AES Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 5, 2023

There are 11 speakers on the call.

Operator

Thank you for attending today's the AES Corporation First Quarter 2023 Financial Review. My name is Alicia, and I'll be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Susan Harcourt, Vice President of Investor Relations with AES Corporation. You may now proceed.

Speaker 1

Thank you, operator. Good morning, and welcome to our Q1 2023 financial review call. Our press release, presentation and related financial information are available on our website ataes.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 Coughlin, 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 Q1 2023 Financial Review Call. We are very pleased with our progress so far this year. And today, I will discuss our Q1 results and provide key business updates. Steve Coughlin, our CFO, will give some more detail on our financial performance and outlook. Beginning on Slide 3, as you may have seen in our press release, we introduced new strategic business units, which better reflect the greatly simplified company that AES is today and the pillars of our future growth.

Speaker 2

We will be giving a broader strategic review at our Investor Day on Monday, including an update on our portfolio transformation and an overview of our strong growth expectations for our Renewables and Utility businesses. Our Q1 2023 adjusted earnings per share was $0.22 compared with $0.21 in 2022, which is in line with our expectations. With these results and the underlying performance we are seeing across our business, We are reaffirming our 2023 adjusted earnings per share guidance of $1.65 to 1 $0.75 and our 7% to 9% annualized growth rate target to 2025. Now turning to Slide 4. We continue to see strong demand for renewables, both in the U.

Speaker 2

S. And internationally, including from U. S. Corporate customers with operations in international markets. So far this year, we have signed PPAs for 309 Megawatts of new renewables, including 154 Megawatts of wind with a U.

Speaker 2

S. Technology customer in Brazil. We're in advanced negotiations for several large additional projects and remain on track to meet our PPA signing target of 14 to 17 gigawatts over the next 3 years. In the U. S, key elements of the Inflation Reduction Act or IRA are being clarified.

Speaker 2

This past month, the Department of Treasury and the IRS released detailed guidance on how clean energy projects located in energy communities can qualify for an additional 10% bonus tax credit. We estimate that approximately 1 third of our 51 gigawatt pipeline of projects in the U. S. Would qualify, which directly translates into a combination of higher potential returns and increased competitiveness for the projects we are developing. We are currently awaiting Treasury Department guidance on certain provisions of the IRA, including requirements for the clean hydrogen production tax credit.

Speaker 2

As a reminder, at our green hydrogen project in Texas, the largest advanced green hydrogen project in the U. S, which we are developing jointly with Air Products. We plan to co locate 1.4 gigawatts of new renewables with electrolyzers. This means that the projects would have the lowest possible carbon emissions of any known project in the U. S.

Speaker 2

Additionally, The project is located adjacent to the site of a decommissioned coal plant, which will provide significant existing infrastructure. All of these attributes and the fact that the energy will include hourly matching indicate that the project should qualify for the highest possible tax credit in any scenario. Turning to Slide 5, our backlog of projects with signed long term contracts It's now around 12 gigawatts, of which roughly half are already under construction. We continue to maintain a robust supply chain and we continue to hit our construction milestones without delay. We expect to bring online more than 3 gigawatts of new wind, solar and battery storage this year.

Speaker 2

As we bring projects currently in the backlog online in coming years, We will nearly double our installed renewables capacity, making us one of the fastest growing renewable companies in the world. Turning to slide 6. We're also happy to report a positive development at AES Ohio, which puts us on track for unprecedented growth in the business. In April, AS Ohio signed a comprehensive settlement agreement for its Electric Security Plan or ESP4, which received broad support from residential, commercial, industrial and low income customers. The settlement included the commission staff as a signatory and we expect to receive final approval by the end of the third quarter.

Speaker 2

With ESP4 in place, along with our existing investment programs, we expect to more than double Our rate base by the end of 2027, which would make AES Ohio one of the fastest growing utility businesses in the country, while still having The lowest tariffs in the state. Turning to slide 7, we also reached a major milestone towards exiting coal by the end of 2025. We agreed to terminate the PPA at the Warrior Run plant in Maryland, for which we will receive total payments of $357,000,000 We will retain control of the site and are exploring new uses that capitalize on its valuable location and existing infrastructure. We see this transaction is very beneficial for all parties involved. Moving to Slide 8, We signed agreements to extend the operations of 1.4 gigawatts of gas generation at our legacy Southland units in California for 3 more years.

