愛依斯電力 (AES) 2021 Q2 法說會逐字稿

Good day, and welcome to the AES Corporation Second Quarter 2021 Financial Review Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Ahmed Pasha, Treasurer and Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to our second quarter 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 Andres Gluski, our President and Chief Executive Officer; Gustavo Pimenta, our Chief Financial Officer; and other senior members of our management team.

With that, I will turn the call over to Andres. Andres?

Good morning, everyone, and thank you for joining our second quarter financial review call. Today, I will discuss our progress to date on a number of key strategic objectives before turning the call over to our CFO, Gustavo Pimenta, to discuss our financial results in more detail.

We had an excellent second quarter, with a 24% increase in adjusted EPS from the second quarter of 2020, and a record 1.8 gigawatts of renewables under long-term contracts added to our backlog, bringing our total to 8.5 gigawatts. We remain on track to achieve 7% to 9% average annual growth in adjusted EPS and parent free cash flow through 2025. I will give more color on our accomplishments while covering the following 3 themes shown on Slide 4.

One, the growth and transformation of our U.S. utilities; two, our rapidly growing renewables business; and three, our strategic advantage from innovation. As you may recall, during our Investor Day in March, we outlined our plan to invest $2.3 billion to transform our 2 US Utilities, AES, Ohio, and AES Indiana.

During the second quarter, we concluded key outstanding regulatory proceedings at both of our U.S. utilities, clearing the path for investment in the latest technologies, which will enable us to deliver a higher level of service and reduce carbon emissions.

At the core of our efforts is a focus and deep understanding of the digital tools that vastly improve customer experience and enable the integration and orchestration of diverse and distributed renewable resources.

Starting with AES Ohio on Slide 5, where we expect to nearly double the rate base by growing 12% annually through 2025. Recently, we made a substantial headway on outstanding regulatory filings. First, the commission approved AES Ohio stipulation, allowing predictable cash flows and investment in smart grid initiative over the next 4 years. And second, AES Ohio also received approval for the FERC regulated formulary, allowing recovery of transmission investments.

Now moving on to AES Indiana on Slide 6, where we're investing $1.5 billion over the next 5 years as part of our grid modernization program, and our transition to more renewables-based generation. We recently received regulatory approval for our 195-megawatt Hardy Hills solar project, and we announced an agreement to acquire the Petersburg Solar project, which includes 250 megawatts of solar and 180-megawatt hours of energy storage. We expect to grow the rate base at AES Indiana by more than 7% annually. With many of the key regulatory approvals behind us, we are now positioned to execute on our utility modernization and decarbonization programs, which have been years in the making.

Now turning to the second theme of renewables growth on Slide 7. Last year was a record-breaking year of renewable contracts for us, with over 3 gigawatts signed. So far this year, we have already signed almost 3 gigawatts of contracts for wind, solar and energy storage, nearly double the amount at the same time last year. More than 90% of the new contracts are in the U.S., and we are well on our way towards achieving or exceeding our target of 4 gigawatts for 2021. At the same time, more than 80% are with C&I customers, negotiated on a bilateral basis. Our new projects will yield after-tax returns at the project level in line with our low teens average for the U.S. and mid- to high teens internationally.

Our progress so far this year includes our recent agreement to acquire 612 megawatts of operating wind assets in New York, as shown on Slide 8. New York state's supportive renewables policies, combined with the scarcity of wind projects in the Northeast, provides us with several pathways for long-term attractive cash flows to support repowering by 2025. This wind acquisition complements our solar and energy storage pipeline, providing us with another resource to offer diversified and differentiated products to our consumers.

Turning to Slide 9. We're particularly pleased with our ability to advance new [planned] energy products. This year, we announced the world's first ever large-scale 24/7 carbon-free energy netted on an hourly basis, supplying Google's Virginia data centers. We see this concept of real-time renewable generation as opposed to the purchase of offsetting renewable credits as the new highest standard in clean energy. We have since replicated similar structures with other large-scale customers, helping them to achieve their sustainability targets, while supporting our renewables growth goals for a total of 1.5 gigawatts of these clean energy products signed or awarded thus far this year. We see these innovative carbon-free energy products as examples of our unique advantages, both in our technical and commercial abilities as well as our culture of working together with customers to understand their specific needs.

