Q1 2022 AES Corp Earnings Call
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Good morning, Thank you for attending today.
First quarter 2022 financial review call. My name is Amber and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end he would like to ask a question. Please press star one on your telephone keypad at any time.
I now have the pleasure handing the conference over to our host Susan Hardcourt, Vice President of Investor Relations.
Susan. Please go ahead. Thank you operator, good morning, and welcome to our first quarter 2022 financial review call.
Our press release presentation and related financial information are available on our website at Aes Dot com.
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 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 <unk>, our president and Chief Executive Officer, Steve Kaplan, Our Chief Financial Officer, and other senior members of our management team.
With that I will turn the call over to Andres Good morning, everyone.
Thank you for joining our first quarter 2022 financial review call.
I am very happy to report that we have obtained an investment grade rating from Moody's.
We are now investment grade rated by all three major agencies.
It is an important milestone for our company and.
Next a decade worth of work to transform our business.
We're also reaffirming our 2022 guidance.
Annualized growth of 7% to 9% through 2025.
Our business model continues to demonstrate its resilience and predictability.
Even in the face of market volatility.
Steve will cover our expectations for the remainder of the year in more detail.
Including the seasonality of our earnings profile.
Today I will discuss.
Our 2022 construction program and the department of Commerce's investigation into solar panel imports.
The diverse drivers of our growth, including site renewable energy Ppas.
In our U S utility.
Hey, Yes next influence.
And our strategic outlook for the sector.
Beginning with our 2022 construction program on slide four.
We are laser focused on ensuring timely completion of the projects as we see our ability to execute on our commitment as a key source of competitive advantage.
This year, we expect to complete more than two gigawatts of new renewables.
Moving over 800 megawatts of solar in the U S.
In late March the U S Department of Commerce launched an investigation into solar imports from for Southeast Asian countries, which collectively supply approximately 80% of solar panels for the U S market.
The Department of Congress is expected to make a preliminary determination on this case by no later than August .
The resulting uncertainty around tariff levels has led to a drop in imports and project delays across the industry.
However, due to our supply chain strategy all of the panels for our 830 megawatts of projects to be completed in 2022 in the U S are already in country, and we do not anticipate any delays to those projects.
I'd also note that one third of our 2022 renewable projects are international and the remaining 683 megawatts in the U S. Our wind and energy storage.
Moving to the diverse drivers of future growth beginning on slide five.
Our strategy is to provide differentiated products that allow us to work with our customers on a bilateral basis.
As a result last year, we signed a total of five gigawatts of Ppas for renewable energy.
Including more contracts with C&I customers than anyone else in the world.
For full year 2022, we continue to expect to sign four five to five five gigawatts of renewables under long term contracts.
With a roughly 50 50 split between the U S and international markets.
We do expect PPA sites in the U S to be more weighted towards the second half of the year.
So far this year, we have signed or have been awarded $1, one gigawatt, bringing our backlog to $10 three gigawatts.
Despite current headwinds for the sector such as delays in U S climate legislation and the supply chain issues. We just discussed we continue to see very strong demand for low carbon.
Energy and especially for structured products, such as our 24, 7% renewable offering.
In fact as you may have seen earlier this week, we announced two key agreements for our structured products first the expansion of our partnership with Microsoft into California.
The third market when we will supply renewable energy to match the load at their data centers.
And second our agreement with Amazon.
<unk>, which we will provide 675 megawatts of renewable energy to their operations in California, including AWS data centers with these agreements we are helping both companies achieve their ambitious sustainability goals as you can see on slide six.
We believe our development pipeline are 59, Gigawatts is the second largest among U S renewables developers.
This robust pipeline provides us with the projects, we need to deliver on our backlog and continue to build on our competitive position in the market.
Now turning to our regulated utility platforms beginning on slide seven.
These businesses represent one of the key contributors to our overall, 7% to 9% annual growth in earnings and cash flow as well as advancing our objective of increasing the proportion of earnings from the U S to 50%.
In both markets, we have the lowest residential rates in the entire state, which provides a runway for growth and investment while keeping affordable rates for our customers moving to slide eight.
And Indiana.
Benefiting from incentives to modernize the transmission and distribution network and transitioning to greener generation.
Through 2025, we will be investing $2 7 billion.
Which we will recover two already approved rate mechanisms. Additionally.
Additionally, we expect to finalize our next integrated resource plan by this fall, allowing us to further transform aes, Indiana generation fuel mix.
Ohio, we're capitalizing on FERC formula rate based investments in the transmission network at.
At the same time, we are implementing our smart grid investment program, which has recovered to an existing rate mechanism.
Yes.
We also have distribution rate case pending before the public utilities Commission of Ohio.
Later this month, we will be presenting oral arguments directly to the commission and a favorable outcome. In this case will bolster our ability to make the new investments needed to further strengthen aes Ohio's network turning to slide nine through 2025, we expect to invest $4 billion to modernize our U S. Utah.
<unk>.
These investments translate to average annual rate base growth of 9% through 2025.
With which is at the high end.
Of growth projections for U S utilities.
We expect the earnings from these core businesses to grow in line with the rate base turning to slide 10 for an update on Aes next we are developing and incubating new products and business platforms through Aes next.
Our investments in Aes mix helped our businesses to be more innovative and competitive and drive value for our customers and shareholders.
We are proud that earlier this year SaaS company named Aes is one of the 10, most innovative energy companies in the world and.
And the only large publicly traded company to be included on that list.
Turning to slide 11.
Mature initiative under Aes next today is fluids.