Speaker 2

These plants were previously scheduled to retire at the end of this year. The extensions will lock in additional upside And will help meet the state of California's grid reliability needs, while supporting its efforts to transition over time to low carbon source of electricity. The monetization of the contract at Warrior Run and the extensions of the legacy Southland units are both good examples of how we are creating value from our existing infrastructure assets during the energy transition. Finally, as I mentioned earlier, We will be holding an Investor Day on Monday, where we will be sharing our strategic long term view of the company, discussing our new business segments and providing long term growth rates through 2027 for adjusted earnings per share, adjusted EBITDA and parent free cash flow. With that, I would like to turn the call over to our CFO, Steve Kaufmann.

Speaker 3

Thank you, Andres, and good morning, everyone. Today, I will discuss our Q1 results, 2023 guidance and 2023 Parent Capital Allocation. Turning to Slide 10. As Andres mentioned, in the Q1, we launched our new strategic business units or SBUs. This new organizational structure reflects AS' very focused and simplified portfolio.

Speaker 3

It also aligns our management teams by business line to maximize our operational synergies and to continue delivering excellent customer experiences across all our markets. Our new SBU reporting segments highlight our rapidly growing renewables and utility businesses and facilitate simplified modeling of AES, which will benefit current and new potential shareholders and analysts. Our new SBUs include renewables, which includes our solar, wind, energy storage and hydro businesses utilities, which includes AES Indiana, AES Ohio and AES El Salvador Energy Infrastructure composed of our Thermal Generation and LNG Infrastructure businesses and New Energy Technologies, which includes our investments in energy technology businesses such as Fluence and Uplight as well as our green hydrogen business line and future new business innovations which support our mission. In addition to the SBUs, we also have a corporate reporting segment, which includes our corporate G and A, Our parent level debt and associated interest expense and our captive insurance program called AJIC. Turning to Slide 11.

Speaker 3

Adjusted EPS for the quarter was $0.22 versus $0.21 last year. Our business was favorable year over year, which I will discuss in more detail shortly. Our results were also impacted by higher parent interest expense and a lower adjusted tax rate. Now to Slide 12. We are fully on track to achieve our Full year 2023 adjusted EPS guidance range of $1.65 to 1 $0.75 We expect a significant contribution from new renewables of at least $0.27 this year.

Speaker 3

This is partially Set by lower contributions from LNG sales, as we have previously mentioned, higher parent interest expense from incremental debt And higher rates on our revolving credit facility and a marginally higher tax rate this year. As is typically the case, Our earnings are heavily weighted toward the second half of the year. This year, we expect approximately 3 quarters of our earnings to occur in the second half. Growth in the year to go will be primarily driven by contributions from new businesses, including over 3 gigawatts of projects in our backlog coming online, which remains solidly on track for completion. We are also reaffirming our expected 7% to 9% Average annual growth target through 2025.

Speaker 3

Turning to Slide 13. As you may have seen in our press release, While we continue to report adjusted EPS, today we are also introducing adjusted EBITDA as a new reporting metric. As the renewables portion of our business grows at an extremely high rate, we believe adjusted EBITDA is a very informative metric in understanding our business results. First, it aligns well with the performance of our underlying business in operating cash generation. And second, adjusted EBITDA is reported for the impact of U.

Speaker 3

S. Renewable tax attributes so that investors and analysts can separate renewable operating earnings from the very valuable tax incentives for U. S. Renewables. Beginning this quarter, I will discuss our new SBU financial results Using adjusted EBITDA with the exception of our utilities SBU, which will be measured using adjusted pretax contribution or PTC to facilitate comparisons with other utilities.

Speaker 3

We will provide full year guidance by SBU during our Investor Day on Monday. Adjusted EBITDA was $628,000,000 this quarter versus $621,000,000 in the prior year. This was driven by higher Q1 LNG sales and growth in renewables, but was partially offset by the impact of warmer than normal weather at our U. S. Utilities.

