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AES Q3 2024 Earnings Call Transcript

Operator

Good morning. Thank you for attending Today's AES Corporation Third Quarter 2024 Financial Review Call. My name is Megan and I'll be your moderator for today. [Operator Instructions]

I would now like to turn the call over to Susan Harcourt, Vice President of Investor Relations at AES Corporation. Susan, you may begin.

Susan Pasley Keppelman Harcourt
Vice President of Investor Relations at AES

Thank you, operator. Good morning, and welcome to our Third Quarter 2024 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 disclosed 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 third quarter 2024 financial review call. We are pleased with our performance this year and today I will discuss our third quarter results, the robust growth we are seeing at our Renewables and U.S. Utility businesses, and our progress towards our asset sales target.

Beginning on Slide 3 with our third quarter results, which were generally in line with our expectations, adjusted EBITDA with tax attributes was about $1.2 billion, adjusted EBITDA was $692 million and adjusted EPS was $0.71. We're on track to meet our 2024 financial objectives, including our expectation to be in the top half of our ranges for adjusted EBITDA with tax attributes and adjusted EPS. At the same time, we now expect adjusted EBITDA to be towards the low end of the guidance range for the year, primarily due to the one-time impact of extreme weather in Colombia and the lower margins in the Energy Infrastructure SBU.

We are reaffirming our expected growth rates through 2027. Steve Coughlin, our CFO will provide more detail on our financial performance and outlook. I'm also very pleased to report that since our last call in August we have signed or been awarded 2.2 gigawatts of new contracts. This includes both long-term renewables PPAs and new data center load growth at our U.S. Utilities.

Turning to our renewables business on Slide 4. Since our Q2 Financial Review call, we have added 1.3 gigawatts of new PPAs to our backlog, bringing our year- to-date total to 3.5 gigawatts, more than 70% of which is with corporate customers. As a reminder, last year we set a target of signing 14 gigawatts to 17 gigawatts of new PPAs from 2023 to 2025; and with 9.1 gigawatts signed or awarded since the beginning of last year, we're currently well on track to meet this objective. Since setting that goal, we also materially increased our project return targets and we are focused on prioritizing the most profitable PPAs.

Moving to Slide 5 and our construction progress. Since our second quarter call in August, we have completed construction of an additional 1.2 gigawatts of new projects, bringing our year-to-date total to 2.8 gigawatts, which represents nearly 80% of the 3.6 gigawatts we expect to complete this year. On time execution is one of our competitive advantages and we believe we have the best supply chain management in the industry. In the U.S., we have 100% of our solar panels on site for those projects coming online this year and 84% in country for next year.

For 2026, we have 100% of our solar panels either in country or contracted to be domestically-manufactured, providing protection against potential changes in tariff policy. We have also been a first mover in securing domestically-manufactured battery modules and cells. We expect our first battery energy storage project with domestic content to come online in the first half of 2026. Additionally, we have established a robust supply chain for wind through our strategic suppliers with domestic manufacturing. Regarding long lead time equipment such as transformers and high-voltage breakers, we have secured all of the supply for our backlog through 2027.

Turning to Slide 6, we are very well positioned as a leading provider of renewable energy to data center companies, particularly in the U.S. and to large mining companies outside the U.S. These customers want to work with AES due to our track record of providing customized solutions that best serve their specific needs and delivering our projects on time and on budget.

With the U.S. Elections only a few days away, I had great confidence in the resilience of our business plan regardless of the outcomes of the Presidential and Congressional elections. While we do not believe the elimination of the Investment Tax Credit or Production Tax Credit is likely, even in an extreme scenario, we're uniquely well positioned due to the following:

First, regardless of federal policies, our corporate customers had a massive need for new power that can only be met by renewables over the next decade. McKinsey estimates that in the U.S. data centers alone could require an additional 450 terawatt hours through the end of the decade, which is equivalent to more than the annual electricity consumption of France. With these market dynamics, we will continue to sign high return renewables PPAs with our core customers.

Second, should there be any changes to U.S. tariff policy, we have a resilient supply chain with a large majority of our project components manufactured domestically by 2026.

Finally, our strategy of procuring our equipment at the time of the PPA signing provides clear safe harboring protections from potential changes in policy.

Now turning to Slide 7. Over the last 12 months we have embarked on the most ambitious investment program in the history of our U.S. Utilities, which will improve reliability and quality of service for our customers while maintaining some of the lowest rates in both states. AES Indiana and AES Ohio are now two of the fastest growing U.S. Utilities with projected double-digit rate base growth through 2027 based on necessary investments for our customers. As you may recall, in the third quarter of last year we received Commission Approval for a new regulatory structure for AES Ohio providing for timely recovery of the majority of these investments.

Similarly, earlier last year we received Commission Approval for new rates at AES Indiana, our first rate case in seven years. We are starting to see the benefits from the $1.2 billion we have invested in both utilities so far this year representing a year-over-year increase of investment of 60%. Excluding the one-time settlement benefit recognized in 2023, year-to-date EBITDA is up 25%.

Turning to Slide 8. We're also seeing additional investment opportunities from data center growth in our service areas above and beyond our existing rate base projections. Our utilities have many natural advantages that are attractive to large technology companies such as proximity to fiber networks and the presence of ample land and water. We have worked to proactively identify sites that are well positioned to support new data centers, capitalizing on our deep relationships with technology companies.

At AES Indiana, we expect to have specific data center deals to announce in the coming months, as we've been in active negotiations with several parties. We recently launched an RFP for 3 gigawatts of new generation to support accelerating demand growth. From a regulatory perspective, we will use the results of this RFP to help inform our IRP submission next year.

