AES Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2022

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AES Corporation Second Quarter 2022 Financial Review Call. My name is Irene, and I will be coordinating this event. I would like to turn the conference over to our host, Susan Hartcourt, Vice President of Investor Relations. Susan, please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to our Q2 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 ks and 10 Q filed with the SEC.

Speaker 1

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 Kauflin, our Chief Financial Officer and other senior members of our management team. With that, I will turn the call over to Andres.

Speaker 2

Good morning, everyone, and thank you for joining our Q2 2022 financial review As you have seen from our earnings release, we reported 2nd quarter adjusted EPS of $0.34 which was in line with our expectations and consistent with our historical quarterly earnings profile. Our CFO, Steve Kauflin, We'll discuss our financial results in more detail. Based on our year to date results and outlook for the second half of the year, we are reaffirming Our 2022 guidance and our expectation for annualized growth in adjusted EPS in parent free cash flow of 7% to 9% through 2025. I would also note that our guidance and expectations do not include any benefit for proposed U. S.

Speaker 2

Climate legislation, which we see as a meaningful source of potential upside as it would drive additional demand for renewables and energy storage and accelerate the development of green hydrogen projects in the U. S. This morning, I will discuss our strategy In the context of 2 broad themes. 1st, our resilience to macroeconomic volatility, including high inflation, high commodity prices, Fluctuations in foreign currency and ongoing supply chain constraints. And second, continued strong demand for renewables, particularly from corporate and industrial customers.

Speaker 2

With this backdrop in mind, I will discuss the robustness of our business And also review our disciplined approach to growth, both of which provide us with full confidence in our ability to hit our financial and strategic goals this year and beyond. Beginning with our resilience on Slide 4, As a result of the transformation of our portfolio over the last 10 years, our financial results this quarter were insulated from the impacts of rising inflation, Appreciating U. S. Dollar and volatile commodity prices. We do not expect any of these factors to have any impact on our full year results.

Speaker 2

As I have discussed on previous calls, 85% of our adjusted pre tax contribution is derived from long term contracts for generation and our regulated utilities. For the 15% of our earnings that is not derived From long term contracts or utilities such as our legacy Southland business in California or the 10% that is not denominated in U. S. Dollars, We have largely hedged both exposures. In some cases, our strong contractual arrangements have allowed for additional upside.

Speaker 2

Throughout 2022, we have signed agreements to redirect excess LNG from Panama to international customers. The benefits of these agreements will accrue through the remainder of the year and we have the potential to sign similar agreements next depending on market conditions. Turning to construction and supply chains on Slide 5. Our strategic sourcing and ability to execute On our commitments, our key competitive advantages, and we expect to complete all of the projects in our 10.5 gigawatt with no cancellation or significant changes. We take a proactive approach to working with our suppliers.

Speaker 2

And as a result, We had all of the solar panels required for our 2022 projects in country earlier this year. More recently, we worked to quickly resume imports following the Biden administration's June executive order And none of our suppliers' panels have been stopped by customs this year. We also took decisive steps to further decrease solar panel suppliers by creating a more robust U. S. Supply chain.

Speaker 2

In June, we launched The U. S. Solar Buyer Consortium along with 3 other solar developers to significantly drive the expansion of domestic solar manufacturing. Collectively, we committed to purchasing more than $6,000,000,000 of solar panels from manufacturers that can supply up to 7 gigawatts of solar modules per year made in the USA starting from 2024. Therefore, Despite industry wide supply chain challenges, we do not anticipate any major delays to our U.

Speaker 2

S. Renewables backlog of 5.9 gigawatts. I would note that only 2 projects have been shifted from 2022 to 2023 and these were moved as a result of changes requested by customers with no impact on our guidance and expectations for this year or next. In addition, we recently broke ground on the largest utility scale solar plus storage project in the state of Hawaii. Across the state, we have more renewable projects under development and or under construction than anyone else.

Speaker 2

As you can see on Slide 6, we anticipate completing 1.8 gigawatts of new renewable globally this year, 4.6 gigawatts next year For a total of 6.4 gigawatts by the end of 2023. Turning to Slide 7, looking to our future growth. We continue to see strong demand for renewables from our key customer groups. Despite increases in the cost of renewables Resulting from inflation and supply chain constraints, a far greater increase in the cost of fossil fuels has made renewable energy even more price competitive. As a result, demand from corporate customers has never been higher.