Speaker 3

I'll cover the performance of our new SBUs in the next four slides. Beginning with our renewables SBU on Slide 14, Higher EBITDA was driven primarily by a higher level of generation at our facilities in Panama, higher wind generation and contributions from new businesses. This was partially offset by higher spend as we continue to ramp up our renewables development and lower power prices impacting our Bulgaria wind facility. Lower PTC at our utilities SBU was mostly driven by warmer than normal winter weather and higher interest expense, but partially offset by higher revenues as a result of our continued investment in the rate base. Higher EBITDA at our Energy Infrastructure SBU primarily reflects higher LNG sales, partially offset by lower margins from coal PPAs, the retirement of our coal plant in Hawaii last year and lower availability at Southland Energy.

Speaker 3

Finally, higher EBITDA at our New Energy Technologies SBU reflects a significant improvement in operations and gross margins at Fluence. Now to our 2023 parent capital allocation plan on Slide 18. Sources reflect approximately $2,100,000,000 to $2,600,000,000 of total discretionary cash, including $950,000,000 to $1,000,000,000 of parent free cash flow, $400,000,000 to $600,000,000 of proceeds from asset sales and $700,000,000 to $1,000,000,000 of planned parent debt issuance. On the right hand side, you can see our planned use of capital. We will return nearly $500,000,000 to shareholders this year.

Speaker 3

This consists of our common share dividend, including the previously announced 5% increase as well as the coupon on the equity units. We plan to invest approximately $1,700,000,000 toward new growth, of which the majority will go to renewables and utilities. In summary, we've made great progress on our financial commitments for the year. At our Investor Day on Monday, We will provide detail on the strategy and future of AES overall and for each of our new SBUs. We will also provide long term growth rates I look forward to talking with many of you then.

Speaker 3

With that, I'll turn the call back over to Andres.

Speaker 2

Thank you, Steve. In summary, we are pleased with our progress to date and remain on track to hit our 2023 adjusted earnings per share guidance of $1.65 to $1.75 and our 7% to 9% annualized growth rate target through 2025. We continue to see strong demand for renewables and especially from our corporate customers. Our supply chain is robust and our construction projects are progressing as planned. We're also encouraged by the settlement agreement at AES Ohio, which paves the way for final approval of our new electric security plan later this year and creates the framework for significant investments in the utility.

Speaker 2

Finally, we see our successful negotiations to terminate the Warrior Run contract and extend the operations Of the 1.4 gigawatts of our legacy Southland units as indicative of the success we are having in maximizing shareholder value from our existing assets as we transform the portfolio. We look forward to providing a broader strategic update at our Investor Day on Monday, including more details around our growth plans and guidance through 2027. With that, I would like to open up the call for questions.

Operator

The first question comes from the line of David Acaro with Morgan Stanley. You may now proceed.

Speaker 4

Hi, good morning. Thanks for taking my question. One thing I wanted to check on, would there be any risk To your renewables growth outlook, if the AD CBD tariffs were to come back into effect just after we've seen the House and Senate passed some legislation there, just curious How you view that risk and also just longer term how you mitigate that, AD CBD tariff risk?

Speaker 2

Yes. Honestly, we don't see any risk whatsoever. First, it passed, I believe, the Senate with 56 votes and that was The President will veto it. And by the we have all the panels that we need for this year And expect to have for next year, by June of next year when the tariff, let's say, tariff holiday rolls off. So we're in very good shape for 'twenty three and 'twenty four.

Speaker 2

And after that, we expect to have supply coming in from the U. S. We're having no problems from our suppliers getting through under the UFLPA. So really, I think we're in the best shape of anybody. We have not Delay a single project due to solar panel supply issues to date.

Speaker 2

And I think that's something I don't know if anybody else can say that.

Speaker 4

Excellent. Thanks. That's helpful. And then I was just curious, any updates into the visibility For the 600 megawatts of projects that are potentially getting completed this year, but could get pushed to next year, any increased visibility there

Speaker 2

Look, as I said in my script, we are progressing well. We have the supply chain. Everything is in place. But look, we won't know until the Q4 of this year, if they're going to fall in this year, they're going to fall in next. But I would remind everybody that's not a value issue.

