AES Q2 2023 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
August 4, 2023
Skip to Questions & Answers
Operator

Good morning, everyone, and welcome to today's conference call titled, The AES Corporation Second Quarter Financial Review Call. My name is Ellen and I'll be coordinating the call for today. [Operator Instructions]

It is now my pleasure to turn the call over to Susan Harcourt, Vice President of Investor Relations. Susan, please go ahead whenever you are ready.

Susan Harcourt
Vice President, Investor Relations at AES

Thank you, operator. Good morning, and welcome to our second quarter 2023 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 and Chief Executive Officer at AES

Good morning, everyone, and thank you for joining our second quarter 2023 financial review call. Today, I will discuss our second quarter results as well as the excellent progress we're making towards our financial and strategic objectives. Steve Coughlin, our CFO, will give some more detail on our financial performance and outlook.

For the second quarter, adjusted EBITDA, with tax attributes, was $607 million and adjusted earnings per share was $0.21. Results for the quarter as well as for the first-half of the year are very much in line with our expectations. Thus, we are reaffirming our 2023 guidance for all metrics and our targeted annualized growth rate through 2027. As we noted earlier this year, approximately 75% of our 2023 earnings will come in the second-half of the year.

Now for an update on our strategic priorities. At the core of our strategy is the focus on, first, new renewables with the target to triple our installed capacity by 2027; second, growth at our U.S. utilities where we expect to increase the rate base by more than 10% per year through 2027; and third, the transformation of our portfolio as we exit coal by the end of 2025 and invest in the new technologies that will define our industry for years to come. Today, I will provide an update on how we're executing across each of these focus areas, beginning with our renewables on Slide 4.

We continue to see significant inbound interest from key customers wanting to do large U.S.-based renewable projects with us. We believe this reflects both our reputation for consistently delivering on-time as well as our best-in-class ability to tailor projects to the specific needs of our customers. Year-to-date, we have now signed 2.2 gigawatts of new PPAs, including 2.1 gigawatts since our Investor Day in May. These numbers do not include 1 gigawatt from Bellefield's second phase or 1.4 gigawatts from our green hydrogen project with Air Products in Texas, both of which could be signed before the year's end. I feel good about the likelihood that we will sign 5 gigawatts to 6 gigawatts of new PPAs this year. We continue to be globally the Number 1 seller of renewable energy to corporate customers. We also have a leading position in the U.S., providing renewable energy to datacenters, which we're seeing explosive growth, in part, as a result of the generative AI revolution.

Turning to Slide 5. Another area of recent success is how we have been working with technology customers to complete projects initiated by other developers. Our corporate customers want us to take on these projects because they know we will deliver them on-time and can also restructure the original PPAs to provide customized solutions. Two great recent examples of this are the 185 megawatt Delta Wind Project in Mississippi, which has a signed PPA with Amazon; and the 2 gigawatt Bellefield project in California, 1 gigawatt of which has a signed PPA with a large technology company that is a repeat customer. Both of these projects demonstrate the strength of the relationships we have with our customers. For us completing other developers projects is especially attractive, because we can get similar returns to greenfield projects, while preserving our current pipeline for future projects. Our 61 gigawatt pipeline represents investments in land, interconnection and development, which must be replaced once utilized. Giving growing constraints on new transmission in markets like California and PJM, having the flexibility to decide when to utilize these resources helps us maximize total returns from our renewables business.

Moving on to Slide 6. We now have a backlog of projects with signed long-term contracts of 13.2 gigawatts, which is the largest in AES' history. I would like to reiterate once more that our definition of backlog includes only signed contracts, for which we have an obligation to deliver and our customers have an obligation to take a given amount of renewable energy for a given amount of time. The average tenor of the contracts in our backlog is 19 years. And currently, 41% of our 13.2 gigawatt backlog is already under construction and 74% is slated to come online within the next three years.

Turning to Slide 7. Since our Investor Day in May, we have completed a number of landmark projects. In June, we announced the commercial operation of the 238 megawatt Phase 1 of the Chevelon Butte Wind Project in Arizona. It is one of the first projects in the country to be placed in service to qualify for the 10% additional Energy Community Tax Credit Bonus under the Inflation Reduction Act. And once Phase 2 is completed, it will reach 454 megawatts and be the largest wind project in the state. In addition, we completed the Andes 2b Solar + Storage Project in Chile for our copper mining customers. Its 180 megawatts of solar plus 560 megawatt-hours of storage will make it the largest battery storage installation in all of Latin America. We were also able to use 5B's prefabricated solar panels for a portion of the project, which advances the learning and lowers the cost of future developments.

Turning to Slide 8. We are on track to complete the 3.4 gigawatts of new renewable projects we committed to earlier this year, including nearly 800 megawatts we've already brought online. In the U.S., we expect to commission roughly 2.1 gigawatts, which is roughly double the capacity we installed last year. I'm very proud of the work our teams have done to ensure that we have had no supply chain or construction delays. All of the necessary equipment has been contracted for our 2023 through 2025 backlog. There remains the potential for completion of up to an additional 600 megawatts this year in the U.S., given the strong performance of our construction program. We see our record of completing projects on-time is a key competitive advantage that is highly valued by our customers. We were one of the only major developers that did not abandon or meaningfully delay construction projects over the last two years, due to supply chain issues. Furthermore, due to our emphasis on long-term planning and strong contractual agreements, we have maintained our project margins despite inflationary pressures and rising interest rates.

