Yahoo Finance The AES Corporation (NYSE:AES) Q3 2023 Earnings Call Transcript
The AES Corporation (NYSE:AES) Q3 2023 Earnings Call Transcript November 3, 2023
The AES Corporation misses on earnings expectations. Reported EPS is $0.6 EPS, expectations were $0.74.
Operator: Good morning, and thank you for joining The AES Corporation Third Quarter 2023 Financial Review Call. My name is Kate, and I will be the moderator for today's call. [Operator Instructions] I would now like to turn the call over to your host, Susan Harcourt, Vice President of Investor Relations. You may proceed.
Susan Harcourt: Thank you, operator. Good morning, and welcome to our third quarter 2023 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-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 Andres Gluski, our President and Chief Executive Officer; Stephen Coughlin, our Chief Financial Officer; and other senior members of our management team. With that, I will turn the call over to Andres.
Andres Gluski: Good morning, everyone, and thank you for joining our third quarter 2023 financial review call. In addition to discussing our third quarter and outlook for the remainder of the year, I will address some concerns that we have heard from investors since our second quarter call in August. Specifically, my remarks today will focus on three areas: strategic and financial updates, our funding sources, and our exposure to interest rates. Beginning on Slide 3. I am pleased to report that our financial results continue to be strong and we now expect full year adjusted EPS to be in the top half of our guidance range of $1.65 to $1.75. We are also reaffirming all of our short- and long-term financial metrics. For the third quarter, adjusted EBITDA with tax attributes was $1 billion, and adjusted earnings per share was $0.60.
I'm very pleased with these results, which Steve will address in more detail shortly. Turning to Slide 4. We continue to see strong demand for long-term contracts for renewables, particularly from our primary customer base of large technology companies with a rapidly expanding data center business. Notably, even with rising interest rates, renewables continue to have the lowest levelized cost of energy, or LCOE, across almost all of the markets where we operate. So far this year, we have signed 3.7 gigawatts of new PPAs, including 1.5 gigawatts since our second quarter call in August. This number does not include the 1.2 gigawatts of new projects we were recently awarded in New York. Given that we have several large contracts that could be finalized in the coming weeks, we remain confident in our ability to sign at least 5 gigawatts of new long-term PPAs this year.
Included in the new contracts that we have already signed, is our first-ever developed transfer agreement, or DTA, to transfer to a utility 975 megawatts of solar plus storage at the point of commencement of construction. This structure allows us to create value from our advanced pipeline without the investment of any AES equity beyond the development costs. Now turning to our backlog on Slide 5. Our backlog of projects with signed long-term contracts is now 13.1 gigawatts. Of this total backlog, we expect more than 70% or over 9 gigawatts to come online through 2025, and we have already secured all of the necessary equipment for these projects. Furthermore, 44% or 5.8 gigawatts is already under construction. Moving to Slide 6. Our construction program continues to make excellent progress with 93% of the megawatts expected to come online this year, already having achieved mechanical completion.
As a result, we have increased our year-end construction target from 3.4 gigawatts to 3.5 gigawatts to incorporate the progress we have made this year. This figure reflects a more than doubling of the renewable projects placed in service compared to last year. Now turning to Slide 7. In light of current market conditions, I would like to directly address the sources of funding that we have in our long-term plan. We will not be issuing any equity until at least 2026, and even then, we will only issue equity if it is value accretive to our shareholders. Instead, we are significantly accelerating our asset sales, and believe, we now have line of sight to at least $2 billion of asset sale proceeds in '24 and '25, and expect our asset sale proceeds to total at least $3.5 billion through 2027.
With the proceeds from the sell-downs of our businesses in the Dominican Republic and Panama that we announced in September, we have already secured all of our external financing needs for the year at attractive terms. The general buckets that are part of our asset sales plan are: coal exit; sell-downs of U.S. renewable projects; partial monetization of businesses, including new energy technologies; and the exit of certain noncore businesses. We also plan to bring in partners at some of our businesses as we have done in the past to reduce future equity needs. While we never disclose specific transactions until we have actually signed sales agreement, we are in active and positive discussions with many interested counterparties. Turning to Slide 8.