Which as of December 31 at four two gigawatts of energy storage products deployed and contracted and assigned backlog of $1 9 billion.
Additionally, fluids as digital platform fluids, IQ recently acquired mist therapy.
And now has a combined 15 gigawatts contracted or under management with more than 80% is with third party customers.
Over the past several months fluids has been dealing with short term challenges, mostly stemming from COVID-19 related supply chain issues.
Their management team has taken proactive steps to address these challenges, including diversifying battery suppliers.
Signing new shipping agreements.
Building out their in house supply chain team and regionalized manufacturing.
Overall demand for energy storage remains very robust and fluids as well capitalized and positioned to grow as the market leader.
We see a pathway for them to improve their margins and grow as the global energy transition continues to progress.
Finally, turning to our strategic outlook for the sector beginning on slide 12.
Our goal is to be the leader in providing low carbon energy solutions, while delivering annualized earnings and cash flow growth of 7% to 9% through 2025.
To date, there is an unprecedented transformation of our sector underway with government utilities and companies working to shift to low carbon sources of power.
For example, just looking at the public commitments of the Rd 100, a group of over 350 large corporations, who have committed to a 100% renewable energy.
We expect our annual demand to more than doubled to almost 400 terawatt hours of renewable energy by 2030.
Facing this immense opportunity, we're taking steps to ensure our continued competitive advantage in this once in a generation transformation of our sector.
As you can see on slide 13, this transformation as reflected in our own portfolio as we expect renewable to represent more than three quarters of our installed capacity by the end of 2025.
During that same time period, we expect our renewables business nearly tripled from 13 Gigawatts to approximately 38, gigawatts and our capacity from coal to go from seven gigawatt to zero.
With that I will now turn the call over to our CFO Steve Coffman.
Thank you Andres and good morning, everyone.
Today, I will discuss our first quarter results 2022 parent capital allocation and 2022 guidance.
Beginning on slide 15, as Andreas highlighted I am very pleased to share that Moody's recently completed a thorough review of our consolidated debt and cash flow across our businesses and upgraded aes to investment grade.
This conclusion further validates our year's long effort to reduce risk and strengthen our balance sheet and will yield further benefits as we grow our business and attract new investors to aes.
As an investment grade rated company, we will continue to lead the renewable sector, while growing our U S utility asset base and our long term contracted generation portfolio.
Turning to slide 16, and the resiliency of our business model.
Today, 85% of our adjusted PTC is from long term contracted generation and utilities.
We are largely insulated from the current macroeconomic volatility affecting commodity prices inflation interest rates and foreign currencies with the vast majority of our portfolio benefiting from contractual indexation fuel pass through or hedging programs that limit our exposure.
Combined these macroeconomic factors had an impact of less than $2 million on our adjusted PTC and the first quarter.
For the full year. We currently expect a net positive contribution from these macroeconomic factors as a result of higher natural gas prices and higher power prices and some of our markets.
Now turning to our financial results for the quarter beginning on slide 17.
Adjusted EPS for the quarter was 21 versus.
Versus 28 last year.
Our core business segments grew by <unk> over the first quarter of 2021.
These positive contributions were offset by several negative drivers we had already anticipated in our 2022 guidance.
First higher losses at Aes next primarily resulting from COVID-19 related supply chain issues that fluids in the fourth quarter of 2021.
As a reminder, we report fluency results on a one quarter lag. So the fluids results relate to their December quarter end, which was disclosed in February and included an Aas was full year guidance on our last call.
Second the higher share count as a result of the accounting adjustment, we made for our equity units.
Third higher quarterly effective tax rate than our overall expectation for the full year due to timing.
And finally nonrecurring gains on interest rate hedges recorded last year, which skewed the quarter over prior year quarter comparison.
Turning to slide 18, adjusted pre tax contribution or PTC was $207 million for the quarter, which was $40 million lower than 2021, consistent with the drivers I just discussed.
Cover the performance of our strategic business units or <unk> in more detail over the next four slides.
In the U S and utilities strategic business unit or SBU.
Higher PTC was driven primarily by earnings from new renewables coming online and higher contributions from Southland, partially offset by higher spend at Aes clean energy due to an accelerated growth plan.
Higher PTC at our South America, SBU was mostly driven by our increased ownership of Aaas Andy's a higher contracted revenue in Colombia.
Lower PTC at our Mexico, Central America, and the Caribbean or MCA.
SBU or primarily reflects the sale of the travel and the Dominican Republic in 2021, and lower availability at our generation facilities in Mexico.
Finally in Eurasia higher PTC reflects higher revenue at our <unk> facility in Vietnam, and higher power prices at our wind plant in Bulgaria, driven by commodity price increases now.
Now to slide 23.
We are on track to achieve our full year 2022, adjusted EPS guidance range of $1 55 to $1 65.
Our typical quarterly earnings profile is more heavily weighted towards Q3 and Q4 with about two thirds of our earnings occurring in the second half of the year.
We continue to expect a similar profile this year as we grow more in the U S or where earnings are higher in the second half of the year based on solar generation profiles utility demand seasonality and the commissioning of more new projects in the third and fourth quarters.
Growth in the year ago will be primarily driven by contributions from new businesses, including over two gigawatts of projects in our backlog coming online over the next nine months as well as further accretion from our increased ownership of Aes Andes.
We are also reaffirming our expected 7% to 9% average annual growth target through 2025 base.
Based on our expected growth in renewables and U S utilities as well as the recycling of our capital into additional investment opportunities, we see across our global portfolio.
Now to our 2022 parent capital allocation plan on slide 24.