Speaker 2

So far this year, we have signed or been awarded 1.6 gigawatts of long term renewable PPAs, the majority of which have been negotiated on a bilateral basis. For full year 2022, we continue to expect to reach a total of 4.5 to 5.5 gigawatts. As shown on Slide 8, we now have a backlog of 10.5 gigawatts, all of which is expected to come online through 2025. Turning to Slide 9. I'd like to note that we currently have 13.7 gigawatts of renewables in operation.

Speaker 2

So this backlog of projects in construction or with signed PPAs represent more than 75% growth in our installed renewable Over the next 4 years, including additional PPAs we expect to sign, By 2025, our portfolio will grow to almost 50 gigawatts of which 77% will be renewable. We also expect to have completely exited coal at that time. As we scale up in renewables, We continue to complement our portfolio with innovative businesses and solutions, which require the best talent in order to deliver on our commitments. Earlier this week, Fast Company recognized AES in their top ten rankings of best workplaces for innovators And as the winner in the category of best workplaces for early career innovator. We are very proud of receiving this recognition and our innovative teams and their many accomplishments.

Speaker 2

Additionally, although we don't have any specific announcements to make today, We continue to make good progress on our 2 large green hydrogen projects in the U. S. And Chile. These projects include the integration of electrolyzers and renewables and have the potential to provide significant new sources of growth. I will provide additional updates in the coming months.

Speaker 2

In the meantime, we launched a 2.5 Megawatt pilot project in Chile. This project will be a hydrogen fueling station and will produce up to 1 metric ton of green hydrogen per day. Finally, turning to Slide 10. Growth opportunities at our U. S.

Speaker 2

Utilities represent one of the key drivers of our overall 7% to 9% annual growth in earnings and cash flow. This growth also advances our objective of increasing the proportion of our earnings from the U. S. To 50%. As a reminder, in both Indiana and Ohio, We have the lowest residential rates in each state, providing a great runway for growth and investment, while keeping rates affordable for our customers.

Speaker 2

Through 2025, we expect to invest a total of $4,000,000,000 in new renewables, generation, transmission, modernization and smart grid at our U. S. Utilities. These investments will improve our customers' experience and translate to average annual rate base growth of 9%, which is at the high end of growth projections for U. S.

Speaker 2

Utilities. We expect the earnings from these core businesses to grow in line with the rate base. At AES Ohio, we are currently awaiting the commission's decision on our distribution rate case. As a reminder, we see significant opportunity to invest to improve reliability and strengthen AES Ohio's balance sheet while remaining cost competitive. With that, I will now I'll turn the call over to our CFO, Steve Kauflin.

Speaker 3

Thank you, Andres, and good morning, everyone. Today, I will discuss our 2nd quarter results, 2022 parent capital allocation and 2022 guidance. Turning to our financial results for the quarter, beginning on Slide 12. I'm pleased to share that we had a good second quarter in line with our expectations, which keeps us well on track for our full year guidance. Adjusted EPS was 0 point $0.31 last year, driven by growth in our core business segments, higher margins primarily at AES Andes and a lower adjusted tax rate.

Speaker 3

These positive contributions were partially offset by the higher share count as a result of the accounting adjustment we made for our equity units, Higher parent interest expense related to growth funding and one time outages at select thermal businesses. These outages were primarily driven by turbine Factor component defects and the plants impacted are now all back online. There are 2 additional points I would like to highlight from the 2nd quarter. First, we successfully closed several nonrecourse subsidiary financings, extending tenors at very attractive rates and expanding facilities that support our renewables growth. And second, our collections and days sales outstanding All of our businesses remain strong, reflecting our predominantly investment grade rated customer base.

Speaker 3

Turning to Slide 13. Adjusted pretax contribution, or PTC, was $304,000,000 for the quarter, which was relatively flat year over year, 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 four slides, beginning on Slide 14. In the U. S.

Speaker 3

And utilities SBU, lower PTC was driven primarily by outages at Southland and AES Indiana as well as lower contributions from AS Clean Energy due to increased investment in renewables development. Contributions from new clean energy project commissioning will be more skewed to the second half of the year. Higher PTC at our South America SBU was mostly driven by higher contributions from AES Andi resulting from our increased ownership as well as higher margins Primarily reflects favorable market conditions caused by better hydrology in Panama. As Andres discussed, The reduced need for thermal generation in Panama has allowed us to sell our excess LNG on the international market at higher prices, which will serve as a positive driver in the remainder of the year. Finally, in Eurasia, while our business performance has been very strong, The lower PTC reflects higher interest expense coming from additional nonrecourse debt at 1 of our Eurasia HoldCo.