Speaker 2

If they come in Couple of weeks later, it doesn't affect the profitability of the project at all. It is an accounting issue. But as of now, We're doing well, but we can't say give you any particular update. We won't know with greater clarity probably until the Q4 of this year.

Speaker 4

Yes, understood. That makes sense. And just one other quick question. I was curious if with the Warrior Run project. Is there any level of EBITDA or earnings contribution that you would point to for that as that Rolls off.

Speaker 4

And then curious how you think about the use of proceeds there. If there's debt specifically on the project That would be paid down or if it gets used more broadly at the corporate level.

Speaker 3

Yes. Hey, this is Steve. There is definitely earnings from this. And so effectively, we're monetizing the remaining 7 roughly years of the PPA, this year. And so we'll recognize earnings this year and we expect to have an obligation For capacity through the middle of next year.

Speaker 3

So the earnings over this termination agreement will be recognized Over roughly 11, 12 months following when the commission approval comes in. So say if it comes in June, probably About half this year and half next year. And there's very little debt to pay down here. So this is These proceeds will likely this is a 7 year payment stream, but we'll likely monetize that this year. And then that's captured in our asset sale in terms of our capital sources this year, If you saw on that slide.

Speaker 3

So that will be used to fund the growth of the business.

Speaker 4

Okay, perfect. Great. Thanks so much.

Operator

Thank you, Mr. Arcaro. The next question comes from the line of Angie Storozynski with Seaport Global. You may now proceed.

Speaker 5

Good morning. So I know we're going to talk about it on Monday, this transition from EPS to EBITDA. And if I understand correctly, at least that's how I see it, it's about renewables being more levered and having a higher Appreciation rate than the thermal assets, for example. However, so there's only one issue here That as we're looking at the Q1 results, right, the contributions from renewables seems Very small, right, to the total EBITDA. So that's one.

Speaker 5

And also, as you are aware, there are different ways how your peers Show adjusted EBITDA. I mean, in your case, you're adjusting it for minority interest and There's no inclusion of the tax benefits, which again might understate the EBITDA versus is what your peers report. So anyway, and I know that we're going to talk about it on Monday, but just ease us into this EBITDA transition, please.

Speaker 2

Sure, Angie. Well, thanks for the question. Look, first I'd say, look, we continue to provide adjusted earnings per share guidance. And as we said, we'll be providing adjusted earnings per share guidance through 2027 on Monday. So I want to make that perfectly clear.

Speaker 2

What we're adding is an additional indicator, which is adjusted EBITDA that we're going to be giving. And partly it's to give greater clarity into our Performance of our Renewables and then partly it has to do with sort of the lumpiness of the projects. So that's the real reason that we're giving an additional one. It also helped people to do so, for example, some of the parts Of our different businesses, renewables, utilities, infrastructure. So I want to make very clear that we're providing adjusted earnings per share through 2027.

Speaker 2

Regarding the other questions that you have, I'm going to go ahead and pass that to Steve.

Speaker 3

Yes. Thanks, Andres, and thanks, Angie. So definitely we'll be talking some more about this on Monday, but our goal here is to really give the clarity that we think is important to understand and model the business. So as Andre said, we'll give the adjusted EPS, we'll also give the EBITDA, which is more closely aligned The underlying business performance and cash generation from the PPAs and then we'll also give the tax attributes And then the sum of the adjusted EBITDA plus the tax attributes. So we think it's going to be a very complete view and package that helps people truly understand How the business is earning and generating cash from the different components of the PPAs and the tax attributes.

Speaker 5

Okay. Okay. And then you can also help us how to allocate the corporate leverage Across, I mean, again, if we are trying to move to the sum of the valuations from an EBITDA perspective, we need to figure out how to allocate the corporate debt, right, among these subsidiaries?

Speaker 3

Yes. I mean, certainly in our reporting, Now we'll be able to separate the debt here for the business. And then as we look ahead, Most all of our growth is in renewables and utilities. About 80% of the growth is in renewables and utilities And about close to 3 quarters 80 percent in the U. S.

Speaker 3

Market. So I think you'll have a lot of good Detail to help understand how to do that allocation.

