AES Q1 2022 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
May 6, 2022
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Operator

Good morning. Thank you for attending today's AES First Quarter 2022 Financial Review Call. My name is Amber and I will be your moderator for today's call. [Operator Instructions]

I now have the pleasure of handing the conference over to our host, Susan Harcourt, Vice President of Investor Relations with AES. Susan, please go ahead.

Susan Harcourt
Vice President of Investor Relations at AES

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.com.

Today, we will be making forward-looking statements. There are many factors that may cause future results to differ materially from these statements which are discussed in our most recent 10-K and 10-Q filed with the SEC. Reconciliations between GAAP and non-GAAP financial measures can be found on our website along with the presentation.

Joining me this morning are Andres Gluski, our President and Chief Executive Officer; Steve Coughlin, our Chief Financial Officer; and other senior members of our management team.

With that, I will turn the call over to Andres.

Andres Gluski
President & Chief Executive Officer at AES

Good morning, everyone and thank you for joining our first quarter 2022 financial review call. I am very happy to report that we have attained an investment-grade rating for Moody's.

We are now investment-grade rated by all 3 major agencies which is an important milestone for our company and reflects a decade worth of work to transform our business. We're also reaffirming our 2022 guidance and 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 signed renewable energy PPAs and our U.S. utility, AES Next influence and our strategic outlook for the sector, beginning with our 2022 construction program on Slide 4. We are laser-focused on ensuring timely completion of projects. As we see our ability to execute on our commitments as a key source of competitive advantage. This year, we expect to complete more than 2 gigawatts of new renewables, including 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 4 Southeast Asian countries which collectively supply approximately 80% of solar panels for the U.S. market. The Department of Commerce 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 1/3 of our 2022 renewable projects are international and the remaining 683 megawatts in the U.S. are wind and energy storage.

Moving to the diverse drivers of future growth, beginning on Slide 5. 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 5 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 4.5 to 5.5 gigawatts of renewables under long-term contracts with a roughly 50-50 split between the U.S. and international markets. We do expect PPA signings in the U.S. to be more weighted towards the second half of the year. So far this year, we have signed or been awarded 1.1 gigawatts, bringing our backlog to 10.3 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 2 key agreements for our structured products.

First, the expansion of our partnership with Microsoft into California, the third market where we will supply renewable energy to match the load at their data centers; and second, our agreement with Amazon, under 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 6, we believe our development pipeline of 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 U.S. utility platforms, beginning on Slide 7. 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 8. In Indiana, we're 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 through already approved rate mechanisms. Additionally, we expect to finalize our next integrated resource plan by this fall, allowing us to further transform AES Indiana's generation fuel mix.

In Ohio, we're capitalizing on FERC formula rate-based investments in the transmission network. At the same time, we are implementing our Smart Grid investment program which is recovered through an existing rate mechanism. We also have a 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 9. Through 2025, we expect to invest $4 billion to modernize our U.S. utilities. These investments translate to average annual rate base growth of 9% through 2025 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 next help our businesses to be more innovative and competitive and drive value for our customers and shareholders. We are proud that earlier this year, Fast Company named AES as one of the 10 most innovative energy companies in the world and the only large publicly-traded company to be included on that list.

Turning to Slide 11. The most mature initiative under AES Next today is Fluence which as of December 31, had 4.2 gigawatts of energy storage products deployed and contracted and a signed backlog of $1.9 billion. Additionally, Fluence's digital platform, Fluence IQ, recently acquired Nispera and now has a combined 15 gigawatts contracted or under management, of which more than 80% is with third-party customers.

Over the past several months, Fluence 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 regionalizing their manufacturing. Overall, demand for energy storage remains very robust and Fluence is well capitalized and positioned to grow as a 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. Today, there is an unprecedented transformation of our sector underway with governments, utilities and companies working to shift to low carbon sources of power. For example, just looking at the public commitment of the RE100, a group of over 350 large corporations who have committed to 100% renewable energy, we expect our annual demand to more than double to almost 400 terawatt hours of renewable energy by 2030. Facing this immense opportunity we are 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 is reflected in our own portfolio as we expect renewables to represent more than 3/4 of our installed capacity by the end of 2025. During that same time period, we expect our renewables business to nearly triple from 13 gigawatts to approximately 38 gigawatts and our capacity from coal to go from 7 gigawatts to 0.

