Q2 2021 AES Corp Earnings Call
Good day and welcome to the Aes Corp, second quarter, 2020, 1 financial review conference call all participants will be in a listen only mode.
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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 on our press release presentation and related financial information are available on our website at Aes <unk> 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 the statements which are discussed in our most recent 10-K and 10-Q filed with the SEC.
The continuation between GAAP and non-GAAP financial measures can be found on our website along with the presentation.
Joining me. This morning are on <unk>, 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 200 and.
And this.
Good morning, everyone and thank you for joining our second quarter financial review call.
Today, I will discuss our progress to date.
And on a number of key strategic objectives before turning the call over to our CFO Gustavo Pimenta to discuss our financial results and more detail.
We had an excellent second quarter.
With the 24% increase and adjusted EPS from the second quarter of 2020.
And a record 1.8 gigawatt of renewable.
Noble's under long term contracts.
Added to our backlog, bringing.
Bringing our total to 8.5 gigawatts.
We remain on track to achieve 7% to 9% average annual growth and 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.
1 the growth and transformation of our U S utilities.
2 of our rapidly growing renewables business and.
And 3 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 U S utilities.
And yes, Ohio and a.
Yes, Indiana.
During the second quarter, we concluded key outstanding regulatory proceedings, and both of our U S utilities clearing the path for investment and 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 the focus and deep understanding of the digital tools the <unk>.
Lastly, 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 substantial headway on outstanding regulatory filings.
First the commission approved the Aes, Ohio stipulation.
Allowing predictable cash flows and investment in smart grid initiatives over the next 4 years.
And second Aes, Ohio also received approval for the FERC regulated formula rate.
Allowing recovery of transmission investments.
Now moving onto a S. 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 190 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're now positioned to execute on our utility modernization and de carbonization programs, which had been years and 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 gigawatt side.
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 2020.1.
At the same time more than 80% or wood 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 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.
And with another resource to offer diversified and differentiated products to our consumers.
Turning to slide 9 and we're particularly pleased with our ability to invent new Glen energy products.
This year, we announced the worlds 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 and 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.
Or 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 and 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 the backlog of $8.5 gigawatts, including 2.5 gigawatts currently under construction.
We expect to bring 1.4 gigawatts of online during the remainder of 2021.
The strength of our U S renewables growth in the rapidly expanding market.
And we'll 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 the pipeline of 37, gigawatts, among the largest and the world.
More than 60% of this pipeline is in the U S.
Including 8 gigawatt, and the hottest market and the country, California.
Now to decarbonization on slide 12.
Last month, Aes, and <unk> announced that 1.1 gigawatts of coal fired generation would be voluntarily retired as soon as January 2025.
And we 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 am pleased to report that these exits along with our substantial renewable additions.
Our generation from coal to approximately 20% of total generation on a pro forma basis and additional.
And the 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 and renewables.
Inflationary pressures and supply chain bottlenecks.
As 1 of the largest global renewable developers with a strong reputation.
We have a long history of successfully negotiating strategic supply agreements.
The resulting and preferential access and pricing.
Honor and the power and utility sector. The Edison Award from the Edison Electric Institute.
4 of 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 and 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 and recent years.
Turning to slide 14, we also continued to build on our prior success and creating technology unicorns.
For example, we have previously mentioned, our strategic investment and 5 B.
A prefabricated solar solution company that has patented technology, allowing solar projects to be built and the third of the time and on half as much land, while being resistant to Hurricane force winds.
We continue to grow 5 BS footprint across several markets.
Including the.
The U S.
Puerto Rico.
Chile, and Panama, and they're now expanding into India.
And where we're working with domestic partners to establish local manufacturing.
We hope India will enable <unk> to reach much greater scale much more quickly, which combined with our leading work and robotics construction will help us lower all in solar cause as we advance on the learning curve.
Turning to slide 15 Sim.
Similarly, we continue to benefit from our investment and the Uplight, which provides cloud based energy efficiency solutions to more than 110 million households, and businesses.
Through its numerous utility customers.
Including a S, 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 now.
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.
Coal by 2025.
I will now turn the call over to establish the Manta our CFO.
Thank you and dress and good morning, everyone.
As Andres mentioned, we're making excellent progress this year, having of red 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.
And Latin America, many of our clients continue to benefit from record steel copper and soybean prices, resulting in a significant improvement and electricity demand across our businesses.
And there's also reflect in our day 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% of 31.
Primarily reflecting execution on our growth plan the manned 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 pre tax contribution or PTC was $303 million for the quarter.
And increase of $65 million versus the second quarter of 2000 and training.
I will discuss the key drivers of our second quarter results in more detail beginning on slide 19.
And the U S and utilities and strategic business unit or SBU PTC. It was up $71 million driven primarily by the demand recovery at our utilities.
Higher contributions for and 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 <unk> is up 9% and demand at Aes and Deanna is up 4%.