Now moving to our second priority of utility growth on Slide 9. We remain on-track to grow our U.S. pretax contribution at an annualized rate of 17% to 20% through 2027. At AES Ohio, we expect to receive commission approval for our new Electric Security Plan or ESP4 by the end of August, at which point, our new distribution rates would go into immediate effect. As a reminder, ESP4 includes approval of timely recovery of $500 million in grid modernization over the next three years, carrying a 10% return on equity. This will allow us to accelerate investments to continue to improve the quality of service, while maintaining the most competitive rates in Ohio. At AES Indiana, we filed for a new rate case in June, the first rate case since 2018. The proposed new rates are designed to recover inflationary impacts since the last case as well as investments in reliability, resiliency improvements and system upgrades. We expect commission approval by the middle of next year. Even after this proposed increase, we still expect our residential rates to be among the lowest in the state. At AES Indiana, we continue to advance our low-carbon generation growth plan. We recently filed for approval to build a 200 megawatt or 800 megawatt-hour storage facility at the site of the retiring Petersburg coal plant. This project is expected to come online by the end of next year, at which point, it will be the largest battery storage project in the Midwest.

Now turning to Slide 10 and our third priority of transforming our portfolio by exiting coal generation by the end of 2025. Since our Investor Day in May, we have significantly advanced our decarbonization objectives by assuring the retirement of an additional 900 megawatts of coal generation. In June, we retired 415 megawatts of coal as we shut-down Unit 2 of the Petersburg plant at AES Indiana. We also announced the retirement of the 276 megawatt Norgener plant in Chile by 2025. Additionally, we received final approval, allowing for the termination of the PPA at our 203 megawatt Warrior Run run plant in Maryland for proceeds of $357 million.

Now turning to Slide 11. We have expanded our leadership in the development and application of new technologies in our sector. We see this as another important competitive advantage. A new example is the use of embedded artificial intelligence, including generative AI, across our operations. This year, we already expect more than $200 million of our adjusted EBITDA to be enabled by AI through both cost reductions and revenue enhancements. We have incorporated AI and data analytics across our operations from areas such as wind production forecasting to vegetation management to identification of isolated solar panel failures. As part of this program, we also continue to pioneer and advance the use of robotics to install and maintain solar panels. Through our solar robotics program, we are developing proprietary AI-based computer vision to install a wide variety of solar modules, including the largest and heaviest models. With this technology, we plan to install projects significantly faster and across a wide range of working conditions, including extreme heat. In the coming months, we will be validating this technology for the installation of tens of megawatts and expect to move to use it for full-scale solar projects in 2024.

Finally, we're consolidating our lead in advanced green hydrogen projects with committed off-takers. We are currently developing the largest announced green hydrogen project in the U.S. jointly with Air Products in Texas. It features 1.4 gigawatts of inside-the-fence hourly matched renewables, 200 metric tons of hydrogen per day and a 30-year take or pay contract. It is expected to come online in 2027. Our pipeline of advanced green hydrogen projects is equivalent to more than 6 gigawatts of renewables in 800 metric tons of hydrogen per day.

With that, I would like to turn the call over to our CFO, Steve Coughlin.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Thank you, Andres, and good morning, everyone. Today, I will discuss our second quarter results, 2023 parent capital allocation and 2023 guidance.

Turning to our financial results for the quarter. Beginning on Slide 13. I'm pleased to share that the second quarter was fully in line with our expectations, keeping us well on-track to achieve our full-year guidance. Adjusted EBITDA, with tax attributes, was $607 million versus $722 million last year, driven primarily by lower margins at AES Andes and higher costs at a Renewables SBU due to an accelerated growth plan, but partially offset by new renewables coming online and higher availability at select thermal businesses. Tax attributes earned by our U.S. renewables projects were relatively flat at $38 million in the second quarter of this year, in line with our expectations.

Turning to Slide 14. Adjusted EPS was $0.21 versus $0.34 last year. In addition to the drivers of adjusted EBITDA, we saw higher parent interest expense this quarter. As a reminder, our year-to-date EPS is fully in line with the breakdown that we outlined earlier this year, in which we noted that roughly 25% of our earnings would come in the first-half of the year and 75% in the second-half.

I'll cover the performance of our strategic business units or SBUs in more detail over the next four slides, beginning on Slide 15. In the Renewables SBU, we continue to execute on our strategic priority to triple our portfolio by 2027. For the second quarter, as expected, we saw higher adjusted EBITDA with tax attributes, driven primarily by higher wind generation and new projects coming online, partially offset by higher business development and fixed costs due to our accelerated growth plan. At our Utilities SBU, we saw higher adjusted PTC, driven by lower maintenance expenses, but partially offset by higher interest expense from new debt. We continue to expect strong utilities earnings for the second-half of the year, driven by typical second-half demand seasonality and depending August decision on the ESP5 at AES Ohio. With this pending decision and the great progress in renewables growth at AES Indiana, we are continuing to pursue our strategic priority to increase rate base by an average of 10% annually through 2027.

Lower adjusted EBITDA at our Energy Infrastructure SBU primarily reflects lower margins at AES Andes, in line with our phase out of coal, partially offset by higher availability at select thermal units. As we execute our third strategic priority to exit coal and complete the transformation of our portfolio, although not every quarter, we generally expect to see annual year-over-year declines in energy infrastructure as we discussed at Investor Day in May.