Sources reflect approximately one four to $1 7 billion of total discretionary cash, including $900 million of parent free cash flow and $500 million to $700 million of proceeds from asset sales.
On the right hand side, you can see our planned use of capital.
We will return nearly $500 million to shareholders. This year.
This consists of our common share dividend, including the 5% increase we announced in December and the coupon on the equity units.
We plan to invest approximately $900 million to $1 1 billion and our subsidiaries as we capitalize on attractive opportunities for growth.
Nearly half of these investments are in renewables, reflecting our success in securing long term contracts during 2021 and our expectations for 2022.
About 25% of these investments are in our U S utilities to fund rate base growth with a continued focus on grid and fleet modernization.
In summary, close to three quarters of our investments. This year are going to renewables growth in our U S utilities businesses, helping us to achieve our goal of increasing the proportion of earnings from the U S to more than half by 2023.
In fact, we have made great progress on our growth investments. So far this year with approximately $650 million already invested primarily in renewables and to increase our ownership in Aaas.
Andes.
We will continue to allocate our capital in line with our strategy to lead the renewable sector further anchor aes in the U S market and to Decarbonize our portfolio.
With that I'll turn the call back over to Andreas.
Thank you Steve.
In summary, our core business continues to perform well.
We have obtained investment grade ratings from all three major agencies.
We are reaffirming our 2022 guidance and annualized growth through 2025.
We continued to deliver on our commitments, including our 2022 construction projects, which we expect to commission on time, even with the ongoing department of Commerce investigation into solar panel inputs.
We are energized by the immense opportunity for growth in our business and remain committed to maintaining our competitive advantage.
With that I would like to open up the call for questions.
Thank you thank.
Thank you I would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to remove that question. Please press star followed by two again to ask a question Thats Star one as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question.
Pause here briefly ask questions registered.
Our first question comes from and Soo, Kim with Goldman Sachs.
Phil Your line is now open.
Sure.
Yeah. Thank you first question.
On the solar the U S solar industry.
Good to see that the 22 projects are.
On time and on schedule for 2023 exposure could you give a little bit more clarity on the amount of capacity that maybe had been contracted at any.
To be delivered in.
And what type of timing delays if any that we can expect for next year and then just related to that.
There are delays to that that were embedded in your growth for 23, how much flexibility do you have to move around other items to still hit your growth.
Okay well good.
Morning.
Let me start with a little background on the Commerce case.
So this cases and investigations by commerce into allegations of one U S manufacturer.
Panels and sales imported from four countries in southeast Asia are circumventing existing antidumping and countervailing duties on solar panels in sales coming from China.
So we think there are strong legal grounds for commerce to make a preliminary determination before August that will signal to the market that the allegations are unfounded and we will be conclusively dismissed without new tariffs.
One of the legal requirements for determining that circumvention occurred is that the activity in southeast Asian countries must be considered minor or insignificant.
However, the solar panel and cell suppliers operating these countries have invested billions of dollars and technologically sophisticated manufacturing assembly and processing facilities.
So their activities do not appear to be minor or insignificant.
Additionally, the critical step of creating solar sales occurs in these countries and not in China and involves the conversion of the wafer into itself.
<unk> itself has previously ruled that this step determines the country of origin for solar inputs.
For these reasons, we think that there are strong grounds for Congress to make an expedited determination.
It is also important to note that theres brought industry opposition to this investigation, including from many U S manufacturers.
Because they rely on solar cells from southeast Asia in order to manufacture solar module here in the U S.
Currently the U S manufacturing industry can only need about 20% of U S demand.
And their capacity to increase supply is negatively impacted by this investigation.
This further supports the decision by commerce to dismiss the circumvention case clean underground that a finding of circumvention would not be appropriate due to time full impacts.
So we will continue to advocate.
Four.
Rapid resolution of this case.
Now getting specifically to your question.
I think what we were able to do this year shows to our supply chain management.
Strategy and many of you will recall that for three years that had been arguing that this huge wave of renewable demand was coming.
And that they were going to be shortages of everything from developers to land two interconnections.
Now we've had.
I would say an additional issue with this.
Commerce case before commerce foresaw.
For solar panels.
So we've been out ahead of US now what will determine what will happen in 'twenty three two.
To us and again I think we are in the best shape of anybody in the industry.
We will be.
There is a early resolution.
Or if there is a determination, let's take the worst case as it comes out and they say that there is circumvention and theres going to be a tariff effects.
Okay, well then people can put cash deposits at that point.
No I think this will have a very deleterious effect for the whole solar industry in the U S. I think we would be in better shape, because we were primarily selling to corporates, who have more flexibility than people say utilities with rfps, who are much more regulated so given that I would say look right now we don't know.
Worst case.
We continue to negotiate with our clients.
We're not citing them yet because we're waiting for the final determination.
But this is not going to stop us.
And in terms of the construction.
How the case comes in sort of the shipping backlog from the rest.
It could potentially.
Affect the second half of 'twenty, three but we'll have to see so we're doing everything possible to minimize this and I think the proof of the putting in the <unk> I think we're one of the few solar use developers, who did not have to postpone or cancel any projects. This year.
That's good color and maybe just the second part of my question was just if maybe the.
Not the worst case, but.
The non constructive case comes out and the delays are more significant for the whole industry.
Our portfolio of global projects, whether its wind or storage or whatnot.
Procured versus how much flexibility do you have to to pull different levers to still achieve that growth.
Well, that's a great point, if you think of our backlog of $10 three gigawatts.
