The AES Corporation (NYSE:AES) Q4 2023 Earnings Call Transcript
The AES Corporation (NYSE:AES) Q4 2023 Earnings Call Transcript February 27, 2024
The AES Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello and welcome to the AES Corporation Fourth Quarter and Full Year 2023 Financial Review call. My name is Elliot and I'll be coordinating your call today. [Operator Instructions]. I'd now like to hand over to Susan Harcourt, Vice President of Investor Relations. The floor is yours. Please go ahead.
Susan Harcourt: Thank you, operator. Good morning and welcome to our fourth quarter and full year 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 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: Good morning, everyone, and thank you for joining our fourth quarter and full year 2023 financial review call. Today I will discuss our 2023 strategic and financial performance. Steve Coughlin, our CFO, will discuss our financial results and outlook in more detail shortly. Beginning on slide three, 2023 was our best year ever as we met or exceeded all of our strategic and financial objectives, including signing a record of 5.6 gigawatts of new PPAs, putting us well on track to achieve 14 to 17 gigawatts of new signings through 2025, completing 3.5 gigawatts of construction, exceeding the target we laid out and doubling our additions compared to 2022, delivering adjusted EBITDA of $2.8 billion in the top end of our guidance range and adjusted EBITDA with tax attributes of $3.4 billion, achieving adjusted EPS of $1.76 and parent-free cash flow of just over $1 billion, both beyond the top end of our guidance ranges, and realizing asset sales proceeds of $1.1 billion, significantly above our target of $400 million to $600 million.
Turning to slide four, despite the backdrop of rising interest rates and supply chain challenges across the sector, we demonstrated that our business model is strong, resilient, and well-positioned. Demand across the sector has never been stronger, and in this context, I'm pleased to announce that we are raising our expected annual growth rate for adjusted EBITDA and adjusted EPS. We now expect our adjusted EBITDA to grow at an annual rate of 5% to 7% and adjusted EPS to grow at 7% to 9%, both through 2027. We are also reaffirming all of our other existing guidance. I can definitely say that I have never felt better about the outlook for this business. Turning to power purchase agreement signings on slide five, we signed 5.6 gigawatts of new PPAs in 2023, more than any other year in our company's 43-year history, putting us well on track to sign 14 to 17 gigawatts of new renewable contracts from 2023 through 2025.
Today, our backlog of projects with signed PPAs is 12.3 gigawatts, the vast majority of which will be commissioned over the next three years. It is worthwhile to note that all of the projects in our contracted backlog remain on track for timely completion, consistent with our historical performance. Moving to slide six, I'd like to highlight that the largest segment of our new business is with corporate customers. In fact, in 2023, nearly 60% of the 3.5 gigawatts of projects we brought online were to serve corporate customers and large technology companies in particular. Bloomberg New Energy Finance has consistently named AES as one of the top two providers of renewable energy to corporations worldwide, and our business continues to expand, particularly given our focus on serving the power needs from data centers which are powering the rapid growth of AI.
We are well positioned to serve this customer segment for a number of reasons. First, we have been on the forefront of working directly with these technology companies to provide innovative solutions to achieve specific renewable energy profiles. Back in 2021, we were the first company to introduce hourly match renewable energy, and today we are working with all of the hyperscale data center companies to provide solutions that are tailored for their renewable energy and sustainability goals. Second, we have a strong track record of delivering our projects on time, on budget, while meeting the unique needs of our customers, which I will cover in more detail momentarily. Our record of reliability is something that is increasingly recognized and valued by our customers.
And third, we have the scale and the pipeline to address growing demand from data centers, which is estimated to more than double by 2030. With over 50 gigawatts of projects in our development pipeline and advanced interconnection queue positions in the most relevant markets in the U.S., we are particularly well positioned to meet the energy demand of technology customers. Turning to slide seven, our success with corporate customers combined with our improved efficiency in development and construction have increased the returns that we have seen across our renewable portfolio. As a result, we are upping our U.S. return ranges by 200 basis points to 12% to 15% on a levered after-tax cash basis. We are seeing even higher returns internationally.