And then that combine as volume and Ohio, and Indiana is largely the back to 2019 pre COVID-19 levels.
This recovery is mainly driven by higher load from commercial and industrial customers. This year as the result of the reopening of local businesses.
Separately and California, our 2.3 gigawatt Southland legacy units are well positioned to contribute to the state's suppressing 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 megawatt Redondo Beach facility to be extended for 2 years through to end of 'twenty 3 to align with our remaining legacy units.
This proposal extension would be and upside to expectations through 2025.
Now I'll turn it 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 2000 and training.
Lower equity earnings from glaucoma, the also in Chile, and drier hydrology in Brazil.
And this impacts were partially offset by higher generation at the shift of our hydro plant in Colombia.
Higher PTC at our Mexico Central America, and the Caribbean, Our MCC and SBU, primarily reflects better hydrology in Panama, which was partially offset by the sale of the taboo in the Dominican Republic.
Finally in Eurasia, PTC remained relatively flat the impact from the sale of our PDC and India was largely offset by lower interest expense and 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.
As we have discussed in the past hour of typical quarterly earnings profile was more back and waited with roughly 40% of earnings occurring and the first half of the year.
Growth in the year to go we will be primarily driven by 1.4 gigawatts of new renewables assets coming on line and the remainder of the year continued demand recovery across our markets, reducing interest expense and cost savings and 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 remained 1 of our top priorities and the last 4 years, we obtain choose the 3 notches of upgrades from the 3 credit rating agencies, including the investment grade ratings from Fitch and S&P. We are also very encouraged by the recent change in outlook to pause.
<unk> on our <unk> 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 and these metrics to continue enabling us to reach triple B ratios by 2025.
Now to our 2021 parent capital location and plan on slide 26, consistent with our prior disclosures sources shown on the left hand side of the slide reflect approximately $2 billion of total discretionary cash. This includes $800 million of parent free cash flow of $100 million of proceeds received.
From the sale of the tableau and the Dominican Republic, and the successful issuance of the $1 billion of equity units in March.
Now to uses on the right hand side will be returning $450 million to shareholder of this year consistent of our common share dividend and the coupon of the equity units.
And we plan to invest approximately 1.4 to $1.5 billion and our subsidiaries as we capitalize on attractive opportunities for growth.
Approximately 60% of those investments are and global renewables, reflecting our success and originations during 2020 and our expectations for 2021 and.
And about 25% of these investments are and our U S utilities to fund rate base growth with the continued focus on grid and fleet modernization.
And the first half of the year, we invested approximately $700 million, primarily and 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 and our Investor day in March positioning Aes as the leader in the energy transition, while delivering superior returns to our shareholders with that I'll turn the call back over to Andreas.
Thank you Gustavo.
In summary.
The World has decided to seriously tackle climate change and this is driving unprecedented and accelerating growth and 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 and 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.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And the first question.
It comes from Julien Dumoulin Smith from Bank of America. Please go ahead.
Good morning, Jami, Thanks for the opportunity appreciate the appreciate connecting here.
Congratulations on the 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 fluid given the latest comments here and and also at the same time can you comment on a little bit of on the storage availability I know you all had been making are taking.
Some preemptive actions to ensure continued supply availability, but if you can comment on the latest backdrop wood are very much appreciate it.
Sure well good morning Julien.
Not too much I can comment the other than the.
Statement and our press release.
In the past I've talked about it that ensuring supply was very important to us and we have mentioned the.
And strategic.
Our arrangement with north pulls for European supply.
So and as I said and 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 fluids at this time.
And given that you are there.
Julien Your line is still open.
The next let's proceed to the next questions no problem at all.
The next question comes from Angie <unk> from Evercore ISI. Please go ahead.
Thank you.
So I hate and I'm.
Just wondering what is the reason for this acceleration in India.
And the our renewable power generation that we're seeing here year to date is it just because you are increasingly focused on C&I customers, hence, hence the of the higher than expected backlog year to date.
Yes, Hi, Andrew that's a great question.
I would say, yes, as you can see where 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 and a half gigawatts of.
Of new contracts, just coming from similar products to the 1 that we had announced with Google. So certainly that is the big driver.
The other thing of course as you know we have a good pipeline of potential projects.
So you know, 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 you know this second quarter was particularly strong and the U S.
And we see that as the most of the most rapidly growing market.
But we're very well placed so we feel good about it and we feel good about the product offerings that we have wood real good about our.
The 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.
Crisil Lake of retiring of the wind farms and the New York State or the acquisition of the of renewable assets in Indiana and ask on that.
And you know from Nextera.
And is it just because you know those are opportunistic.
The deals that all of our highest returns. Hence you know those are not the traditional you know the ground mounted solar installations that you would typically Brazil.
Look we're focused on satisfying our customers' needs and this particular cases Aes, Indiana.
So you know if there was a better project in MISO that we need to put together to meet our.
The transition towards more renewables, we will we will take it.