At AES Ohio, we have now signed agreements for new data center load growth of 2.1 gigawatts, including an incremental 900 megawatts on top of the 1.2 gigawatts we already announced on our last call. On our fourth quarter call in February, we will provide a comprehensive update on how these agreements impact our long-term investment plan and rate base growth. Today, we can indicate that just what we've signed to-date provides a nearly 30% increase in investment through the end of the decade over our current plan.

Turning to Slide 9. In September, we announced a plan to sell down 30% of AES Ohio to CDPQ, our long-time partner in AES Indiana. This transaction builds upon our strong relationship with CDPQ&Allows for common ownership across our U.S. Utilities. This partnership will support growth at AES Ohio, with CDPQ as a funding partner for increasing investments to support reliability and economic development.

Finally, as you may have seen in our release, we are pleased to report that we have now closed the sale of our equity interest in AES Brazil. We are proud of the work our people have done in Brazil to expand beyond the 2.7 gigawatt hydro portfolio by adding 2.5 gigawatts of operating wind and solar, creating one of the largest renewable businesses in the country.

With these two transactions, we have now signed or closed agreements for more than three-quarters of our $3.5 billion asset sale proceeds target through 2027. We have also further simplified our portfolio and eliminated Brazilian weather, interest rate and currency risks.

With that, I would now 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 third quarter results and our 2024 guidance and parent capital allocation.

Turning to Slide 11, adjusted EBITDA with tax attributes was approximately $1.2 billion in the third quarter versus $1 billion a year ago. Although we realized $458 million of additional tax value year-over-year, renewables EBITDA was down $68 million, driven mostly by record-breaking drought conditions in South America. In addition, our Energy Infrastructure SBU was down $221 million largely due to expected items, which I'll cover in more detail on a later slide.

Turning to Slide 12. Adjusted EPS for the quarter was $0.71 versus $0.60, last year. Drivers were similar to those of adjusted EBITDA with tax attributes but partially offset by higher parent interest due to growth investments as well as a higher adjusted tax rate. I'll cover the performance of our SBUs or Strategic Business Units on the next four slides.

Beginning with our Renewables SBU on Slide 13. Higher EBITDA with tax attributes was driven primarily by significant growth from new projects in the U.S. where we've added 3.3 gigawatts since Q3 2023, but was partially offset by significant declines at our Colombia and Brazil businesses. This year we've experienced unprecedented weather volatility and a record-breaking drought in South America driven by El Nino conditions. In June, a historic flooding event took out our 1 gigawatts Chivor facility in Colombia for nearly two months followed by an extreme drought across the entire country.

Also, you may recall that the third quarter of 2023 was extremely positive as we had better hydrology at our Chivor facility than the rest of the country while spot prices were very high yielding significant margins. As a result, Colombia is down $92 million versus the third quarter of last year and over $130 million year-to-date versus last year. In Brazil, the record drought and extremely low wind resource this year have also negatively impacted renewables in Q3 and year-to-date.

While 2024 has been a difficult year due to the events in South America, we expect our Renewables segment will grow significantly in 2025. Emerging La Nina conditions in the Pacific are expected to return the region to much better hydrology; while in the U.S,. by the end of this year, we will have brought online a total of nearly 2 gigawatts of new capacity which will drive a large increase in our Renewables segment EBITDA in 2025.

Now, turning to Slide 14. Lower adjusted PTC at our Utilities SBU was mostly driven by the prior year recovery of $39 million of purchased power costs at AES Ohio, included as part of the ESP4 settlement as well as higher interest expense from new borrowings. This was offset by returns on new rate-based investment in the U.S. as well as new rates implemented in Indiana in May. Adjusting for the one-time settlement last year, Utilities adjusted PTC grew by 18% in the third quarter over prior year.

Lower year-over-year Q3 EBITDA at our Energy Infrastructure SBU was primarily driven by nearly $200 million of expected declines at our Warrior Run and Southland Legacy businesses and the impact of several selldowns all of which were baked into our guidance. At Warrior Run, we recognized revenues from the accelerated monetization of the PPA beginning last year, and ending in the second quarter of this year.

Our Legacy Southland assets benefited from Energy margins earned in the prior year, which are no longer an opportunity in 2024 under the new extension monetization structure. In addition to these known drivers, we experienced lower margins at our new Southland combined cycle assets in the U.S. due to much milder weather, as well as extended outages at our TEG and TEP thermal plants in Mexico. Finally, higher EBITDA at our New Energy Technologies SBU reflects continued high growth and margin increases at Fluence.

Now turning to our expectations on Slide 17. We are reaffirming our 2024 adjusted EBITDA with tax attributes guidance of $3.6 billion to $4 billion and adjusted EPS guidance of $1.87 to $1.97, and continue to expect to be in the top half of both ranges, driven in part by the success we've had securing higher tax value on our new projects.

Our renewables team expects to capture over $200 million in tax value upside this year, which reduces our growth capital needs. EBITDA from renewables will be favorable in the fourth quarter from revenues earned on our new PPAs, although we expect lower tax attributes in the fourth quarter as a result of the more balanced timing of renewable commissionings throughout the year. We also expect further growth in our U.S. Utilities in Q4 as we continue to realize returns from our investment program. This will be offset by the negative impact from the prior year monetization of the Warrior Run PPAs as well as incremental impact from asset sales including AES Brazil.

Drivers of adjusted EPS will be similar along with higher interest expense from growth capital, but benefiting from a lower adjusted tax rate. As a result of our efforts to spread renewables construction more evenly throughout the year, we've achieved more than 80% of our adjusted EPS guidance year-to-date, providing greater certainty around our 2024 financial objectives.