Speaker 5

Okay. Okay. See you guys on Monday. Thank you.

Speaker 2

All right. See you, Angie.

Operator

Thank you, Ms. Storozynski. The next question comes from the line of Richard Sunderland with JPMorgan, you may now proceed.

Speaker 6

Hi, good morning and thanks for the time today. Maybe I'll pick it up where Angie left off on the new SBUs. Turning to the New Energy Technologies SBU, can you speak more to the green hydrogen side? I'm curious if this represents a shift in thinking of where you like to be involved in hydrogen or you're just specifically calling out the breakout there relative

Speaker 2

Yes. Thanks for the question. Look, what I'd say is that we have a very interesting pipeline, which we will be discussing on Monday of green hydrogen projects. We really think we're a leader here. We have the most advanced and lowest carbon emitting project in Texas here in the U.

Speaker 2

S. But we also have projects in Los Angeles, we have projects In Houston, we have projects in Brazil for export and we have projects in Chile for the for our corporate clients, the mining sector. So we'll be providing more color there. Now in the specific case of, for example, Texas, We do co own the electrolyzers as well as the renewables with our joint venture partner of Air Products. And the reason for that is to really maximize the value of the project because even though the project will be basically Co locating all the renewables with the electrolyzers, it is interconnected with the grid.

Speaker 2

So there could be occasions, just to give you a hypothetical, a polar vortex in Texas, Well, the most profitable use of our renewables is to inject them into the grid and actually not run the electrolyzers. And so we wanted to have all of our interests aligned. So there'll be some projects like that where we also own the electrolyzers as well. In the case of Texas, it's a take or pay with their products, but there are other ones in which we would be selling, Possibly selling green hydrogen to our corporate customers to whom we're already selling renewables. So that's the reason for calling it out.

Speaker 2

Also, as you know, AES Next looks at what's next in terms of technologies. So we're also, I would say, Have it there so that we can look at what new technologies help us produce green hydrogen cheaper and better for our clients. So that's the reason for calling it out there.

Speaker 6

Got it. That's very clear. Sticking with the SBU theme, Energy Infrastructure, are you able to disclose how much of that is coal today?

Speaker 3

Yes. So we have roughly a little bit shy of 7 gigawatts of coal today, And that includes some of the assets that we've already announced sales and retirements of, including, for example, Mongong In Vietnam, some of the retirements in Chile, in Ventanas, for example. So that number is coming down rapidly, but that's Roughly what's in the base of Energy Infrastructure today.

Speaker 2

Yes. I would add on it if Go ahead. Sorry.

Speaker 6

Just on a EBITDA contribution basis or a percentage of SBU basis?

Speaker 3

Yes. So on a percentage, so what we've talked about is it's about $0.30 of EPS is coming from coal Today, now what's important is that is that's not all necessarily going away. For example, We are converting the Petersburg 34 units in Indiana under the integrated utility in Indiana. So this will leave This will actually be new investment to do the gas conversion, and so there'll be earnings from the rate base and an increasing rate base from That asset. And then in other cases, we are looking at some additional conversion opportunities for these.

Speaker 3

And then, of course, where there is sales, We'll have proceeds from those sales to then recycle capital into the Renewable and Utility Growth segments.

Speaker 6

Got it. Very helpful. And then just one more for me. In consideration of the Warrior Run termination relative to the $400,000,000 to $600,000,000 asset sale target, Where are you currently with announced and closed transactions relative to that range?

Speaker 3

Yes. So we initially announced this exit a year ago. And but really prior to that, we had already been significantly reducing our coal portfolio. So our coal portfolio at one point was around 22 gigawatts and we're already down to 7. So the reality is we've already executed On 2 thirds of this program over the many years and as we a year ago saw the pathway To meet our financial commitments and to fully exit coal, which we think is going to attract new investors To AES that have some bright line thresholds here, we saw that pass.

Speaker 3

So I think we've made tremendous progress already And we have visibility into how we're going to exit the remaining assets either through sales that we've announced, Additional sales that we have not yet announced, and then, some of these conversions and retirement, that will continue. So We feel very good about the program and very good about the earnings trajectory even post call.