The last topic I want to address before turning the call over to Steve is our exposure to interest rates. As a normal course of business, we have always proactively matched the profile of the debt to the profile of the cash flows that are supporting, which minimizes any impact from higher interest rates. Approximately 80% of our debt is non-recourse to the AES parent. And of that, the vast majority is either utility debt included in our customer rates or project level debt that is matched to the underlying project revenues. All of our long-term debt at Corp is either fixed or hedged, and as we have stated before, we've been able to pass on higher costs and interest rates in the new PPAs we signed. Finally, I want to highlight our commitment to maintaining our investment-grade credit ratings, which we see as an important component of our value proposition.
To that end, in every business decision we make, we take into consideration our relevant credit metrics. We take a disciplined approach to growth and overall risk management to ensure that we consistently maintain these metrics. With that, I would like to turn the call over to our CFO, Steve Coughlin.
Steve Coughlin: Thank you, Andres, and good morning, everyone. Today, I will discuss our third quarter results, our 2023 guidance, how we are flexing our plans to adapt to current financial market conditions and how we minimize our exposure to interest rates. Turning to our financial results for the quarter, beginning on Slide 10. I'm pleased to share that we had a strong third quarter and are fully on track to achieve our full year guidance. Adjusted EBITDA with tax attributes was just over $1 billion versus $991 million last year, driven primarily by higher contributions at our Renewables SBU, the recovery of prior year's purchase power costs at AES Ohio included as part of the ESP4 settlement and improved results at Fluence.
These drivers were partially offset by the absence of the significant LNG transaction margins, which we earned last year. Tax attributes earned by our U.S. renewables projects this quarter were $18 million versus $60 million a year ago, in-line with our expectations of a higher share of renewable projects coming online in the fourth quarter. Turning to Slide 11. Adjusted EPS was $0.60 versus $0.63 last year. In addition to the drivers of adjusted EBITDA, we saw higher parent interest expense this quarter as well as a higher adjusted tax rate. I'll cover the performance of our strategic business units or SBUs in more detail over the next few slides, beginning on Slide 12. In the Renewables SBU, we saw higher adjusted EBITDA with tax attributes, driven primarily by higher contributions from new projects brought online in the last 12 months, as well as higher margins in Colombia.
This was partially offset by lower tax credit recognition as a result of fewer new projects placed into service this quarter versus a year ago. Our business continues to make strong progress, not just with construction, but also the financing of new projects. We continue to see a robust market for tax credits. This year, we have already raised $1.8 billion in tax capital financing. The market for tax attributes is also greatly expanding as a result of the tax credit transfer option that has brought many more participants to the market. Importantly, tax credit transfers get recognized in operating and free cash flow, which further enhances our financial funding flexibility. Going forward, we will increasingly use tax credit transfers as a means to monetize tax credits including for nearly 500 megawatts of projects in 2023.
At our Utilities SBU, higher adjusted PTC was driven by the recovery of prior year's purchase power costs at AES Ohio included as part of the ESP4 settlement, which have been recognized as an expense in the third quarter of last year. I'd now like to take a moment to discuss the continued progress of our utility growth program on Slide 14. In August, we received commission approval at AES Ohio for our new Electric Security Plan, or ESP4, which includes timely recovery of $500 million of grid modernization investments at a 10% return on equity, allowing us to further improve the quality of service. As a reminder, we plan to grow the combined rate bases of our U.S. utilities at a 10% average annual rate through 2027. 80% of our planned investments through 2027 are either already approved or under FERC formula rate programs.
