The AES Corporation
Q4 2019 Earnings Call Transcript

Published: 28 Feb 2020

[Operator:]

Good morning, and welcome to the AES Corporation's Fourth Quarter 2019 Financial Review Conference Call. Please note today's event is being recorded. I would now like to turn the conference over to Ahmed Pasha, Vice President of Investor Relations. Please go ahead.

[Ahmed Pasha:]

Thank you, Anita. Good morning, and welcome to our full year 2019 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 during the call. There are many factors that may cause future results to differ materially from these statements. Please refer to our SEC filings for a discussion of these factors.

[Andres Gluski:]

Good morning, everyone, and thank you for joining our financial review call. Today, I will discuss our 2019 performance and our strategy to continue delivering attractive returns to our shareholders. I'll begin with some of the key highlights for this call on Slide 3. In 2019, we earned $1.36 of adjusted EPS, 10% higher than in 2018 and toward the top end of our range of $1.30 to $1.38. We're reaffirming our 7% to 9% average annual growth in adjusted EPS and Parent Free Cash flow through 2022. In 2019, after reducing our Parent Debt by half, we were upgraded to an investment grade rating for the first time in AES history. In 2019, we completed construction of 2.2 gigawatts of new projects. We also signed 2.8 gigawatts of renewable contracts, bringing our backlog to 6.1 gigawatts. This pace puts us on track to nearly triple our portfolio of renewables in operation to 22 gigawatts by the end of 2024 versus 2016. We achieved critical milestones in expanding our LNG infrastructure in the Dominican Republic, Panama and Vietnam. To accelerate a broader adoption of clean energy, we are delivering innovative energy solutions through our leading platforms, including Fluence, Uplight, and our strategic alliance with Google. Considering our success to-date in substantially lowering our carbon intensity, today, I'm announcing a target to reduce our coal fire generations to below 30% measured in megawatt hours by the end of this year. Furthermore, we expect to reduce it to less than 10% by 2030. Turning now to our strategy on slide 4, we spent the last several years positioning AES to lead the energy transition and cementing our place is a top renewables developer throughout the Western Hemisphere. Today, I will discuss the three core themes of our strategy. Investing in sustainable growth, offering innovative solutions and delivering superior results. Through our strong presence in key markets, we are well positioned to benefit from the global transition towards more sustainable energy. In these markets, we see growth in clean energy of 30 gigawatts per year. By capitalizing on our competitive position, and the dynamics favoring clean power generation, we have had great success in increasing our backlog of signed PPAs. Turning now to the backlog of projects beginning on slide 5. In 2019, we signed long-term PPAs for 2.8 gigawatts of which approximately half is wind, 40% is solar and 10% is energy storage. 40% of this capacity is in the U.S., and 60% is located internationally.

[Gustavo Pimenta:]

Thanks Andres. Today, I will cover our financial results, credit profile and capital location. I will conclude by addressing our guidance for this year and expectations through 2022. As Andres mentioned, we finished 2019 on a strong note, achieving the upper hand range of our adjusted EPS and setting a solid foundation for growth. As shown on slide 15, adjusted EPS was $1.36 primarily reflecting growth at our regulated utilities, contribution for new businesses including renewables and AES Colon, and a lower tax rate. These positive drivers will partially offset by the asset dispositions including 2.6 gigawatts of coal-fired generation. Turning to slide 16, adjusted Pretax Contribution or PTC was $1.2 billion for the year and increase of $55 million. I will cover our results in more detail over the next four slides begin on slide 17. The U.S. and utilities SBU increase PTC reflects regulated rate cases completed in 2018, as well as contributions for new renewables projects. These impacts were partially offset by the exit of coal-fired generation at Shady points and DPL. At our South America, SBU, lower PTC was largely driven by lower generation and asset sales, partially offset by better operating results at Guacolda and lower interest expense in Chile. Higher PTC at our MCAC SBU reflects the commencement of operations at AES Colon and better contracted prices in Panama, as well as insurance recover in the Dominican Republic and the Panama net of outage costs. Importantly, these facilities in the DR and Panama have resumed operations at full capacity. I would now like to discuss briefly the resilience of our portfolio. This was the worst hydrological year on record in Panama, but the financial impact was significantly lower than in years past, due to actions we have taken to improve our portfolio. The addition of AES Colon not only diversifies our fuel mix, but also lowers the hydraulic exposure and the spot price volatility of the entire system. This is just one example of how our capital allocation strategy has enabled us to lower our overall EPS risk from hydrology, foreign currency and commodities by 70% since 2011.

