The AES Corporation
Q1 2020 Earnings Call Transcript

Published: 7 May 2020

[Operator:]

Good day, and welcome to the AES Corporation First Quarter 2020 Financial Review Conference Call. . I would now like to turn the conference over to Ahmed Pasha, Vice President of Investor Relations. Please go ahead.

[Ahmed Pasha:]

Thank you, and good morning, everyone, and welcome to our first quarter 2020 financial review call. Our press release, presentation and financial information are available on our website at aes.com. Today, we will be making forward-looking statements during the call. 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.

[Andrés Gluski:]

Good morning, everyone, and thank you for joining our first quarter financial review call. Today, I will discuss the current state of our business and our strategic goals going forward. We are well positioned to withstand the effects of the COVID-19 pandemic and are seeing the benefits of our multiyear effort to enhance the resilience of our business. The vast majority of our earnings come from long-term contracted generation, which provides significant protection from the downturn in electricity demand and prices. Furthermore, our liquidity position is strong. We have no major near-term debt amortizations, and we continue to improve our investment-grade metrics. Our construction projects are progressing on schedule without any supply chain disruptions, and we are on track to grow our renewables backlog and achieve our environmental goals. The net effect of this is that despite seeing double-digit reductions in demand in some of our markets, we are lowering our earnings guidance for the year by only 5% to a range of $1.32 to $1.42. We are reaffirming our expectations for 2020 parent free cash flow and our longer-term growth projections for both adjusted EPS and current free cash flow. Gustavo will provide an overview of our first quarter financial results, our liquidity and our guidance in more detail. Turning to Slide 4. Today, I will focus my discussion on the 3 core themes of resilience, sustainable growth and leadership in innovation. Beginning on Slide 5 with the resilience. These are certainly unprecedented times with a global pandemic and a sharp economic downturn, resulting from restrictions on travel, mobility and work. Fortunately, for AES, as you may recall from our last quarterly call, we were closely monitoring the spread of COVID-19 and taking steps to reduce its impact on our business. We began to implement our plans for all nonessential personnel to work remotely by the first week of March, increased our stocks of fuel and PPE at our plants and work sites and built up cash liquidity at all levels of our portfolio. We also ensured that national and local governments recognize the critical importance of the service we provide and classified our operations as essential, facilitating the movement of personnel to our generation plants, utilities and construction sites.

[Gustavo Pimenta:]

Thank you, Andres. Today, I will cover our financial results, credit profile and capital allocation. I will conclude by addressing the impact of COVID-19 on our guidance for this year and expectations through 2022. In the first quarter, we made good progress on our key financial metrics. As shown on Slide 14, adjusted EPS was $0.29 versus $0.28 in Q1 2019, in line with our expectations. We benefited from higher contributions from the MCAC SBU, largely due to improved availability and hydrology in Panama as well as lower effective tax rate. These positive drivers were partially offset by the reversion to prior rates at DPL in Ohio and mild weather at our regulated utilities in the U.S.

[Andrés Gluski:]

Thank you, Gustavo. Before we take your questions, let me summarize today's call. The fundamentals of our business remain strong, and our portfolio of largely long-term contracted generation is resilient in the current pandemic and related economic downturn. Therefore, we remain on track to achieve our strategic goals of greening our portfolio, leading in new technologies and attaining a second investment-grade rating. We have already taken steps this year to strengthen our liquidity and further reduce costs to mitigate the impact on earnings from decreases in our sales. Although we expect a 5% reduction in this year's earnings, we are reaffirming our 2020 parent free cash flow and longer-term growth rates in earnings, cash and dividends. We expect to generate $3.4 billion of discretionary cash through 2022, which we will invest to continue to deliver double-digit returns to our shareholders. And finally, I would like to thank the people of AES, who through their discipline and hard work are ensuring safe, reliable and affordable energy in all of the markets we serve. Operator, I now would like to open the line for questions.

[Operator:]

. And our first question will come from Ryan Greenwald with Bank of America.

