical quarterly earnings profile is more heavily weighted toward Q3 and Q4 with about 2 thirds of our earnings occurring in the second half of the year.

Speaker 3

We continue to expect a similar profile this year as we grow more in

Speaker 2

the U.

Speaker 3

S. Where earnings are higher in the second half of the year based on solar generation profiles, utility demand seasonality and the commissioning of more new projects in the 3rd and 4th quarters. Growth in the year to go will be primarily driven by contributions from new businesses, including over 2 gigawatts of projects coming online over the next 9 months as well as further accretion from our increased ownership of AES Andes. We are also reaffirming our expected 7% to 9% average annual growth target through 2025. Based on our expected growth in renewables and U.

Speaker 3

S. Utilities as well as the recycling of our capital into additional investment opportunities we see across our global portfolio. Now to our 2022 parent capital allocation plan on Slide 24. Sources reflect approximately $1,400,000,000 to $1,700,000,000 of total discretionary cash, including $900,000,000 of parent free cash flow and $500,000,000 to $700,000,000 of proceeds from asset sales. On the right hand side, you can see our planned use of capital.

Speaker 3

We will return nearly $500,000,000 to shareholders this year. This consists of our common share dividend, including the 5% increase we announced in December and the coupon on the equity units. We plan to invest approximately to $1,100,000,000 in our subsidiaries as we capitalize on attractive opportunities for growth. Nearly half of these investments are in renewables, reflecting our success in securing long term contracts during 2021 and our expectations for 2022. About 25% of these investments are in our U.

Speaker 3

S. Utilities to fund rate based growth with the continued focus on grid and fleet modernization. In summary, close to 3 quarters of our investments this year are going to renewables growth in our U. S. Utilities businesses, helping us to achieve our goal of increasing the proportion of earnings from the U.

Speaker 3

S. To more than half by 2023. In fact, We have made great progress on our growth investments so far this year with approximately $650,000,000 already invested primarily in renewables and to increase our ownership in AES Andes. We will continue to allocate our capital in line with our strategy to lead the renewable sector, further anchor AES in the U. S.

Speaker 3

Market and to decarbonize our portfolio. With that, I'll turn the call back over to Andres.

Speaker 2

We are reaffirming our 2022 guidance and annualized growth through 2025. We continue to deliver on our commitments, including our 2022 construction projects, which we expect to commission on time even with the ongoing Department of Commerce investigation into solar panel imports. We are energized by the immense opportunity for growth in our business and remain committed to maintaining our competitive advantage. With that, I would like to open up the call for questions.

Speaker 1

Of course. Thank

Operator

Our first question comes from Insoo Kim with Goldman Sachs. Insoo, your line is now open.

Speaker 4

Yes, thank you. First question on the solar the U. S. Solar investigation. Good to see that the 22 projects are on time and on schedule.

Speaker 4

Just for 2023 exposure, could you give a little bit more clarity on the amount of capacity that maybe has been contracted and need to be delivered and what type of timing delays, if any, that we could expect for next year? And then just related to that, if there are delays to that, that were embedded in your growth for 'twenty three, how much Do you have to move around other items to still hit your growth?

Speaker 2

Okay. Good morning, Insoo. Let me start with a little background on the Commerce case. So this case is an investigation by Commerce into allegations of 1 U. S.

Speaker 2

Manufacturer that panels and cells imported from 4 countries in Southeast Asia are circumventing existing antidumping and countervailing duties on solar panels and sales coming from China. So we think there are strong legal grounds for Commerce to make a preliminary determination before August that will signal to the market that the allegations are unfounded and will be conclusively dismissed without new tariffs. One of the legal requirements for determining that circumvention occurred is that the activity in Southeast Asian countries must be considered minor or insignificant. However, the solar panel and cell suppliers operating in these countries have invested 1,000,000,000 of dollars in technologically sophisticated manufacturing, assembly and processing facilities so that their activities do not appear to be minor or insignificant. Additionally, the critical step of creating solar cells occurs in these countries and not in China and involves the conversion of the wafer into a cell.

Speaker 2

Commerce itself has previously ruled that this step determines the country of origin for solar imports. For these reasons, we think that there are strong grounds for Commerce to make an expedited determination. It's also important to note that there's broad industry opposition to this investigation, including from many U. S. Manufacturers because they rely on solar cells from Southeast Asia in order to manufacture solar modules here in the U.