We are executing on this plan and with our investment programs across the two utilities, we are on track to increase our capital expenditures by over 35% year-over-year as we work to modernize and invest in system reliability. As we previously discussed, our utilities in Ohio and Indiana continue to charge the lowest residential rates of all electric utilities in both states. Turning back to our third quarter results, with our Energy Infrastructure SBU on Slide 15. Lower adjusted EBITDA primarily reflects significant LNG transaction margins in the prior year, partially offset by prior year onetime expenses in Argentina and higher revenues recognized from the monetization of the PPA at our Warrior Run coal plant. Finally, at our New Energy Technologies SBU, higher adjusted EBITDA reflects continued improved results at Fluence.
Fluence has continued to demonstrate improving margins and strong pipeline growth, and they have indicated their expectation to be close to adjusted EBITDA breakeven in the fourth quarter of their 2023 fiscal year. This year-over-year improvement would be reflected in our own fourth quarter results. Turning to Slide 17. I'm very pleased to highlight that we now expect to achieve the top half of both our 2023 adjusted EPS guidance range of $1.65 to $1.75 and our parent free cash flow range of $950 million to $1 billion. This reflects the strong performance of our renewables construction team whose excellent execution this year means that we expect to exceed our construction target of 3.4 gigawatts by at least 100 megawatts. Now to Slide 18. We are reaffirming our full year 2023 adjusted EBITDA guidance range of $2.6 billion to $2.9 billion.
Including the $500 million to $560 million of tax attributes we expect to realize in 2023, we expect adjusted EBITDA with tax attributes of $3.1 billion to $3.5 billion. The additional U.S. projects we expect to bring online this year should allow us to exceed the midpoint of the tax attributes estimate we provided at Investor Day. Now to our 2023 parent capital allocation plan on Slide 19. Sources reflect approximately $2.4 billion of total discretionary cash, including $1 billion of parent free cash flow, $400 million to $600 million of asset sales, and the $900 million parent debt issuance we completed in Q2. With the agreement to sell down a minority interest in our gas and LNG business in the Dominican Republic and Panama, we have secured the entirety of our external sources of parent level capital for 2023.
Turning to Slide 20. Since our Investor Day in May, financial market conditions have changed, and AES will flex its near-term and long-term plans accordingly. Looking ahead, we will continue to prioritize our strong credit profile and investment-grade ratings, hitting our financial metric growth targets, funding our growth primarily in U.S. renewables and U.S. utilities and advancing on our decarbonization and portfolio simplification goals. We have a number of levers to adjust that will keep us on track with these objectives. First, and to be clear, we will not issue equity at or near current share price levels and not until it is value accretive to our shareholders on a per share basis. As such, we are increasing our asset sale target to at least $3.5 billion for the 2023 to 2027 timeframe and accelerating our plan to achieve $2 billion of asset sale proceeds in 2024 and 2025.
With this change, we will not issue any equity until at least 2026, and the amount anticipated has been reduced to $500 million to $1 billion through our guidance period. Second, the tax credit transferability option that we now have creates added flexibility to monetize the tax value of our U.S. renewables projects with a broader base of market participants while also increasing free cash flow and the capacity to fund growth. Third, while we still intend to exit all of our coal businesses in a few of our markets, our coal assets will be temporarily needed to support the energy transition beyond 2025 as renewable deployments and transmission have not progressed as quickly as required. We still intend to exit the majority of our remaining coal businesses by the end of 2025.
However, we have the flexibility to delay the exit of a few select plants through 2027 to support continued electricity reliability. This delay would yield continued financial contributions from these assets during this period. For 2024 and 2025, we expect to fund our remaining parent capital needs entirely with asset sales and planned debt issuances. We feel confident that we can achieve the $2 billion asset sale target in these years, as we have already held discussions for a large portion of the assets in this program. We anticipate competitive processes that will yield attractive valuations with minimal dilution to earnings and cash beyond what had been incorporated in our plan. Our sales program is designed to meet our strategic objectives to simplify and decarbonize our portfolio while funding our core growth investments in U.S. renewables and utilities.