[Unidentified Analyst:]

So maybe if we can just start with asset sales. It looks like Jordan through late last month. So if you kind of just talk about your commitment there and you're confidence to get out of the sales on those in here?

[Andrés Gluski:]

Yes. Look, our asset sales continue to progress. In the specific case of Jordan, I don't think is as binary as you described. So we remain confident of closing a number of sales this year, and there's continued interest in those assets, and we're making progress. I would add that we're really not depending this year for any asset sales to fund our growth. So we remain confident. We think that we'll close a number of sales. There's interest. And of course, we don't talk about them until they're actually completed.

[Unidentified Analyst:]

Got it. Fair enough. And then I appreciate all the commentary around demand trends and sensitivities. But could you just allude a little more to any latitude you might have under a more severe protracted scenario? I know you kind of alluded to $50 million in additional savings already?

[Andrés Gluski:]

Yes. So first, I want to be clear that we're trying to be as transparent as possible. So as Gustavo described, what we're seeing is, quite frankly, continued reduction in demand, lower demand for the remainder of the year. So most severe in the second quarter. And then you have a single-digit -- high single-digit decline in the third quarter and lower single-digit decline in the fourth, and only recovering in the first quarter of next year. So that's our assumption. So that really would is consistent with a U-shaped recovery or even a double U-shaped recovery. If things are more severe, we are in a resilient case. And of course, we have more latitude on different levers that we can pull. I would add that because what we did very early on was increase our liquidity, we have about $0.02 of having that additional liquidity on hand. But I think that was the right thing to do given that there was a lot of uncertainty. So we have a very good track record of cost controls and reductions. And I think that, again, we will react given to how we see the situation evolving. Now we did mention $0.05 this year, mostly from our digital initiatives. And I think that we have learned how to work remotely. And there are more digital tools that we can implement, and we expect to -- that these savings will continue into next year. So we have some continued additional upside because that's really not in next year's numbers.

[Unidentified Analyst:]

Got it. And then just lastly, the interest capitalization that you guys did at Alto Maipo, is that included in adjusted EPS?

[Andrés Gluski:]

It is. It is included in the adjusted EPS.

[Unidentified Analyst:]

And what was kind of the thinking there?

[Andrés Gluski:]

No, that's just an adjustment based on the history of the project. We've adjusted this year as the team refined the calculation. So it impacted Q1 this year.

[Operator:]

Out next question will come from Charles Fishman of Morningstar.

[Charles Fishman:]

Andres, you mentioned a 10% reduction in demand in April at the U.S. utilities, was that weather normalized?

[Andrés Gluski:]

Yes, that's weather normalized.

[Charles Fishman:]

Okay. And then earlier this week or it might have been late last week, there was an article in The Wall Street Journal about the impact of the pandemic in Brazil. And it was -- looked pretty severe. Are you noticing -- obviously, you got boots on the ground in there. Are you noticing anything? Is there any color you can add? You've got a significant interest in Tiete? You've got other solar projects in Brazil and maybe just expand that to Argentina as well.

[Andrés Gluski:]