Speaker 2

S. Currently, the U. S. Manufacturing industry can only meet about 20% of U. S.

Speaker 2

Demand and their capacity to increase supply is negatively impacted by this investigation. This further supports a decision by Commerce to dismiss the circumvention claim underground that a finding of circumvention would not be appropriate due to harmful impacts. So we'll continue advocate for a rapid resolution of this case. Now getting specifically to your question, I think what we were able to do this year shows to our supply chain management strategy. And many of you will recall that for 3 years I've been all arguing that this huge wave of renewable demand was coming, and that there were going to be shortages of everything, from developers to land to interconnections.

Speaker 2

And now we've had, I'd say, an additional issue with this Commerce, case before commerce for solar panels. So, you know, we've been not ahead of this. Now, what will determine what will happen in 2023 to us. And again, I think we're in the best shape of anybody in the industry. We'll be, if there's an early resolution Or if there is a determination, let's take the worst case.

Speaker 2

There's a comes out and they say that there is a convention and there's going to be a tariff of X. Okay. Well, then people can put cash deposits at that point. Now I think this would have a very deleterious effect for the whole solar industry in the US. I think we would be in better shape because we're primarily selling to corporates who have more flexibility than people, say utilities with RFPs who are much more regulated.

Speaker 2

So given that, I'd say, look, right now, we don't know. I mean, worst case, we continue to negotiate with our clients advances. We're not signing them yet because we're waiting for this final determination. But this is not going to stop us. And in terms of the construction, it depends how the case comes in and the sort of shipping backlogs and the rest.

Speaker 2

It could potentially affect the second half of twenty twenty three, but we'll have to see. So we're doing everything possible to minimize this. And I think the proof of the pudding is in the eating. I think we're one of the few solar U. S.

Speaker 2

Developers who did not have to postpone or cancel any projects this year.

Speaker 4

That's good color. And maybe just the second part of my question was just if maybe the not the worst case, but a non constructive case comes out and the delays are more significant for the whole 3, just your portfolio of global projects, whether it's a wind or storage or whatnot are pretty diverse. How much flexibly do you have to to pull different levers to still achieve that growth?

Speaker 2

Well, that's a great point. If you think of our backlog of 10 0.3 gigawatts. Only about a third is US solar. So the rest is either international or wind For other technology. So again, I think that what will happen, well, it We are a diverse portfolio and so we will try to make it up elsewhere.

Speaker 2

But again, we think that there are very strong ground to dismiss this case. It doesn't make a lot of legal sense, honestly. A prior similar case was dismissed because they didn't have, Let's say nobody was standing up in front of it. Now you have one small U. S.

Speaker 2

Manufacturer. And I think the grounds of this being insignificant or not material, the value add added in South Asian countries is almost laughable quite frankly. So it is just rent seeking I think from a few small U. S. Players.

Speaker 2

What is dramatic is that it's had such an effect on the industry. Now again, fortunately, we've been very concerned about shortages for 3 years. And you'll also recall that even when COVID first appeared in February of 2020, We talked about its potential supplies on effects on supply chain. So again, stay tuned. I don't think there's anybody in better shape than us.

Speaker 2

And as you point out, We are diverse in terms of technologies and also in terms of geographies.

Speaker 4

Okay. That makes sense. My second question quickly, The Slide 43, the sensitivity slide to different moving commodities or currencies or whatnot, it's always helpful to us. Just the updates there, I think with stuff like Henry Hub gas prices being almost 8 dollars to 9 Right now, just looking at your sensitivity of the year to go assumptions, if these Commodity prices do remain elevated and we said no other changes, it seems like there could be a more meaningful EPS impact for 2022, but that assumes no other changes, whether it's power prices or whatnot. Can you just walk through at this point with the various commodity price or Power price environment, how you see that net impact for the balance of the year as it stands today?

Speaker 4

Thanks.

Speaker 3

Yes. Hey, Insoo, it's Steve. So just as a reminder, that page, the sensitivities are in isolation. So when you see the gas Price sensitivity, it's not doesn't include any corresponding power price increase, which we would actually expect to happen in most cases. So on balance, the environment we're really on the net positive side, as I said in my comments.

Speaker 3

In particular, in Bulgaria, we have our wind portfolio there, which has done very well and I expect will do very well for the rest of this year. It does have some market exposure and with tower prices in excess of $200,000 it's done very well. And then the other thing I would point to is our LNG business in MCAC. So we have long term contracted gas That's been contracted for some time. So in fact, there are some upsides that we're working have worked through and we'll continue to work through to take advantage of some of the high gas price opportunities to benefit The Q3 hedging program another success.