Finally, at our New Energy Technologies SBU, higher adjusted EBITDA reflects continued improved profit margins at Fluence. Fluence has shown year-over-year improvement for three straight quarters and we are very pleased with the strong results they are delivering this year.

Now to Slide 19. We are on-track to achieve our full-year 2023 adjusted EBITDA guidance range of $2.6 billion to $2.9 billion. Growth in the year-to-go will be primarily driven by contributions from new businesses, including growth at our U.S. utilities and contributions from new renewables projects coming online. As a reminder, the 3.4 gigawatts of new renewables we expect to add this year represents an increase of over 75% compared to the 1.9 gigawatts we added to our portfolio last year. This amount also represents a doubling of new renewables in the U.S. versus 2022. This growth will be offset by approximately $200 million of LNG sales we've recorded primarily in the third quarter last year, which we do not expect to recur this year. In addition to our adjusted EBITDA, we expect to realize $500 million to $560 million of tax attributes in 2023, bringing our total adjusted EBITDA plus tax attributes to $3.1 billion to $3.5 billion for the year.

Turning to Slide 20. We are also reaffirming our full-year 2023 adjusted EPS guidance range of $1.65 to $1.75. As a reminder, we expect our adjusted EPS to be heavily fourth quarter weighted due to the late year seasonality of our U.S. renewable project commissioning.

Now to our 2023 parent capital allocation plan on Slide 21. Sources reflect approximately $2.4 billion of total discretionary cash, including $1 billion of parent free cash flow, $400 million to $600 million of asset sales and a $900 million parent debt issuance we completed in Q2. For more information on our debt issuances at the parent company and our subsidiaries, please refer to the appendix of the presentation. On the right-hand side, you can see our planned use of capital remains largely in line with guidance, with higher parent investment reflecting our recent acquisition of the 2 gigawatt Bellefield project in the U.S. At our Investor Day in May, we outlined our capital allocation plan through 2027, including asset sales, along with debt and potential future equity issuances.

We appreciate all of the feedback we received, and I want to take a moment to clarify that we will only raise an invest capital in a way that's value-accretive to our shareholders. Any potential future equity issuances would have to yield accretive value to shareholders for us to pursue equity as a source of capital. We are also committed to improving our credit profile over time and further bolstering our investment-grade rating. We have a number of other levers to pull to support our growth, such as increased capital recycling through asset sales and sell-downs. Given our strong asset sale track-record and recent success, it is possible that any future equity issuances could be materially lower than the five-year figure we previously shared. As always, our Investor Relations team is happy to take additional feedback and to follow-up on additional questions or data requests.

In summary, we're continuing to make progress on transforming AES' portfolio, while delivering strong growth in adjusted EBITDA, earnings and parent free cash flow. Our businesses are executing successfully and delivering on their commitments. We will continue to allocate our capital towards our high growth renewables and utilities to maximize shareholder value.

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

Andres Gluski
President and Chief Executive Officer at AES

Thank you, Steve. In summary, we are reaffirming our 2023 guidance for all metrics and our targeted annualized growth rate through 2027. We continue to make substantial progress on our strategic priorities, including tripling our installed renewables capacity by 2027, increasing the rate base at our U.S. Utilities by more than 10% per year through 2027 and transforming our portfolio by exiting coal by at the end of 2025, while investing in new technologies. We are delivering on all the commitments we made on our Q4 2022 earnings call and at our Investor Day presentation.

With that, I would like to open up the call for questions.

Skip to Participants
Operator

Thank you. We will now enter our Q&A session. [Operator Instructions]

We will take our question from Durgesh Chopra from Evercore ISI. Durgesh, your line is now open, please proceed.

Durgesh Chopra
Analyst at Evercore ISI

Hey, team, good morning, and thank you for giving me time. Andres, just -- you're now, if I heard you correctly in your remarks, are targeting 5 gigawatt to 6 gigawatt of new PPAs first. Can you confirm whether that is accurate, because that's higher than what kind of you might have logged down in previous years? And then what's driving that higher range?

Andres Gluski
President and Chief Executive Officer at AES

Sure, Durgesh. Good to talk to you. Look, we signed 5.2 gigawatts of new PPAs last year. So, what we're seeing this year, as you know, we already have 2.2 gigawatts signed. We have visibility into just two projects, which would be another about 2.4 gigawatts, right, it would put us 4.4 gigawatts. And, of course, we have other projects in the pipeline. And so, we're not really setting out an official target, but I'm saying that we believe that we should be similar to last year. And we do have a couple of, as what I call, these whales, these 1 gigawatt-plus targets, but we feel very good, because we see a lot of demand for our products. We have people coming to us with products. So, it's really looking at how do we best allocate our money where we get the highest returns and best allocate our teams.

Durgesh Chopra
Analyst at Evercore ISI

Got it. Thank you for that. And then maybe when could we get clarity on the potential 600 megawatts in terms of timing? Is that really sort of a Q3 call event when we would know more? How should we think about that? I'm just thinking about the projects that were pushed into 2024, yeah.

Andres Gluski
President and Chief Executive Officer at AES

Sure. Look, I would say that, we feel very good about our construction program. So -- versus -- this was the big challenge of this year to grow our construction program in the U.S. by 100%, we feel very good about it. Unfortunately, a lot of these are slated to be commissioned towards the latter part of the year. So, we should have a good view in -- on the Q3 call of where we stand and whether we're going to do more of these projects this year.