With that, I will now turn the call over to our CFO, Stephen Coughlin.

Steve Coughlin
Chief Financial Officer at AES

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 Andres highlighted, I'm 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 in 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 in some of our markets.

Now turning to our financial results for the quarter, beginning on Slide 17. Adjusted EPS for the quarter was $0.21 versus $0.28 last year. Our core business segments grew by $0.04 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-related supply chain issues at Fluence in the fourth quarter of 2021. As a reminder, we report Fluence's results on a 1 quarter lag. So the Fluence results relate to their December quarter end which was disclosed in February and included in AES' 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, a 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 pretax contribution, or PTC, was $207 million for the quarter which was $40 million lower than 2021, consistent with the drivers I just discussed. I'll cover the performance of our strategic business units or SBUs in more detail over the next 4 slides. In the U.S. and utility 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 AES Andy's and higher contracted revenue in Colombia. Lower PTC at our Mexico, Central America and the Caribbean, or MCAC SBU primarily reflects the sale of Itabo in the Dominican Republic in 2021 and lower availability at our generation facilities in Mexico. Finally, in Eurasia, higher PTC reflects higher revenue at our Mong Duong facility in Vietnam and higher power prices at our wind plant in Bulgaria, driven by commodity price increases.

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 2/3 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. 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 to go will be primarily driven by contributions from new businesses, including over 2 gigawatts of projects in our backlog coming online over the next 9 months, as well as further accretion from our increased ownership of AES AMS's. We are also reaffirming our expected 7% to 9% average annual growth target through 2025, 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 $1.4 billion 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 in 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 3/4 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 AES Andres. 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 Andres.

Andres Gluski
President & Chief Executive Officer at AES

Thank you, Steve. In summary, our core business continues to perform well. We have attained investment-grade ratings from all 3 major agencies. We are reaffirming our 2022 guidance and annualized growth through 2025. We continue 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 imports. 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.

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Operator

[Operator Instructions] Our first question comes from and Insoo Kim with Goldman Sachs. And sir, your line is now open.

Insoo Kim
Analyst at The Goldman Sachs Group

Yes. Thank you. First question on the solar -- the U.S. solar investigation. Good to see that the '22 projects are on time and on schedule. Just for 2023 exposure, could you give a little bit more clarity on the amount of capacity that maybe has been contracted and need to be delivered? And what type of timing delays, if any, that we could expect for next year? And then just related to that, if 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.

Andres Gluski
President & Chief Executive Officer at AES

Let me start with a little background on the commerce case. So this case is an investigation by commerce into allegations of 1 U.S. manufacturer that panels and cells imported from 4 countries in Southeast Asia are circumventing existing antidumping and countervailing duties on solar panels and cells 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 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 in these countries have invested billions of dollars in technologically sophisticated manufacturing, assembly and processing facilities so that their activities do not appear to be minor or insignificant.

Additionally, the critical step of creating solar cells occurs in these countries and not in China and involves the conversion of the wafer into a cell. Commerce itself as previously ruled that this step determines the country of origin for solar imports. For these reasons, we think that there are strong grounds for commerce to make an expedited determination. It's also important to note that there's broad 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 modules here in the U.S. Currently, the U.S. manufacturing industry can only meet 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 claim on a ground that a finding of circumvention would not be appropriate due to its harmful impacts. So we'll continue to advocate for a 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 3 years, I've been arguing that this huge wave of renewable demand was coming and that there were going to be shortages of everything, from developers, to land, to interconnections. And now, we've had, I'd say, an additional issue with this commerce -- case before commerce for solar panels; so we've been not ahead of this. Now what will determine what will happen in '23 to us. And again, I think we're in the best shape of anybody in the industry, will be if there's an early resolution or if there is a determination, let us take the worst case. They come out and they say that there is a convention and there's going to be a tariff of X.