Speaker 6

But just to be clear on the numbers, so sorry, sorry, Andres.

Speaker 2

No, no. Just what I would add is that Just like we have simplified our portfolio getting out of different markets over time, I think we've done it in a way that maximizes shareholder value. I think we're doing the same with coal. So we could have perhaps accelerated this faster, but I think Warrior Run and for example, the monetization some years ago, the BHP contract in Chile shows that we're really able to make money from the transition and time this in a way that we can Provide renewables to meet the energy demands of our clients, in some cases batteries or hydro to meet the capacity or dispatchable need. So I just mentioned that we feel very good about the program and we think we're executing very well on it.

Speaker 6

Got it. Thank you. But just on the Savaria run is $357,000,000 $400,000,000 is the low range of the 23 targets that That gets you most of the way there. And then did you receive any proceeds on the quarter? Is the rest either, I guess, Jordan or future announcements?

Speaker 3

We had so also included in that number is the asset or the renewable business recycling. So we had the closure of that operating portfolio of renewable assets that capital into Recycling into new growth in renewables. So that's an important part of the program here. It's not just exits of coal, but also The way we recycle capital, once we've derisked projects, we brought them online, we recognize tax credits, we sell them down to relatively Low risk type capital and improve both our returns as well as then help us support A higher growth rate in the renewables business. So that's part of the asset sale program.

Speaker 3

And then we have the Jordan Sale that has not yet been closed, that's been announced. And then there's some additional possible Sales and sell downs in the works this year that could come into that number. But as you point out, we've already made significant progress Towards the target this year, so we feel very good about the target that we've laid out.

Speaker 6

Perfect. Well, thank you for

Speaker 2

the time today. See you on Monday. See you on Monday.

Operator

Thank you, Mr. Sunderland. The next question comes from the line of Durgesh Chopra with Evercore ISI, you may now proceed.

Speaker 7

Hey, good morning team. Thanks for taking my questions. Hey, Andres, just can you comment on the new PPAs signed year to date? When I compare this to Q1 of last year, that is 2022, you'd signed over a gig. Here you've only signed 309 megawatts.

Speaker 7

I think in your Commentary, you mentioned a couple of large contracts. So just maybe a little bit more color there. And are you confident that the 4.5 to 5.5 gigs per year signage, is that are you still tracking well against that?

Speaker 2

Hi, congrats. Well, thanks for the question. It's a great question. Look, we feel very good. And the one thing is, if you'll recall from last year, I believe we had a lot of signings in the last quarter.

Speaker 2

And so What we're seeing here, these things are lumpy. So we have been ranked 2 years running as the largest developer of Renewable projects for corporations. And so when you're dealing with these corporations, these are big projects. So one project can easily be a giga. For example, the Just another case, our green hydrogen project in Texas, that's 1.4 giga.

Speaker 2

So these are lumpy. So I'm not the least bit concerned about Meeting our growth targets, we're seeing a lot of interest. We're in advanced negotiations. But they don't count until you sign them. So We feel good about them.

Speaker 2

No cause for concern. And that's one of the issues we have that they're lumpy. But when you're going for Big contracts, as an example, the project, the Green Hydrogen Project in Texas, that's what 1.4 gigawatts just in one. And we have others that are in that range. So it's going to be lumpy, but we're not concerned because we will land enough of these to keep us on track.

Speaker 7

Understood. That's very clear. And maybe is there a cost update on your joint venture, the hydrogen project with APD? I know their project, I'm not I'm going to mispronounce this, but NUM. They had some increases early in the year when they reported, I believe.

Speaker 7

So Any update to cost there in terms of the overall project costs or costs allocated to you for that project?

Speaker 2

Look, we have no update for costs. It's still going to be in the range of around $4,000,000,000 the whole Project, we think it's again, it's going to be the lowest carbon project in the state. As you know, you have a $3 Per kilogram subsidy, if you have below a certain threshold Of carbon intensity. So we feel we're well within that. If you have less than that, for example, if you're taking energy from the grid, then it drops to $1 So we feel very good about that.