Sure. So let's take maybe sort of the Latin American region. So first, the reaction there will be different, perhaps by country, but it's also somewhat different than the developed countries. So there's a number of things. First, in general, they were quite quick lock down. Brazil was an exception to that and Mexico. But in most countries, the lockdown was quite severe and quite early. Second, they will be lifting these restrictions. But in general, the pandemic has been less severe in those countries than it has in the developed world. What we do know about the pandemic is that the, quite frankly, biggest drivers are age. And the second is obesity rates. So when you think of age, a lot of these countries have an average age of 30, which is very different from an average age of almost 50 in some of the developed countries. So the pandemic will have a different effect there. So I'd say the main difference is how much fiscal stimulus can they apply to react to that. So what we're seeing is -- again, it varies by country, but some of the smaller countries have had pretty aggressive fiscal stimulus. And they have gone out and basically assured the liquidity in countries like Panama, for example, have assured the liquidity on hand. And then Gustav also mentioned that we have worked with the -- even though we're not in most cases, not directly affected because it's more at the distribution company level, but we've also been working with multilateral institutions to have windows to a discount accounts receivable. But the vast bulk of our clients are multinationals, investment-grade multinationals in these countries. So taking a specific case of Brazil, I mean, as of yet, we have -- it's in one of those countries in the range that Gustavo talked about, between sort of 5% to 15% of our key countries. In Brazil, it's different very much state to state. Brazil is 1 of the countries where we don't have the long-term contracts. They tend to be shorter-term contracts. So there has been some effect there in Brazil, and it's also the 1 of the ones that we have in local currency. Brazil is obviously 1 that's been affected. What is our feeling about it? I think, again, in general, these countries will open up. The effects of the pandemic will be somewhat different because of the demographics of it. Personally, I think that 1 of the things to watch is commodity prices. Because that will maybe even have a bigger effect than some of the shutdowns, given the large informal sectors that these countries have. You mentioned Argentina. Argentina is doing very well on the shutdown in terms of its few cases, very controlled cases. And I would say that the main thing to watch in Argentina is debt refinancing or debt restructuring, let's say, that they're undergoing now. You will notice that our parent free cash flow is unchanged, but we have a decrease in earnings. One of the -- that's reflecting in part Argentina, where you've had significant devaluations. And you've had some degradation of our tariffs. But we weren't expecting to get any dividends out of it. One of the other businesses affected was the P&L, for example, where we don't expect any dividend. So that's -- I just wanted to explain why our cash remains unchanged and we're seeing a decrease in dividend. So regarding Latin America, in general, I'm pleased by the reaction of a lot of countries. The populations have been very supportive of their governments in that respect. And given the different demographics, it will evolve differently. So I do expect them to start opening up. Depends on the country. But later on this month and certainly by June. And the -- again, the reaction of a younger population will be different.

[Charles Fishman:]

Okay. Andres, that's very helpful. Just 1 final question on DP&L. The $300 million incremental investment over the next couple of years. Is that dependent on the resolution of the earnings test or any other regulatory things you need to put in place before you make that investment announcement?

[Andrés Gluski:]

So the first 150 -- the answer is no for the C test because we feel pretty good about it. Our average ROE filed is below 10% and our recommended threshold is around 16%. So we feel good about that one. But we are discussing an acceleration of our smart grid plan. Remember, we had filed for a smart grid plan 2 years ago, and we are now resuming that conversation. So we're expecting to have the approval to fund the second $150 million, and that's going to come as we get more clarity around this market approval.

[Operator:]

. And our next Richard Rosen with Columbia .

[Unidentified Analyst:]

Yes. How is it that, that expectations for new renewable signings should be thought of and financing thereof? Should there be more issues in getting financing going forward?

[Andrés Gluski:]

Let me see if I understood the question. In terms of how we are proceeding with our renewables as we were before. We are getting project financing. We are seeing perhaps some areas be stronger than other areas. As I said, smaller projects in the states, we see demand particularly strong. At this point, about -- if you look at our renewables about 1 quarter is related to energy storage, and we see demand there very strong. So I guess the question is, we basically see demand for like energy storage projects and renewables, especially for utilities is very strong. We have the green blend and extend angle in Latin America, and that remains strong for large, especially mining offtakers.

[Unidentified Analyst:]

Your goal has been, what, 2 to 3 gigawatts a year. Is that still a reasonable expectation?

[Andrés Gluski:]

Yes, absolutely. And if you look at our run rate for the first trimester, it was 700 megawatts. So that's, quite frankly, almost on the button of what we were doing last year.

[Unidentified Analyst:]

Well, the world changed between Q1 and Q2, which is why -- but you're keeping that expectation. That's really fantastic. Okay. That's it. And stay safe.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Ahmed Pasha for any closing remarks. Please go ahead, sir.

[Ahmed Pasha:]

Thank you, 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 stay safe. Bye-bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.