Speaker 3

We expect more success this year with $0.05 of energy margin upside last year. So on balance, we're actually in quite good shape. Most of our contracts are inflation indexed Around the world, I think it's like 83%. And those that are not are really U. S.

Speaker 3

Renewable contracts where we've locked in are our costs upfront and that was baked into the overall cost of the pricing in the PPA. So really, AES has transformed a lot and actually we're in quite good shape in this environment.

Speaker 2

I would say, Anshul, we're on the right side of history on this one. I mean, because where we have fuel, it's mostly a pass through. And we're mostly competing with fossil fuels with either hydro, with renewables. So And I would say the biggest winner of what's happened is really Bulgaria because in Bulgaria, we've just signed an MOU with the government of Bulgaria where they recognize the validity of the PPA. And they also we're working together on decarbonizing the Maritza project, Whether it be and we're looking at different alternatives, whether it be carbon capture and sequestration, biofuels or conversion to gas, and at the same time, stepping up investments in energy storage.

Speaker 2

So, again, I really can't think of any case where This is impacting us negatively.

Speaker 4

Okay, color. Thank you so much guys.

Operator

Thank you, Insoo. Our next question comes from Richard Sunderland with JPMorgan. Richard, your line is now open.

Speaker 5

Hi, good morning and thank you for the time today. And maybe just wanted to touch on the 2020 free solar outlook a

Speaker 3

little bit more.

Speaker 6

Could you speak to

Speaker 5

a little bit more around the risks there beyond just The earnings delays, is it really just so much as the timing of

Speaker 3

the earnings come in? Or are

Speaker 5

there any contractual obligations around energy procurement or elsewhere that you need to fulfill with those contracts?

Speaker 2

Yes. No, I'm not aware of any. Quite frankly, I think that in the very worst case, I don't think it would be demand There would be a delay in some cases of commissioning them. But no, we would obviously have Our contracts would not hold us to having supply energy if there is a major disruption in the solar panel market. But again, we think that's the not the most likely scenario, but if it were to occur, we wouldn't be suffering LDs because of not fulfilling contracts.

Speaker 5

Got it. Very helpful. And then thinking about the announcements around these recent structured deals, could you speak to a little bit of the capacity you have for more of those And the overall appetite there. And then I guess just to be clear on the Amazon front, are those new projects or reflected in the 2021 signings? Yes.

Speaker 2

First, most of these are reflected in 2021 projects. But what I would say is we're seeing a tremendous demand for our structured product. And we have been talking about this. We weren't able to release some of the names prior to that, till the client was ready. But we could do more projects.

Speaker 2

I think the real issue is to have the projects in the right market ready. So it's, stay tuned, more is coming. But I think what we like very much is the Like repeat buying. So with micro sauce, for example, we've done projects in PJM. We did a project in Chile, And now we did a project in Creso in California.

Speaker 2

And so we expect the other to happen with the other big clients. So if you think of the large data center clients. We have big contracts for 3 of them and we have we're in a very good position. So Really, the demand is there. It's a question of how fast we can bring the projects online.

Speaker 2

Yes.

Speaker 3

And I would just add, in the investments Andre said, Richard, we have the flexibility to pivot to some other markets. You've done Microsoft, in Chile. And so the Amazon announcement is what we've been able to announce. This is something I've wanted to talk about for some But there's more to come and we built the pipeline significantly. We're up 59, almost 60 gigawatt pipeline and that's in large part because we're playing forward the demand coming from our commercial industrial customers in aggregating pipeline where we know that they're going to need us to supply their load.

Speaker 2

Yes. I think an important point, Good part of this pipeline is in California. And it's quite ready. And that we started acquiring land in interconnection rights about 3 years ago. We really got a little bit ahead of this wave that we see now.

Speaker 2

So the demand is there. It's a question of bringing all the projects online. Now realize that these are versions of 20 fourseven or round the clock renewables. So it's not only a question of having the availability to build new megawatts, it's also can you combine them and have the energy storage to really provide that round the clock guaranteed netted on an hourly basis renewable energy.

Speaker 5

That's very helpful color. And I just wanted to follow-up real quick on that sort of contracting backdrop. You talked

Speaker 3

a little bit about more

Speaker 5

of a switch weighting to the U. S. Signings, Obviously, the DoC overshadowing all of this. So can you give just a little bit more color on what you're seeing in terms of discussions against your But you just need that, say, that August data point to then start finalizing contracts? Just any more information would be helpful there.