But in general, we're very pleased with the supply chain, with our construction teams. The team has really stepped-up to the task. And I'm very proud of them.

Durgesh Chopra
Analyst at Evercore ISI

Excellent. And then just one last one for me. Steve, you mentioned that the equity needs could be materially reduced. It's nice to here that in your prepared remarks. Maybe just -- can you give us more color when could we get an update on timing? What are you thinking just the current equity needs, when in the plan are those scheduled to hit and just when could we get an update?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. Look, I mean, as I said in my remarks, Durgesh, this is just a function of multiple levers. And we're seeing a lot of great progress on our asset sale program and the $3 billion that we put out at Investor Day was well below the total universe of opportunities. So, what I wanted to point out is that we're only going to issue equity in the future and that could be far in the future to the point that it's value-accretive to shareholders and we haven't also tapped other sources that we intend to tap, which is our asset recycling program.

So, as you saw with Warrior Run, as we've seen -- as we've executed on the renewable sell-downs, as we exit further coal assets, we have a lot of upside in that asset sale number. So, at this point, it's indefinitely into the future and our share price would need to be substantially higher than where it is today and it would have to be value-accretive to shareholders on a per share basis.

Andres Gluski
President and Chief Executive Officer at AES

Yeah. And, Durgesh, another point I'd like to make is that we've been very effective at bringing in partners to fund our projects. So, that's obviously another lever that we have. So, we laid out what could be a possible path, we were very conservative on the numbers. But if we don't feel that we want to some point in the future issue equity, we can always invite partners into our project. Of course, we're giving them part of the upside as well.

Durgesh Chopra
Analyst at Evercore ISI

Got it, guys. I appreciate that detailed commentary. Thank you very much.

Andres Gluski
President and Chief Executive Officer at AES

Thank you.

Operator

Thank you. Our next question comes from David Arcaro from Morgan Stanley. David, your line is now open, please go ahead.

David Arcaro
Analyst at Morgan Stanley

Hi, good morning. Thanks so much for taking my questions.

Andres Gluski
President and Chief Executive Officer at AES

Hi, good morning.

David Arcaro
Analyst at Morgan Stanley

I was wondering, just what's -- good morning. What's your latest thinking on just the hydrogen PTC timing in terms of treasury guidance here and what the rules around matching and additionality might be? And it kind of -- it -- just in coordination with that, what are your -- what's your current, like, project pipeline in discussions with potential partners on that side of the business as it stands currently?

Andres Gluski
President and Chief Executive Officer at AES

Sure. Great question. Well, of course, the final rules haven't come out. What I would like to say is that our Felix project, our project in Texas, is really would meet the very strict criteria. So, it is additional, it is hourly matched, it is regional. So, it has the very lowest carbon footprint technically feasible in the U.S. So I'd like to put that right out there that our project is not dependent in any way about how the rules come out.

Now having said that, I do believe that additionality is important. I also believe that we have to move to early matching, in part, because we need green hydrogen projects to be tradable goods. So, these are the rules in Europe. I also think regionality is important. So, we don't add further congestion. So, really what we want is that the new rules come out help us create a market, but they also help lower total carbon footprint. So, we don't want to just be squeezing the balloon, taking off renewable energy from the grid to produce green hydrogen. We can get into more specifics there.

So, I do expect that the rules will come out, will incorporate some of these factors. But I want to say that our projects are very solid, we have committed off-takers, which I think is the key. What is -- because this market for green hydrogen is developing. So, they have early-on projects. I think the key is not only have a great project, have it with a very low-carbon footprint so you get all of the benefits of the IRA, but to have a committed off-taker.

David Arcaro
Analyst at Morgan Stanley

Okay. Great. That's helpful color. And then I was curious if you could speak to the transmission challenges just related to transmission interconnection in the renewable industry. You alluded to it in your commentary, but I was wondering if you could speak to what your kind of current pipeline of maybe transmission queue positions and also with regard to like early-stage development, land positions, things like that, how soon could transmission constraint potentially impact your business and how are you positioned now to kind of avoid that in the foreseeable future?

Andres Gluski
President and Chief Executive Officer at AES

Yeah. Well, look, I think transmission constraints are affecting the market already. So, we got out early, we started getting a filing for interconnections on a big way three years ago in key markets like PJM, CAISO. So, I think we're in a good position there. I think right now, we have a new industry here. And so, I think we have to come to terms with the new definitions, what is pipeline. So, for us, pipeline is projects that we already have either land rates, interconnection rates, real prospects to make a project. And then, of course, there are different phases, some projects are far more advanced, shovel-ready and some are more at the beginning of the queue. I think having looked at a lot of their proposals from other developers, they can't pipeline things that are, we would call, prospects. And I think we have to move towards a common definition. I mean, a little bit perhaps like the oil sector which has possible reserves, has probable reserves and has proven reserves, right?

And I think what's very important is that the -- to get a pipeline, you have to invest and you have to have money. So, some of the new changes, for example, on the interconnections will make it a little bit more costly, just sort of spurious, flood the zone, request for interconnection. So, maybe, Steve can give you some comments on how that is progressing, which would be favorable to us. We don't see any sort of short-run effect of it. But in the long-run, it's favorable to us, because I think we've been the most, I would say, stringent about what we consider pipeline. And what we're very interested in doing is maximizing the conversion rate.