Speaker 2

In terms of the costs, what I'd say is what they announced on their NEOM project, and again, I'm just Repeating what they put on there, that they were going to make some more capital investments to lower operating costs. So it's the NEOM project in Saudi Arabia, Which is very good for us because they are using very similar project to this one, but it's at more advanced. So we can learn from that project, jointly learn from that project. But no, we have no updates, but we have no reason to think that there'd be any additional cost overruns at this point in time.

Speaker 7

That's very helpful, Clark. Thank you, Andres. See you on Monday.

Speaker 2

See you on Monday.

Operator

Thank you, Mr. Chopra. The next question comes from the line of Julien Dumoulin Smith with Bank of America. You may now proceed.

Speaker 8

Hey, good morning team. Thank you guys for the time and the question here. Look, I just wanted to follow-up on the ITC, PTC conversation we've been having of late. I'm just curious, are you guys still pretty committed to using ITCs? I know some of your peers have been evolving towards PTCs.

Speaker 8

You guys focused on the Eastern U. S. Can you talk about the thought process and philosophy there? And then also to follow-up back on Angie's question, to the extent to which that you are using ITC's seventythirty split is still good. I know that for instance here in the quarter for tax code it's fairly low.

Speaker 8

So I just want to make sure That ITC heuristic of seventythirty in year 1, year 2 still applies.

Speaker 3

Yes. Hey, Julien, it's Steve. So definitely, we have the lion's share of our tax attributes Are from investment tax credits and will continue to be. So and I would say when we look at the investment tax credit With the profile of when projects are coming online, it is roughly fair to say about 2 thirds of the investment tax credit gets recognized In the year of the commissioning and then about a third, 30% in the 2nd year following commissioning. So that holds the total volume of tax credits will grow annually And we expect as the portfolio grows, so we're targeting the commissioning of about 2.1 gigawatts This year of U.

Speaker 3

S. Renewables, say that doubles next year, I would expect the volume of tax attributes to roughly follow That same growth rate, so a doubling of the tax credit from this year to next year, just as it doubled from last year to this year when we went from 1 gigawatt To 2 gigawatts. The production tax credit is a good incentive in some or a better incentive in some projects. Typically, it has been in wind, but in some cases now where we see a energy community adder, Now that we have some clarity on that and we see the potential for domestic content adders, with the investment tax credit, keep in mind those adders are richer on the investment tax credit than they are on the production tax credit basis the way the IRA was written. So there's a bit of an offset there in that some projects where we have very healthy pipeline, good opportunity to get these bonuses, the investment tax credit May still be the best option, but we'll look at that project by project and look at what yields the best returns.

Speaker 3

But I see very strong growth in our tax attribute number year over year going forward.

Speaker 8

Right. But the point is your ITC, you're still vastly weighted towards ITC versus PTC, right, as you have been and you don't intend to change that necessarily, Especially given your commentary here. I just want to make sure there's been some concern otherwise.

Speaker 3

Yes, vastly. And the vastness of that will be clear on Monday when I show you The tax credit breakdown between ITC and PTC. And then also keep in mind that for our backlog, we've Essentially locked in already that election and who that tax equity partner is going to be. So for the next couple of years, it's pretty well decided.

Speaker 8

The one thing I would add on the dividend

Speaker 2

to be doing more wind in the States? Julie, so we'll be doing more wind in the States, which will be PTC. So for example, the Project in Texas is 900 megawatts of wind. So yes, we've been more towards ITC, partly is because we've been very heavily in solar. We're very strong in solar.

Speaker 2

Over time, we expect more of a balance.

Speaker 8

Right. And then on just the backlog adds, I know you said it's lumpy, but is domestic One of the reasons why customers aren't moving because they don't have guidance from treasury yet, so therefore holding folks back. We've heard this from some folks.

Speaker 2

Yes. I mean, in our case, not really. I don't I think I would point to that. It's just we're in some negotiations for some whales. When we land them, it will come through.

Speaker 2

What did happen last year because of the Aksim tariff circumvention case, That did delay projects. It did delay projects and set them off into, let's say, a longer time horizon than would otherwise. But again, since we do a lot of bilateral negotiations, that and we haven't had any problems with our supply chain. That is not what's driving it. Where the domestic content issue does come in is in terms of the $6,000,000,000 contract we have for Domestic manufacturer of solar panels here in the States.