Speaker 2

Yes. What I feel comfortable saying is you're right, you characterize this right that we are in discussions And there are more contracts with many clients and that I'd say a factor is having some clarity in August What it would be because you'd have to make cash deposits and negotiating this. As I said, our corporate clients, which are the bulk of what we're doing in the States, have greater flexibility and speed than, say, regulated clients. So, let's see what happens. But again, I think it, you know, it would just really be nefarious for the whole sector, for the whole U.

Speaker 2

S. Drive through more carbon free electric sector, this would slow us down and it would basically make renewables in the U. S. More expensive. So if you want to onshore manufacturing, what do you need?

Speaker 2

You need cheap And clean energy is a vital factor. And the thing that's happening here again is really just Slowing it down, creating uncertainty. And again, we are in the best shape, I think, of anybody in the sector. So its effects will be much greater outside of AES.

Speaker 3

Yes. And I would just add, the last year, 80% of the contracts were done in bilateral commercial So bilateral negotiations. So we the customers that we're working with are very much aware of this issue. We're moving forward with all the details that we can move forward on and this piece is open and it's very frustrating and it's not a good thing. But These are customers that have made very strong and vocal commitments to their decarbonization, and we They're going to want to continue to find a path to get there.

Speaker 3

And since we're in a bilateral relationship, I think we're going to work through

Speaker 2

And I would add, look, we're all in favor of on shoring, but what you need is certainty and you need a timeline. So you need to know what tariffs would be applied in what way and but you also have to say how far down the supply chain they're going to go. And the further down the supply chain you're going to go, the more time you need to move the supply chain. And so for example, right now, most of the Most of the solar panels we're buying from Southeast Asia, actually the polysilicon is going to be coming from Germany. So it's not even coming from China.

Speaker 2

So this is basically, you know, rent seeking by a small number of actually one firm in this case, An insignificant firm, I may add. I don't think it's delivering 1% of the supply in the U. S. So it really is Quite egregious the whole situation.

Speaker 5

Got it. Really helpful color there. Thank you.

Operator

Thank you, Richard. Our next question comes from Durgesh Chopra with Evercore. Georges, please proceed.

Speaker 6

Hey, good morning team. Thank you for taking my question. Hey, Steve, maybe this one is in sort of your house. Sorry, can you hear me okay?

Speaker 3

Yes, go ahead, Serge.

Speaker 6

Okay. Sorry, I just heard some background there maybe. I was just going to ask you, as it relates to the 2022 EPS guidance, Steve, Can you remind us what are you modeling for Fluence embedded in that guidance? And then obviously, Fluent has had some challenges with COVID-nineteen as Andreas articulated in his prepared remarks. If that continues throughout the year, what kind of flexibility do you have to kind of make that up in other areas of the business?

Speaker 3

Yes. So, hey, thanks for the question. Look, so Fluence had Difficult their Q1, which as I've had in my remarks, for their fiscal 'twenty two, their fiscal year runs October to September. So and we'd report them on a 1 quarter lag. So what they reported in December is just hitting this quarter that we're now reporting.

Speaker 3

So we already had anticipated and updated updated forecast for Fluence when we gave our guidance. And that's largely that's about What I can say on it, unfortunately, Fluent, I can't say much more. My hands are a bit tied here. They're a public company. They'll be releasing earnings next week.

Speaker 3

So but what I can say is I feel very comfortable given that I have the latest expectations for Fluence in our numbers. We've already absorbed their Q1 and we reported that here. So look, they've had a lot of issues that they've talked about. I think they're working through those. Some of them are quite temporary in nature and they've already worked through both, shining new shipping contracts, diversifying their battery supply.

Speaker 3

They're regionalizing their manufacturing around the world. So I think it's going to take some time, as they've said, to work through some of these challenges. But we're very confident. The long term is strong. Their entire market has continued to be very strong.

Speaker 3

The demand is still there. I think they had kind of the perfect storm of some issues coming together here with supply chain, batteries, shipping, etcetera. But in our guidance, We have the latest forecast, and it's not knocking us off our guidance range.

Speaker 2

So What I would add is that the company is well capitalized and see strong demand. And what you're seeing is, increase in battery supply outside of China. So you just saw the announcement by the U. S. Government that they would have incentives for battery manufacture in the U.

Speaker 2

S. Poland has agreement with Northvolt for production of batteries in Poland. So I think what you're going to see is the main constraint, which has been access to batteries, Will start to be addressed. Now it's not going to be immediate, but by next year you start seeing more capacity come online.