So and many of our deals you know we use we have 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 the.
Also I'd say production capabilities, so first and 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 bus bar and <unk>.
Ppas that that's what we're going after and 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 is of great opportunity in New York to Repower and again. This comes back to the idea that we want a mix of assets you know of.
We know wind solar.
Of energy storage and some cases, even small hydro's to be able to deliver those sort of round the clock renewables.
So think of it that way. The you know we are solving for what the customer wants and.
And we will put the package of sources.
Whether we build them or we buy somebody else's project to satisfy that.
Yeah, very good again and incredible start of there. Thank you.
Thank you very much.
And the next question comes from <unk> Chopra from Evercore ISI. Please go ahead.
Hey, good morning team. Thanks for taking my question Andreas I. Appreciate you can't say much about points, but maybe I'm just kind of curious on the timing of the announcement here. So Q I E sort of made the investment late last year are you seeing more growth opportunity. Just can you walk us through maybe the top process on why now versus wait a couple.
The year, just anything along those lines.
Okay.
Yeah, well honestly I can't comment.
And on it and know what I can refer you to what I've said in the past.
And with Q I would say, it's not just the financial Investor strategic Investor.
And which has investments and other very important companies, which can help this business. So I'll have to limit my comments to that and I'm sorry.
And that's okay, we'll leave it there maybe just shifting gears to Chile.
The last I remember there were some legislations on early retirements you guys of kind of regardless of coal plants can you talk about your exposure there as the percentage of the company as a as the whole post the announcement of the skull retirements and do you see any risks the margins and cash flow there and Chile.
Well look I'd say overall chili's may be like 15% remember that Aes and these include sort of Colombia and.
And includes 100% renewable.
Hydro in Colombia.
S and has done a remarkable transformation.
In terms of being a primarily.
Coal contracted coal generator.
Into.
By 2000, and twenty-five having very little.
And a lot of green blend and extend so this really gave us and 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 of 4 capacity. So this is you know again, it's quite a remarkable transformation.
So the last thing I would say is you know regarding the potential legislation that's being talked to I think it's really you know chili's as a serious country and they're really looking at how the grid can maintain its reliability with the retirement of these coal plant. So what we've said is look we're willing to retire these plants you know the.
The 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.
I don't see you know this everything that we're doing is in our forecast and I'll pass it to Gustavo to make some more comments yeah. The Josh I think the 1 thing that I would add is after they announced that the retirement the latest 1 that we've done we are left with just 2 facilities.
4 of Green blend and extend and retirements of its about 800 megawatt left and everything else has been announced we've been able to implement the green blend and extend so its a substantially smaller share of where we were and are a couple of years ago.
Got it sounds like Oh.
And a small portion of EBITDA cash flow earnings wherever.
Come from Chile Force. These retirements, okay. Thanks, guys the great execution on the backlog and congratulations on getting more on the.
The board here.
Thank you very much.
As a reminder, if you have a question. Please press star then 1 to be joined the queue.
The next question comes from tissue parent Sheryl with Susquehanna. Please go ahead.
Hi, good morning, Thanks for taking my question.
And Richie touched on some of the supply chain.
And I was wondering if you could talk a little bit about <unk>.
How you might be impacted from the the Osha and W. R O and maybe some of the steps you're taking to mitigate that impact.
Yeah, Great question and look.
And some of you.
Who followed us for a while you know we're always very paranoid about our supply chain and all that.
Why I think it was January of <unk>.
'twenty with February of 2020, and we were talking about supply chain issues with Covid and how we're going to get ahead of it. So here. We have also been on top of this you know they are obviously in the past year, there were supply chain issues, where the imports what was the what was going to be the tariffs on panels from China and then you know what was going to be the tariff of <unk>.
Example, on aluminum and so.
Could you manufacture locally.
So you know we've been on top of this issue so today.
I would say all of our solar panels coming in to 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 of only topnotch.
Panel manufacturers first here.
And getting certificate, so that none of the poly silicon.
Comes from Ocean, the there could be associated and anyway with <unk>.
Force Labor. So that's where we are we are you know this is a developing story and.
In the past, what we've been able to do.
With the terrorist for example is to move panels that we're coming to the states 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 you know we are certainly and solar 1 of the top 5 I would say and the country.
In terms of new solar development. So we're very well positioned we're on top of that we have you know longstanding agreements and our suppliers are doing everything possible I think of it.
The good at that in the future, we're going to we're making sure that the poly silicon would come from alternative sources like Germany.
Or Korea. So that's in the works, but you know this does take a transition.
So we're on top of the.
And you know and stay tuned because well.
And while we feel very good about our certification and all of the rest of.
It's a question of.
Where does that polysilicon arrive and can you prove it and so again we are having.
Say as extensive F of Davids from.
Suppliers as anybody on this matter.
That's very helpful. Thank you.
Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Ahmed Pasha for any closing.
Yeah.
Thanks.
Thanks, everybody for joining us on is 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.