Turning to Slide 18. We are also reaffirming our adjusted EBITDA guidance range of $2.6 billion to $2.9 billion. While I'm pleased with our execution this year on our growth objectives, several large drivers have impacted results primarily at our legacy businesses, and we now expect to end the year toward the lower end of our guidance range. Milder weather compressed spark spreads in California resulting in lower margins at our Southland combined cycle gas plants. The PPA for these assets contains an option that allows us to choose to sell the energy to the market in a given year. We previously chose to execute this option for 2024 and were therefore impacted by declining spark spreads that occurred later in the year.

In Mexico, the unplanned outages which have now been resolved further impacted our results in the second and third quarter.

In Colombia, the combination of the Q2 flood related outage at Chivor and year-long record drought have negatively impacted us versus our guidance.

Finally, inverter failures at several of our solar sites impacted availability versus our plan. These inverters were under warranty and are being remediated by the manufacturers. Despite the confluence of these one-time negative impacts, growth in U.S. Renewables remains very strong and our U.S. Utilities have outperformed. We expect to continue this momentum and substantially increase EBITDA at both our Renewables and Utilities businesses in 2025.

Now to our 2024 Parent Capital Allocation Plan on Slide 19. Sources reflect approximately $2.7 billion of total discretionary cash, including $1.1 billion of parent free cash flow, $950 million of hybrid debt that we issued in May and $650 million of proceeds from asset sales. Sale proceeds will be slightly lower than expected in 2024 due to timing, but we are well ahead of our $3.5 billion long-term target through 2027. On the right-hand side, you can see our planned use of capital. We will return approximately $500 million to shareholders this year, reflecting the previously announced 4% dividend increase. We also plan to invest $2.2 billion to $2.3 billion in new growth.

In summary, we've continued to execute in the year-to-date and are well positioned for a strong finish to 2024. Our substantial renewables commissionings thus far give us greater line of sight toward achieving our earnings and cash targets and our funding plan is largely complete. With $1.60 of adjusted EPS. year-to-date we have overachieved on our EPS growth with a clear path to landing at least in the upper half of our guidance range. As we look ahead to 2025, we see strong growth in our Renewables and Utilities segments and continued execution of our decarbonization strategy in Energy Infrastructure. I look forward to providing additional detail around 2025 and beyond on our fourth quarter call.

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

Andres Gluski
President and Chief Executive Officer at AES

Thank you, Steve. Before opening up the call for Q&A, I would like to summarize the highlights from today's call. We continue to execute well on our strategic priorities, including robust growth at our renewables and U.S. Utilities businesses. With 9.1 gigawatts of new PPA signed were awarded in 2023 and year-to-date. 2024, we are well on our way towards achieving our goal of 14 gigawatts to 17 gigawatts in 2023 through 2025.

Regarding our Construction program, we have added 2.8 gigawatts of new projects to our operating portfolio so far this year, and we're seeing the direct financial benefits in our adjusted EPS and adjusted EBITDA with tax attributes results. At our U.S. Utilities, we have embarked on the most ambitious investment program in their history while signing agreements for 2.1 gigawatts of data center load growth and we expect more in the coming months. We're also executing well on our Asset Sale and Transformation program and we feel good about the remainder of 2024 and our long-term outlook, despite specific one-time weather-related events this year.

Finally, I can confidently say that I believe no one is better positioned with large technology customers than AES. Energy market fundamentals and the strong demand we are seeing from our corporate customers give us great confidence in the resilience of our business plan, regardless of the outcomes of the upcoming U.S. Elections.

Operator, please open up the line for questions.

Operator

Absolutely. [Operator Instructions] Our first question will go to the line of Nick Campanella with Barclays. Your line is now open, Nick.

Nick Campanella
Analyst at Barclays

Hey, good morning. Thanks for taking my questions.

Andres Gluski
President and Chief Executive Officer at AES

Good morning, Nick.

Nick Campanella
Analyst at Barclays

I wanted to ask -- yeah, good morning. So I wanted to just ask the comments about supply chain, you seem well positioned through 2026 with panels, etc., but you continue to construct 3.5 gigs for this year. You kind of outlined this previous target at the end, let's say of 14 gigs into 2025. So while we're getting closer up to '25 now, I just kind of want to check in and see how you feel progressing towards that target because there will be, it seems like there'll be a pretty good step up into '25 here and is that still attainable? Thank you.

Andres Gluski
President and Chief Executive Officer at AES

Yeah. Thanks for the question, Nick. I mean, we feel very strong about our Supply Chain Management and Construction program. We are the only large renewables developer, which really hasn't had to abandon any large PPAs over the last three, four years. So what we've said, we have all the equipment we need this year. We have 84% of what we need for next year already in country. In the next month or so, we should have 100%. So we feel very good about supply chain.

And we tend to concentrate on the big items like wind turbines, batteries, solar panels. But you also have inverters and you have transformers which are long lead time and we feel very solid there. In addition, we've really had no problems with the workforce either because we have strategic relationships with EPC contractors, so that they can move the crews from one project to the next.

So in answering your question, we feel very good about our Construction program. And as you know, in 2023 we geared up 100%. So now we've been able to really smooth out our commissioning throughout the year and we expect that in 2025 and 2026.

Nick Campanella
Analyst at Barclays

All right. Thanks. And when I think about '25 again, obviously you had on an ex [Phonetic] tax attribute basis some one-timers. That's kind of putting you a little lower here. And I --and I sense the notable confidence on the growth into 2025. Can you just kind of quantify for us how much has really just returned to normal versus new EBITDA from Renewables contributions?

And then, when you consider things like Brazil blowing off, do you still expect that Renewables segment to grow year-over-year? Thank you.