Speaker 3

Now to Slide 18. 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 toward Q3 and Q4 with about 2 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. Where earnings are higher in the second half based on solar generation profiles, Utility demand seasonality, the commissioning of more new projects in the 3rd and 4th quarters and higher demand at Southland in the peak cooling months in Southern California.

Speaker 3

Growth in the year to go will be primarily driven by contributions from new businesses, including 1.4 gigawatts of projects Our backlog coming online over the next 6 months as well as further accretion from our increased ownership of AES Andi, higher LNG revenues and growth at our U. S. Utilities. We are also reaffirming our expected 7% to 9% average annual growth target through 2025 based on our expected growth in renewables, energy storage and U. S.

Speaker 3

Utilities. Our guidance also assumes the recycling of capital from many of our thermal businesses into those three growth areas across our portfolio. Now to our 2022 parent capital allocation plan on Slide 19. Sources reflect approximately 1,600,000,000 Total discretionary cash, including $900,000,000 of parent free cash flow. Due to timing uncertainty around our planned asset sales, We are now expecting to achieve the lower end of our $500,000,000 to $700,000,000 asset sales target within the year, with the remaining sales expected to close in 2023.

Speaker 3

To fund our strong growth expectations until the asset sales are completed, we plan to issue approximately $200,000,000 of new parent debt, which was already included in the long term capital allocation plan we laid out earlier this year. On the right hand side, you can see our planned use of capital. We will return nearly $500,000,000 to shareholders This consists of our common share dividend, including the 5% increase we announced last December and the coupon on the equity units. We plan to invest approximately $1,100,000,000 in our subsidiaries as we capitalize on attractive opportunities for growth. About half of these investments are in renewables, reflecting our success in securing new long term contracts during 2021 and our expectations for Nearly a quarter of these investments are in our U.

Speaker 3

S. Utilities that's on rate based growth with a continued focus on grid and fleet modernization. In summary, nearly threefour of our investments this year are going to grow AES' renewables businesses and our U. S. Utilities, reflecting our commitment to continue executing on AES' portfolio transformation.

Speaker 3

We have made great progress on our growth investments so far And remain on track with our annual investment target. We will continue to allocate our capital in line with our strategy to lead in renewables, Grow our utilities by 9% annually and to recycle capital out of thermal assets to decarbonize our portfolio. With that, I'll turn the call back over to Andreas.

Speaker 2

Thank you, Steve. In summary, our actions and strategy have put us in a strong position to achieve this year's guidance and a 7% to 9% annualized growth through 2025. Once again, Our portfolio of businesses is proving its resilience to any macroeconomic volatility in the U. S. Or internationally.

Speaker 2

We have signed or been awarded 1.6 gigawatts of new renewable PPAs year to date and we're targeting 4.5 to 5.5 gigawatts this year. Our backlog has reached 10.5 gigawatts and our construction schedule has not been affected by supply chain issues. To further de risk our supply chain, we have led a consortium to buy up to 7 gigawatts of U. S.-made solar panels annually starting in 2024. Finally, we see significant upside to our growth, including green hydrogen in the U.

Speaker 2

S. Should the proposed Inflation Reduction Act be approved. With that, I would like to open up the call for questions.

Operator

Thank Our next question comes from Insoo Kim from Goldman Insoo, your line is open.

Speaker 4

Hey, thank you. First question, starting off with the IRA bill. Thank you for the comments on potential upside and all that stuff. I guess, are you inferring that if this Bill, does pass as proposed that you could potentially see upside to your 79% EPS growth over the next few years kind of on a CAGR basis?

Speaker 2

Yes. Good morning, Insoo. Look, what we're saying is that there's a number of very good opportunities, Which would be certainly made more likely by the iRO bill. And one of them, for example, is green hydrogen In the U. S.

Speaker 2

We'd also expect greater demand from utilities and corporate customers as well. So it's generally. So Rather than say we're going to exceed that, it certainly would push us towards the higher end if these come true. So that's how I would think about it. Okay.

Speaker 4

And you think that higher end there's enough visibility of that if the components of the build has passed?