Finally, turning to Slide 21, we are largely hedged against future increases in interest rates. Looking at the parent company, our long-term debt is entirely fixed and we hedge our exposure to refinancing risk over a five-year window. Our nearest maturities in 2025 and 2026 were previously hedged at a rate of approximately 3%. Approximately 80% of our consolidated debt is at the subsidiary or project level and is non-recourse to the parent. We typically pre-hedge future project debt issuance for the full tenor when we sign a PPA, insulating our expected returns from future rate movements. The amortizing structure of our project debt rather than bullet maturities allow the project to support higher leverage. As we grow, our long-term debt balances will increase proportionally to the underlying cash flow of our businesses, enabling us to maintain steady leverage ratios and investment-grade credit metrics.
At the end of the third quarter, we had approximately $6 billion of interest rate hedges outstanding at an average rate of 2.9%. Looking at the impact of a 100 basis point shift in interest rates on our future issuances, refinancings and U.S. floating rate debt, we have under $0.01 of EPS exposure from interest rates in 2024 and $0.03 to $0.04 of exposure in 2025. Unhedged floating rate debt is primarily located outside the U.S. where inflation indexation in our PPAs provides a natural hedge against rising rates. In summary, as we approach year-end, we've made excellent progress on achieving our financial and strategic objectives for 2023. Our balance sheet is strong, and we are flexing to adapt to current financial market conditions. With line of sight to our future growth funding needs, we will create value from our excellent market position while continuing to prioritize maintaining investment-grade credit metrics and achieving our financial commitments.
With that, I'll turn the call back over to Andres.
Andres Gluski: Thank you, Steve. Before moving to Q&A, I would like to briefly address a few other concerns that we have heard from some of you regarding the future of the renewable sector in general. For starters, global warming is, unfortunately, very real and likely accelerating. We have seen it in all-time record temperatures over the past five years and especially this summer in the Northern Hemisphere. This new reality was reflected in record demand for energy during heat waves, unprecedented wildfires and more volatile rainfall, all of which affect the general public. Completely apolitical actors, such as insurance companies, are pulling out of certain markets in vulnerable areas after suffering material losses due to climate change.
It is, therefore, extremely unlikely that major corporations will abruptly walk away from all of their carbon reduction goals regardless of any short-term unscientific political rhetoric. Given all that is happening in the renewable space, it is now more important than ever to differentiate among companies and developers. In my opinion, nobody is better placed than AES to create shareholder value from the ongoing energy transition because we have been focusing for years on the most resilient and lucrative opportunities. We are among the largest suppliers of renewable energy in the most attractive markets in the U.S., California, New York and PJM. We are also the biggest supplier of renewable energy to corporations in the world and particularly to data centers.
Already, data centers represent half of our U.S. backlog and the growth of generative AI will only accelerate their demand for more renewable energy. An important differentiator is that AES is one of the very few major renewable developers that has not had to abandon projects in its backlog due to cost increases or supply chain disruptions. This has cemented our reputation for reliability among premium customers. And finally, AES is the most innovative company in the sector, developing and implementing new technologies such as: grid scale energy storage, hourly match renewable power purchase agreements, refabricated solar, construction robotics and software for energy efficiency in AI-enabled grid visualization. I believe these efforts will have material and growing benefit to our shareholders, especially by maintaining our lead in the most lucrative market segments.
Regarding significant drivers for future growth post 2027, AES is best positioned to be the leader in green hydrogen production with the most advanced large project in the country, in Texas, in our participation in two of the largest hubs chosen by the Department of Energy. Our green hydrogen projects have real off-takers and sites, and we expect that they will meet the most exacting standards of additionality, regionality and hourly matching. Today, AES has the technology, the people, customer and supplier relationships, the scale and proven track record to continue to grow renewables profitably during the now unstoppable energy transition. While the total addressable market for our products and services is truly immense, I want to emphasize, once more, that our aim is to maximize shareholder value, not the number of megawatts or market share.
Our priority will always be to ensure the best risk-adjusted returns for our shareholders on a per share basis. With that, I would like to open up the call for questions.
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