Andres Gluski
President and Chief Executive Officer at AES

Yeah, look. That's a very good question. We aren't giving guidance for 2025 at this time. But you're right, what you really have is mean reversal -- reversion. You're really coming back to a more normal year; 2024 is a year that we've never had before, the sort of combination of extreme floods and extreme droughts in some of our service territories, largely driven by El Nino coming into La Nina, we expect a return to normal. But you also correctly point out that we're maintaining all of our guidance and our long-term growth rates without Brazil. And so, that means that the other sectors are picking up.

So to the extent that I can say, we expect next year to be a more normal year and that we've absorbed the sale of Brazil by increasing the growth rates especially in U.S. Renewables and U.S. Utilities.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah, and. Hey Nick, it's Steve. I would just add, we -- we've added or -- and will add a total of 3 gigawatts of new renewables this year across the portfolio. So there's in addition to some more normalization with like La Nina coming in South America, the install base is going to be significantly higher. So that's part of it. Renewables segment will grow significantly, and we also have outside the Renewables we have the Utilities growth. So with a full year of new rates in Indiana and continued rate based growth in Ohio.

Nick Campanella
Analyst at Barclays

That makes sense. Thanks for answering those questions and we'll see you soon. Thank you.

Andres Gluski
President and Chief Executive Officer at AES

Thanks, Nick.

Operator

Thank you, Nick. Our next question goes to the line of David Arcaro with Morgan Stanley. David, your line is now open.

David Arcaro
Analyst at Morgan Stanley

Hey. Thanks so much. Good morning.

Andres Gluski
President and Chief Executive Officer at AES

Good morning. David,

David Arcaro
Analyst at Morgan Stanley

I was wondering if you could elaborate on the outperformance you had in tax credits that you received. You referenced the $200 million higher-than-expected tax credits. Wondering what that stemmed from? And is there an opportunity for any more outperformance from here?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yes. Hey Dave, it's Steve. Definitely, been a very good year. Look this is, I would say, a very core competency for us and a key differentiator. We have I think the strongest tax team and renewables finance team there is. We're always looking to ensure that we maximize the tax value opportunity because what does that do? It reduces our capital requirements and also increases returns.

So it's -- we've had a good year. We've done a number of things to ensure we qualify for bonuses, including places where there's a brownfield adder that allows us to qualify for the Energy community. These are sites that were formerly, say, agricultural sites that had different materials, chemicals applied that allowed them to qualify. So we've done a lot of research and digging to justify adders where we can.

So the other thing we're doing is all tax credits are not created equal. So because of our track record, people tend to come to us, and expect -- and we get less of a discount and we get people very focused on working with us. So I would say, monetizing through transfers, we've had a lot of success and transfers do tend to get recognized a little earlier than through the tax equity partnerships, but the credit value. So that's part of it as well.

So I do see this as potential upside in the future. But of course, there's other things going on in the portfolio. We have to take a holistic look, and when we give guidance in '25, we'll update you guys on the entire portfolio.

David Arcaro
Analyst at Morgan Stanley

Okay. Got it. That's helpful. Thanks. Yeah, good to see just chipping away at the financing need with that. And then wondering if you could just touch on what renewable returns has been on the incremental projects that you've been signing, I guess, since raising your return expectations earlier in the year? How those return levels have been trending? Has there been continued momentum upwards?

Andres Gluski
President and Chief Executive Officer at AES

Well, we're seeing good returns from our projects, and we continue to see a market that values what we bring to our customers. So the answer to that is, yes, that we continue to see -- our newer projects have been within that range towards the upper end of that range. So we feel very confident in the numbers that we've provided.

David Arcaro
Analyst at Morgan Stanley

Okay. Got it. Appreciate it. Thanks so much.

Andres Gluski
President and Chief Executive Officer at AES

Thanks, Dave.

Operator

Thank you, David. Our next question goes to the line of Durgesh Chopra with Evercore ISI. Durgesh, your line is now open.

Durgesh Chopra
Analyst at Evercore ISI

Hey, thank you. Good morning, team. Thanks for taking my questions.

Andres Gluski
President and Chief Executive Officer at AES

Good morning.

Durgesh Chopra
Analyst at Evercore ISI

Just wanted to start off with -- hey, good morning, Andres. Just want to start off with the actual portfolio that is going to come online, not from the guidance. But in terms of the 2.8 gigawatts that's coming online this year, should we expect an uptick in that number as we go into 2025, the actual construction and getting projects online?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yes. So -- this is Steve. So we'll give that guidance in February. So there's a number of moving pieces here. I would say, the largest inflection will be beyond 2025, Durgesh. And so, I expect Renewables will be up somewhat. But I think based on what our COD schedules look like, the largest increases will come in '26 and '27.

Durgesh Chopra
Analyst at Evercore ISI

Got it. Okay. That's very helpful. That's just project timing. Okay. I have two other questions. First, on the hydrogen project with APD, there may have been some changes there, with the activist involvement with the company. Just can you update us what your plan is there? How much capital might you have invested to-date? And what do we do with those gigawatts coming online? Just anything you can share there, that would be helpful.

Andres Gluski
President and Chief Executive Officer at AES

Sure. No, I appreciate the question. Look, we have developed a very attractive 1.5 gigawatts of renewables which, as you know, there is a market that there's a shortage of large advanced renewable projects. So we have to see when 45V comes out and other things, how much of this goes to hydrogen. But in any case, we have a very attractive asset there.

Regarding outside of the states, I do see those projects likely going forward with Asian buyers stepping up and as partners in the early part of it. So we don't have a lot of money invested other than development money that we've done. However, I think that this is probably some of the best in pipeline development that we've done, because it's a particularly attractive asset.