Only about a third is U S. Solar so the rest is either international or wind or.
Or other technology.
So again I think that what will happen.
It.
We are a diverse portfolio.
Portfolio and so we will try to make it up elsewhere.
But again, we think that they're very strong ground to dismiss this case honestly it doesn't make a lot of legal sense honestly a prior similar case was dismissed because they didn't have.
Let's say nobody was standing up in front of it now you have one small U S manufacturer.
And.
I think the grounds.
Insignificant or not.
Not material the value add added in southeast Asia countries.
Yes.
It is almost laughable quite frankly so.
It just went seeking I think from a few small U S players.
What is dramatic.
Dramatic has had such an effect on the industry now again, Fortunately we've been very.
Concerned about shortages for three years and you'll also recall that even when COVID-19.
First appeared in February of 2020, we talked about its potential supplies.
FX on supply chain, so again stay tuned.
Think theres anybody in better shape than us and as you point out.
We have a diverse in terms of technologies and also in terms of the geographies.
Okay that makes sense my second question quickly.
Slide 43.
Sensitivity slide two different moving commodities or currencies or whatnot. It's always helpful to us just any update there.
I think with.
Stuff like Henry hub gas prices being almost eight to nine box right now.
Looking at your sensitivity of the year to go assumption.
No.
If these commodity prices do remain elevator elevated and we've had no. Other changes it seems like there could be a more meaningful EPS impact for 2022, but.
That assumes no other changes.
Whether it's power prices or whatnot can you just walk through at this point with the various commodity price or power price environment, how you see that net impact.
For the balance of the year.
As it stands today.
Yes, hey into its Steve.
Just as a reminder, that page so sensitivities are in isolation. So when you see the gas price sensitivity. It's not doesn't include a corresponding.
Power price increase, which we would actually expect to happen in most cases so.
On balance the environment.
We're really on a net positive side as I said in my comments.
In particular in Bulgaria, we have our wind portfolio, there, which has done very well and I expect we'll do very well for the rest of this year. It does have some market exposure and with power prices in excess of 200, it's done very well.
Then the other thing I would point to is our LNG business and MGIC. So we have long term contracted gas.
And contract for some time so in fact there are some.
Sides that we're working hard work through and we will continue to work through to take advantage of some of the high gas price opportunities.
Two.
Benefit our LNG business, so I think.
There is upside there as well Southland has been another upside we see Q3 hedging program another.
Success, we expect more success. This year was five cents of energy margin upside last year. So on balance we're actually in quite good shape. Most of our contracts are inflation indexed around the world I think it's like 83%.
And those that are not are really U S renewable contracts, where we've locked in our cost up.
And that was taken to the overall cost of the pricing and the PPA.
No really.
Aaas's transformed a lot and actually were quite good shape.
Environment.
I would say and so we're on the right side of history on this one because.
Where we have a fuel.
Mostly a pass through.
We're mostly competing with fossil fuels with either hydro with renewables.
So.
I would say the biggest winner of whats happened is really Bulgaria, because in Bulgaria, We just signed an Mou with the.
The government of Bulgaria.
Where they recognize the validity of the PPA.
And they also were working together on Decarbonising the Maritza project.
Whether it would be and we're looking at different alternatives, whether it be carbon capture and sequestration biofuel or conversion to gas.
And at the same time stepping up investments in energy storage. So again, I really can't think of any case, where this.
This is impacting us negatively.
Good color. Thank you so much guys.
Thank you.
Our next question comes from.
Richard Sunderland with Jpmorgan.
Mr. <unk>. Your line is now open.
Hi, good morning, and thank you for the time today.
And then just wanted to touch on the 2023 solar outlook a little bit more.
Could you speak to a little bit more around the risks there beyond just the earnings the waves.
So much of the timing of the earnings coming in are there any contractual obligations around <unk>.
Energy procurement or elsewhere that you.
We need to fulfill with those contracts.
Yes, no I'm not aware of any great. Thank you I think that.
Worst case, I don't think it would be demand destruction, there would be a delay in some cases.
Commissioning them, but no we would always be honestly have.
Our contracts would not hold those.
Two having to supply energy.
A major disruption in the solar panel.
Market, but again, we think thats the.
Not the most likely scenario, but if it were to occur.
We wouldn't be suffering LDS because of not fulfilling contracts.
Got it very helpful and then thinking about the announcements around these recent structured deals could you speak to a little bit of the <unk>.
Cassidy for more of those and the overall appetite there and then I guess just to be clear on the Amazon front are those new projects or reflected in the 2021 signings.
Yes.
First.
Most of these are reflected in 2021.
Projects.
But what I would say is we're seeing a tremendous demand for our structural projects and we have been talking about this we werent able to release some of the names.
Prior to that.
Still the client was ready, but we could do more projects I think the real issue is to have the projects in the right market ready so it's.
Stay tuned more is coming but I think what we like very much at this shows like repeat buying so.
Microsoft for example, we've done projects in PJM, we did a project in Chile, and now we did a project and queso in California.
So we expect the other.
To happen with the other big clients so.
<unk> of the.
Large data center clients.
We have big contracts with three of them and we have we're in a very good position. So really the demand is there. It's a question of.
How fast we can bring the projects online.
Yes, and I would just add in the.
Customer Thunder said, Richard we have the flexibility.
To pivot to some other markets within Microsoft and Google.
And so the Amazon announcement.
What we've been able to announce something I wanted to talk about for some time, but.
But there is more and more to come and we've built a pipeline significantly we're up to.
