The AES Corporation (NYSE:AES) Q4 2022 Earnings Call Transcript

The AES Corporation (NYSE:AES) Q4 2022 Earnings Call Transcript February 27, 2023

Operator: Good morning and a warm welcome to the AES Corporation Fourth Quarter and Full-Year 2022 Financial Results Call. My name is Candice, and I will be your moderator for today’s call. I would now like to hand you over to our host, Susan Harcourt, Vice President of Investor Relations. The floor is yours. Please go ahead.

Susan Harcourt: Thank you, operator. Good morning and welcome to our fourth quarter and full-year 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-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; Steve 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 fourth quarter and full-year 2022 financial review call. Today, I will discuss our 2022 financial results and strategic accomplishments, as well as our 2023 guidance. Steve Coughlin, our CFO will discuss our financial results and outlook in more detail shortly. Beginning with our 2002 results and accomplishments on Slide 3. I am very pleased with our performance in 2022, which was our best year ever. Adjusted EPS came in at $1.67, above our guidance range of $1.55 to $1.65. This accomplishment is primarily the result of three factors: strong performance across our portfolio, growth in renewables, particularly from solar and energy storage in the U.S., and the benefit of embedded optionality in our LNG contracts.

Turning to Slide 4. I would like to highlight an area in which we are particularly proud of our performance, our success in bringing our construction projects online. In 2022, despite numerous market-wide challenges throughout the year, we added approximately 2 gigawatts of new projects to our portfolio, which was consistent with our expectations at the beginning of the year. Our success was the result of the extensive work we have done to develop the people, processes, and solid supplier relationships to rapidly expand our portfolio of renewables. We see our ability to execute as the source of competitive advantage that is highly valued in the marketplace. Not only does it support our strong global customer relationships, but it also contributes to our confidence in our long-term forecast.

In addition to our execution, 2022 was a year where we focused on taking actions that will position us well for future growth. These actions included signing a record number of new PPAs for projects that we will complete in the coming years, investing in our pipeline of future projects, creating a leading position in green hydrogen, establishing strong regulatory foundations to support future utility growth, and achieving significant cold phase out milestones in Hawaii and Chile. As you can see on Slide 5, 2022 was a record year for PPA signings for AES. We signed 5.2 gigawatts of renewables under long-term contracts, increasing our backlog to 12.2 gigawatts. In fact, for the second year in a row, BNEF reported that AES signed more renewable deals with corporate customers than anyone else in the world.

This included an expansion of our 24/7 structured projects. Moving to Slide 6. We also worked hard throughout the year to grow our pipeline of future projects, which increased by 25% to 64 gigawatts, including 51 gigawatts in the U.S. We see extensive and growing demand for renewables worldwide and expect that in the future a key limitation to growth will be the availability of projects. We have been preparing by investing in land, interconnections, and permitting work to advance the projects that will be used for future PPA signings. Turning to Slide 7. We also established ourselves as a leader in green hydrogen. In December, we announced a partnership with Air Products to develop, build, and own, and operate the largest green hydrogen production facility in the U.S. This project will have the capacity to produce more than 200 metric tons per day of green hydrogen and will include approximately 1.4 gigawatts of wind and solar generation.

It builds upon the expertise we have developed in combining renewables to create around the clock carbon free energy. This project has the potential to serve approximately 4,000 trucks, which while significant represents less than 0.1% of the current market for long haul trucking. As such, we see a massive total addressable market for decarbonizing the transportation sector. Turning to Slide 8. Another focus of our 2022 work was to develop strong regulatory foundations for future growth at our U.S. Utilities, where we expect to grow the combined rate basis 9% annually through 2025. Specifically, at AES Ohio, we filed a new electric security plan or ESP 4 to enhance and upgrade the network and improve service reliability. With the lowest in the states, across all customer categories, AES Ohio is well positioned to make the much needed customer centric investments.

A ruling by the Ohio Commission on ESP 4 is expected this summer. Finally, we’re pleased with the constructive outcome of AES Ohio’s distribution rate case in which the Ohio Commission approved an annual revenue increase of $75.6 million. At AES Indiana, we filed our integrated resource plan for IRP with the Indiana Utility Regulatory Commission in December. AES Indiana’s near term plan includes the conversion of the utility’s last two coal units to natural gas in 2025 using an existing on-site gas pipeline. It also includes the addition of up to 1.3 gigawatts of new wind, solar, and energy storage by 2027 and should reduce AES Indiana’s carbon intensity by two-thirds from 2018 to 2030. This plan is an important step to fully transition away from coal and provides the opportunity for substantial additional investments at AES Indiana.