Durgesh Chopra
Analyst at Evercore ISI

Got it, Andres. That's very helpful. And this is part of the backlog that you show, right? The -- I believe, that number is 12 now. Is that the 1.5 gig that's included in the 12?

Andres Gluski
President and Chief Executive Officer at AES

No, no. We only include in our backlog, that's which is signed or awarded at the very final stage. We've never taken any project out of our backlog really. Nothing but -- so we wouldn't include it until we have a signed PPA.

Durgesh Chopra
Analyst at Evercore ISI

Understood. Okay. Very clear. And then one final question, sorry for dragging for this long. Steve, just on Moody's basis, earlier in the year, we've had conversations on the methodology -- potentially a methodology change at Moody's. Maybe just update us on where you stand on Moody's basis? And the latest conversations you've had with the credit rating agency?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Sure, Durgesh. So the dialogue continues. I do expect that they will publish an update before year-end. I characterize the conversations as continuing to be very constructive. They do see that our credit quality has indeed improved since they gave us the initial upgrade a few years back. What's the reality here is that we've been really transforming the portfolio, exiting markets, exiting carbon-intensive assets and rotating capital into long duration, U.S. dollar, high creditworthy counter-parties with no fuel exposure. So we have a very, very attractive profile.

I think what they're working through, since Moody's looks at AES on a consolidated basis, as opposed to S&P and Fitch, which is at their parent recourse level only, they're looking at the project finance structures and how they take account of those. Project finance is amortizing when we put debt on our projects, it amortizes over the life of the contract, so there's not an exposed levered tail there. So it's a low-risk structure. It's actually investment-grade-rated debt at the project level. So it's an attractive structure, it just hasn't fit within the -- well within the way they define their thresholds.

So they're looking at that. They're also looking at how -- given our high growth, we have -- we carry a fairly material amount of construction debt, and that's not yet yielding. And so, they're looking at that in ways to recognize that there is cash flow pending, that's very certain. And of course, this is non-recourse debt as well that they're looking for adjustments along those lines as well. So I feel good about where we are. I feel really good about the conversations. And I do expect they'll be sharing their view here before the end of the year.

Andres Gluski
President and Chief Executive Officer at AES

Yeah. I would add that if you think of the sort of the big picture, overall, we continue to improve our credit profile. So we exited Brazil, which was a substantial amount of our FX, certainly a big part of our foreign interest rate exposure and weather-related exposures we learned to assume. So as we shut down coal plants or sell coal plants, you're changing two-year PPAs with fuel risks for really long-term 20-year PPAs with no fuel risk with investment-grade off-takers in the U.S. So I feel very confident that any credit rating agency looking at overall company, where we are today versus where they gave us the ratings a year or two ago, is a substantially better company.

Durgesh Chopra
Analyst at Evercore ISI

Got it. Really appreciate that color, guys. Thank you.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Thank you, Durgesh.

Operator

Thank you, Durgesh. Our next question goes to the line of Julien Dumoulin-Smith with Jefferies. Julien, your line is now open.

Julien Dumoulin-Smith
Analyst at Jefferies Financial Group

Hey, good morning, team. Thank you guys very much for the time. I appreciate it. Can you guys hear me?

Andres Gluski
President and Chief Executive Officer at AES

Hi, Julien. Very well.

Julien Dumoulin-Smith
Analyst at Jefferies Financial Group

Hey. Thank you, Andres. Excellent. Well, actually, since we're talking on the credit here, just to kick-off on the nuance there, just where do you see your metrics getting here? And then more specifically, do you anticipate needing to upsize the asset sales or accelerate the asset sale targets to kind of true up the balance sheet for any reason here? I get that Moody's methodology is in flux but you know, as you think about the asset sale piece of this, any observations to make on that front since we were focused on this a second ago?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah, yeah. No, certainly. So I mean the credit metrics remain strong at the, at the parent level and actually things that we've been doing are quite credit-accretive. So some of the largest things we've done here now just closing on Brazil. Brazil, while it was generating a significant amount of EBITDA in the Renewables segment was actually producing very, very little cash. The business is highly levered and so the sale is actually very credit-accretive. Similarly, with the Ohio sell down, when that closes next year, we're going to be paying down a tranche of debt that's due at the holdco [Phonetic] over $400 million. So we see that as also credit-accretive and that we do in fact expect as a result of the transaction, Ohio will be able to start paying dividends at least a year sooner than it otherwise would have.

So we really feel good about the trajectory. I would expect at the end of this year the parent level metrics will be in between 22% and 23%, which are well above the threshold of 20% that we have. And so yeah, no, Julien, I think the asset sale program, we've had a lot of success targeted $3.5 billion, the universe is in fact bigger. So you know, we'll see what makes sense going into the future. But I see us having a lot of runway here and that the credit metric has actually in fact been supported by the asset sale program.

Andres Gluski
President and Chief Executive Officer at AES

I'd like to sort of also say that we've always exceeded our asset sale program targets and I would also say, quite frankly, I think we have a very good record of selling assets at good value and what we've always been doing is maximizing the value for our shareholders and not just doing asset sales to hit a certain, let's say megawatt or generation composition target.

