AES CORP Q4 FY2023 earnings call

Management Statement and Operational Highlights

• 2023 Performance: 2023 was AES's best year ever, with 5.6 gigawatts of new PPAs signed, 3.5 gigawatts of construction completed, adjusted EBITDA of $2.8 billion (top end of guidance), adjusted EBITDA with tax attributes of $3.4 billion, adjusted EPS of $1.76, parent-free cash flow over $1 billion, and asset sales proceeds of $1.1 billion (significantly above target).
• Growth Outlook: Raised adjusted EBITDA growth rate to 5%-7% and adjusted EPS growth rate to 7%-9% through 2027. Upped U.S. renewables return ranges to 12%-15% on a levered after-tax cash basis.
• Corporate Customers: Nearly 60% of 2023 projects served corporate customers, with a strong track record of delivering projects on time, scale and pipeline to meet data center demand (estimated to more than double by 2030).
• Construction: Ability to complete projects on time and on budget is a differentiator; 100% of major equipment for 2024 projects is contractually secured, and nearly 80% is already on site.
• Utilities: AES Ohio and Indiana achieved milestones, with rate-based growth in U.S. utilities; focus on customer affordability and timely investment recovery, with ~75% of growth capital deployed under mechanisms to reduce regulatory lag.
• Asset Sales: Exceeded 2023 asset sale target ($1.1B vs. target $400M-$600M), on track for $2B by 2025 and $3.5B by 2027.

Segment Performance

• Renewable Strategic Business Unit (SBU): Higher adjusted EBITDA with tax attributes driven by 3.5 gigawatts of new projects online in 2023 and higher margins in Columbia, partially offset by sell-down of select U.S. renewable operating assets.
• Utilities SBU: Higher adjusted PTC due to recovery of prior year's purchase power costs at AES Ohio (part of ESP4 settlement) and rate-based growth in the U.S.
• Energy Infrastructure SBU: Lower adjusted EBITDA due to significant LNG transaction margins in 2022, lower margins in Chile, and sale of a minority interest in Southland combined cycle assets; partially offset by higher revenues from accelerated monetization of the PPA at Warrior Run coal plant.
• New Energy Technologies SBU: Higher adjusted EBITDA reflects improved results at Fluence, which achieved positive adjusted EBITDA in fiscal 2023 fourth quarter and guided to positive adjusted EBITDA for full fiscal 2024.

Guidance

• 2024 adjusted EBITDA with tax attributes guidance: $3.6 billion to $4 billion, driven by over $500 million from new renewables projects and rate-based growth at U.S. utilities, with a $200 million partially offsetting impact from asset sales. Excluding tax attributes, adjusted EBITDA expected to be $2.6 billion to $2.9 billion.
• Raised U.S. renewables return ranges to 12%-15% on a levered after-tax cash basis.
• 2024 adjusted EPS guidance: $1.87 to $1.97.
• Long-term adjusted EBITDA growth target: 5%-7% through 2027; adjusted EPS growth target: 7%-9% through 2027.
• 2024 parent free cash flow: ~$1.05 billion to $1.15 billion; net asset sale proceeds: $900 million to $1.1 billion; investment in new growth: ~$2.6 billion; dividend: ~$500 million.

Risks

• Interest rate exposure managed with hedging, but potential impact on future issuances and refinancings.
• Supply chain challenges in the past, though past issues are mitigated.
• Coal plant retirements delayed, but still plan to be out of coal by 2027.

Question and Answer

Q: Originally had a 3%-5% EBITDA target, but 2024 guidance seems flat. What's driving this?

A: Primarily due to being ahead on the asset sale target ($1.1B vs. $400M-$600M), with a $200M drag from asset sales this year offsetting growth from rate base and renewables projects.

Q: On asset sales, is there room to offset debt issuance?

A: The investment grade is a top priority, with cushion built into metrics; asset sales have multiple ways to be achieved, and debt exposure is managed with hedging, with only one penny of EPS exposure from interest rates in 2024.

Q: What sparked higher return levels in renewables?

A: Combination of higher returns on prior PPAs, shortage of good renewable projects in select markets (like California, PJM, New York, Chile), and increased efficiency in construction and development.

Q: How has the growth rate mix shifted?

A: More on the renewable side due to higher returns, utilities also contributing, and energy infrastructure shrinking due to coal exit plan extension.

Q: Why is the level of gigawatts entering commercial operation flat to 2023?

A: Due to project timing; 2023 was a dramatic year with 100% increase in construction, and projects will converge over time, with 100% major equipment contracted for 2024 projects and 80% on site.

Q: Any degradation in EBITDA or cash flow from existing assets?

A: No, existing assets are performing better than forecast, with no degradation in performance.

Q: Delayed coal plant retirements, update?

A: A handful of assets extended through 2027, smoothing EBITDA reduction from coal exit plan, with strategic objective to be out of coal by 2027.

Q: Nuclear power impact on renewables pursuit?

A: Unlikely to stop renewables growth in next 5-10 years, as nuclear renaissance has yet to prove and build out, and demand from clients is strong.

Q: Dividend growth rate 2%-3% long-term?

A: Committed to dividend, with decision made after analyzing capital opportunities and higher returns from growth investments, starting in 2025.

Q: 2024 tax credit guidance $1B, timing?

A: Driven by success of business, transfer of credits recognized earlier, growth in projects, energy community adder, and domestic content for wind projects, expected to continue rising.