Okay. Well, then people can put cash deposits at that point. Now I think this would have a very deleterious effect for the whole solar industry in the U.S. I think we would be in better shape because we're primarily selling to corporates who have more flexibility than people say utilities with RFPs who are much more regulated. So given that, I'd say, look, right now, we don't know. I mean worst case and we continue to negotiate with our clients, with advances. We're not signing them yet because we're waiting for this final determination. But this is not going to stop us. And in terms of the construction, it depends how the case comes and the sort of shipping backlogs and the rest. It could potentially affect the second half of '23 but we'll have to see.

So we're doing everything possible to minimize this. And I think the proof of the pudding is in the eating. I think we're one of the few solar U.S. developers who did not have to postpone or cancel any projects this year.

Insoo Kim
Analyst at The Goldman Sachs Group

That's good color. And maybe just the second part of my question was just if maybe the -- not the worst case but a nonconstructive case comes down and the delays are more significant for the whole industry. Just your portfolio of global projects, whether it's wind or storage or whatnot, ARPU diverse, how much flexibility do you have to pull different levers to still achieve that growth?

Andres Gluski
President & Chief Executive Officer at AES

Well, that's a great point. If you think of our backlog of 10.3 gigawatts, only about 1/3 is U.S. solar. So the rest is either international or wind or other technology. So again, I think that what will happen, well, it -- we are a diverse portfolio. And so we will try to make it up elsewhere. But again, we think that they're very strong ground to this miss 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 1 small U.S. manufacturer. And I think the grounds of this being insignificant are not material, the value-add added in Southeast Asian countries is almost laughable quite frankly. So it is just rent seeking, I think, from a few small U.S. players. What is dramatic is it's had such an effect on the industry. Now again, fortunately, we've been very concerned about shortages for 3 years. And you'll also recall that even with COVID that first appeared in February of 2020, we talked about its potential effects on supply chain.

So again, stay tuned. I don't think there's anybody in better shape than us. And as you point out, we are diverse in terms of technologies and also in terms of geographies.

Insoo Kim
Analyst at The Goldman Sachs Group

Okay. That makes sense. My second question quickly, on the Slide 43, the sensitivity slide to different moving commodities or currencies or whatnot, it's always helpful to us. Just the update there. I think with stuff like Henry Hub gas prices being almost $8 to $9 right now, just looking at your sensitivity of the year-to-go assumptions. If these commodity prices do remain elevated and with 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 do you see that net impact for the balance of the year as it stands today.

Steve Coughlin
Chief Financial Officer at AES

Yes, it's Steve. So just as a reminder, that page, those sensitives are in isolation. So when you see the gas price sensitivity, it's not -- doesn't include any corresponding power price increase which we would actually expect to happen in most cases. So on balance, the environment, we're really on the 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.

And then, the other thing I would point to is our LNG business in MCAC. So we have long-term contracted gas that's been contracted for some time. So in fact, there are some upsides that we're working -- have worked through and we'll continue to work through to take advantage of some of the high gas price opportunities to benefit our LNG business. So I think there's upside there as well. Southland has been another upside we see the Q3 hedging program, another success. We expect more success this year with $0.05 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%. Those that are not are really U.S. renewable contracts where we've locked in our cost upfront and that was baked into the overall cost of the -- our pricing in the PPA.

So really, AES has transformed a lot. And actually, we're in quite good shape in this environment.

Andres Gluski
President & Chief Executive Officer at AES

I would say, too, we're on the right side of history on this one. I mean, because where we have fuel, it's mostly a pass-through. And we're mostly competing with fossil fuels with either hydro, with renewables. So -- and I would say the biggest winner of what's happened is really Bulgaria because in Bulgaria, we've just signed an MOU with the government of Bulgaria where they recognize the validity of the PPA. And they also -- we're working together on decarbonizing the Maritza project, whether it be -- we're looking at different alternatives, whether it be carbon capture and sequestration, biofuels or conversion to gas and at the same time stepping up investments in energy storage. Again, I really can't think of any case where this is impacting us negatively.

Insoo Kim
Analyst at The Goldman Sachs Group

Thank you so much, guys.

Operator

Our next question comes from Richard Sunderland with JPMorgan. Your line is now open.

Richard Sunderland
Analyst at JPMorgan Chase & Co.

Good morning and thank you for the time today. And maybe 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 delays? Is it really just so much as the timing of the earnings come in? Are there any contractual obligations around energy procurement or elsewhere that you need to fulfill with those contracts?