Julien Dumoulin-Smith
Analyst at Jefferies Financial Group

No. Fair enough, guys. Thank you for that. Let me pivot real quickly to PALCO here, right? We saw your peers to the north with NIPSCO. NiSource gave a very robust update. You guys are talking about 3 gigawatts of procurement activity. I know you guys already had a team's trajectory articulated at the Analyst Day last year, but I suspect that number is potentially meaningfully higher or potentially extends itself for meaningfully greater duration given, a, the 3 gigawatts; and b, the baseline of the rate base at PALCO here. If you can speak a little bit to what your expectations on what total portion that you can own? And how it impacts your financials here?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Okay. So look, I mean the rate case this year was resolved early, settled early and approved early. So we had a significant increase over $70 million annual increase. And so, that is driving a significant year-over-year. We'll have a full year of the new rates next year. And then as Andres described in his comments, we're launching RFP for a lot of new generation in the utility. It'll go into the integrated resource plan to be filed next year. And we're talking I think we said in the last call, 3 gigawatts total and that's increasing of data center load across the utilities in addition to what we've already signed.

So there's a -- I would say what we guided to is double-digit rate base growth across the utilities. It's going to be much higher than that. So we'll give more guidance in '25 Julien. But given what we're seeing, the utility investment is going to increase, the returns are going to increase, the rate base will increase. And that's also part of why we also sold down Ohio because although we're selling down 30% in fact our net investment in the utilities is increasing. So this sell down is allowing us to improve credit, get to earlier distributions from the utility. It will improve the credit quality in Ohio and it helps fund a much bigger investment program than even we anticipated a year ago. And our net investment even though we're at 70% ownership in both utilities is going to be even higher. So that's how I would look at it.

And of course in Indiana it's an integrated utility. So not only do we have the load on the network, but we also have the generation piece to supply as well. So we see a lot of generation growth.

Julien Dumoulin-Smith
Analyst at Jefferies Financial Group

Right. So even the medium-term rate base growth CAGR could potentially be heading higher is what I'm hearing.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yes.

Julien Dumoulin-Smith
Analyst at Jefferies Financial Group

But actually you made allusion to one thing here, if I can just clarify. You'll be providing an updated outlook here on the fourth quarter. And I know that there's a lot of different things that are moving around in the plan. So as you guys have done historically, expect that kind of integrated update here on the 4Q roll forward from the Analyst Day?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yes, absolutely. Yes, yes we will update you on our long term for -- in February.

Julien Dumoulin-Smith
Analyst at Jefferies Financial Group

Wonderful. Excellent guys. Thank you for the time. Appreciate it.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Thanks.

Andres Gluski
President and Chief Executive Officer at AES

Thanks, Julien.

Operator

Thank you, Julien. Our next question goes to the line of Angie Storozynski with Seaport. Angie, your line is open.

Angie Storozynski
Analyst at Seaport Global Securities

Thank you for taking my question. So I just wanted to focus the renewable power EBITDA, so the one without credits, so tax -- so cash EBITDA I would call it. So I'm looking at these results. I mean, you will be basically flat since 2022 and now it looks like 2025. It's going to be also in like a 620, 630 range. So I mean I understand that there are one-off items that weighs on this year's EBITDA which is going to be even lower than the number I just mentioned.

So I mean there has to be some growth in that number. And I hear you Steve, that there will be some in '26-'27. But you're making very substantial investments and we're not seeing growth in that cash renewable EBITDA. Now the reason I'm actually asking about it is because if you look at the parent free cash flow, parent distributions, I mean the vast majority of them come from Energy Infrastructure, but that's a segment that is shrinking. So I will have to rely on cash distributions from Renewables very soon in order to hit the free cash flow expectations. So I'm just hoping that we can reconcile this? Thanks.

Andres Gluski
President and Chief Executive Officer at AES

Yeah. First, we're not saying that the Renewables EBITDA will grow substantially in 2025. And what you have is the fact that we're selling Brazil, that's 5 gigawatts, so what you're having a little bit of apples and oranges here. So we're seeing the operating results from our renewable builds. Absolutely, and where we think it should be. So it is -- there's a number of things going on here, Angie, that we can clarify, but I don't think that -- it's so you can say that we're not getting the results from the investments that we're making. It's just moving.

And then, second on the Energy Infrastructure. Yes. I mean we have a balanced portfolio. So we tend to have bad events in one spot offset by good events in the other. And this was a particular quarter where really a lot of things came together that normally don't come together. So normally if you have dry conditions, you have more wind. This time we had both. But what we also had was sort of all the years rain came in a very short period of time and damaged a 1 gigawatt hydro. So I think we really did have sort of one-time events. And I think you're drawing sort of longer-term conclusions from that.

I'll pass it to Steve.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yes. I would just say, Angie, the only reason we're down year-over-year is because of the record drought. The only material reason is because of the record drought, primarily Colombia and suit with [Phonetic] -- to a degree, Brazil as well. So those conditions are known to be changing. Moving to La Nina, obviously Brazil is out of the portfolio. So Colombia, we do expect returning to much more normal conditions next year.

And don't forget, we also had an extremely high third quarter last year in Colombia, unusually high. So it makes the year-over-year comparison look more extreme. But what's the reality is the U.S. growth is significant and so this year and even higher into next year more than overcoming the loss of Brazil from the Renewables segment. So the Renewables growth will be very material next year.

So we get that we're not on track at this point with the guidance -- or if you were to straight line the guidance. But we're picking up substantially into next year and are reaffirming through 2027 that 19% to 21% growth rate. And that's largely driven by all of this U.S. growth which is taking off.

As I said, we have added a total of 3 gigawatts of renewables across the year since Q3 of last year. We also will ultimately move Chile into the renewable segment where it belongs as we execute on our coal exit. So the cash from this Renewables segment will grow accordingly as well and the EBITDA will be on track with that growth rate.

Angie Storozynski
Analyst at Seaport Global Securities

Okay. So let me just push back the latter. Meaning the Chile was supposed to be additive to the growth trajectory that you were showing at the Analyst Day. And now that we see the results like year-over-year changes versus '23 results, we clearly point out that the second half of '23 had some big one-times benefits which you could not have counted on during your '23 Analyst Day. And yet you came below your expectations, even the low end on Renewables EBITDA for '23.