[Andres Gluski:]

Thank you, Gustavo. Before we open the call to your questions, I will summarize the key points we have made this morning. Through actions we have taken over the last several years, we have greatly enhanced the resiliency of our portfolio. In 2019, this was reflected in our financial performance, as well as the investment grade rating we achieved. By adding 2.8 gigawatts of renewables to our backlog, we have cemented our position as a leader in the global transition to cleaner energy. By successfully executing on its green blend and extend strategy AES Gener sign 2.5 gigawatts of renewable contracts. These contracts will ensure strong earnings at AES Gener by largely offsetting the roll off of legacy contracts expiring through 2024. We are also accelerating a cleaner energy future by delivering innovative solutions through Fluence, Uplight and our strategic alliance with Google. We are targeting a reduction in coal generation to below 30% by the end of this year, and to less than 10% by 2030. Finally, we're reaffirming our 7% to 9% average annual growth in adjusted EPS and parent free cash flow through 2022, which along with our growing dividend will deliver double digit total returns to our shareholders. Operator, we're now ready to take your questions.

[Operator:]

The first question today comes from Julien Dumoulin-Smith, with Bank of America. Please go ahead.

[JulienSmith:]

Hey, good morning, Team. Hey, howdy. So, if I can dig in a little bit on the latest capital raises in Gener as well as the uptick in renewable spending here and the equity involved. How do you think about the current outlook reconciling versus the long-term earnings growth rate, right? So you've seen a further uptick in the CapEx and renewables. Does that put you in a different place relative to that range? How do you think about your disclosed CapEx at this $8 billion mark relative to achieving your longer-term targets? And again, this is more of as you ramp up, how do you think about where you are within that range? And then maybe a sub point on that is, how should we think about that global renewables investment relative to the capital raises scenario, I suspect is a different number than the CapEx on that front.

[Andres Gluski:]

Okay, let me take sort of the big picture. Let's start with Gener. So in the case of AES Gener, the capital raise is to fund the very successful green blended extent, we've gotten 2.5 gigawatts of green blended extend PPAs, this is good for the existing assets, this is good for us because we get these long-term contracted renewables, average life is around 17 years. So that is what we're raising the capital for that because that's up and above, we did very well in doing that and Gener needs to raise the money. And it basically will largely offset the roll off of existing thermal contracts that Gener has through 2024. So that's one thing. So basically, the capital raise of Gener and our participation, we think it's a good investment; these are renewable contracts in dollars, inflation adjusted. And we want to fund that growth and really move Gener into the sustainable, long-term future. Regarding our other investments, so this basically keeps us on target that we have given before. So we're on target, we're successfully delivering on these renewables. And what we're seeing is our investments in some of the most or innovative fields, whether it be Fluence, whether it be Uplight, are going to help us achieve those renewable goals, and also achieve our financial targets. So it's all coming together very nicely. And what this really is allowing us to do is to meet our financial guidance and commitments, while at the same time decarbonizing even faster. So that really is I’d say the big story. I think Gustavo will add something.

[Gustavo Pimenta:]

I would just add, Julien, I think one of the benefits of especially this investment in Gener is the post 2022 story, right. So, a lot of the investments that we are doing now will help, as we said in the call, sustain the earnings and cash flow that AES Gener has been providing to AES. So it's not within the 7% to 9%, it's going to be post that period, but it allows AES to continue to sustain growth post 2022.

[JulienSmith:]

Got it. So if I can clarify briefly the 330 is above and beyond what you have in your global renewables CapEx and equity. Right?

[GustavoPimenta:]

That's right.

[JulienSmith:]

And that's what your contributions, and again, the critical point that you're making is that it's - the investments in that 330 are targeted beyond the growth rate that you're currently talking about

[GustavoPimenta:]

That is exactly right. And we increase the asset sales, which is helping funding some of the investments.

[JulienSmith:]

Got it. And if I can say it even more succinctly, if I'm hearing you, right, you think that based on the broad assumptions that you're looking at, you can keep AES Gener earnings and cash flow largely intact after 2022 when some of those contracts roll off.

[GustavoPimenta:]

That is exactly. Gener will provide more detail in their call, but that is exactly the way we see.

[JulienSmith:]

Right. And that's with the existing set. Are you still needed to scale up Gener to get that level?

[GustavoPimenta:]

With existing. With this new contract and assuming the roll off of the legacy assets. The legacy -

[JulienSmith:]

You're already there?

[GustavoPimenta:]

Yes.

[Operator:]

The next question comes from Charles Fishman with Morningstar. Please go ahead.