Speaker 2

And so obviously, what's key there before sort of Setting on the dotted line is what is domestic content. And that the main difference is how granular it's defined Because if it's more similar to what has been done, for example, for wind, then it's much easier To comply with initially, but our plan is to move up the supply chain and have more and more of the inputs made in the States, including some of the More basic minerals, etcetera, coming in. We already have with our suppliers, the wafering is moving out of China, Which was the last sort of main component. We were already buying panels that were made outside of China. And of course, all the wafering, etcetera, was done in Eastern China, not Western China.

Speaker 2

So We feel very good about that and we've had no issue thus far.

Speaker 8

Got it. Last question here just on 2023 earnings. Just when you look at some of the items in the quarter, whether it was the gain on the asset sale or whether it was LNG, was that upside relative Are you trending better than you would have expected or was that gain kind of contemplated in your 2023 guide earlier when you think about your positioning on the year here?

Speaker 3

Yes, I would say some of these are definitely upsides, Julian. So all else being equal, yes, there's upside. Unfortunately, as is the case, I think with most utilities, the warmer winter weather was somewhat of an offset So those upsides for the Q1. So we still see the potential for upside above even the midpoint of our guidance, but that's not It remains to be seen just how the rest of the year goes.

Speaker 8

Right. Puts and takes as you say. All right. Excellent, guys. See you Monday.

Speaker 8

Thank you very much. All the best.

Operator

Thank you, Mr. Smith. The next question comes from the line of Greg Orrill with UBS. You may now proceed.

Speaker 9

Yes. Hi. Thanks for the question. I was wondering if you could Hey, congratulations. I was wondering if you could touch on the financing plan, just sort of the levers that You feel are available to you for equity or equity like?

Speaker 9

And would you need that to execute At least the plan through 2025, just to sort of reaffirm your thoughts there. Thank you.

Speaker 3

Yes. Hey, it's Steve. So, sure. So we'll definitely talk Some more about the longer term financing plan through 2027. So I think that will give additional color.

Speaker 3

So we'll hold for that. This year, I think as I laid out on the slide, we will raise additional parent debt capital largely to fund growth in the Renewables segment. And then we have the asset sale program in addition to the close to $1,000,000,000 of So there's no plan for equity this year. Looking ahead, we'll talk some more about that in the plan for Monday. What I would Say there is certainly we have we're well positioned for growth.

Speaker 3

We're in a leadership position And we want to drill beyond 2025. But certainly through 2025, we would not need equity to Our 20 25 commitments, however, we would expect to start investing in growth, including things like the green hydrogen project, Which would get started before 2025 to support the second half of the decade. But we'll share more detail on that on Monday.

Speaker 2

Thank you.

Operator

Thank you, Mr. Oral. The next question comes from the line of Ryan Levine with Citi. You may now proceed.

Speaker 8

Hi. I'm hoping to get

Speaker 10

a better understanding of how you arrived at The new disclosure, you're using EBITDA with additional tax disclosure. How do you decide on that versus maybe CAFD or free cash flow Or FFO metrics that some other peers are utilizing?

Speaker 2

I would say, look, part of it is that that's what the most of our peers are using. And what we felt was Most transparent is to provide EBITDA and also then the tax attributes. And so if for comparison purposes you need to add the 2, you can do so. But it was really try to make it easier on everyone by using what's most used in the market.

Speaker 10

And then in terms of the new developments and extending contracts in California, Are you anticipating that that gets extended further beyond the initial extension that was recently announced?

Speaker 2

I think the lower we've got a 3 year extension. It's those assets those locations are extremely valuable For the grid. So we'll see what developments there are. But right now, 3 years going forward is pretty good.

Speaker 10

Okay. Thank you.

Speaker 2

Thank you.

Operator

Thank you, Mr. Levine. There are no additional questions waiting at this time. So I will pass the conference back over to Susan Harcourt for closing remarks.

Speaker 1

We thank everybody for joining us on today's call. We look forward to seeing many of you at our Investor Day on Monday. 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

That concludes today's conference call. Thank you for your participation. You may now disconnect your

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Earnings Conference Call
AES Q1 2023
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