59, almost 60 gigawatt pipeline and Thats in large part because we're playing forward because demand coming from our commercial industrial customers and aggregating pipeline, where we know that they're going to they're going to need us.
<unk> I think in the portfolio.
Good part of this pipelines in California.
It's a quite ready and that we started acquiring land and interconnection rates about three years ago.
We really got a little bit ahead of this saw this wave that we see now so the demand is there it's a question of bringing projects.
Projects online now realize that these are <unk>.
<unk> of $24 7 million or.
Round the clock renewables, so it's not only a question of having the.
Availability to build new megawatts is also can you combine them and have the energy storage to really provide that round the clock guaranteed netted on an hourly basis renewable energy.
Well, that's very helpful color and I just wanted to follow up real quick on that sort of contracting backdrop, you talked a little bit about more <unk> weighted to the U S signings, obviously that the DSC.
Overshadowing all of this.
Could you give just a little bit more color on what youre seeing in terms of discussions I guess are active but you just need that date that August data point. So then start finalizing contracts just any more information would be helpful. There.
Yes, what I'd feel comfortable saying is youre right characterize this right that we are in discussions.
And are there more contracts.
Clients and that.
I'd say it factors, having some clarity in August what it would be because you'd have to make cash deposits in negotiating this as I said, our corporate clients, which are the bulk of what we're doing in the states.
Have greater flexibility and speed.
Regulated clients so.
Let's see what happens, but again I think it.
It would just really be the barriers for the whole sector for the whole U S drive too.
More carbon free electric sector. This would slow us down and it would basically make renewables in the U S. More expensive. So do you want to onshore manufacturing what do you need you need cheap and clean.
Energy is a vital factor and.
The thing Thats happening here again is really just slowing it down creating uncertainty and again, we are in the best shape I think of anybody in the sector. So.
Its effects will be much greater outside of Aes.
And I would just add.
Last year, 80% of the contracts were done in bilateral commercial industrial.
PPA so bilateral negotiations so.
The customers that we're working with are very much aware of this issue. We're moving forward with all the details that we can move forward on this piece is open and it's very frustrating.
It's not a good thing but.
These are customers that have made very.
Strong and vocal commitments to bear de carbonization, and we suspect theyre going to want to continue to find the path.
Yet there and such.
We're in a bilateral relationship I think we're going to we're going to work through that.
And we're all in favor of onshoring.
But what you need is certainty and you need the timeline, so you need to know what.
Tariffs will be applied in what way.
And but you also have to say how far down the supply chain, they're going to go.
And the further down the supply chain, you're going to go the more time, you need to move the supply chain.
And so for example, right now most of the.
Most of the solar panels were buying from southeast Asia.
Should be the poly silicon is going to be coming from Germany.
So it's not even coming from China. So this is basically.
Rent seeking by the small number of actually one firm in this case, an insignificant firm I may add I don't think its.
Delivering 1% of the supply in the U S. So it really is.
Quite egregious the whole situation.
Got it really helpful color there. Thank you.
Thank you Richard.
Our next question comes from.
Jonathan <unk> with Evercore.
Please proceed.
Hey, good morning team. Thank you for taking my question.
Steve maybe just wondering in your house.
House.
Sorry can you hear me okay.
Yes go ahead.
Okay, sorry, I just background than maybe I was just going to ask you as it relates to the 2022 EPS guidance Steve.
Can you remind us what are you modeling for.
Fluence.
Embedded in that guidance and then obviously <unk> had some challenges that COVID-19 is Andreas articulated in his prepared remarks, if that continues throughout the year, what kind of flexibility do you have to kind of make that up in other areas of the business.
Yes, so thanks for the question.
Look so fluids.
Difficult their first quarter, which as I've had in my remarks for their fiscal 'twenty to fiscal year runs October to September .
And we report them on a one quarter lag so what they reported in December is just hitting this quarter that we're now reporting.
So we already had anticipated an updated forecast for fluids, when we gave our guidance and thats largely.
That's about what I can say on it unfortunately fluids.
I can't say much more of a hands are a bit tied here. They are a public company there'll be releasing earnings next week.
So, but what I can say is I feel very comfortable given that I have the latest.
Expectations for fluids in our numbers.
We've already absorbed.
Their first quarter and we reported out here. So look they've had a lot of issues that they've talked about I think they're working through those.
Some of them are quite temporary in nature and they have already worked through both.
Shiny new shipping contracts.
We're supplying their battery supply.
<unk> regionalized their manufacturing around the world. So I think it's going to take some time as they've said to work through some of these challenges, but we're very confident the long term is strong there.
They're there.
The entire market has continued to be very strong. The demand is still there I think they had kind of the perfect storm of some some issues coming together here with supply chain batteries shipping et cetera, but.
In our guidance, we have the latest forecast and it's not.
Not knocking us off our guidance range.
Yes.
What I would add is that the company is well capitalized and see strong demand and what youre seeing is increase of battery supply outside of China.
So you just saw the enel.
Announcement by the U S government that they would have incentives for battery manufacturer in the U S.
<unk> has the agreement with north volt for production of batteries in Poland. So I think what youre going to see is the main constraint, which has been access to two batteries.
We will start to be addressed now.
It's not going to be immediate but by next year, you start seeing more capacity come online.
Got it that's that's.
Very comprehensive thank you guys.
In terms of just.
Going back to the backlog of additions right. I mean, you started the year strong roughly over a gig versus the four five to five and a half target sounds like you're confident that you're going to hit that in 2022, but as we think about 'twenty in light of the slower investigation in light of the commentary.
Around potential.
