AES CORP Q3 FY2023 earnings call

• Strategic and Financial Updates: Financial results are strong; full year adjusted EPS is expected to be in the top half of the guidance range of $1.65 to $1.75. Reaffirmed short- and long-term financial metrics. Third quarter adjusted EBITDA with tax attributes was $1 billion, and adjusted earnings per share was $0.60.
• Renewables Demand: Strong demand for long-term renewables contracts, especially from large technology companies with expanding data centers. Signed 3.7 gigawatts of new PPAs this year, including 1.5 gigawatts since the second quarter call, and confident in signing at least 5 gigawatts of new long-term PPAs this year. Backlog of projects with signed long-term contracts is 13.1 gigawatts, with over 70% or over 9 gigawatts expected to come online through 2025 and 44% or 5.8 gigawatts already under construction.
• Construction Progress: Construction program making excellent progress, with 93% of megawatts expected to come online this year already having achieved mechanical completion. Increased year-end construction target from 3.4 gigawatts to 3.5 gigawatts.
• Funding Sources: Will not issue equity until at least 2026 unless value accretive. Significantly accelerating asset sales, with line of sight to at least $2 billion of asset sale proceeds in '24 and '25 and at least $3.5 billion through 2027. General buckets of asset sales plan include coal exit, sell-downs of U.S. renewable projects, partial monetization of businesses, and exit of certain noncore businesses.
• Interest Rate Exposure: Proactively matches debt profile to cash flows supporting it. Approximately 80% of debt is non-recourse to the AES parent, and most is either utility debt included in customer rates or project level debt matched to underlying project revenues. All long-term debt at Corp is either fixed or hedged.

Renewables SBU

• Adjusted EBITDA with tax attributes saw growth, driven by higher contributions from new projects in the last 12 months and higher margins in Colombia, partially offset by lower tax credit recognition due to fewer new projects placed into service this quarter compared to a year ago. Year-to-date, $1.8 billion in tax capital financing has been raised, and tax credit transfers are increasingly used to monetize tax credits, including for nearly 500 megawatts of projects in 2023.

Utilities SBU

• Higher adjusted PTC was driven by the recovery of prior year's purchase power costs at AES Ohio included as part of the ESP4 settlement, which had been recognized as an expense in the third quarter of last year. The utility growth program is progressing, with 80% of planned investments through 2027 already approved or under FERC formula rate programs, and plans to grow the combined rate bases of U.S. utilities at a 10% average annual rate through 2027.

Energy Infrastructure SBU

• Lower adjusted EBITDA primarily reflects significant LNG transaction margins in the prior year, partially offset by prior year onetime expenses in Argentina and higher revenues recognized from the monetization of the PPA at our Warrior Run coal plant.

New Energy Technologies SBU

• Higher adjusted EBITDA reflects continued improved results at Fluence, which has demonstrated improving margins and strong pipeline growth and is expected to be close to adjusted EBITDA breakeven in the fourth quarter of its 2023 fiscal year.

• Expect full year adjusted EPS to be in the top half of the guidance range of $1.65 to $1.75 and parent free cash flow in the range of $950 million to $1 billion.
• Reaffirm full year 2023 adjusted EBITDA guidance range of $2.6 billion to $2.9 billion, including $500 million to $560 million of tax attributes, resulting in adjusted EBITDA with tax attributes of $3.1 billion to $3.5 billion.
• Increase asset sale target to at least $3.5 billion for the 2023 to 2027 timeframe and accelerate plan to achieve $2 billion of asset sale proceeds in 2024 and 2025. Will not issue equity until at least 2026, with the amount anticipated reduced to $500 million to $1 billion through the guidance period.
• Tax credit transferability option creates added flexibility to monetize tax value of U.S. renewables projects.
• While still intending to exit all coal businesses by the end of 2025, can delay exit of a few select plants through 2027 to support electricity reliability.

• Interest rate fluctuations could impact debt costs. - Asset sale progress may be slower than expected. - Delays in renewable energy project construction and commissioning. - Coal exit progress may be affected by market factors such as slower renewable deployments and transmission progress.

Q: So strong update in terms of the contract originations within the renewables development portfolio. I was wondering if you could elaborate on what you're seeing in terms of that backdrop, the trends in customer demand. There have been concerns in the market around renewable slowdown given the higher PPA prices financing challenges, et cetera. Wondering if you could talk about what your conversations are like with your customers? Are there pockets of weakness? Or is there still an ample opportunity set out there for contract signings?

A: What we're seeing is very strong demand from our target customers. So we have not seen a weakening. And as we said, it's -- I think it's very important to distinguish what markets you're operating in. So markets like California and New York, PJM, there is very strong demand. And there's very strong demand from corporations, especially from the tech companies in the data center business. So we have not seen a slowing down. Now, if you're talking about WEC and auctions for public utilities, et cetera, we're seeing a lot more competition for those projects. But for the -- our target customers in our target markets, we're seeing demand very firm.

Q: Just want to start off with a quick housekeeping question here. Just the $0.10 EPS upside that we talked about, Steve, from projects potentially being moved from '24 into late '23, is that factored into your raised EPS guidance now, or is that still an upside?

A: Yes. So a portion of it, Durgesh, so we did guide to 100 megawatts over at least this year, so the 3.4 to 3.5. So just a portion of that $0.10 is included. And the good thing is we have a very clear line of sight at this point to that increase as mechanical completion has been achieved on 93% of the new capacity. That means everything is all built out. We're just in final synchronization of equipment and systems. And so, we feel very confident in the year-end number. That which does not come online this year of that upside will be in the first half of next year.

Q: I wanted to -- you mentioned about -- you mentioned transferability of tax credits. I just wanted to make sure that were not in a sense window dressing and trying to solve for a certain credit metrics, but this is actually driven by economics. So when I look back to your Analyst Day, you financed your renewables in the U.S., 40% tax equity, 40% project level debt and then 20% equity. So I just wanted to make sure that, that structure is still in and we're not trying to basically boost credit metrics by levering these projects more? And again, just explain to me that why we're moving from the traditional credit -- tax equity structures, which allowed you to monetize accelerated depreciation, among others to the transferability?

A: Yes. Angie, it's Steve. Thanks for the question. No, it is important to recognize that AES has always been maximizing their tax credit value. And so that continues to be the case. The reality is the transfers offer a more -- a broader market -- a broader set of market participants. I think a more liquid market, so many more corporates coming in from different sectors. It's a faster, simpler transaction to execute, but we'll still do both because it's important that you not only monetize the tax credit value but also the benefit of the accelerated depreciation which is not something that's transferable and does require either AES or a partner in the asset to be able to utilize that accelerated depreciation benefit. So there'll be hybrids done here. But my primary point is that it is a broader market, simpler transactions, more liquidity. And I do think it's appropriate that it shows up in operating cash and free cash because this is truly an important component of value and a return to the investment that gets made in the assets.