Speaker 6

Got it. That's very comprehensive. Thank you, guys. In terms of just going back to the backlog of additions, right? I mean, you started the year strong roughly over a gig versus the 4.5 to 5 point Have your target sounds like you're confident you're going to hit that in 2022.

Speaker 6

But as we think about 'twenty three in light of the solar investigation, in light of commentary around potential delays. Do you go back like I mean what's so the I think the long term, the 79% EPS growth is predicated on, correct me if I'm wrong, 3 to 4 gigawatts a year. Is that sort of do you expect to sort of hit that in 2023, maybe the low end? Or what's the thinking there as we think about 2023 additions?

Speaker 2

So you're talking about citing new PPAs? Or you're talking about commissioning of projects?

Speaker 6

The new PPAs, Andreas, the target.

Speaker 2

Okay. Look, in the Q1, we did 1.1 gigawatts. So we are on target for our 4.5 to 5.5 gigawatts for the year. As I mentioned, Due to this commerce case, some of the signing of PPAs in solar in the U. S.

Speaker 2

Will be You know, more heavily weighted towards the second half of the year, you know, because people will wait till this resolution and come to a conclusion. Do I think that this will knock us off our growth trajectory? No, the answer is no. And because I If anything, it might move things around from 1 quarter to the next, but we're seeing very strong demand for our products. And this will The RE100, for example, they're not going to abandon their sustainability goals.

Speaker 2

So they're going to go forward with this. So I think that I feel confident of it. Can it cause some delays in signing of PPAs? Yes, we're saying that. But I think that we'll have a catch up.

Speaker 2

So it might make things a little bit lumpier than they would be otherwise, which is not ideal, but That's the hand we've been dealt.

Speaker 6

Understood. It sounds like the long term trajectory intact, you may have some lumpiness in The near term, but you feel confident long term in hitting all

Speaker 4

of your targets?

Speaker 2

Exactly. Exactly.

Speaker 7

All right.

Operator

Our next question comes from Julien Dumoulin Smith with Bank of America. Julian, your line is now open.

Speaker 8

Hey, good morning, team. Can you hear me?

Speaker 3

Yes. We can hear you loud and clear. Hi, Julian.

Speaker 8

Excellent. Thank you. Appreciate it. So, guys, I want to try to quantify things a little bit more if we can. Obviously, we talked about these commodity sensitivities a little bit earlier.

Speaker 8

Can we talk about the longer dated commodity sensitivities and trying to quantify it based on what's implied in your slides? It looks as if again these commodities are flying around, but it could be north of $0.10 positive versus what you guys did your last guidance. I mean, is that directionally correct? I mean, can you try to quantify that a little bit and affirm it? And then related, to the extent to which that is indeed through directionally.

Speaker 8

What does that mean in terms of your appetite to potentially expedite the exit from both barrier for instance? I just want to try to get at that a little bit more and or absorb some of these other impacts, be it solar or Fluent and still be within your range Yes or higher within your range.

Speaker 3

Sure. Sure. Julian, so you're right. I mean, and you're looking through the page On the commodities and seeing that there's actually upside here as I described. So Bulgaria, where the hot power prices are high, we're really seeing significant upside there, Both in the near term as well as in the value of the Marissa plant, which is under contract, but that PPA is well in the money for the government of the people of Bulgaria, plus we have the upside in the wind plant.

Speaker 3

In our LNG business, In our gas businesses in Central America and the Caribbean, we have long term gas contracts that have Well before this commodities environment. So We have some flexibility in how we manage our cargoes. We have customers with plants that have dual fuel capability. And so we're able to perhaps work on swapping to liquid fuels and redirecting cargoes into Europe, For example, with our partners. So this is a really important part of our portfolio, one that we don't tend to a lot about, but it is in this environment, important diversification of our portfolio.

Speaker 3

So we see Both with tower prices as well as the upside in our position in natural gas given our long term contracts Yes, directionally, you are correct. I wouldn't venture to say whether it's $0.10 or exactly at this point. But And some of that relies on discrete transactions that we will do and have done and will do to take advantage of that upside on LNG.

Speaker 2

Yes. And talking about Bulgaria, what I would say is, look, in the past the PPA had been questioned before the sort of Anti competitive or say illegal state aid really was the case before the European Commission. So what we're seeing is that To some extent, we're getting past that. This is a confirmation of the PPA. So it's a very attractive asset.

Speaker 2

Maritza is a very attractive asset through the end of its contract period and beyond. It's actually doing what it the reason it was built was to make Bulgaria independent of Russian gas. That's why it was built and it uses local coal. So it's not affected by international prices. So it's very much in the money for our client.