Potential delays do you go back like I mean, what's the current plan I think the long term that 79% EPS growth is predicated on correct me if I'm wrong three to four Gigawatts a year.
Is that sort of.
Do you expect to sort of hit that in 2022, maybe the low end or what's the thinking there as we think about 2023 additions.
So youre talking about signing new ppas or youre talking about commissioning of projects.
The new Ppas Andreas the new.
<unk> targets.
Okay look in the first quarter, we did one one gigawatts. So we are on target for our four five to five five gigawatts for the year.
As I mentioned.
Do this commerce case, some of the signing of Ppas.
Solar in the U S will be.
More heavily weighted towards the second half of the year.
People will wait till this resolution and come to a conclusion.
Do I think that this will.
Knock us off our real trajectory no the answer is no and because.
If anything it might move things around from one quarter to the next but we are seeing very strong demand for our products.
And.
This will.
The Rd 100 for example, they're not going to abandon their sustainability goals. So theyre going to go forward with this so I think that.
I feel confident of it.
Kind of caused some delays in signing Ppas, yes, we're saying that but I think that we'll have a catch up so.
It might make things a little bit lumpier than they would be otherwise, which is not ideal but.
That's that's the hand, we've been dealt.
Understood. It sounds like the long term trajectory intact. He may have some lumpiness in the near term.
But you feel confident long term in hitting all the targets.
Exactly exactly.
Alright. Thank you guys appreciate the time.
Thank you. Thank you.
Thank you Jeff.
Our next question comes from.
Julien Dumoulin Smith with Bank of America.
Julien Your line is now open.
Hey, good morning team can you hear me.
Yes, we can help you loud and clear.
Excellent. Thank you I appreciate it.
Guys I wanted to try to quantify things a little bit more if we can.
Obviously, we talked about these commodity sensitivities a bit earlier can we talk about the longer dated commodity sensitivities and trying to quantify it based on what's implied in your slides and it looks as if.
Again, these commodities are flying around but it could be north of 10 positive versus what you guys have your last guidance.
Is that Directionally correct, I mean can you try to quantify that all of it in the permit and then related to the extent to which that that is indeed true directionally.
What does that mean in terms of your appetite to potentially expedite the exit from Bulgaria for instance.
I just wanted to try to just trying to get at that a little bit more <unk> absorb some of these other impact.
Be it solar or fluid.
And still be within your range or higher within your range there.
Sure Julien.
Julien So youre right and Youre looking through the page on the commodities. It seems there's actually upside here as I described so.
Bulgaria, where the power prices are high we're really seeing significant upside there both in the near term as well as in the value of the Maritza plant, which is under contract but.
That PPA as well.
And the money for the government of the people Bulgaria, plus we have the upside of the wind plant.
In our LNG business and our gas businesses in.
Central America, and the Caribbean, we have long term gas contracts.
I've been set.
Well before this commodities.
Environment. So we have some flexibility in how we manage our cargos.
Have customers of plants that have dual fuel capability.
And so we're able to perhaps.
Work on <unk> and <unk>.
Walking to liquid fuels.
And redirecting cargoes into Europe for example, with our partners so.
This is a really important part of our portfolio. One that we are don't tend to talk a lot about but it is.
In this environment important diversification of our portfolio. So we see both.
With power prices as well as the upside in our position in natural gas given our long term contracts yes.
Yes, Directionally you are correct I wouldn't.
Venture to say, whether it's 10 or.
Exactly at this point, but some.
And some of that relies on discrete transactions that we.
We will do and have done and will do to take advantage of that upside on LNG.
And talking about Bulgaria, what I would say is look.
In the past the PPA had been question before the sort of.
Anti competitive.
Illegal state aid really was the case before the European Commission. So what we're seeing is that.
To some extent, we're getting past that.
The confirmation of the PPA.
So it's a very attractive asset and <unk> is a very attractive assets through the end of its contract period and beyond it's actually doing what the reason. It was built was to make Bulgaria independent of Russian gas. That's why it was built and it uses local coal so it's not affected by international prices.
Very much in the money for our clients so.
The asset is much more valuable today than it was say six months ago.
And we've also agreed to help the Bulgarian government look at energy storage and other alternatives to.
When.
Let's say maritza away from just running on call. So stay tuned to that but I would say this has been the big winner from from this horrible situation in Europe .
Got it fair enough and then I just wanted to try to quantify.
Some of the qualitative comments earlier around the ADC bdus on 'twenty three I just.
Again, it sounds as if specifically you're reaffirming the origination ranges going into next year. Your confidence there is there any I mean, when you try to quantify any of these risks any way to do so around solar here, just any quantum of origination rates any any quantity of <unk>.
And the higher cost et cetera, I, just want to make sure we're crystal clear on what they saw.
Yes.
Look what I would say is the following look we are continuing to negotiate with our clients.
This has pushed off the final signing of a number of additional ppas because there is uncertainty about.
This tariff.
So that's sort of the remaining item too.
Complete these ppas.
Now its effect will depend on August .
August provide enough clarity and it should you should have an indication of how much the tariff would be how much you would have to put it in sort of <unk>.
Cash deposits.
Even though it might be finalized later, but typically those move up and down.
Not that drastically so we think we could work with that.
However, I mean.
The issue to me the biggest issue is whether the.
The suppliers continued to run these factories in southeast Asia.
The decrease in global supply of solar panels. So that's a little bit more of the issue. So there are a lot of things there, but rest assured that we're doing everything possible and using our sort of global footprint too.
Tried to.
Be able to give.