Speaker 2

Yes. I mean, I think there'll be discrete projects, potentially in green hydrogen. And also you would see it In the number of renewables that we signed in the U. S.

Speaker 4

Got it. My second question on that Portion for domestic panel manufacturing on solar, how should we think about what that does for the projects that get Those paneled domestically from a cost perspective and just any changes to the return profile for those projects that we should be considering?

Speaker 2

Well, this starts in 2024. I would say that the major component is the security of supply. As we've seen just this week, having a domestic manufacturing is very beneficial. You'll also see The Fluence came out with an announcement that they're going to manufacture their modules in Utah here in the States. So I'd say, look, it's large enough that it should be cost competitive.

Speaker 2

And so this would be incorporated. We have To see what is the market clearing prices here in the U. S. For solar projects. Now as we talked about in the past, we were most of our projects In the U.

Speaker 2

S. Are bilateral negotiated with corporate clients. We're not just adding a generic Clean kilowatt hours, we're also adding other features and more value for our customers. So I think this will help us be more Cost competitive, I think, but the most important factor is that it will insulate us from any sort of Trade restrictions in the future on imports of solar panels from Asia. So that is, I think, the main benefit.

Speaker 4

Understood. Thank you so much. Thank you.

Operator

Thank you, Ingo. Our next question comes from David Arcaro from Morgan Stanley. David, you may ask your question.

Speaker 2

Hi, good morning. Thanks so

Speaker 5

much for taking my question. I was wondering on the pace of PPA signings here. What's the pace we should expect through the rest of the year? We've seen, I guess, a bit of a slowdown in the Q2 with the uncertainty around the tariff. What's your confidence level right now in still achieving that 4.5 to 5.5 gigawatt level by the end of the year?

Speaker 2

Yes. Good morning, David. Great question. As I had said on the prior call that we expected this to be more weighted towards the second half of the year Because of uncertainties, you know that we continue to negotiate it with key clients. But there was a certain amount of price uncertainty That we had to have cleared and that has occurred.

Speaker 2

So just as we speak right now, we expect To sign another 500 megawatts roughly today, and that would bring us up to 2.1. So as of again, we expect sort of breaking news, we expect them to be signing as we speak. And if that occurs, then we would be at 2.1, which is close to the half of the bottom range. But we do expect activity to pick up In the second half. So we feel confident that we'll be in the range of 4.5 to 5.5.

Speaker 2

These are lumpy. So you notice that this It's not like we're signing them in 50 megawatt increments. If had this occurred one day earlier, the information on the press release and Our disclosure would have been different. So we expect to sign this morning. And with that, we'd be at 2.1.

Speaker 5

Got it. Okay. Now that's great to hear. Sounds like active dialogue going on, obviously. I And I just wanted to touch on foreign exchange.

Speaker 5

We've seen some sizable moves in the foreign exchange rates. But are You've seen or any way you could quantify the potential kind of drag or some impact on future years and if Efforts are kind of underway to look for offsets and to manage that, any downside exposure there?

Speaker 3

Yes. Hey, this is Steve. So we are I think you're asking for the longer term, but we are very well hedged through 2023, even a little bit beyond. So actually we actually see some net upside frankly this year based on our hedge positions. The other thing to keep in mind is that we're about 90 Percent of our business is U.

Speaker 3

S. Dollar denominated. So where we're exposed It's a limited set of businesses. It's Argentina, it's Brazil and Colombia. So It's basically a fairly small exposure.

Speaker 3

I think, in fact, Brazil, we've seen the real appreciate this year. She's had some favorability there. So I would say really it's just we have to keep our eye on Argentina. We have ways to mitigate that. We have expenses in the country of local debt in the country.

Speaker 3

So It's manageable within the guidance is how

Speaker 4

I would look at it.

Speaker 2

Yes. I would add also that part of that's Bulgaria, which is euros. So if you look at between dollars and euros, you're probably getting to about 95%. So we're very much in strong currency. This is Again, a decade of work and the great job that the finance team has done in shaping our Portfolio, but also making sure that the new contracts we signed are primarily in dollars.

Speaker 5

Got it. That's helpful. Thanks so much.

Speaker 2

Thank

Speaker 3

you.

Operator

Thank you, David. Our next question comes from Durgesh Chopra from Evercore. Durgesh, your line is open.