So again, I mean I hear you that there is a growth in the U.S. portfolio, which will benefit the EBITDA. But again, I mean you had some big positives in second half of '23, which you could not have expected when you were giving guidance on '23 on Renewables, and yet you came below expectations on Renewables in '23 now. So why should I have conviction that the same is not going to be true in future years?

Andres Gluski
President and Chief Executive Officer at AES

Well, we feel confident we're going to hit the long range growth that we talked about. I mean, it has to do with reaching critical mass on some of these things. And certainly, we can have one-time weather events. But I think the important thing is, what returns are you actually seeing from the projects you're bringing online? What is the value of the PPAs you are assigning? And as we move forward, it'll be easier to make apples and apples comparisons as we have the same portfolio year-to-year.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. The other thing I would say Angie is referring to last year, we did end up having more of our commissionings very late in the year. In fact, most in December. So a little later than expected this year. We have substantially changed that trend. And so, the renewable commissionings were much more evenly spread throughout the year. That's why we've already recognized $900 million the tax attributes already. So I think that's another reason as that program has become more mature and spread throughout the year, that we're seeing a better result and that '23 was lower.

Angie Storozynski
Analyst at Seaport Global Securities

And just one other question, so I'm looking at your guidance here on the free cash flow for the parents for the year. It seems like you were expecting about $1.5 billion to $1.6 billion in distributions from subsidiary and you are at about $800 million, $880 million [Phonetic] -- I forget. So is this apples-to- apples, meaning that I am basically 50% of distributions, meaning that the fourth quarter will be this big catch up on distributions?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah, but that's, that's a normal trend. So that's, we've been having that type of seasonality for a long time. In, I would say in most cases, the cash is already sitting there. It's based on the windows in time relative to our debt service that we're also allowed to pay dividends. So we have clear visibility into the remaining dividend. It's just a matter of timing at this point as to when they get released on the periodic twice a year -- once a year, in some cases. So I'm very, very confident in the distribution level.

Angie Storozynski
Analyst at Seaport Global Securities

Okay. Thank you.

Andres Gluski
President and Chief Executive Officer at AES

Thank you, Angie.

Operator

Thank you, Angie. Our next question goes to the line of Michael Sullivan with Wolfe Research. Michael, your line is now open.

Michael Sullivan
Analyst at Wolfe Research

Hey. Good morning.

Andres Gluski
President and Chief Executive Officer at AES

Good morning, Michael.

Michael Sullivan
Analyst at Wolfe Research

Just -- yeah, I know that kind of got hashed through a bunch there on the last line of questions or commentary, I guess. Just to make it simple, like you keep talking about significant growth in '25. We obviously don't know what that means exactly, but you have this 5% to 7% EBITDA CAGR off of '23. When do you get inside of that within your plan?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. So again, we'll give an update in February. The early years, as we have been executing on the transformation and things like the Brazil exit, we'll have the Vietnam exit. Next year, we have the Warrior Run shut down and so that goes away. So that weighs on the early years. But the trajectory, as I said, there's more of an inflection point beyond next year overall, getting through the 2027 period. So what's happening is that the Renewables will grow significantly next year, the Utilities will grow significantly, catching back up to closer to that level of return or growth that we've been expecting.

But the Energy Infrastructure shrinking has been a little more front-end loaded. And then the Brazil sale obviously is a headwind in Renewables in the near-term, but we're more -- significantly more than offsetting it next year so that, that's how I would characterize it. We feel good about the growth rate overall, but it's influenced by how we execute on the transformation and as well as the growth. And the transformation shows up in the shrinking of the Energy Infrastructure. So that's how I would characterize it. And so, we'll give more in February.

But again, I feel really good about the Renewables and the Utilities, and then the Energy Infrastructure, we'll look at the choices we have around how fast to continue the transformation and discuss that interpretation.

Michael Sullivan
Analyst at Wolfe Research

Okay. That's very helpful, Steve. And then I had two ones just on your resource additions. The first, just in terms of looking at new gas at the utility, will we see that in the RFP? Or is that not until the IRP? And do you have a good handle on how much you could look to be doing in gas?

And then on the non-utility side, you all have traditionally been pretty solar-heavy, though. I think, you mentioned Wind a few times just in terms of supply chain. But when I look at you and your peers, it doesn't seem like anyone's adding too much wind these days. So just curious what you're seeing on that front? Thank you.

Andres Gluski
President and Chief Executive Officer at AES

Yeah. On your first question, that would be really waiting for the IRP. So we certainly are looking at all options. So it will be likely a mix of Renewables and some Thermal, of course, batteries as well.

Now, regarding the second question and Wind. Well, we had been building quite a lot of Wind in Brazil, but a lot of the projects that we have in our pipeline have a considerable amount of Wind. So if you think of the -- what's been known as sort of the green hydrogen project in Texas, 1.5 giga, that's primarily Wind. So we'll have a more balance -- more of a balance, let's say in the U.S. between Wind and Solar in future years.

Michael Sullivan
Analyst at Wolfe Research

Okay, great. Thank you very much.

Andres Gluski
President and Chief Executive Officer at AES

All right, thank you.

Operator

Thank you, Michael. Our next question goes to the line of Ryan Levine with Citi. Ryan, your line is now open.

Ryan Levine
Analyst at Smith Barney Citigroup

Hi. Good morning, and thanks for taking my questions.

Andres Gluski
President and Chief Executive Officer at AES

Hi, Ryan.