Andres Gluski
President & Chief Executive Officer at AES

Yes. No, I'm not aware of any, quite frankly. I think that in the very worst case, I don't think it would be demand destruction. It would be a delay in some cases of commissioning them. But no, we would obviously have -- our contracts would not hold us to having to supply energy if there is a major disruption in the solar panel market. But again, we think that's the -- not the most likely scenario. But if it were to occur, we wouldn't be suffering LDs because of not fulfilling contracts.

Richard Sunderland
Analyst at JPMorgan Chase & Co.

Got it. Very helpful. And then thinking about the announcements around these recent structured deals. Could you speak to a little bit of the capacity 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?

Andres Gluski
President & Chief Executive Officer at AES

Yes. First, most of these are reflected in 2021 projects. But what I would say is we're seeing a tremendous demand for our structured project. And we have been talking about this, we weren't able to release some of the names prior to that until 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 is this shows like repeat buying. So with Microsoft, for example, we've done projects in PJM. We did a project in Chile. And now we did a project in CAISO in California. And so we expect the other to happen with the other big clients. So if you think of the large data center clients, we have big contracts with 3 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.

Steve Coughlin
Chief Financial Officer at AES

Yes. And I would just add, in these customers, as Andre said, Richard, we have the flexibility to pivot to some other markets. We've done Microsoft and Google in Chile. And so the Amazon announcement is what we've been able to announce. This is something I wanted to talk to for some time but there's more to come. And we built a pipeline significantly. We're up to 59%, almost 60 gigawatt pipeline and that's in large part because we're playing forward the demand coming from our commercial industrial customers in aggregating pipeline where we know that they're going to need us to supply their load.

Andres Gluski
President & Chief Executive Officer at AES

Yes. I think an important point, a good part of this pipeline is in California and it's quite ready and that we started acquiring land and interconnection rights about 3 years ago. We really got a little bit ahead of this wave that we see now. So the demand is there. It's a question of bringing all the projects online. Now realize that these are versions of 24/7 or round-the-clock renewables. So it's not only a question of having the availability to build new megawatts. It's 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.

Richard Sunderland
Analyst at JPMorgan Chase & Co.

That's very helpful color. And I just wanted to follow up real quick on the sort of contracting backdrop. You talked a little bit about more risk weighted into the U.S. signings, obviously, the DFC overshadowing all of this. So can you give just a little bit more color on what you're seeing in terms of discussions to get it active but you just need that August data point to then start finalizing contracts? Just any more information would be helpful there.

Andres Gluski
President & Chief Executive Officer at AES

Yes. What I feel comfortable saying is you're right, you can characterize this right, that we are in discussions and there are more contracts with many clients and that I'd say a factor is having some clarity in August what it would be because you'd have to make cash deposits and 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 than, say, regulated clients. So let's see what happens. But again, I think it would just really be nefarious for the whole sector for the whole U.S. drive to 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 that's 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.

Steve Coughlin
Chief Financial Officer at AES

Yes. And I would just add, the last year, 80% of the contracts were done in bilateral commercial industrial PPAs, so bilateral negotiations. So -- we -- 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. And this piece is open and it's very frustrating and it's not a good thing. But these are customers that have made very strong and vocal commitments to their decarbonization and we suspect they're going to want to continue to find the path to get there. And since we're in a bilateral relationship, I think we're going to work through that.

Andres Gluski
President & Chief Executive Officer at AES

And I would add, look, we are all in favor of onshoring. But what you need is certainty and you need a time line. 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 solar panels we're buying from Southeast Asia, actually, the polysilicon is going to be coming from Germany. So it's not even coming from China. So this is basically rent seeking by a small number of -- or actually one firm in this case, an insignificant firm, I may add. I don't think it's delivering 1% of the supply in the U.S. So it really is quite agreed to the whole situation.

Richard Sunderland
Analyst at JPMorgan Chase & Co.

Got it. Really helpful color there. Thank you.

Andres Gluski
President & Chief Executive Officer at AES

Thank you, Richard.

Operator

Our next question comes from Durgesh Chopra with Evercore. Please proceed.