Speaker 6

Hey, good morning, team Andres. Breaking news at the 500 megawatts. Can you Is that with one customer? Congrats, by the way. Is that with one customer or is that multiple customers?

Speaker 2

That is one transaction. That is one transaction.

Speaker 6

Okay. Excellent. Congrats on that. Okay. So I wanted to kind of dig in a little bit on the alternative minimum tax and How do you think that, that impacts you and your business?

Speaker 6

I mean, I think the last time we talked about it, the headwind was offset by credits. Maybe just talk to that. And then Andres, I'd love to get your views on this transferability concept that is introduced in the bill. How do you think that works?

Speaker 3

Okay. So I'll take on the tax side, I guess. So look, It is still somewhat early. The situation is still fluid and moving around. But based on what we know at this point, we don't see any material impact from the 15 percent globalmint tax in the near term.

Speaker 3

So we'll continue to look into the details and monitor it And we'll make a final assessment once the bill is finalized. If anything, it would be several years into the future. And I would expect that We would have offsets in planning activities by that time. So basically, this is like a it's a parallel We already are subject to the GILTI tax regime. This is just another way of calculating to ensure you reach a minimum.

Speaker 3

Again, I don't expect and our tax team doesn't expect it to impact us over the next few years.

Speaker 2

Yes. Regarding your question on transferability, this is Being able to sell tax credits to 3rd parties, we don't see like a major impact, but we see it as an additional tool in our cash Management practices. So that's favorable.

Speaker 3

Yes. I mean, it could impact the way tax equity partnerships are structured, could make it Simpler perhaps. So we've got to see what all the rules are around the transferability first. But if anything, It looks that it may make the financing structure simpler to manage and account for.

Speaker 6

Got it. Okay. And I appreciate it certainly. So thank you for the discussion. Maybe just really quick follow-up.

Speaker 6

Steve, just that when you say Several years out on the alternative minimum tax, is that because of your U. S. Businesses are not at that $1,000,000,000 threshold? Is that why it is? Or when you say several years out, what does that mean?

Speaker 3

Yes. So there is a $1,000,000,000 test as you referred to. So I don't expect that we would meet that. And there's like a 3 year, I think, averaging of that. I don't expect we would meet that for several years to

Speaker 6

Got it. Thanks for the time guys.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Richard Sunderland from JPMorgan. Richard, your line is open.

Speaker 7

Hi, good morning. Thanks for the time today. Starting with the 2H walk, I see $0.08 from new renewables. I'm curious is that pretty locked in given your commentary around only 2 projects shifting into 2023? I guess similarly on that front that the 0.08 LNG, U.

Speaker 7

S. Utilities and other. Can you break that down to the components, uses and relative line of sight to the U. S. Utilities portion, you've given Ohio remains outstanding?

Speaker 3

Yes. So the $0.08 of renewables, yes, I feel very good about both of these buckets, frankly. So the renewables is both the growth in new projects as well as we do have some Higher generation out of our hydro portfolio. As you recall, last year was a poor hydro year, so that's in that bucket as well. And then on the utilities and LNG side, as Andres mentioned, we've had we've been really on the right side of things With the commodities this year.

Speaker 3

So LNG international prices are quite high. We have LNG position, of course, in our MCAC unit, specifically in Panama, where we've had quite a wet year. We've been able to not use that gas in Panama and redirect those cargoes and sell them on the international market. So there while that's not in the year to date, it is a year to go favorability. So that's A little over half, I would say, of that $0.08 We've got some additional utility growth baked in for the second half of the year.

Speaker 3

Those are the 2 primary Components of that $0.08 And frankly, it's the potential for even more upside. So that's and then I think you asked about Ohio as well. So with Ohio, we're as Andre said in his comments, We don't yet have a decision. It's not something that we had a material contribution assumed from the new rates this year. So certainly, we look forward to a decision, continue to expect a constructive outcome, but it's not going to be a driver one way or the other for this year.

Speaker 7

Understood. Appreciate the color there.

Speaker 2

And then thinking broadly about the U.

Speaker 7

S. Green hydrogen opportunity, How do you

Speaker 2

think this ties in with

Speaker 7

the existing renewables platform? How could it expand, I guess, both the demand for new renewables and tie in with some of The more complex structured products opportunities you've capitalized on in the past 2 years?