Turning to Slide 10. With nearly 3 gigawatts of renewables and energy storage project added this year, we now have a backlog of 8.5 gigawatts, including 2.5 gigawatts currently under construction. We expect to bring 1.4 gigawatts online during the remainder of 2021. The strength of our U.S. renewables growth in a rapidly expanding market will support achieving our goal of having 50% of our earnings from renewables and utilities, and 50% of our earnings from the U.S. by 2025.

We also continue to aggressively grow our pipeline of early, mid- and late-stage development projects to support future growth. As you can see on Slide 11, we now have a pipeline of 37 gigawatts, among the largest in the world. More than 60% of this pipeline is in the U.S., including 8 gigawatts in the hottest market in the country, California.

Now to decarbonization on Slide 12. Last month, AES Andes announced their 1.1 gigawatts of coal-fired generation would be voluntarily retired as soon as January 2025 and will be replaced with 2.3 gigawatts of newly contracted renewables. Since 2017, we have announced the sale or retirement of almost 12 gigawatts of coal-fired generation, which is among the largest programs of any American company. I'm pleased to report, along with our substantial renewable additions, reduce our generation from coal to approximately 20% of total generation on a pro forma basis, an additional reduction of 5 percentage points since last quarter. I would like to address 2 key concerns that we're hearing from investors related to growth in renewables: inflationary pressures and supply chain bottlenecks.

As one of the largest global renewable developers, with a strong reputation, we have a long history of successfully negotiating strategic supply agreements, resulting in preferential access and pricing. Furthermore, we lock in the hardware prices when we signed the PPA, sheltering us from future price fluctuations. With 90% of the equipment needed for our 8.5 gigawatt backlog already secured, we feel very comfortable in our ability to execute on our strong pipeline over the short and medium term.

Now turning to Slide 13 and our third theme of innovation. As our entire sector continues to rapidly evolve, we increasingly find that there is a competitive advantage for those who are able to effectively incorporate new technologies and business models. For example, we have benefited significantly from our energy storage business, which we started over 10 years ago and which now is one of the largest in the industry. There are important synergies between our core businesses and technology ventures. For example, this year, about half of our renewables energy PPAs include an energy storage component.

Last month, once again, we were awarded the highest honor in the power and utility sector, the Edison Award from the Edison Electric Institute. For our work developing energy storage as a cost-effective alternative to new gas peaking plants. Specifically, the award was for the AES Alamitos battery energy storage system, consisting of 400-megawatt hours of energy storage that can supply power to tens of thousands of homes in milliseconds. This is our seventh Edison Award overall, and third, U.S. Edison Award over the last decade.

I would like to note that we have won many more Edison Awards than any other company in recent years.

Turning to Slide 14. We also continue to build on our prior success in creating technology unicorns. For example, we have previously mentioned our strategic investment in 5B, a prefabricated solar solution company that has patented technology, allowing solar projects to be built in 1/3 of the time and on half as much land, while being resistant to hurricane force winds. We continue to grow 5B's footprint across several markets, including the U.S., Puerto Rico, Chile and Panama and are now expanding into India, where we are working with domestic partners to establish local manufacturing.

We hope India will enable 5B to reach much greater scale, much more quickly, which combined with our leading work in robotics construction will help us lower all-in solar cost as we advance on the learning curve.

Turning to Slide 15. Similarly, we continue to benefit from our investment in Uplight, which provides cloud-based energy efficiency solutions to more than 110 million households and businesses through its numerous utility customers, including AES Ohio and AES Indiana. In July, we closed the previously announced transaction with Schneider Electric and a group of investors that valued Uplight at $1.5 billion.

In conclusion, we're very pleased with our progress to date across all of our key strategic initiatives. Not only are we well positioned to achieve all of our financial goals, but we are on track to hit our transformational targets of more than 50% of our earnings from renewables and utilities and more than 50% from the U.S. while having less than 10% of our generation from coal by 2025.

I will now turn the call over to Gustavo Pimenta, our CFO.

Thank you, Andres, and good morning, everyone. As Andres mentioned, we are making excellent progress this year, having already achieved significant milestones on our strategic and financial objectives. We are pleased to see the continued economic recovery across our markets driven by the reopening of local economies. In Latin America, many of our clients continue to benefit from record steel, copper and soybean prices, resulting in a significant improvement in electricity demand across our businesses. This also reflects in our days sales outstanding, which remain at historically low levels.