Durgesh Chopra
Analyst at Evercore ISI

Hey, good morning team. Thank you for taking my questions. Steve, maybe this one is in sort of your house. 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 in that -- embedded in that guidance? And then obviously, Fluence has had some challenges with COVID-19 as Andres 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?

Steve Coughlin
Chief Financial Officer at AES

Yes. So thanks for the question. Look, so Fluence had a difficult their first quarter which, as I had in my remarks, for their fiscal '22, our fiscal year runs October to September and we report them on a 1 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 Fluence when we gave our guidance and that's largely -- that's about what I can say on it. Unfortunately, Fluence. I can't say much more. My hands are tied here. They're a public company, they'll be releasing earnings next week. But what I can say is I feel very comfortable given that I have the latest expectations for Fluence in our numbers. We've already absorbed their first quarter and we reported that 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've already worked through both signing new shipping contracts, diversifying their battery supply, they're regionalizing 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. They're -- 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 issues coming together here with supply chain batteries, shipping, etcetera. But in our guidance, we have the latest forecast and it's not it's knocking us off our guidance range.

Andres Gluski
President & Chief Executive Officer at AES

What I would add is that the company is well capitalized and see strong demand. And what you're seeing is increase in battery supply outside of China. So you just saw the announcement by the U.S. government that they would have incentives for battery manufacturer in the U.S. Fluence has an agreement with Northvolt for production of batteries in Poland. So, I think what you're going to see is the main constraint which has been access to batteries will start to be addressed. Now it's not going to be immediate but by next year, you start seeing more capacity come online.

Durgesh Chopra
Analyst at Evercore ISI

Got it. That's very comprehensive. In terms of just going back to the backlog of additions, right? I mean you started the year strong, roughly over 1 gig versus the 4.5 to 5.5 gig target. Sounds like you're confident that you're going to hit that in 2022 but as we think about '23 in light of the solar investigation, in light of the commentary around potential delays. Do you go back? Like, I mean what's -- so the current plan, I think the long term, the 7% to 9% EPS growth is predicated on, correct me if I'm wrong, 3 to 4 gigawatts a year. Is that sort of -- do you expect to sort of hit that in 2023, maybe the low end? Or what's the thinking there as we think about 2023 additions?

Andres Gluski
President & Chief Executive Officer at AES

So you're talking about signing new PPAs? Are you talking about commissioning of projects?

Durgesh Chopra
Analyst at Evercore ISI

The new PPAs, Andres; the target.

Andres Gluski
President & Chief Executive Officer at AES

The new PPAs. Okay. Look, in the first quarter, we did 1.1 gigawatts. So we are on target for our 4.5 to 5.5 gigawatts for the year. As I mentioned, due to this Commerce case, some of the signing of PPAs in solar in the U.S. will be more heavily weighted towards the second half of the year because people will wait until this resolution and come to a conclusion. Do I think that this will knock us off our growth trajectory? No? The answer is no. And because -- if anything, it might move things around from 1 quarter to the next. But we're seeing very strong demand for our products. And this will -- the RE100, for example, they're not going to render their sustainability goals. So they're going to go forward with this. So, I think that -- I feel confident of it. Kind of cause some delays in signing of 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 the hand we've been built.

Durgesh Chopra
Analyst at Evercore ISI

Understood. It sounds like the long-term trajectory intact, you may have some lumpiness in the near term. But you feel confident long term in hitting all of our targets?

Andres Gluski
President & Chief Executive Officer at AES

Exactly, exactly.

Durgesh Chopra
Analyst at Evercore ISI

All right. Thank you, guys. Appreciate the time. Thank you.

Operator

Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is now open.

Julien Dumoulin-Smith
Analyst at Bank of America

Good morning. Can you hear me?

Andres Gluski
President & Chief Executive Officer at AES

Yes, we can, loud and clear.

Julien Dumoulin-Smith
Analyst at Bank of America

Thank you. Appreciate it. So I want to sort of quantify things a little bit more if we can. Obviously, we talked about these commodity sensitivities a little 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 $0.10 positive versus what you guys -- your last guidance. I mean, is that directionally correct? I mean can you try to quantify that a little bit and affirm it? And then, related to the extent to which 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 want to try to get at that a little bit more and/or absorb some of these other impacts, be it solar or Fluence and still be within your range or higher within your range.