Speaker 2

Well, as we said in the past, we are looking at partnerships with Producers of hydrogen to actually get more integrated in the whole Production change. So what's very interesting is that the problem of producing cheap Green hydrogen is very much like supplying 20 fourseven, 100 percent green energy or carbon free energy to data center. So we think we have a leg up here. So we're working on this. If the legislation passes, then it's very likely to move forward.

Speaker 2

So that's what we've been waiting for. In the meantime, in Chile, we have a different project, which obviously does not depend on this. And that would be much more to supply the local market. And we have done a very good job of decarbonizing the Chilean system and the mining sector in particular. So No, we feel good about both of these and these would be significant projects.

Speaker 2

So they would accelerate the growth of renewable Because of the additional demand.

Speaker 7

Understood. Very helpful. Just one final cleanup for me. The Southland outage, what led to that and the 2H impact there?

Speaker 3

Yes. So it was actually Southland also, it was the same Because at Indiana, so there were veins on the turbine compressor unit, I understand. So don't get me to go into too much detail, but they there's a failure of component related to a manufacturing defect. And so those units both have replacements in Eagle Valley and Indiana and at our Southland, the new Southland Combined cycles in the gas turbine. So, those have been replaced.

Speaker 3

They are both back online at this point.

Speaker 6

Understood. Thank you for the time today. Thank you.

Operator

Thank you. Our next question comes from Angie Storozynski from Seaport. Angie, your line is open. Thank you. So I wanted to go back to

Speaker 8

the Ohio rate case. So I understand that it has no impact or the timing of the decision has no impact on 2022, but it will have on 2023. I mean, by all accounts, sounds like you will have to file an ESP. So it might take time, right, the final resolution. So there should be an impact on 2023.

Speaker 8

And so in that context, I mean, can you I mean, you mentioned that there is additional optionality around the LNG cargoes that could impact 2023. So is it fair to assume that any impact from that Ohio rate case delay could be mitigated by those by the shifting of the LNG cargoes also in 2023?

Speaker 3

I mean, it certainly could be. We're not necessarily attributing One is an offset to the other, Angie. So the issue the staff had already come out and supported The issue at hand was whether because we've had historically had this rate stability charge In place, it's been in place for about 20 years now. Whether the rate any new rates could be implemented while that charge is still in place. And so that's, I think, the fundamental issue being evaluated by the commissioners.

Speaker 3

If in fact the rates are frozen, we'll move quickly to File a new ESP and that will have new riders associated with it. And so it would be more of a delay Anything. So at that point, the current rate stability charge would stay in place. We We would file a new ESP and we would then and that the new rates would be implemented once that ESP is then approved. So that would take Into the middle of next year, so some delay.

Speaker 3

We're still optimistic based on our belief of Our legal position here that the rate freeze is not necessary or should not be required That the outcome will be in our favor on that. But regardless, we see a path To what we included in our guidance just could be a delay if we have to go down the path of the rate freeze, as I described to get that ESP filed.

Speaker 2

And Angie, maybe to describe a little bit the opportunity in Panama. We have hydros, but we also have the LNG regasification terminal being at Henry Hub prices, of course, Henry Prices plus, transportation, liquefaction, regasification. But nonetheless, it's kind of a one-sided bet because we have enough gas to fulfill our contracts, But we have the opportunity if there is a lot of water, a lot of water in the reservoirs to not burn And therefore, ship those cargoes to international customers at obviously the international rate. So there's a very interesting arbitrage Opportunity there. So it's a one-sided bet.

Speaker 2

If it stops raining or the reservoir levels fall, then we'll just consume the gas and fulfill our

Speaker 8

And how soon are you going to know that? So in a sense, I mean, it's hard to predict hydro conditions. But I mean, is it like a rainy season that by some month?

Speaker 2

Yes. So look, it's been raining a lot. So the rainy season has started, the reservoirs are full and that's why we're able to make these sell gas to international Customers can get that arbitrage. What I'm referring to more really would be 'twenty three. Do these conditions persist?

Speaker 2

Or does say 'twenty three Have a start off being a very dry year. So for 'twenty two, we're locked in. It's really a question of will this opportunity repeat in 'twenty

Speaker 8

Okay. So moving on to the inflation bill. So I understand the comments you made about green hydrogen and energy storage. But when you actually listen to smaller developers, they are also talking about Maybe installing, adding solar PV to existing sites of conventional power assets, Retrofitting existing assets with storage facilities, I mean, some changes in repowering of for wind farms. I mean, there are some, I would say, secondary benefits from that bill, which could also benefit your portfolio.