<unk> certainty to some of the suppliers that they will be able to continues to be running so stay tuned but.
We hope that by August or actually sooner because the cases, so weak it should be dismissed and it's amazing that it's gotten this far.
But.
Is this there should be some clarity or has to be some clarity by August and then we'll let you know and we will continue to work with all the suppliers to ensure that we get those panels to the states.
On time to complete 2023 projects.
Got it Alright fair enough and then just the last last one to clarify the fluids, obviously, it's a trailing impact et cetera. The lock up expired of late it seems it's still strategic to you from an origination perspective in your sales efforts right regardless of the results.
Yes, I'm optimistic about fluids.
In.
In the long run or let's say medium term because.
These it's very difficult with the launch of new product when you get hit by Covid shutdowns in China that there were some of the battery suppliers had issues with.
And that caused the shortage in the market as well.
So.
There were tremendous shipping issues that they had to face, but look it's a well capitalized firm <unk>.
Product is good.
Digital is expanding well.
They will talk about these things and for US It has helped us.
Really create a market for energy storage.
Solar plus energy storage or 24, seven relies on energy storage.
If a version of the climate plus Bill gets passed.
And there is clarity about around green hydrogen that will require a lot of energy storage. So yes. It is.
Our strategic relationship and we hope to grow together for years to come.
Boston Alright, Thank you guys.
Good luck. Thank you Julian Thanks Joey.
Thank you Julien.
Our next question comes from.
Andy stores and ski with key point.
Andrew Your line is now open.
Thank you Phil.
My first question is about the timeline.
Timeline of your coal plant retirements.
<unk> seem to be in this new gas price environment basically everyone everywhere in the world.
<unk>.
We haven't yet heard many companies.
<unk> the timeline, but.
There is money to be made continued operations of some of these assets.
So that's one and then the second question.
And then a bit more.
Longer dated I guess is that so far.
Do you see the reasons why C&I customers signed renewable power Ppas.
Mentioned.
The carbonization is the main driver we haven't yet heard much about economic renewables.
And that's probably the insulation and equipment prices doesn't help us.
But are you expecting.
Second wave of demand from C&I, that's a nice as we are in this higher.
Power price environment, probably for years to come.
Yes, those are great questions first.
First on the first one.
We have to the question of.
Trying to sell these assets.
And down at times that are most appropriate so the shutdowns is talking a lot with the.
Local.
System operator.
The Ministry of energy.
So those I don't see being affected by what's happening on some of the sales you're right.
Many of these plants are more valuable and certain locations again maritza being the Prime example.
Some of these shutdowns may be.
May be somewhat delayed because they must run.
In terms of availability of natural gas, but it doesn't change our goal.
Getting rid of all coal plants by 2025.
The second question is Im really glad you asked it because.
The companies are committed to their dear carbonization goals are not just going to abandon them because of the app.
Case, before commerce or because of slightly higher.
Prices of.
Let's say everything from wind turbines solar panels batteries due to what's happening on the.
Minerals side commodity side.
But what people are talking about is that the.
Increase in cost of renewables.
Is much much less than the increase in the price of fossil fuels.
All of them, whether it be coal gas.
For our diesel so actually renewables are more competitive today than ever.
And in almost all cases, I can say that the energy from renewables is the cheapest energy is just a matter of degree how much cheaper is it even with the increase in the cost of construction.
So I'd say that the.
And the main issue is not energy capacity.
How to keep the lights on 24, seven and you really have two choices one is to continue to run.
Legacy assets, whether they be gas or coal and combined it with renewables. That's what we did in Chile sort of green Tegra, our green blend and extend or.
Or energy storage.
And as people go lets say further on this journey of de Carbonization, that's why that's going to be such strong demand for energy storage lithium ion based energy storage. So it really to me. It's a question of supply can you get enough batteries to meet this and the more batteries that become available then youll be able to retire fossil plants sooner.
So that's I'd.
I'd say the main things so you're right.
On the cost equation renewables are more competitive than ever than before this crisis.
Yes, because it is pretty amazing to see that.
Large commercial and industrial customers.
Comfortable locking in for example in PJM power prices.
Hi, 50 box in 2026 2027, when they could purchase renewables like $45 46, I mean that is just one thing that I don't fully grasp and I'm hopeful that that just means that there is more growth to come for you guys.
There is going to be more growth I mean, maybe in some of these cases, it's just that.
Do they have confidence that the projects are there because it's.
Can you deliver those projects and in the sector there have been a lot of projects delayed or canceled.
Yes.
Due to.
Different kinds of supply shortages so.
That might be it might be that.
Going for certainty so what we feel differentiates us and we're very conscious of is that we have been delivering on our projects.
Very good thank you.
Thank you.
Thank you Angie.
Our next question comes from.
Craig oral with <unk>.
Greg Your line is now open.
Yes. Thank you.
I was wondering if you could.
Comment on it.
Moodys to investment grade anything you wanted to highlight there.
[laughter].
Look this has been a pass this over to Steve because he did most of the work, but what I would just add this is been a decade. So if you look at any of our statistics.
In terms of our exposure to commodities. If you look at the fact that we're almost at 88% I think an 85% contracted in or U S. Utilities. If you look at the fact that we are.
I guess, almost 90% hedged I mean, all the indicators are very strong so.
Cash flow has been really strong for a long time, but.
This company is just so fundamentally different from where it was even five years, but I'll pass it off to Steve.
Thanks, Andres and thanks for the question, Greg I was hoping someone would bring it up is we're very proud of that.