Steve Coughlin
Chief Financial Officer at AES

Sure. Julien. So you're right. I mean and you're looking through the page on the commodities and seeing that 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 is well in the money for the government of the people in Bulgaria, plus we have the upside in the wind plant. In our LNG business, in our gas businesses in Central America and the Caribbean, we have long-term gas contracts that have been set well before this commodities environment. So we have some flexibility in how we manage our cargoes, we have customers or plants that have dual fuel capability. And so we're able to perhaps work in swapping 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 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. But yes, directionally, you are correct. I wouldn't venture to say whether it's $0.10 or exactly at this point. But some of that relies on discrete transactions that we will do and have done and will do to take advantage of that upside in LNG.

Andres Gluski
President & Chief Executive Officer at AES

Yes. And talking about Bulgaria, what I would say is, look, -- in the past, the PPA had been questioned before the sort of anticompetitive -- say, legal 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. This is a confirmation of the PPA. So it's a very attractive asset. Maritza is a very attractive asset 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. So it's very much in the money for our clients. So the asset is much more valuable today than it was, say, 6 months ago.

And we've also agreed to help the Bulgarian government look at energy storage and other alternatives to wean, say, Maritza away from just running on coal; so stay tuned to that. But I'd say this has been the big winner from this horrible situation in Europe.

Julien Dumoulin-Smith
Analyst at Bank of America

Got it. Fair enough. And then, I just want to try to quantify versus some of the qualitative comments earlier around the AD CVD risk on '23. I just -- again, it sounds as if specifically, you're reaffirming the origination ranges going into next year, your confidence is 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 risk? Any quantum of impact and higher costs, etcetera. I just want to make sure we're crystal clear on this all.

Andres Gluski
President & Chief Executive Officer at AES

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's uncertainty about this tariff. So that's sort of the remaining item to complete these PPAs. Now, it's effect will depend on -- will 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 in sort of 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 suppliers continue to run these factories in Southeast Asia. Do you have a 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 to try to be able to give certainty to some of the suppliers that they will be able to continue to be running.

So stay tuned but we hope that by August or actually sooner because the case is so weak, it should be dismissed and it's amazing that it's gotten this far. But there should be some clarity or has to be some clarity by August and then we'll let you know and we'll continue to work with all the suppliers to ensure that we get those panels to the states on time to complete 2023 projects.

Julien Dumoulin-Smith
Analyst at Bank of America

Got it. All right. Fair enough. And then just the last to cover this. Fluence, obviously, it's a trailing impact, etcetera, the lockup expired of late. It seems it's still strategic to you from an origination perspective and your sales efforts, right, regardless of the results?

Andres Gluski
President & Chief Executive Officer at AES

Yes, I'm optimistic about Fluence in the long run or I will say medium term because these -- it's very difficult to launch a new product when you get hit by COVID shutdowns in China. There were -- some of the battery suppliers had issues, let's face it. And that caused a 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. The product is good. Digital is expanding well. They'll talk about these things. And for us, it has helped us really create a market for energy storage, solar plus energy storage. Our 24/7 relies on energy storage. If a version of the climate plus bill gets passed and there's clarity around green hydrogen that will require a lot of energy story. So yes, it is a strategic relationship. And we hope to grow together for years to come.

Julien Dumoulin-Smith
Analyst at Bank of America

Thank you, guys. Good luck.

Andres Gluski
President & Chief Executive Officer at AES

Thank you, Julien.

Operator

Our next question comes from Agnieszka Storozynski with Seaport. Your line is now open.

Agnieszka Storozynski
Analyst at Seaport Research Partners

Thank you. So my first question is about the time line of your coal plant retirements. We seem to be in this new gas price environment, basically everywhere in the world. We haven't yet heard many companies change the time line but there is money to be made on continued operations of some of these assets. So that's one. And then the second question, a little bit more longer dated, I guess, is that so far, when you see the reasons why C&I customers signed renewable power PPAs, they mentioned decarbonization as the main driver. We haven't yet heard much about economic renewables and it's probably the inflation and equipment prices doesn't help. But are you expecting the second wave of demand from C&I customers as we are in this higher power price environment probably for years to come.