Speaker 8

I guess it depends on the age of your contracts and how much how heavily they are in the money. But could you talk about, again, benefits or additional benefits that this Bill could add to the existing portfolio?

Speaker 2

Well, of course, I think it helps repowering and add ons. What we'd have to see is that we already have contracts in these places. And so the question is, do we Negotiate an additional contract from that location based on we've done Repowering already. We're starting to we've been repowering units in California at Mountain View and also we Plan to do some in Maryland at Laurel Mountain. So this helps Those to happen.

Speaker 2

And you're right, it does one does have to look at what you have existing and what additional opportunities there are. But Since we are on the renewable side pretty much fully contracted, then the question would be that additional energy, do you is there an adder that could add to the same client to keep it simple or what are the opportunities there. But you're right, this is an upside That's smaller, so we haven't talked that much about it.

Speaker 8

Okay. And lastly, I mean, we saw these media reports about Vietnam offshore wind. I mean, I don't think that I've ever imagined seeing AES and offshore wind in the same sentence. So could you talk about that opportunity?

Speaker 2

Sure. Well, you noticed it was at our press release. First, so I'd say, look, this is a we're in Vietnam. We're The Vietnamese come up with a plan to decarbonize their grid. So we do have the LNG terminal project there.

Speaker 2

And we have been talking about bringing in energy storage and other renewables, So to eliminate the need for additional coal plants. So at this point, I'd say this was more sort of An exploratory issue. We will be very disciplined and committed to all the goals that we've given, 50 U. S. 50% Renewables.

Speaker 2

Now whenever we get into a new technology, we'd obviously have to partner with somebody. So we haven't done any after win because it didn't make sense economically. The markets we're in like the U. S, there's still plenty of Land, it just really wasn't cost competitive, but we have nothing against the technology itself. But of course, we would have to partner with somebody Who has a long experience.

Speaker 2

So we're not going to get into a new technology in a large scale on our own at this time. And so this was Again, this is not an announcement from us. And what we guarantee is we're going to stick to the exact goals that we have given you.

Speaker 1

Great. Thank you.

Speaker 4

Thank you.

Operator

Thank you, Angie. Our next question comes from Julien Dumoulin Smith from Bank of America. Julien, your line is open.

Speaker 4

Hi, good morning. It's Paul Zimbardo, pinch hitting on this busy morning. Thanks a lot.

Speaker 5

Good morning.

Speaker 4

Wanted to check-in, I believe the last long term guidance you gave for AES Next was Breakeven net income by the end of the plan in 2025, is that still a good assumption? And how could that evolve under the Inflation Reduction Act?

Speaker 3

Yes. Actually, it was 2024 call that I said that. So look, Fluence is the largest component of next.

Speaker 6

So I

Speaker 3

can't go into details. I'll have their call soon and we'll talk about their performance. But They've been executing on a number of things lately. As Anders talked about, they're launching their Utah manufacturing facility. They're diversifying their battery Supply base.

Speaker 3

So we fully expect based on what they've guided to, which is that they'll be Bottom line neutral by 2024, that's very consistent with what we've included in our guidance as well. And so I would say they'll talk about their progress, but we feel good about both what Fluence is doing as well as the levers AES has. Regardless of what happens with Fluence, that portfolio will be neutral and And growing from there.

Speaker 2

And maybe you speak a little bit about the other components like Uplight. As you know, they did the deal with Schneider Electric. So they now have a much, let's say, wider product offering and very strong strategic partner in Schneider. And then you have 5B, which is the producer of Maverick, the pre fab solar. We're seeing a lot of interest in Maverick, we have the 1st large scale projects being completed in Chile.

Speaker 2

We have big projects in Puerto Rico and we've already done a small project In Panama, so what's very important about this project, this product is that it's hurricane wind resistant. So we're seeing a lot of interest in the whole sort of Hurricane built of the Caribbean for this product. And there's also been a change of government in Australia. This is an Australian company. So they have very large projects in Australia, which are looking very favorably and that's being sort of hometown champion.

Speaker 2

So we feel good about that as well. So overall, we feel that ASNEXT is fulfilling its mission of really Giving us the leading edge technologies and giving us the opportunity to be the 1st to roll them out.

Speaker 4

Okay, Great. Thank you. And then just separately, could you please elaborate a little bit on the recent California legislation and How that would impact either extending, increasing or both the cash flows from the gas assets you have there?