Moody's achievement, so, but this is the third of three and so it really fully solidifies our investment grade status as Aes something that the team set out to do a long time ago I can't I've only been in my job for six months, So I can't really claim.
Much credit for it.
So it really goes to Amit John and the team and so look.
Moodys takes a different approach, where they're looking at our consolidated debt, including all of the nonrecourse debt and all the cash flow from our from our businesses. Our subs. So they really did a very deep review.
And they looked at also the overall risk profile of our businesses. So.
Our our commercial structure are long term contracts dollar denominated.
Our growth in our utilities and so it's been a combination of the strengthening of the balance sheet.
The increases in our in our cash flow and that business mix. So.
And we've actually been in Moody's territory for four quarters straight well into Moody's territory. So this was becoming really really obvious that that was something that aaas deserved and we're very proud of it and look at.
We felt really good about our transformation.
And I think this is just another validation point of that transformation as I said, they did a really thorough review.
I would highlight what Steve said Moody's.
<unk> is different so it takes into account not only the nonrecourse debt with the recourse debt. So in our case, it's about three.
$3 $5 billion of recourse Jack Thank you for your understanding.
$14 three of nonrecourse, yes, exactly yes, and I think I said non refresh, but the recourse debt that's different here they've really deeply in the whole organization.
This tells you that all of our subs.
Have confidence in the cash flow coming from ourselves.
Most of our subs are.
Investment grade rating, so it's a great confirmation.
A decade in the making but the team did a fantastic job in the last year to get this across the finish line.
The other thing I would just point out.
As I think it is a bright line for some investors. So having this third one having all three now locked in I think we'll likely see some new investors.
Attracted to the company now.
Got it thanks.
Thank you Brad.
Our next question comes from.
Ryan Levine with Citi.
Your line is now open.
Good morning.
Yes.
Global favorable view of the DLC Alpine and bundles heat stone are you, hoping to be more acquisitive and new development all quality solar projects.
Sure.
Look what we're seeing is that clients are coming to us and asking us can we do projects that other people have walked away from quite frankly.
Now what we're mostly interested in the states. These $24 seven so really it has to do does it fit into where we're trying to combine assets to be able to deliver 24, seven but it does open up some opportunities so.
I think again under the Department of Commerce case, we just feel that the legal case of the.
Linked appears very very weak and.
And we think that Furthermore, if you look at the.
Objectives of de Carbonization of onshoring.
It moves us in the wrong direction. So yes, we will.
I'd put it is that we continue to.
See opportunities to acquire some projects if they help us meet our clients' demands.
I appreciate the color and then one follow up from earlier, we'll go to breakout the ballgame and commission for the quarter.
We did not break that out for the quarter.
Probably fast as we talk about the full year, but it.
We expect it will be a few cents for the full year.
Okay. Appreciate it thank you.
Thank you Ryan.
Our next question comes from.
David Peters with Wolfe research.
David Your line is now open.
Hey, good morning, everybody.
I'm just curious Andres I think in your prepared remarks, you said.
Do you expect backlog additions this year to be roughly 50, 50 U S and international is that the mix you guys expected heading into this year.
Or are you leveraging your geographic diversity, some given the uncertainty here in the U S. In the near term and should we maybe think of that as a lever you can sort of pull in 'twenty three to the extent there are delays with U S projects.
423, this will be projects that are already signed in terms of commission now in terms of signings. Yes, obviously, we can we have a diverse portfolio and we can adjust correspondingly. So I don't think it would affect 2023% now.
The 50, 50 mix again that sort of legacy.
And.
Again.
We hope again with the resolution of this case is that the proportion of U S would increase.
Yes, and I would just add it's also coming from our utility rate base growth, 9% rate base growth in utilities.
It is helping achieve that and then a lot of what we're doing well really almost everything we're doing even internationally is in a similar strategy with commercial industrial customers. Some of them. The same customers in the U S power and data centers in our core markets overseas. So we would expect to have a similar.
It hits at a different flag, but it will still be a long term contract and in many cases U S dollar denominated contracts.
That's a very important point I mean, what we are.
Really emphasizing abroad as long term renewable contracts in dollars.
So if youre supplying say Microsoft in Chile, It really isn't.
Risks from Microsoft in California.
So again, our business is already.
Over 80% in dollars, but it will only grow.
Thank you and then just last one in.
In California, just in light of solar delays this year and next and maybe storage that's attached that to.
Potentially have an extension of Diablo Canyon being discussed I'm just curious your guys as most recent thoughts on the likelihood of of your OTC units itself funds getting extended at the end of 'twenty three.
Without <unk> ourselves very very we think it's very likely so.
At least that.
The environment there is not such that they wanted to do long term extensions all at once but we've extended through 2023.
And we have not it's an upside to our guidance, but we do think there is a very good chance that those clients will get extended into.
Several years following so it may be year by year, maybe two years at a time, but.
We think that portfolio is very important.
And some of the disruption this is a bit of an offset to some of the current disruption in the <unk>.
All of our supply chain.
And thats it. Thank you guys both from.
Yes that comes both from a capacity.
Revenue perspective, as well as the opportunity for the Q3 peak demand energy hedging that we've done.
So it's it's quite it can be quite material.
Okay, great. Thank you.
Thank you David.
That concludes today's Q&A portion of the call I will now pass the conference back over to Susan Harcourt for any closing remarks.
We thank everybody for joining us on today's call.
Always the IR team will be available to answer any follow up questions you may have.
Thank you and have a nice day.
That concludes today's Aes first quarter 2022 Financial review conference call. Thank you for your participation you may now disconnect your line.