[Charles Fishman:]

Good morning. Slide 15 I look at - I'm sorry, I got the wrong - wait, I'm on the wrong slide deck. I apologize here. It's the slide that shows 2019 headwinds on EPS basis. There it is, Slide 15 on the slide deck, $0.12 headwind. What will be the - I'm looking at slide 45, which has the PTCs? It doesn't look like asset sales will be a big headwind in 2020. Am I correct on that?

[GustavoPimenta:]

Yes. And intention is that that's right. I think we continue to have some assets sales the plan. We've up at this and so I think what is important is might seven to nine, even with the increase in asset sales that represented. They are incorporated in those numbers. So the 2020 EPS already has whatever the dilution we have as a result of asset sales is incorporating that 7% to 9% growth. If I answered your question.

[Charles Fishman:]

Yes, no, I think you did. Okay. Second question is I think Andres, there's first call quite a while. I didn't hear Alto Maipo mentioned is no news good news that still goes operational this year.

[AndresGluski:]

Yes, yes. In this case, look, Alto Maipo is 90% completed. It has sort of two phases. So the first phase is we only have, I think less than a little bit more than three miles of tunneling left. So most of the tunneling on Phase 1 is done, and we expect it to be substantially completed by the end of this year. And so we're already putting in the electronics and machinery and so it's going forward well, so that's why we didn't talk about it. Because it's going forward. And again, it is part of this - let's say transformation at Gener towards much lower carbon intensity.

[Charles Fishman:]

So the tunnel boring machines were the cause of the problem initially, those are operating pretty well now, and we're over that.

[AndresGluski:]

Yes, a lot of them have actually finished their tasks and have been taken out. So I think we have two left. At one point, we had six, which is probably the most I think of any project in the world. So yes, I mean, there were issues with the rock quality, and more than anything else. So that's basically being overcome. What will continue in 2021 is what's called Volcan, which is basically just to bring additional water to the project but the project will have its full capacity of 531 megawatts, but what is very interesting also is this first virtual reservoir, which we have 10 megawatts up and running. And the regulation is in place five hour batteries. And that will allow us to dispatch this run of the river plant differently, take advantage of differences in daily pricing. And if this goes well, we could expand this from 10 megawatts to 240, which would be really substantial. So realize that the Alto Maipo is together with Alfalfal. So together, this is 750 megawatts of hydro, close to the load center of Chile in Santiago, so it really will be a terrific asset.

[Operator:]

Next question comes from Steve Fleishman with Wolfe Research. Please go ahead.

[SteveFleishman:]

Hi, good morning. Maybe just in thinking about some of the businesses like Fluence and Uplight and Google partnership. Can you - I'm not sure, I don't think you kind of can disclose like financial impacts from them yet, but I don't know when they can be material to the company. Can you maybe give some color on how we could see value from them kind of show up to the AES holder?

[AndresGluski:]

Sure. That's a great question. So let's take Fluence which is the most mature. In the case of Fluence, this is a market which is and a technology which is, really hitting, I would say, very rapid rates of growth, anybody you will talk to, will talk about, whether it's U.S. whether it's India. 10s of gigawatts of energy storage, which is needed to be able to operate, the greater numbers of renewables and the technology keeps improving, we're coming out with new products, we’ll be launching them this year, which will help lower costs and for example, prefab modular et cetera. So that's very exciting. Now, getting to valuation, as I've said in the past, we would like and to really get a marker by having a capital raise at Fluence, so that you can see what was the value created. So as you know, we feel that, there's a lot of value is being created, we think it would be a unique asset in the market, there's nothing else similar to it. So we're working on that. Regarding Uplight, we first bought Simple Energy, and then we merged it with Uplight and the valuation that we got from Simple Energy in that merger was up about 100%, from what we paid in less than two years. So Uplight is again, doing many things for a lot of people in terms of being really a cloud based digital services provider for utilities, really the leader in the field, and it's also helping us, with our cost savings and quality improvement as well. So that when you probably longer term, I mean, we're already seeing the benefits in terms of our own operations and in terms of the things that we can offer. And you're right. And especially in the case of Google, there's not that much that we can disclose other than, this involves, as I said, energy management, providing them with energy, we have our first PPA in Chile, to provide them with renewable power. And what's very interesting to them is really our ability to provide 24x7 renewables. So, we're working on a number of fields with them. And in all of these is how we really get a competitive edge in renewables that combining that with our existing platforms and existing client relationships.

[Operator:]

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

[Ahmed Pasha:]

Thanks 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. Thanks and have a nice day.

[Operator:]

This conference has not concluded. Thank you for attending today's presentation. You may now disconnect.