Now, turning to our outlook for 2023 on Slide 9. Today, we’re initiating adjusted EPS guidance of $1.65 to $1.75, and reaffirming our long-term growth rate of 7% to 9% through 2025 for both adjusted EPS and parent free cash flow of a base year of 2020. Our focus this year will remain on execution. As you can see on Slide 10, we expect to complete approximately 3.4 gigawatts of new projects, including 2.1 gigawatts in the U.S. I will note that our 2023 guidance range does not include a potential upside from 600 megawatts of projects currently scheduled to be completed in December 2023, but which are likely to come online in 2024. Looking at our growth through 2025 on Slide 11. We expect to maintain the pace of PPA signings we have established with an estimated 14 gigawatts to 17 gigawatts expected to be signed over the next three years.

We see strong demand for renewables across all of our key markets, particularly the U.S. where the benefits of the Inflation Reduction Act or IRA are becoming even clearer. Thus, given the strength of our backlog and our visibility into future PPA signings and project completions. We are confident in reaffirming our long-term guidance through 2025. Finally, today we’re announcing that we will hold an Investor Day this spring, we will be sharing our strategic long-term view of the company, introducing new business segments, and extending our long-term growth rate. We will provide additional details at a later date. With that, I now would like to turn the call over to our CFO, Steve Coughlin.

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Steve Coughlin: Thank you, Andres, and good morning everyone. Today, I will cover the following key topics. Our financial performance during 2022, our parent capital allocation, and our 2023 guidance and expectations through 2025. As Andres mentioned, our results for 2022 demonstrate the strength, resiliency, and flexibility of our portfolio as we surpassed our guidance range of $1.55 to $1.65. Overall, our portfolio was well structure to perform in the current market environment and is well-positioned for growth as AES continues to lead the global energy transition. Turning to Slide 13. Full-year 2022 adjusted EPS was $1.67 versus $1.52 in 2021, driven primarily by a significant volume of LNG sales in our increased ownership of AES Andes.

These positive drivers were partially offset by unplanned outages, several one-time expenses we recorded at our U.S. and utilities and South America SBUs, a higher share count as a result of the 2021 accounting adjustment for our equity units, and higher parent interest stemming from higher debt balances. The $1.67 per share also includes approximately $0.12 of losses from AES Next. Primarily from our ownership in Fluence, which served as an additional drag year-over-year. We expect Fluence’s results to significantly improve beginning this year as they discussed on their recent earnings call. Turning to Slide 14. Adjusted pretax contribution or PTC was $1.6 billion for the year, an increase of 149 million and a 11% growth over 2021. I’ll cover our results in more detail over the next four slides, beginning with the U.S. and utilities SBU on Slide 15.

Lower PTC in the U.S. was primarily driven by the recognition of one-time expenses from previously deferred purchased fuel and energy costs at our utilities. Outages at Southland Energy and AES Indiana in the second quarter and lower contributions from Clean Energy and the retirement of our coal plant in Hawaii. Partially offset by higher contributions from our Southland legacy assets in the third quarter. Higher PTC at our South America SBU was primarily driven by our increased ownership of AES Andes and higher margins at both AES Andes and AES Brazil, but partially offset by a prior year gain related to an arbitration at Alto Maipo, outages at AES Andes and a one-time regulatory provision in Argentina. Higher PTC at our MCAC SBU reflects the benefit from a large volume of LNG sales redirected to the international market.

As I’ll discuss later, we do not expect an opportunity of the same scale recur this year and anticipate lower PTC from MCAC in 2023. The LNG sales were partially offset by the full-year impact from the sale of our coal plant in the Dominican Republic in 2021. Finally, in Eurasia, adjusted PTC was relatively flat year-over-year with an overall net decline driven by higher interest expense, but partially offset by higher energy prices earned at our wind plant in Bulgaria. Now, let’s turn to how we allocated our capital in 2022 on Slide 19. Beginning on the left hand side, sources reflect 1.3 billion or total discretionary cash. This includes parent free cash flow of $906 million, which was near the top end of our guidance expectations. Asset sales were below our expectations for the year, but we still expect to achieve our goal of $1 billion in proceeds by 2025.