Speaker 2

So The asset is much more valuable today than it was, say, 6 months ago. And we've also agreed to help Bulgarian government look at energy storage and other alternatives to wean, I would say Maritza away from just running on call. So stay tuned to that. But I'd say this has been the big winner from this horrible situation in Europe.

Speaker 8

Got it. Fair enough. And then I just want to try to quantify versus some of the qualitative comments earlier around the ABCVD risk on 2023. I just again, it sounds as if specifically you're reaffirming The origination ranges going into next year, your confidence is there. Is there any I mean, when you try to quantify any of these risks, Any way to do so around solar here?

Speaker 8

Just any quantum of origination risk, any quantum of impact in higher costs, I just want to make sure we're crystal clear on the call.

Speaker 2

Yeah. Look, what I would say is the following. Look, we are continuing to negotiate with our clients. This has pushed off the final signing of a number of additional PPAs because there's uncertainty about tariff. So that's sort of the remaining item to complete these PPAs.

Speaker 2

Now its effect will depend on will August provide enough clarity and it should, you should have an indication How much the tariff would be, how much you would have to put in sort of cash deposits, even though it might be finalized later. But typically those move up and down not that drastically. So we think we could work with that. However, I mean The issue to me, the biggest issue is whether the the suppliers continue to run these factories in Southeast Asia. Do you have a decrease in global supply of solar panels.

Speaker 2

So that's a little bit more of the issue. So there are a lot of things there, but rest assured that we're doing everything possible And using our sort of global footprint to try to be able to Give certainty to some of the suppliers that they will be able to continue to be running. So stay tuned. But We hope that by August or actually sooner because the case is so weak, it should be dismissed and it's amazing that it's gotten this far. But there should be some clarity or has to be some clarity by August and then we'll I'll let you know and we'll continue to work with all the suppliers to ensure that we get those panels to the stage on time to complete 2023 projects.

Speaker 8

Got it. All right. Fair enough. And then just the last one to clarify this. Fluence, obviously, it's a trailing etcetera, the lockup expired of late.

Speaker 8

It seems it's still strategic to you from an origination perspective in your sales efforts, right, regardless of the results.

Speaker 2

Yes, I'm optimistic about Fluence in In the long run or let's say medium term because these it's very difficult to launch a new product when you get hit By COVID shutdowns in China, there were some of the battery suppliers had issues, let's face it, and that caused a shortage in the market as well. So there were tremendous shipping issues that they had to face. But look, it's a well capitalized firm. The product is good. Digital is expanding well.

Speaker 2

They'll talk about these things. And for us, it has helped us It'll really create a market for energy storage, solar plus energy storage. Our 20 fourseven relies on energy storage. If a version of the Climate Plus Bill gets passed and there's clarity about around green hydrogen that will require a lot of energy storage. So, yeah, it is a strategic relationship.

Speaker 2

And we hope to grow together for years to come.

Speaker 3

Awesome. All right.

Speaker 2

Thank you, guys. Good luck. Thank you, Julien.

Speaker 3

Thanks, Julien.

Operator

Thank you, Julien. Our next question comes from Antti Storozynski with Seaport.

Speaker 9

So Look, my first question is about the timeline of your coal plant retirements. We seem to be in this new gas environment basically everywhere in the world. We haven't yet heard many companies change the timeline, but there is money to be made on continued operations of some of these assets. So that's one. And then the second question, a little bit more longer dated, I guess, is that so far when you see the reasons why C and I customers signed renewable power PPAs, they mentioned decarbonization as the main driver.

Speaker 9

We haven't yet heard much about economic renewables and it's probably the inflation and equipment prices doesn't help, but are you expecting the second wave of demand from C and I customers as we are in this higher power price environment probably for years to come?

Speaker 2

Yes, those are great questions. Look, first on the first one, we have to reach our goal by 2025. So it's a question of trying to sell these assets or shut them down at times that are Most appropriate. So the shutdowns, it's talking a lot with the local system operator and or the Ministry of Energy. So those I don't see being affected by what's happening now.

Speaker 2

On some of the sales, you're right, Many of these plants are more valuable in certain locations, again Maritza being the prime example. And some of these shutdowns may Maybe somewhat delayed because they must run-in terms of availability of natural gas. But it doesn't change our goal of getting rid of all coal plants by 2025. The second question is, I'm really glad you asked it because The companies are committed to their DeereCar organization goals. They're not just going to abandon them because of the Case before commerce or because of slightly higher prices of I would say everything from wind turbines to solar panels to batteries due to what's happening on the mineral side, commodity side.