But I do also want to emphasize that if somebody comes to us, a client and asks us to complete an advanced stage development projects, that's the best of all worlds, because we get to conserve the pipeline. We weren't investing money when it was at the highest-risk stage and can bring it online more quickly and satisfy that client.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. And I would -- just add to that, look, I mean, we're very pleased with the final rules coming out of the FERC order 2023. But, although, as Andres said, we've -- this has been our strategy to lead renewables development for many years. So, we put ourselves in an advantaged position I think many years ago, getting into these queues. Nonetheless, it is important for the industry overall for these queues to be move along faster and the process to be more efficient. So, having the higher financial thresholds to get into the queues and to stay in the queues, having a demonstrate project maturity in terms of permits and financing behind them, having cluster studies so that this isn't just a one-by-one review process and then having the penalties and the teeth behind the deadlines that have to be met to do the studies, because it's also important. So, there's a number of angles at which this issue is being approached through the order.

The order is due to be published I think very, very soon and will go into effect 60 days later. So, I think, it's a great thing for the industry. We've already felt great about our position. But of course, over the longer-term to have these queues cleaned up and moving faster is very important and I think will further accelerate growth throughout the rest of the decade.

Andres Gluski
President and Chief Executive Officer at AES

And I'd say, look, we're also taking sort of technological -- a look at how we can improve transmission for our projects. So, this is like using the grid stack to be able to baseload transmission lines, which were really peakers. This means dynamic line rating. This means using our prefab solar, which takes about half the space to be able to put higher loads, where we have a good interconnection. And you also notice that we're putting large battery projects where we have interconnections from our decommissioning coal plants.

So, we're looking at this problem rather holistically. And, again, I think we're in a very good position to take advantage of what's going to be an increasingly congested grid.

David Arcaro
Analyst at Morgan Stanley

Okay. Got it. Understood. Thanks so much. I appreciate it.

Andres Gluski
President and Chief Executive Officer at AES

Thank you.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Thank you.

Operator

Thank you. Our next question comes from Richard Sunderland from JP Morgan. Richard, your line is now open, please proceed.

Richard Sunderland
Analyst at JP Morgan Cazenove

Hi, good morning. Am I coming through clearly?

Andres Gluski
President and Chief Executive Officer at AES

Yes, you are.

Richard Sunderland
Analyst at JP Morgan Cazenove

Okay. Great. Thank you. Thank you for the time today. Circling back to the datacenter commentary from new scripts, curious how much of a near-term change in C&I demand you're seeing from this sub-sector specifically and any indications of upside just on that ramp over the next one to two years relative to what you were seeing maybe six months or a year ago?

Andres Gluski
President and Chief Executive Officer at AES

I would say, yes. I mean, there is some definitions that they are waiting for in various markets, but -- about rules and where you can locate datacenters. But no, we're definitely seeing increased interest and increasing demand and we are the largest provider to U.S. datacenters. And so, I think we can uniquely provide datacenters, with the same quality of service. For example, in certain markets abroad, be it Mexico, Chile, Brazil, which is another advantage for us. So, yeah, we are seeing increased demand from that sector.

Richard Sunderland
Analyst at JP Morgan Cazenove

Got it. Very helpful. And then just wanted to parse the kind of backlog pipeline conversation a little bit more finely for the hydrogen. It sounds like the 1.4 gigawatts for Texas could come in this year. Could you just speak a little bit more to your confidence level there for '23 specifically, and what you're focused on there? And then thinking about the balance of the hydrogen opportunities, when could those come in over the next few years?

Andres Gluski
President and Chief Executive Officer at AES

Well, again, I think with the most advanced in terms of real green hydrogen projects. So, in the U.S., we have committed off-takers for that project in Texas. We have several other projects, including two of the hubs, one in Los Angeles, also one in Houston. I would say that we could sign the first project this year. It will be coming online for 2027, outside of our guidance range. And the subsequent ones would be somewhat further out '27, '28.

But what we're seeing is a strong demand. And basically, we are seen as a preferred partner by several people. And we also have very good projects, for example, in Chile, which is to green the mining sector, their heavy equipment, we've already greened their electricity use and a possible ammonia export project in the Northeast of Brazil. So, again, stay-tuned, but I feel quite confident saying we're the most advanced in projects with committed off-takers and we think we will hit these numbers. It's really a question of as they come online, because you have to have the equipment that can use it. Certainly, in the shorter-term, you can substitute green hydrogen in thermal processes in a lot of petrochemicals or steel plants, other things like that.

So, we have to see as this market develops. But again, I think we're very well-positioned. It's very exciting opportunity for us.

Richard Sunderland
Analyst at JP Morgan Cazenove

Understood. Very helpful. And then just one final one from me. The Bellefield project, you've been very clear in a lot of the messaging around how that came together. I'm just curious in terms of considerations around Phase 2 versus Phase 1. Does Phase 1 meet your return thresholds on a standalone basis? How to think about the progress to signing Phase 2? Anything you can offer there would be helpful.

Andres Gluski
President and Chief Executive Officer at AES

I think we're well-advanced on Phase 2 is what I'm willing to say. Again, it's -- it would be a similar project to Phase 1. So, that is the largest solar-plus-storage project in the U.S., in California. So, it's a very unique offering that we can bring together.

Richard Sunderland
Analyst at JP Morgan Cazenove

Great. Thank you very much for your time today.

Andres Gluski
President and Chief Executive Officer at AES

Thank you.