Given the delay in asset sales, we accelerated the issuance of some parent debt, which is within our long-term expectations. Moving to uses on the right hand side. We invested more than 700 million in growth at our subsidiaries, of which approximately two-thirds were in the U.S. We also allocated nearly 500 million of our discretionary cash to our dividend. Turning to our guidance and expectations, beginning on Slide 20. Today, we are initiating 2023 adjusted EPS guidance of $1.65 to $1.75. This year, we expect to commission approximately 3.4 gigawatts of new renewables, which is the largest year-over-year increase in AES history. This growth further validates AES’ position as a leader in renewables and highlights the outstanding efforts of our commercial and operations teams in our markets.

Roughly 65% of this new renewable capacity is located in the U.S. More than half our total 2023 adjusted PTC will come from the U.S. this year as we execute on the transformation of our portfolio. As I discussed last quarter, our U.S. renewables projects benefit from both investment tax credits and production tax credits. Our 2023 guidance includes approximately 500 million of adjusted PTC from tax credits generated and recognized by new U.S. renewable projects coming online this year, which is approximately double the amount from 2022. Tax credits are an important component of our renewables business earnings and cash flow and we intend to provide updates on our 2023 tax credit expectations throughout the year. While the midpoint of our 2023 guidance range is below our long-term annual growth target, we are reaffirming the 7% to 9% growth rate through 2025.

2023 growth is lower than the long-term trend for a few reasons. First, we’ve taken a conservative approach to modeling renewables projects expected to come online in 2023. Our renewables construction is typically concentrated in the fourth quarter and this year will be no exception. As a result, construction delays of only a few days could cause a project to shift from 2023 to 2024 and negatively impact this year’s results. This is particularly relevant for our U.S. renewables projects where we recognized significant earnings from investment tax credits in the year a project is placed into service. Of the 2.1 gigawatts we plan to complete in 2023, two-thirds are expected to come online in the fourth quarter. Our guidance assumes that an additional 600 megawatts of projects currently scheduled to come online in December slip into 2024.

If some or all of these projects are completed on schedule, this will create up to $0.10 of upside to our 2023 guidance. It’s also important to note that even if there are delays to next year, this is only a timing issue with no material value impact. And would support higher growth in 2024 with no impact on our long-term growth rate expectation. Second, we expect to see lower contributions from our MCAC SBU on a year-over-year basis, primarily driven by more than 200 million of adjusted PTC from LNG sales we executed in 2022. Our commercial team was able to leverage the optionality embedded in our LNG supply contracts to capitalize on high international gas prices by redirecting Henry Hub-linked LNG cargoes to the international market. Although LNG sales will continue in 2023, we do not expect the same magnitude of opportunity as the spreads between Henry Hub and international gas prices have compressed and more of our gas supply this year is linked to TTF international prices rather than Henry Hub.

Third, we expect to see lower margins at our Chile business this year, particularly in the first half of the year, which is a temporary impact of our Green blend and extend strategy to transition our customers from coal power to renewables. Several coal PPAs have or will expire this year as we proceed with our intent to fully exit coal by 2025, and others have been restructured to be priced off renewables that are still under construction. We view this as a short-term cost of decarbonizing our portfolio and do not expect any impact to our 7% to 9% long-term growth rate. Looking ahead, our teams are working on commercial solutions to mitigate the dilution as the portion of our earnings from coal continues to decline. Based on the drivers discussed, we expect our 2023 earnings to be significantly second half weighted with approximately three quarters recognized in the second half of the year.

While we typically have had about two-thirds of our earnings in the second half, the increase in seasonality this year is driven by the significant volume of new U.S. renewable projects coming online in the fourth quarter. Now, turning to our 2023 parent capital allocation plan on Slide 21, beginning with approximately 2.2 billion of sources on the left-hand side. Parent free cash flow for 2023 is expected to be 950 million to 1 billion, in-line with our annualized growth target. In addition to parent free cash flow, we expect to generate 400 million to 600 million in asset sale proceeds this year. This includes our previously announced sale in Jordan, as well as the pending sell-down of some of our operating renewables in the U.S. I also want to point out that we intend to relaunch the sale process for our Mong Duong coal plant in Vietnam to better align with the approval requirements that became clear during the initial sale.