Speaker 2

But what people aren't talking about is that the increase in cost of renewables is much, much less than the increase in the price of fossil fuels. All of them, whether it be coal, gas, or diesel. So actually, renewables are more competitive today than ever. And in almost all cases, I can say that the energy from renewables is the cheapest energy. It's just a matter of degree, you know, how much cheaper is it even with the increase in the cost of construction.

Speaker 2

So I'd say that the main issue is not energy, it's capacity. How to keep the lights on 20 fourseven. And you really have 2 choices. 1 is to continue to run your legacy assets whether they be gas or coal and combine it with renewables, that's what we did in Chile, the sort of green tegra or green blend and extend Or energy storage. And as people go, let's say, further on this journey of decarbonization, That's why there's going to be such strong demand for energy storage, lithium ion based energy storage.

Speaker 2

So really, to me, it's a question of supply. Can you get enough batteries to meet this? And the more batteries that become available, then you'll be able to retire fossil plants sooner. So that's I'd say the main thing. So you're right.

Speaker 2

But on the cost equation, renewables are more competitive than ever than before this crisis.

Speaker 9

Yes, because it is pretty amazing to see that large commercial investor customers are comfortable locking in, for example, in PJM power prices as far as as high as $50 in 2026, 2027 when they could purchase renewables for like 45, 46. I mean that is just one thing that I don't fully grasp and I'm hopeful that that just means that there is more growth to come for you guys?

Speaker 2

There is going to be more growth. I mean, maybe in some of these cases, it's just that Do they have confidence that the projects are there? Because it's can you deliver those And in the sector, there have been a lot of projects delayed or canceled, not by us, due to different kinds of supply shortages. So, that might be it. It might be that they're going for certainty.

Speaker 2

So what we feel differentiates us and we're very conscious of is that we have been delivering on our projects.

Operator

Very good. Thank you.

Speaker 2

Thank

Speaker 8

you. Thank

Operator

you, Angie. Our next question comes from Greg Orrill with UBS. Greg, your line is now open.

Speaker 3

Yes, thank you. I was wondering if you could comment on what got Moody's to investment grade, Anything you wanted to highlight there?

Speaker 2

Look, this has been a I'll pass this over to Steve because he did most of the work. But what I would just add, this is in the decade. So if you look at any of our statistics in terms of our exposure to commodities, If you look at the fact that we're almost, what, 88% I think in dollars, 85% contracted in or U. S. Utilities, if you look at fact that we are, I guess, almost 90% hedged, I mean, all the indicators are very strong.

Speaker 2

So our cash flow has been really strong for Long time, but this company is just so fundamentally different from where it was even 5 years ago. But I'll pass it off to Steve.

Speaker 3

Thanks, Andres. And thanks for Craig, I was hoping someone would bring it up because we're very proud of the Moody's achievement. So look, this is the third of 3. And so it really fully solidifies our investment grade status as AES, something that the team set out a long time ago. I can't I've only been in my job for 6 months, so I can't really claim too much credit for it.

Speaker 3

So it Really good to Ahmed, John and the team. And so look, Moody's takes a different approach where they're looking at our consolidated debt, Including all the non recourse debt and all the cash flow from our businesses, our subs. So they really did a very deep review and they looked at also the overall risk profile of our businesses. So Our commercial structure, our long term contracts, dollar denominated, our growth in our utilities. And so it's been a combination of the strengthening of the balance sheet, the increases in our cash flow and that business mix.

Speaker 3

So and we've actually been in Moody's territory for 4 quarters straight, well into Moody's territory. So this was becoming really, really obvious that it was something that AES And we're very proud of it. And look, we felt really good about our transformation, and I think this is just another validation point of that transformation. As I said, they did a really thorough review.

Speaker 2

Yes. And I would highlight what Steve said that Moody's methodology is different. So it takes into account Not only the non recourse debt, but the recourse debt. So in our case, it's about, I guess, dollars 3,500,000,000 of recourse.

Speaker 3

Yes. Thank you. I understand.

Speaker 2

And 14.3 of non recourse.

Speaker 3

Yes, exactly. Yes, I mean I think I said non recourse, but it's the recourse debt that's different here. They really look deeply into the whole organization.

Speaker 2

So this tells you that all our subs, That they have confidence in the cash flow coming from our subs and most of our subs are investment grade rating. So It's a great confirmation and it was a decade in the making, but the team did a fantastic job in the last year to get this across the finish line.