Turning to our financial results for the second quarter on Slide 17. Adjusted EPS was up 24% to $0.31, primarily reflecting execution on our growth plan, demand recovery at our U.S. utilities, and parent interest savings. These positive drivers were partially offset by lower contributions from Chile and Brazil, and a slightly higher adjusted tax rate.

Turning to Slide 18. Adjusted pretax contribution or PTC was $303 million for the quarter, an increase of $65 million versus the second quarter of 2020. I will discuss the key drivers of our second quarter results in more detail beginning on Slide 19. In the US and Utilities Strategic Business unit, or SBU, PTC was up $71 million, driven primarily by the demand recovery at our utilities, higher contributions from about 1 gigawatt of new renewable assets and the commencement of power purchase agreements, or PPAs, at Southland Energy in California.

Turning to Slide 20. We are very encouraged to see material recovery from system demand at our U.S. utilities. For Q2, on a weather-normalized basis, demand at AES Ohio is up 9%, and demand at AES Indiana is up 4%. The net combined volume in Ohio and Indiana is largely back to 2019 pre-COVID levels. This recovery is mainly driven by higher load from commercial and industrial customers this year as a result of the reopening of local businesses.

Separately, in California, our 2.3 gigawatt Southland legacy units are well positioned to contribute to the state's pressing energy needs and its transition to a more sustainable carbon-free future. In fact, the State Water Board is considering the California Energy Agency's recommendation for our 876 megawatts Redondo Beach facility to be extended for 2 years through 2023 to align with our remaining legacy units. This proposed extension would be an upside to expectations through 2025.

Now turning back to our quarterly results on Slide 21. At our South America SBU, lower PTC was mostly driven by recovery of expenses from customers in Chile in 2020, lower equity earnings from Guacolda also in Chile and [drier hydrology] in Brazil. These impacts were partially offset by higher generation at the Chivor hydro plant in Colombia.

Higher PTC at our Mexico, Central America and the Caribbean, or MCAC SBU primarily reflects better hydrology in Panama, which was partially offset by the sale of Itabo in the Dominican Republic. Finally, in Eurasia, PTC remained relatively flat. The impact from the sale of OPGC in India was largely offset by lower interest expense in Bulgaria.

Turning to Slide 24. With our first half results, we are on track to achieve our full year 2021 adjusted EPS guidance of $1.50 to $1.58. As we have discussed in the past, our typical quarterly earnings profile was more back-end weighted, with roughly 40% of earnings occurring in the first half of the year. Growth in the year to go will be primarily driven by 1.4 gigawatt of new renewables assets coming online in the remainder of the year, continued demand recovery across our markets, reduced interest expense and cost savings benefits. We are also reaffirming our expected 7% to 9% average annual growth target through 2025.

Now turning to our credit profile on Slide 25. Strong credit metrics remain 1 of our top priorities. In the last 4 years, we obtained 2 to 3 notches of upgrades from the 3 credit rating agencies, including investment-grade ratings from Fitch and S&P. We are also very encouraged by the recent change in outlook to positive on our Ba1 rating at Moody's. These actions validate the strength of our business model and our commitment to improving our credit metrics. We expect the positive momentum in these metrics to continue, enabling us to reach BBB ratios by 2025.

Now to our 2021 parent capital allocation plan on Slide 26. Consistent with our prior disclosures, sources shown on the left-hand side of this slide reflect approximately $2 billion of total discretionary cash. This includes $800 million of parent free cash flow, $100 million of proceeds received from the sale of the Itabo in the Dominican Republic, and the successful issuance of the $1 billion of equity units in March.

Now to uses on the right-hand side. We'll be returning $450 million to shareholders this year, consisting of our common share dividend and the coupon of the equity units. And we plan to invest approximately $1.4 billion to $1.5 billion in our subsidiaries as we capitalize on attractive opportunities for growth. Approximately 60% of these investments are in global renewals, reflecting our success in originations during 2020 and our expectations for 2021. And about 25% of these investments are in our U.S. utilities to fund rate base growth, with a continued focus on grid and fleet modernization.

In the first half of the year, we invested approximately $700 million, primarily in renewables, which is roughly 50% of our expected investments for the year.