Operator

Thank you. Our next question comes from Angie Storozynski from Seaport. Angie, your line is now open, please go ahead.

Angie Storozynski
Analyst at Seaport Global Securities

Good morning, guys. So, I wanted to start with some high-profile management departures we've seen since the Analyst Day, basically, from your core businesses, right, the U.S. utilities and U.S. renewables. I mean, we -- you might be just victims of your own success in a sense, but -- just how you can reassure us that there is no change in the execution of your growth plans, especially in these two businesses and the deep bench that you have to fill those vacancies?

Andres Gluski
President and Chief Executive Officer at AES

Well, hi, Angie, and thanks for that question. And I think you've got it spot-on. Look, this is a -- quite frankly a symptom of strength in our case. We have the hardest management team in the market. And so, of course, people are going to be being made offers. And if -- people are -- obviously if they want to go to private equity and debt on a longer-term, I feel that, that's their right.

But this is in no way affects our business whatsoever. And I think the best proof of that is after the departure in clean energy, we've signed more PPAs. So, we're doing very well. I don't expect it to have any impact on the business, and I expect the same in U.S. utilities. I don't expect this will have any impact whatsoever, but it is a sign of the -- yeah, we have a strong team, we have a deep bench and we'll continue to identify talent and prepare it and move it up. It's -- again, let's say, where AES was, say, in 2012 or something, our team wasn't the hardest in the business, people wouldn't be trying to poach it.

So, it is what it is. But I feel very good about where we are and it doesn't change our plans whatsoever and I think the teams are very motivated on executing on the plans that we laid out.

Angie Storozynski
Analyst at Seaport Global Securities

Okay. And then -- and moving on, I mean, you talked a lot about your backlog of renewable power projects, so -- and then potential monetization of assets in lieu of equity. So, first on the backlog. I mean, we've heard stories about some public renewable power developers basically showing in their backlogs third-party projects where they don't have exclusivity for these projects. So, again, I know this is just anecdotal evidence, but I'm just wondering if you've heard of those two instances and if any of this could be true for you guys? Okay.

Andres Gluski
President and Chief Executive Officer at AES

Okay. Well, I can say categorically, okay, absolutely under no uncertain terms, we have no such projects in our backlog. I want to make very clear, because maybe some other people are doing that. I think that's not transparent. I would not recommend anybody do it. In our case, whatever we have in the backlog, we are -- we have the projects we are committed to delivering it on a certain date for a certain amount of time and our clients have an obligation to take that energy -- a certain amount of energy for a certain amount of time. So, this is binding for both sites.

And the fact that 43% of our backlog is currently being built, we have ordered all the equipment for our '23 through '25 backlog and about three-quarters of them will come online by 2025. So, I want to make very clear, that's a good question. I wouldn't recommend anybody to do that. And I can say categorically we would never do something like that.

Angie Storozynski
Analyst at Seaport Global Securities

Okay. And then on the monetization of assets. So, I understand that there is a very big difference between the assets that recently transacted and the ones that you're developing, if only because of the duration of the PPAs, so basically the duration of the cash flows. But on the flip side, right, you have higher discount rates for the DCF value of those cash flows.

So, I'm just thinking if you were to monetize some of these assets again, I guess, it all depends where the stock is, but again, how would that, from your perspective, demonstrate the value of the portfolio that you currently have?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah, Angie, this is Steve. So, look, we have, as you know, been selling down our renewable projects after they've come online and we package them together in portfolio. So, we have seen some, I would say, relatively small uptick in return requirements there, but nothing outside the range of what we expected within our plan in terms of -- this is -- these are very low-risk assets, they're solar coupon essentially, no fuel costs, very low maintenance. So, these are very predictable and the demand for these assets continues to be very strong.

So, we don't see any impact to the plan for how we sell-down from sort of where rates are in the market today. Does that address your question, or...

Andres Gluski
President and Chief Executive Officer at AES

Yeah. I think so, I mean the other thing is that these are all investment-grade quality off-takers, the very highest quality off-takers that you can have. So, we are selling down the premium product in the market. So, I think it's important to say that look, people have talked about inflation, people have talked about rising interest rates. We're not seeing a degradation of our margins. And so, the margin of our money into these projects, we're not seeing any squeeze whatsoever.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. And on top of that, of course [Speech Overlap] the higher rate incentives, we -- just -- so just as Andres pointed out, with the Chevelon Butte Project, we have the energy community adder for that project. And actually most all of our wind projects going forward, we expect to qualify for the domestic adder as well. Angie, so there is some significant offsets to the cost of financing that we've been achieving too.

Angie Storozynski
Analyst at Seaport Global Securities

Very good. Thank you, guys.

Andres Gluski
President and Chief Executive Officer at AES

Thank you, Angie.

Operator

Thank you. Our next question comes from Julien Dumoulin-Smith from Bank of America. Julien, your line is now open, please go ahead.

Julien Dumoulin-Smith
Analyst at Bank of America

Hey, good morning, team. Thank you very much for the time. Appreciate it. No, a lot has been said here ready, but let me follow-up on some details here just on the year-over-year comparisons here as we go to the back-half of the year, if I may. Look, I'd love to talk about, I think, you have in your slides, you've $0.24 of positive net impact in the back-half of the year from renewables and year-over-year comps on LNG. But if I rewind here, I think, you said in the back-half of the year, I mean, last year it was like $0.30 contribution from LNG.