Ryan Levine
Analyst at Smith Barney Citigroup

What is the time line for the $92 million -- hi, what is the time line for the $92 million Colombia impact to return to historic norms? And what is the risk to achieving this ramp at this stage in the year?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. So conditions are already improving. The fourth quarter, in fact, I expect will be higher in Colombia than last year, Ryan. And all forecasts point to La Nina being highly probable over the next couple of months and lasting well into next year. So it's pretty much turning around now.

Again, I expect the fourth quarter to be higher; and then throughout next year, I expect Colombia to be higher than this year overall. So Colombia has been -- and it was $92 million in the quarter alone. It's $130 million down year-to-date over prior year. So that is the single largest driver here. And it shows up in the Renewables segment. But the U.S. growth is doing hard work to offset that, and significantly overcomes it in the fourth quarter here and into the next year.

Andres Gluski
President and Chief Executive Officer at AES

Yeah. I would add we had a two-month outage.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah.

Andres Gluski
President and Chief Executive Officer at AES

So the truth is that outage was at the worst possible time.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah.

Andres Gluski
President and Chief Executive Officer at AES

Because if -- we hadn't had the outage because we had a rain which was 25% higher than anything prior -- previously recorded, we could have used that water to very good results subsequently in the drought. So being out for two months is -- but that that's part of the recovery.

Ryan Levine
Analyst at Smith Barney Citigroup

Okay. So then by 2026, you should be back to a more normal performance, if I'm hearing it correctly?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

No, '25, Ryan. So the conditions are already improving. We expect this quarter, fourth quarter to be higher than last year. And next year, in 2025, we expect normal to better hydrology from the La Nina.

Ryan Levine
Analyst at Smith Barney Citigroup

Okay. And then maybe switching gears, you referenced in your prepared comments impact to California spark spreads. Are you looking to change your hedging strategy there? Or any color you could share around the outlook going forward for the Southland asset? [Phonetic]

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. So just as a reminder, the Southland structure has a 20-year contract for capacity and energy. So we have a very known monetization stream. It is at our election annually a year in advance to decide whether we want to market the energy ourselves and hedge it or put it to the off-taker under the PPA. So for '24, we did previously decide at the end of '22 to call the energy to us and to market it. Unfortunately, spark spreads changed significantly during the time that we made that decision and we're executing on the hedge program. And so, we had downside this year. But still relative to the put value, still a good decision.

And so we have made that decision also for 2025 that we will market the Energy. We are over 95% hedged already at values well in excess of the put value. So it -- the market has changed, the market has compressed a lot due to better hydro conditions. What we've had is milder weather, there's been a lot more battery penetration in California. So the market value is not as high over the long term as it had been back in '22 when we first made those -- that decision. But nonetheless, we see overall the strategy is -- has been increasing or has added value over the put. It's just not as much as we expected when we gave the guidance, unfortunately.

Ryan Levine
Analyst at Smith Barney Citigroup

So then as a follow up, given that framework in your decisions for next year, is there any color around direction and travel for that asset's performance for '25 given what you've already decided?

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Yeah. I mean, I would say at this point, since we've already decided on '25, it is in excess of the put value. And we're already nearly 100% hedged, 95% hedged, as I said. So the value is lower than it was in the original guidance, but still above had we taken a No Risk strategy. And then for 2026, we have not yet made that decision and we'll have to -- here later in the fourth quarter and we'll update you all on that later. And that will be based just upon what we see in the hedge market at the time relative to the put value.

Ryan Levine
Analyst at Smith Barney Citigroup

Thanks for taking my questions.

Stephen Coughlin
Executive Vice President and Chief Financial Officer at AES

Thanks.

Operator

Thank you, Ryan. Our next question goes to the line of Richard Sunderland with JPMorgan. Richard, your line is now open.

Rich Sunderland
Analyst at JPMorgan Chase & Co.

Hey. Thanks for the time. I know you've covered a lot of ground. Just one quick cleanup. You've talked at various points about the asset sale program and how you've thought about timing that and effecting [Phonetic] that. It sounds like more to come on year-end around that, but just curious how you're thinking about monetizing the new energy technologies investments? And if that's something that should fall within the planned period. Any thoughts there? Thank you.

Andres Gluski
President and Chief Executive Officer at AES

What do you think about the new energy technologies? Look, what we've talked about is through 2027, and we approach these strategically. So what we've always said is that we will monetize these assets when we feel it's appropriate and when -- we aren't sort of long term venture capitalist investors. So we'll monetize them at the right time when we don't think we're adding a lot of value.

And we know, we've already done some monetization and it took -- taken some money off the table. So it's been a very successful program and I think there's a lot more value there than is being recognized by most of the -- some of the parts. But what I would say is that. So long as we add a lot of value, we'll -- we stay in. However, we'll continue to opportunistically monetize and certainly we're well ahead of our plan for 2027. But as Steve mentioned, the universe is greater, so it would include some things from new energy technologies.

Rich Sunderland
Analyst at JPMorgan Chase & Co.

Great. Thank you.

Andres Gluski
President and Chief Executive Officer at AES

Thank you.

Operator

Thank you, Richard. There are no additional questions waiting at this time. So I'll turn the call back over to Susan Harcourt for closing remarks.

Susan Pasley Keppelman Harcourt
Vice President of Investor Relations at AES

We thank everybody for joining us on today's call. As always, the IR team will be available to answer any follow-up questions you may have. We look forward to seeing many of you at the EEI Financial Conference later this month. Thank you, and have a nice day.

Operator

[Operator Closing Remarks]

Corporate Executives

  • Susan Pasley Keppelman Harcourt
    Vice President of Investor Relations
  • Andres Gluski
    President and Chief Executive Officer
  • Stephen Coughlin
    Executive Vice President and Chief Financial Officer

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