In summary, we are making significant progress on executing on the strategic and financial objectives we laid out in our Investor Day in March, positioning AES as a leader in the energy transition while delivering superior returns to our shareholders.

With that, I'll turn the call back over to Andres.

Thank you, Gustavo. In summary, the world has decided to seriously tackle climate change, and this is driving unprecedented and accelerating growth in demand for renewables and energy efficiency applications and services. In relative terms, I don't believe anyone is better positioned than AES to capitalize on this once-in-a-lifetime transformation of our sector. We have a proven track record of success. We have the most innovative new products and an 8.5 gigawatt backlog and the 37 gigawatt pipeline of projects. All in all, we're enthusiastic about our future, and we feel confident about delivering on our 7% to 9% average annual growth rate.

Our core contracted generation and utility businesses have shown great resilience in the face of global and regional effects of COVID. Beyond our robust growth rates in earnings and cash flow from our core businesses, we are creating very significant value for our shareholders through our technology joint ventures. There has never been a better time for AES. With that, I would like to open up the call for questions.

(Operator Instructions) And the first question comes from Julien Dumoulin-Smith from Bank of America.

Congratulations on the developments year-to-date. I am very curious on the latest on the battery business and some of the strategic angles you're thinking about here. Can you talk about what's evolved around Fluence given the latest comments here? And then also, at the same time, can you comment a little bit on the storage availability? I know you all have been making or taking some preemptive actions to ensure continued supply availability, but if you can comment on the latest backdrop, would very much appreciate it.

Sure. Well, there's not too much I can comment other than the statement in our press release. In the past, I've talked about it that ensuring supply was very important to us, and we have mentioned the strategic arrangement with Northvolt for European supply. So as I said in the call today, overall, we feel very good about being able to have access to the equipment we need for our growth program. But I really can't comment much more on Fluence at this time.

Julien, are you there?

Julian, your line is open.

Yes, let's proceed to the next question.

No problem at all. The next question comes from Angie Storozynski from Evercore ISI (sic) [Seaport Research]

So I'm just wondering, what is the reason for this acceleration in the renewable power generation that we're seeing year-to-date? Is it just because you're increasingly focused on C&I customers, hence the higher-than-expected backlog year-to-date?

Angie, that's a great question. I would say, yes, as you can see, we're focusing a lot on C&I. We have come up with innovative products like the around-the-clock carbon-free energy. So as we mentioned in my speech, we have 1.5 gigawatts of new contracts just coming from similar products to the one that we had announced with Google. So certainly, that is a big driver.

The other thing, of course, is we have a good pipeline of potential projects. So we're just finding that we're working very well with our clients. We have many repeat clients in terms of signing on new deals. So this second quarter was particularly strong in the U.S. And we see that as the most -- the most rapidly growing market. But we're very well placed. So we feel good about it. We feel good about the product offerings that we have. We feel good about our customer relations, and we feel good about our supply chain.

Okay. And secondly, I mean, it seems like you guys are starting to do projects, which -- I mean, you don't typically pursue like repowering of the wind farms in New York State or the acquisition of renewable assets in Indiana from NextEra. Is -- I mean, is it just because those are opportunistic deals that offer highest returns, hence, those are not the traditional ground-mount solar installations that you would typically pursue?

Look, we're focused on satisfying our customers' needs. In this particular case, it's AES Indiana. So if there was a better project in MISO that we need to put together to meet our transition towards more renewables, we will take it. So in many of our deals, we use -- we -- a lot of them require additionality. So we're building most of them, but we know there's no problem with acquiring somebody else's project to get the optimal mix from a risk and also, I'd say, production capability. So first, that's something that's inherent in our product offerings. So we're really trying to solve the clients' need. It's much less about sort of RFPs and [busbar] PPIs. That's what we're going after.

In the case of New York, look, we don't have a lot of wind assets of ourselves. Other people have done a lot of wind assets repowering. We think this is an idea that the time has come with the technology. So we're doing some repowering on our old wind farms, but we saw this as a great opportunity in New York to repower. And again, this comes back to the idea that we want a mix of assets, wind, solar, energy storage, in some cases, even small hydros to be able to deliver those sort of round-the-clock renewables. So think of it that way. We are solving for what the customer wants, and we'll put the package of sources, whether we build them or we buy somebody else's project, to satisfy that.

And the next question comes from Durgesh Chopra from Evercore ISI.