Andres Gluski
President & Chief Executive Officer at AES

Yes, those are great questions. Look, first on the first one, we have to reach our goal by 2025. So it's a question of trying to sell these assets or shut them down at times that are most appropriate. So the shutdowns, it's talking a lot with the local system operator or the Ministry of Energy. So those I don't see being affected by what's happening now. On top of the sales, you're right, many of these plants are more valuable in certain locations, again, Maritza being the prime example. And some of these shutdowns may be somewhat delayed because they must run in terms of availability of natural gas. But it doesn't change our goal of getting rid of all coal plants by 2025.

The second question is, I'm really glad you asked it because the companies are committed to their decarbonization goals. They're not just going to abandon them because of the case before commerce or because of slightly higher prices of let's say, everything from wind turbines to solar panels to batteries due to what's happening on the mineral side, commodity side. But what people aren't 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 or 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. It's 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 main issue is not energy, it's capacity. How to keep the lights on 24/7. And you really have 2 choices. One is to continue to run your legacy assets, whether they be gas or coal and combine it with renewables. That's what we did in Chile, the sort of Green integra or Green Blend and Extend or energy start. And as people go, let's say, further on this journey of decarbonization, that's why there's going to be such strong demand for energy storage, lithium ion-based energy storage.

So 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 you'll be able to retire fossil plants sooner. So that's -- I'd say, the main thing. So you're right. But on the cost equation, renewables are more competitive than ever than before this crisis.

Agnieszka Storozynski
Analyst at Seaport Research Partners

Yes. Because it is pretty amazing to see that large commercial industrial customers are comfortable locking in, for example, in PJM power prices as far as high as $50 in 2026, 2027 when they could purchase renewables for 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 no growth to come for you guys.

Andres Gluski
President & Chief Executive Officer at AES

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 this sector, there have been a lot of projects delayed or canceled, not by us due to different kinds of supply shortages. So that might be it. It might be that they're going for certainty. So what we feel differentiates us and we're very conscious of is that we have been delivering on our projects.

Agnieszka Storozynski
Analyst at Seaport Research Partners

Very good. Thank you.

Operator

Our next question comes from Gregg Orrill with UBS. Your line is now open.

Gregg Orrill
Analyst at UBS Investment Bank

Thank you. I was wondering if you could comment on what got Moody's to investment grade. Anything you wanted to highlight there?

Andres Gluski
President & Chief Executive Officer at AES

Look, this has been -- I'll pass this over to Steve because he did most of the work. But what I would just add, this is in 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, what, 88%, I think, in dollars, 85% contracted 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 our cash flow has been really strong for a long time but this company is just so fundamentally different from where it was even 5 years ago. But I'll pass it off to Steve.

Steve Coughlin
Chief Financial Officer at AES

Thanks, Andres. And thanks for the question, Gregg. I was hoping someone would bring you up as we're very proud of the Moody's achievement. So look, 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 6 months, so I can't really claim too much credit for it. So it really goes to Andres, John and the team. And so look, Moody's takes a different approach where they're looking at our consolidated debt, including all the nonrecourse debt and all the cash flow 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 commercial structure, our 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 cash flow and that business mix and we've actually been in Moody's territory for 4 quarters straight -- well into Moody's territory.

So this was becoming really, really obvious that it was something that AES 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.

Andres Gluski
President & Chief Executive Officer at AES

Yes. And I would highlight what Steve said that Moody's methodology is different. So it takes into account not only the nonrecourse debt but the recourse debt. So in our case, it's about I guess, $3.5 billion of recourse?

Steve Coughlin
Chief Financial Officer at AES

Yes, yes. Thank you, Andres.

Andres Gluski
President & Chief Executive Officer at AES

$14.3 million of nonrecourse.

Steve Coughlin
Chief Financial Officer at AES

Yes, exactly. Yes. I mean I think I said nonrecourse but the recourse debt that's different here. They really look deeply into the whole organization.

Andres Gluski
President & Chief Executive Officer at AES

So this tells you that all our subs that they have confidence in the cash flow coming from ourselves and most of our subs are investment-grade rating. So it's a great confirmation. It was a decade in the making but the team did a fantastic job in the last year to get this across the finish line.