The remaining portion of our 2023 asset sales is expected to come from additional sell-downs and sales supporting our decarbonization goals. Now, to the uses on the right-hand side. We plan to invest approximately 1.7 billion toward new growth, of which about two-thirds will be allocated in the U.S. to renewables and to increase our utility rate base. We expect to allocate approximately 500 million to our shareholder dividend, which reflects the previously announced 5% increase. In summary, we exceeded our financial commitments for 2022 and are confident in this year’s guidance and the long-term outlook for AES. The energy transition provides tremendous investment and innovation opportunities, and I believe no company is better positioned than AES to lead this transition.

As we execute on our strategy, we will continue to deliver on our financial commitments to maximize per share value for our shareholders. With that, I’ll turn the call back over to Andres.

Andres Gluski: Thank you, Steve. In summary, 2022 was our best year ever. Not only did we meet or exceed our targets for adjusted EPS and parent free cash flow, but we signed more PPAs and added more renewables to our portfolio than ever before. Once again, we were recognized by BNEF as the top developer worldwide, selling clean energy to corporations through PPAs. We also launched the first mega scale green hydrogen project in the U.S. and developed a regulatory foundation that will enable us to grow our U.S. utilities by 9% annually through 2025. Looking forward, we are very well positioned for the future. Our leadership in corporate PPAs and green hydrogen gives a line of sight into our continued success. We remain focused on executing on our construction program and further developing our pipeline of potential future projects, and we are on track to exit coal by the end of 2025. With that, I would like to open up the call for questions.

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Q&A Session

Operator: Thank you. So, our first question comes from the line of Angie Storozynski. Your line is now open. Please go ahead.

Angie Storozynski: Good morning, guys. So first, maybe about the disclosure that you guys have in the €“ in your presentation, I understand that there’s an Analyst Day coming, but there are a number of slides that are missing, especially the segmental earnings contributions for 2023. I mean, is there any reason for that?

Steve Coughlin: Yes, Angie, hey it’s Steve. So yes, and that’s because, as Andres shared in his remarks, we are intending to update you on our new business segments. And so when we issue that level of guidance, it will come in the Investor Day.

Angie Storozynski: Okay. I understand. Okay. Just moving on, just looking at the year-over-year bridge between 2022 and 2023 there is no benefit from lower losses of AES Next. And I’m just wondering, I mean, it’s not even mentioned as a driver. Can you comment about your expectations for that business?

Steve Coughlin: Yes. So Next, in total, Angie, was roughly a $0.12 drag last year. We have to be careful because Fluence is a separate public company, and we can’t get ahead of their disclosures. They haven’t specifically guided to earnings, but on their last call, they did guide to a significant improvement in margins this year. So, Next is a positive driver this year, and I would say, to a material extent, but I can’t say specifically because I can’t get ahead of them on their earnings disclosures. But we are expecting it to be much better. They’ve made a ton of progress on all of the operational and commercial improvements that they’ve been outlining. And as I’ve said previously, the Next portfolio we expect to be neutral to earnings by 2024, and I still expect that.

Angie Storozynski: Okay. But I’m just €“ so again, not to be picky, but so which bucket would this be included in? I mean on that Slide 20, I mean, I understand that it’s lumped with some other drivers. So, would it be based on the upside to the guidance?

Steve Coughlin: No, it would be lumped into that second column with the negative €“ it would be an offset in that negative $0.15, basically.

Angie Storozynski: Okay. Okay. I understand. Okay. And then just one other question about 2022. So, when I’m looking at the actual results versus what you were guiding to, the corporate drag as more than 100 million higher than expected. And I’m just wondering, I understand some of it is interest expense, but any other driver?

Steve Coughlin: The corporate does include AES Next, under our current segments. And so, we’ll be talking more at Investor Day about the future, but I can say, it’s largely parent interest on the revolver, where we’ve had higher balances and of course, higher rates going into the revolver, as well as the incremental drag from AES Next.

Angie Storozynski: Okay. Thank you. And then the core question. So, based on the IRA, I mean, there’s this discussion about shifting from solar ITC to solar PTC, there’s obviously the bonus ITC. And I’m just wondering how are you positioned to benefit from those additional tax credits in the U.S.? And also, I mean, it’s a very competitive market, as I understand. So, can you actually retain some of this benefit, i.e., boost the profitability of future solar projects in the U.S. or is it more a function of basically securing more contracts by trading away that benefit?