Just like think about that, that seems like a pretty big step-up year-over-year on renewables. Can you talk about what renewables assumptions you're baking in as, sort of, a discrete item in -- especially in the back-half of the year to sort of make-up for what you need to get to your guidance?

And then if I think about the start of the year, right, in terms of what you talked about renewable contributing, I think, we talked about $0.27 for the full year. So, it seems like -- what's implied here? Again, I'm curious that renewables is actually contributing more than what we thought at the start of the year, and maybe what that says for future years as well, but please, by all means, respond accordingly.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Okay, So, yeah, this is Steve, Julien. So, the $0.30, it doesn't sound correct or actually more like $0.20 is the LNG year-over-year delta to be offset and then, of course, we're more than doubling the renewable commissioning this year. So, if you recall, it was just around 1 gigawatt last year and it's 2.1 gigawatts this year, most all of which is in the second-half of the year. So, what we're carrying in the first-half is sort of more of the costs in renewables, the EBITDA has been relatively flat through the first-half. In the second-half then, we're going to see that renewable number of pick-up substantially and that's why we have the 75% loading on the second-half of the year earnings, that's a major driver.

The other is, of course, utility demand in Ohio and Indiana kicking in Q3. You've got Southland, where we have the peak cooling season in the third quarter and then we have hydro in Latin America, typically, the volumes are much higher as we come out of the wet season in the summer, in the winter, and you have the snow melt into the fall. So, those are really the primary drivers is the clean-energy Southland utilities and then some of the hydro assets in Latin America having much more volume in the second-half of the year. But the LNG offset is really only about $0.20 for the -- and mostly in the third quarter.

Julien Dumoulin-Smith
Analyst at Bank of America

Yeah. Okay. Fair enough. [Speech Overlap] Oh, sorry, go ahead, Andres.

Andres Gluski
President and Chief Executive Officer at AES

No, I was just saying, we're executing exactly what we laid out at the beginning of the year. So, there has been no change. I want to make that clear.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. This is -- I think we're right at 20% on the EPS, Julien, year-to-date. So, this is -- what we're seeing -- although the year-over-year in the quarter is lower, that's primarily due to coal retirements in Chile as we've done the green blend and extend, some of the coal that still there, the margins have come down, which was all expected. So, we're exactly on-track.

And also to your point, there is some potential upside as Andres noted, we feel really good about being on-track with the construction program and there still remains the upside on the 600 megawatts true potential.

Julien Dumoulin-Smith
Analyst at Bank of America

All right. But the point is the plan for $0.27 of renewables contribution in '23 unchanged from the start of the year, so.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. Let us get back to you on the exact number, because I don't have that math in front of me. But the renewables contribution is looking at least on-track is what I would say.

Julien Dumoulin-Smith
Analyst at Bank of America

Okay. Wonderful. Thank you. If I can give it slight different direction here, and trying to follow-up on a few earlier questions, just on the on the asset sale dynamics versus equity. Can you comment a little bit further about what else you're seeing out there or what else could be monetized just as you think about de-emphasizing equity? It sounds like the lever, Andres, you were alluding to is that you would just sell down your interest in the renewables -- the new renewables even more so. Is that fair to say in terms of like the alternative lever here versus the corporate level equity?

And also just to clarify the point you made earlier, Andres, very precisely, at these levels today, you would definitively move away from the equity levels that you -- equity issuance levels you defined earlier in lieu of these alternatives.

Andres Gluski
President and Chief Executive Officer at AES

So, on the first point, no, it's not fair. Your characterization is not fair. So, what -- look...

Julien Dumoulin-Smith
Analyst at Bank of America

All right.

Andres Gluski
President and Chief Executive Officer at AES

We have partnerships in all of our businesses. So, we don't necessarily have to do it on the new projects. So, we can bring in partners to -- money is fungible. So, if we monetize a different business, that means we have more money available for renewables. We will -- as we have in the past, we can choose to optimize the return on invested capital. And I think that we are doing a very good job of how we exit coal. I think the Warrior Run monetization, I think, is probably better than people's expectations. And so, we continue to manage that.

So, all I'm saying is that we never -- as Steve said in his script, we didn't -- we put this out as the five-year plan. And then in the five-year plan, we had a certain amount of asset sales, a conservative number, and we had a, sort of, range for potential equity issuance as well. So, the two somewhat offset each other. So, if we do better on the asset sales, we will need less equity, and if we do better in terms of bringing in partnerships. So -- but we're seeing at these levels, we do not feel comfortable issuing equity. But I think it's been very clear from our presentation that we have a tremendous demand for what we're doing. And that is a once in a lifetime market opportunity. So, we want to create the most value for our shareholders from that opportunity.

So, obviously, if we don't have, what we feel is, correctly valued equity, we'll have to use other levers. And this should be nothing new to you guys. We have financed a remarkable change in this Company without issuing equity. We did it by selling down assets. We got into wind by bringing in partners. So, what we're saying is nothing like a promise for the future. It's just more of the same. So, we will use whatever the levers creates the most value for our shareholders, and we will continue to do so.

Julien Dumoulin-Smith
Analyst at Bank of America

Got it. Right. So, your point ultimately is not committing to selling down partners per se, a variety of different sources here incrementally just not issuing an equity at current levels. And if I can also [Speech Overlap] clarify this, Maritza process is underway. I know that was -- it was listed in the queue here as well. Is that still status quo underway?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

There's no -- yeah, no, there's no specific Maritza process underway, Julien, at this point. So, still evaluating different pathways for Maritza.