Andres, I appreciate you can't say much about Fluence, but maybe I'm just kind of curious on the timing of the announcement here. So QIA sort of made their investment late last year. Are you seeing more growth opportunities? Just -- can you walk us through maybe your thought process on why now versus wait a couple of years? Just anything along those lines?

Honestly, I can't comment much on it. What I can refer you to what I've said in the past. And with QIA, I would say it's not just a financial investor, it's a strategic investor, which has investments in other very important companies, which can help this business. So I'll have to limit my comments to that, and I'm sorry.

That's okay. We'll leave there. Maybe just shifting gears to Chile. The last -- I remember there were some legislations on early retirements. You guys have kind of retired your coal plants. Can you talk about your exposure there as a percentage of the company as a whole post the announcement of these coal retirements? And do you see any risks to margins and cash flow there in Chile?

Look, I'd say overall, Chile is maybe like 15%. Remember that AES Andes includes Colombia and includes 100% renewable hydro in Colombia. AES Andes has done a remarkable transformation in terms of being a primarily coal -- contracted coal generator into, by 2025, having very little coal. And a lot of green blend and extend. So this really gave us an in was the ability to modify those contracts so that a large proportion, if not the majority of the energy would come from new contracted renewables, and you keep the coal for capacity. So this is, again, quite a remarkable transformation. So the last thing I would say is regarding the potential legislation that's been talked about, I think it's really -- Chile is a serious country and they're really looking at how the grid can maintain its reliability with the retirement of these coal plants. So what we said is, look, we are willing to retire these plants as soon as 2025 is really to give the grid operator the opportunity to have -- to ensure a reliable grid. We can shut them down sooner from our perspective. So I don't see -- this -- everything that we're doing is in our forecast. I will pass it to Gustavo to make some more comments.

Yes, Durgesh, I think the 1 thing that I would add is after the announced retirement, the latest 1 that we've done, we are left with just 2 facilities for green blend and extend and retirement. So it's about 800 megawatt left and everything else has been announced. We've been able to implement green blend and extend. So it's a substantially smaller share of where we were in (inaudible) a couple of years ago.

Got it. It sounds like a small portion of EBITDA, cash flow earnings, whatever come from Chile post these retirements. Okay.

Great execution on the backlog and congratulations on getting more on the board here.

(Operator Instructions) The next question comes from Biju Perincheril with Susquehanna.

Andres, you touched on some of the supply chain concerns. I was wondering if you could talk a little bit about how you might be impacted from the Hoshine WRO and may be some of the steps you're taking to mitigate that impact?

Yes, a great question. Look, for some of you who follow us for a while, we're always very paranoid about our supply chain. That's why I think it was January of -- February actually of 2020, we were talking about supply chain issues with COVID and how we're going to get ahead of it. So here, we've also been on top of this. They're, obviously -- in the past year, there were supply chain issues with imports. What was going to be the tariff on panels from China? And then what was going to be the tariff, for example, on aluminum? So could you manufacture it locally? So we've been on top of this issue.

So today, I would say all of our solar panels coming into the states are not coming in from China. They're coming in from Malaysia. We do buy some U.S. panels as well, which are non-polysilicon. We're also working with top notch -- only top-notch panel manufacturers, first tier, and getting certificates that none of the polysilicon comes from Hoshine. That could be associated in any way with forced labor. So that's where we are. This is a developing story. In the past, what we've been able to do with the tariffs, for example, is to move panels that were coming to the state, for example, to Chile and vice versa to optimize the supply chain. So -- which, quite frankly, worked out very well.

So if you look at what we're doing, we are certainly in solar, one of the top 5, I would say, in the country in terms of new solar development. So we're very well positioned. We're on top of that. We have long-standing agreements, and our suppliers are doing everything possible. I think I could add that, in the future, we're going to -- we're making sure that the polysilicon would come from alternative sources like Germany or Korea. So that's in the works.

But this does take a transition. So we're on top of that. And stay tuned because, while we feel very good about our certification and all the rest, it's a question of where does that polysilicon arrive? And can you prove it? So again, we are having, I'd say, as extensive affidavits from our suppliers as anybody on this matter.

This concludes our question-and-answer session. I would like to turn the conference back over to Ahmed Pasha for any closing remarks.

Thanks, 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. Thanks, and have a nice day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.