Steve Coughlin
Chief Financial Officer at AES

Yes. And the other thing I would just point out is I think it's a bright line for some investors. So having this third one, having 3 all locked in. I think we'll likely see some new investors be attracted to the company now.

Gregg Orrill
Analyst at UBS Investment Bank

Got it. Thanks.

Operator

Our next question comes from Ryan Levine with Citi. Your line is now open.

Ryan Levine
Analyst at Smith Barney Citigroup

Good morning. Given your favorable view of the DOC outcome and balance sheet strength, are you looking to be more acquisitive than new-in development third-party solar projects in the solar?

Andres Gluski
President & Chief Executive Officer at AES

Look, what we are seeing is that clients are coming to us and asking us, can we do projects that other people have walked away from, quite frankly. So that -- now what we're mostly interested in the states, these 24/7. So really, it has to do, does it fit into where we're trying to combine assets to be able to deliver 24/7. But it does open up some opportunities. So I think, again, on the Department of Commerce case, we just feel that the legal case of the length of here is very, very weak. And we think that -- furthermore, if you look at the objectives of decarbonization of onshoring, this actually moves us in the wrong direction. So yes, where I would put it is that we continue to see opportunities to acquire some projects if they help us meet our clients' demands.

Ryan Levine
Analyst at Smith Barney Citigroup

I appreciate the color. And then I guess one follow-up from earlier. Are you going to break out the Bulgarian wind contribution for the quarter?

Steve Coughlin
Chief Financial Officer at AES

We did not break that out for the quarter, probably best as we talk about the full year. But it -- we expect it will be a few cents for the full year.

Operator

Our next question comes from David Peters with Wolfe Research. Your line is now open.

David Peters
Analyst at Wolfe Research

Yes. Hey, good morning, everybody. I'm just curious, Andres, I think in your prepared remarks, you said you expect backlog addition 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 '23 to the extent there are delays with U.S. projects?

Andres Gluski
President & Chief Executive Officer at AES

Well, I mean, for '23, these will be projects that are already signed in terms of commissioning. 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 per se. Now the sort of 50-50 mix, again, that's sort of legacy. And again what we hope, again, with the resolution of this case is that the proportion of U.S. would increase.

Steve Coughlin
Chief Financial Officer at AES

Yes. And I would just add, it's also coming from our utility rate base growth, so 9% rate base growth in utilities 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. powering data centers in our core markets overseas. So we'd expect to have a similar if it's different flag but it would still be a long-term contract and in many cases, U.S. dollar-denominated contracts.

Andres Gluski
President & Chief Executive Officer at AES

That's a very important point. I mean what we're really emphasizing abroad is long-term renewable contracts in dollars. So if you're supplying, say, Microsoft in Chile, it really isn't a different risk from Microsoft in California. So again, our business is already over 80% in dollars and that will only grow.

David Peters
Analyst at Wolfe Research

And then, just last one. In California, just in light of solar delays this year and next and maybe storage that's attached that, too. You now potentially have an extension of the Diablo Canyon being discussed. I'm just curious your guys' most recent thoughts on the likelihood of your OTC units itself on this getting extended at the end of '23.

Steve Coughlin
Chief Financial Officer at AES

Without jinxing ourselves very -- we think it's very likely. So these -- the environment there is not such that they want to do long-term extensions all at once but we've extended through 2023. And we have -- it's an upside to our guidance but we do think there's a very good chance that those plants will get extended into several years following. So it may be year by year, maybe 2 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 solar supply chain. And that goes 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 quite -- it can be quite material.

David Peters
Analyst at Wolfe Research

Okay, great. Thank you.

Operator

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.

Susan Harcourt
Vice President of Investor Relations at AES

We thank everybody for joining us on today's call. As always, the IR team will be available to answer any follow-up questions you may have. Thank you and have a nice day.

Operator

[Operator Closing Instructions]

Corporate Executives
  • Susan Harcourt
    Vice President of Investor Relations
  • Andres Gluski
    President & Chief Executive Officer
  • Steve Coughlin
    Chief Financial Officer
Analysts

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