Speaker 3

Yes. No, we feel very optimistic. So we have, as I talked about previously, we've only included Southland legacy businesses, you need to have Alamitos, Huntington Beach and Redondo through 2023. So it may not be all three plants, but I would say probably at least 2 That we would expect to be extended possibly for several years. So the formal process I would expect in terms of permitting the once through cooling permits that are needed, etcetera, will likely kick off here in the next 1 to 2 months.

Speaker 3

And then that will run into the first, say, half of next year through the first half of next year. As we've done in the past, when we've been facing a potential extension, we've looked to do where we've executed contingent Capacity contracts continued upon the permitting and all that coming forward going forward. So We'll start looking at commercial opportunities for the extensions once the formal process gets underway In the state and so we'll have more certainty next year, but I would say we're all very optimistic here that given the fundamentals of the California system And the droughts in the Southwest of the U. S, but that additional peak Capacity is going to be needed for several years to come. And so we feel we're in a good position to provide that and that will provide some upside to our plan.

Operator

Thank you. Our next question comes from David Peters from Wolfe Research. David, your line is open.

Speaker 4

Yes. Hey, good morning, everyone. Andres, I was just wondering if you could comment Specifically with respect to the UFLPA, we've heard from some companies here recently that they're seeing issues with Panels being stopped recently at the border. Just wondering if you all are seeing this at all and if not kind of What you're doing differently, I guess?

Speaker 2

Yes. The Uyghur Forced Labor Prevention Act, I guess, We have not seen any of our panel imports stopped by causes. As you know, we've been on top of this matter for a long time. The polysilicon, first the panels that we import to the U. S.

Speaker 2

Come from Southeast Asia, ASEAN countries. And we have asked the manufacturers to make sure that there's nothing That comes from Western China that could be allegedly using forced labor. Polysilicon,

Speaker 4

the plan

Speaker 2

is that we're starting Polysilicon coming from Korea and not China would be the more likely place where you there could be allegations of forced labor. But as you know, the making of the wafers themselves, 95% of that today is still occurring in China. So we have to move that supply chain out of China, but it's going to take some time. But the short answer is no, we haven't seen anything and we believe our suppliers are the best place Not have any issues and documentations and we've been working with them for a long time now. So this is nothing new, but We have to just see how this develops, but we don't expect any major issues.

Speaker 4

Great. Then just one other one on the asset sale target being at the The low end and I guess you're expecting a little less dilution this year as a result too. Can you just give a little bit more of an update on the So, Seas in Vietnam and Jordan and just when are those expected to close, I guess?

Speaker 2

Yes. Look, what's basically have at least have to do with government approval. So we've agreed with our counterpart. It's not a question of price. It's just a question that the government well, in the case of Vietnam, it's been the government's approval Of the new operator of the plant.

Speaker 2

So that's taken some time for them to get comfortable with it. That's why it's dragged on. But we do expect resolution by the end of this year. And the other case, I think you mentioned is Jordan and that really has to do with some of the lenders, including the U. S.

Speaker 2

Government signing off on the loans to the new buyers. So these have been really just bureaucratic issues, but the sale price, the buyer, The conditions have all been agreed to. It has taken longer than we expected.

Speaker 3

Yes. So that's the majority of the 500 $1,000,000 So we feel good. As Anders said, we'll get there on those by the end of this year. And then we have been working on additional Sales and sell downs of primarily thermal businesses. So as we work towards those and the timing around those, some variability, It looks like some of that may happen in, say, the first half of twenty twenty three, which is why we said Let's focus on $500,000,000 this year.

Speaker 3

The remaining of the $500,000,000 $700,000,000 will come in through next year. And then we have the full $1,000,000,000 target we feel well on track for. So it's just a matter of some timing expectations around What we're doing in the next, say, 12 months or so.

Speaker 4

Okay. Thank you, guys. Thank you.

Operator

Thank you. Currently, we have no further questions. Therefore, I would like to hand back to Susan Harcourt for any closing remarks. Susan, please go ahead.

Speaker 1

We thank everybody for joining us on today's call. As always, the IR team will be available to answer any

Operator

Thank you. Ladies and gentlemen, this concludes It's today's conference call. Thank you for being with us today. Have a lovely day ahead. You may disconnect your lines now.

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Earnings Conference Call
AES Q2 2022
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