Julien Dumoulin-Smith
Analyst at Bank of America

Okay. All right. Fair enough. All right, guys. Thank you very much. I appreciate it.

Andres Gluski
President and Chief Executive Officer at AES

You are welcome.

Operator

Thank you. Our next question comes from Ryan Levine from Citi. Ryan, your line now open, please go ahead.

Ryan Levine
Analyst at Smith Barney Citigroup

Good morning. A couple of specific follow-on questions. Is your Fluence stayed core to your portfolio? And I guess on -- secondly, on the financing side, are you still open to considering the convert market to help offset equity issuance?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Hey, so, this is Steve. So, yes, Fluence is part of the portfolio, we own roughly a third, 34% of Fluence. It is not consolidated, but it does come in through equity method. And we do, in our adjusted EBITDA definition, include an adjustment to include Fluence EBITDA. So, that does show up and it's in our new Energy Technologies SBU, and Fluence margin continues to improve.

Ryan Levine
Analyst at Smith Barney Citigroup

The question is, is that core? Is that core to...

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Is it at core, or did you say is that core -- is it core to our business?

Ryan Levine
Analyst at Smith Barney Citigroup

Core.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

So, look, I mean, I would say -- core, yeah. So, given that it's an outside business, I don't think I would parse this out as like core or non-core. It's been a really important strategy for us to be able to lead in energy storage, both in development as well as in the technology and -- as well as sort of advancing the way that storage gets used to create the innovative solutions we've done like 24/7 carbon-free energy to make those products work. We've done a lot of co-innovation, co-development with Fluence around that.

So, that's, I would say, definitely core to our strategy is what we've been able to do with storage. But as Andres said many times, these are technology businesses of their own right. They're separated. We are not in them indefinitely, and we continue to grow new opportunities. And as we do, we may look to monetize part of our positions down the road. No time soon, and we see a lot of value upside. We're very pleased with how the new management team has driven value already, that's been recognized. But we still see a lot of upside and there's a lot of partnership that we continue to work on new solutions around. So, it is core from that perspective that I laid out.

Ryan Levine
Analyst at Smith Barney Citigroup

Okay. And then on the convert option?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

So, no, nothing that we're contemplating at this point. I mean, look, we did a $900 million debt deal just in the second quarter. Nothing -- no specific convert for us contemplated at this point.

Ryan Levine
Analyst at Smith Barney Citigroup

And then last question. In terms of Puerto Rico, what's your strategy there from existing assets and future development perspective?

Andres Gluski
President and Chief Executive Officer at AES

Well, in Puerto Rico, we're greening the island's energy grid. So, we do have renewal projects, we're bringing in batteries as well. And it's our plan to phase out coal by 2025. So, we're assisting the island and its energy transition. And I think we've been very clear what our objectives are.

Ryan Levine
Analyst at Smith Barney Citigroup

Okay. I appreciate it. Thank you.

Andres Gluski
President and Chief Executive Officer at AES

Thank you.

Operator

Thank you. Our final question comes from Gregg Orrill from UBS. Gregg, your line is now open, please proceed.

Gregg Orrill
Analyst at UBS Group

Yeah. Thank you. Probably quick. On AES Ohio, is the DPO rate case, how does that timing compare with what you're assuming in guidance or any other differences with how that's proceeding versus the '23 guidance?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. Hi, Gregg. It's right on track with what we assumed in our guidance. So, it -- the decision has been put on the agenda for next week, August 9, that was just published, I believe, yesterday. So, right on track in terms of when we assume the decision to be made. And we still feel really good about where that is likely to come out. As a reminder, once the decision is made, ESP4 put in place, then the new rates that were decided upon last year immediately go into effect. And as we've laid out, the riders would go into effect and then the frequent quarterly recovery on our distribution investments going forward would start to be put in place.

And so, this is a business really pivoting to a very different phase from where we've been de-levering and setting that business up for a more normalized structure. This is an important pivot point for Ohio to really pivot to growth, and there's a lot of room for growth as there's the lowest rates in the state there in all customer classes. And even with the ESP4, the new rates, we expect it to continue to be the lowest rates in the state for the foreseeable future. And we have, as Andres noted, 10%-plus rate base growth expected going forward. So, we're very excited about this and look forward to the decision next week.

Andres Gluski
President and Chief Executive Officer at AES

Yeah. Look, I'm also very excited about that Dayton is finally getting incoming investment. So, you have a new Honda EV plant, you have a battery plant coming into our service area. So, you're starting to see an economic recovery. Dayton had sort of been not participating in the expansion that we had seen in Eastern Ohio. So, it's a very exciting time, and we're very happy that we could invest and continue to improve the quality of service and continue to attract new investments into the Dayton area.

So, it's not only a rate base story, I think there's an economic recovery story happening in Dayton for the first time in decades. So, it's a very exciting time to be in Dayton.

Gregg Orrill
Analyst at UBS Group

Good. Thanks.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Thanks, Gregg.

Operator

I will now hand back to Susan Harcourt for any closing remarks.

Susan Harcourt
Vice President, 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 Remarks]

Corporate Executives
  • Susan Harcourt
    Vice President, Investor Relations
  • Andres Gluski
    President and Chief Executive Officer
  • Stephen Coughlin
    Executive Vice President and Chief Financial Officer
Analysts

Alpha Street Logo