Speaker 3

Yes. And the other thing I would just point out is, I think it's a bright line for some investors. So having this third one, having 3 now locked in. I think we'll likely see some new investors be attracted to the company now.

Speaker 6

Got it. Thanks.

Operator

Thank you, Greg. Our next question comes from Brian Levine with Citi. Brian, your line is now open.

Speaker 7

Good morning. Given your favorable view of DOC outcome and balance sheet strength, are you looking to be more acquisitive in new in development third party solar projects And your short line?

Speaker 2

Look, what we were seeing is that clients are coming to us and asking us, Can we do projects that other people have walked away from, quite frankly. So that now what we're mostly interested in the states, you know, these 20 fourseven. So really it has to do does it fit into where we're trying to combine assets to be able to deliver 20 fourseven. But it does open up some opportunities. So I think again on the Department of Commerce case, we just feel that the legal case of the length of year is very, very weak.

Speaker 2

And we think that furthermore, if you look at the objectives of Decarbonization of on shoring, this actually moves us in the wrong direction. So yes, where I would put it is that we continue to You'll see opportunities to acquire some projects if they help us meet our clients' demands.

Speaker 7

And then I guess One follow-up from earlier. Are you able to break out the Bulgarian wind contribution for the quarter?

Speaker 3

We did not break that out for the quarter. Probably best as we talk about the full year, but it we We expect it will be a few cents for the full year.

Speaker 7

Okay. Appreciate it. Thank you.

Operator

Thank you, Ryan. Our next question comes from David Peters with Wolfe Research. David, your line is now open.

Speaker 7

Yes. Hey, good morning, everybody. I'm just curious, Andres, I think in your prepared remarks you said you expect backlog additions this year to be roughly fifty-fifty U. S. And international.

Speaker 7

Is that the mix you guys expected heading into this year? Or are you leveraging your geographic diversity some given the uncertainty in the U. S. In the near term. And should we maybe think of that as a lever you can sort of pull in 'twenty three to the extent there are delays with U.

Speaker 7

S. Projects?

Speaker 2

Well, I mean, 423, these will be projects that are already signed in terms of commissioning. Now in terms of signings, Yes. Obviously, we can we have a diverse portfolio and we can adjust correspondingly. So I don't think it would affect 2023 per se. Now the sort of fifty-fifty mix again that's sort of legacy.

Speaker 2

And again, what we hope again with the resolution of this case is that the proportion of U. S. Would increase.

Speaker 3

Yes. And I would just add, it's also coming from our utility rate base growth. So 9% rate base growth in utilities is helping And then a lot of what we're doing, well, really almost everything we're doing even internationally is in a similar strategy with commercial industrial customers, some of them the same customers in the U. S. Powering data centers in our core markets overseas.

Speaker 3

So we'd expect to have a It's in a different flag, but it would still be a long term contract and in many cases, U. S. Dollar denominated

Speaker 2

That's a very important point. I mean what we're really emphasizing abroad is long term renewable contracts in dollars. So if you're supplying, say, Microsoft in Chile, it really isn't a different risk from Microsoft in California. So again, our business is already over 80% in dollars and that will only grow.

Speaker 7

Thank you. And then just last one. In California, just in light of solar delays this year and next and maybe storage Just attach that to now potentially have an extension of Diablo Canyon being discussed. I'm just curious your guys' most recent thoughts on the likelihood Of your OTC units itself once getting extended at the end of 'twenty three?

Speaker 3

Without jinxing ourselves, we think it's very likely. So these the environment there is not such that they want long term extensions all at once, but we've extended through 2023. And we have it's not it's an upside to our guidance, But we do think there's a very good chance that those plans will get extended into several years following. So it may be year by year, it may be 2 years at a time, but we think that portfolio is very important and some of the disruption. This is a bit of an offset to some of the current disruption in the solar supply chain.

Speaker 3

And that comes both from a capacity revenue perspective as well as the opportunity for the Q3 peak demand energy hedging that we've done. So it's quite it can be quite material.

Speaker 7

Okay, great. Thank you.

Operator

Thank you, David. That concludes today's Q and A portion of the call. I will now pass the conference back over to Susan Harcourt for any closing remarks.

Speaker 1

We thank everybody for joining us on today's call. As always, the IR team will be available to answer any follow-up questions you may have. Thank you and have a nice day.

Operator

That concludes today's AES Financial Review Conference Call. Thank you for your participation. You may now disconnect your line.

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