With strong market demand in AES's leading position, we are able to be increasingly selective about the projects we build with a focus on those with the best overall financial benefits. Next, turning to construction on slide eight, our ability to complete projects on time and on budget has become a major differentiator for AES. Not only is this something that our customers highly value, but it is also a pillar of our business model and ensures that our realized financial returns are on average equal to or better than our projections. At the time of PPA signings, we lock in contractual arrangements for all major equipment, EPC, and long-term financing, which we hedge to ensure no interest rate exposure. At the same time, we systematically embed flexibility in our supply chain to safeguard against a variety of scenarios.
We also have a multi-year strategic arrangement with top suppliers, including Fluence, who we see as having the most competitive product in the industry. More than half of our solar projects in recent years have co-located storage components, and our relationship with Fluence helped us to have the best on-time project completion rate in the industry. In 2024, we feel very confident in our ability to add 3.6 gigawatts of new projects, including 2.2 gigawatts in the U.S. We currently have 100% of the major equipment for these projects contractually secured and nearly 80% already on site. Now turning to our utilities, beginning on slide nine. In 2023, we achieved important milestones at our U.S. utilities that will drive future growth, continue decarbonization, and improvement in customer service.
At AES Ohio, we put in place a new regulatory framework, and at AES Indiana, we reached a unanimous settlement for our first-rate case since 2018. As a result, investments are on track for the rate-based growth in the high teens at both utilities, and we now have close to 70% of our planned investments through 2027 already approved in regulatory orders. Turning to slide 10. At AES Ohio, we are embarking on the largest investment program that this utility has ever seen, which includes the expansion and enhancement in our transmission assets. With over 25% rate-based growth per year, this is one of the fastest transmission growth rates in the country. We also recently filed for regulatory approval of the second phase of our smart grid plan, which upgrades our grid to improve service quality and customer experience.
Turning to slide 11. At AES Indiana, we continue to invest to improve service quality and greener generation mix. I am happy to say that we now have regulatory approval for the build-out of all named renewable projects at AES Indiana, encompassing 106 megawatts of wind, 445 megawatts of solar, and 245 megawatts of energy storage. As we continue to invest in our customer experience, service quality, and sustainability at both of our U.S. utilities, two core principles have guided our growth plan. First is customer affordability as we address much-needed investments. We currently have the lowest residential rate in both states, which we expect to maintain throughout this period of growth. And second is to prioritize the timely recovery of our investments through existing mechanisms and programs.
Across both utilities, we now anticipate approximately 75% of the growth capital to be deployed under such mechanisms, which substantially reduces regulatory lag. Finally, turning to slide 12. Last year, we set an asset sale proceeds target of 400 million to 600 million. We greatly exceeded this range with 1.1 billion of gross proceeds. These transactions not only put a high valuation marker on our businesses, but also put us well on our way towards achieving our asset sales goal of $2 billion through 2025 and $3.5 billion through 2027. Our success this past year provides us with a cushion, and we expect 2024 to be another strong year. With that, I would like to turn the call over to our CFO, Steve Coughlin.
Steve Coughlin: Thank you, Andres, and good morning, everyone. Today, I will discuss our 2023 results and capital allocation, our 2024 guidance, and our updated expectations through 2027. As Andres mentioned, 2023 was AES's best year on record as we met or exceeded all of our strategic and financial targets. We beat our adjusted EPS guidance range of $1.65 to $1.75 and our parent-free cash flow guidance range of $950 million to $1 billion. We also recorded strong adjusted EBITDA well above the midpoint of our inaugural guidance range of $2.6 billion to $2.9 billion. Turning to slide 14, full year 2023 adjusted EBITDA with tax attributes was $3.4 billion versus $3.2 billion in 2022, driven primarily by contributions from new renewables projects, as well as the recovery of prior year's purchase power costs at AES Ohio included as part of the ESP4 settlement.
These drivers were partially offset by lower contributions from the energy infrastructure SBU. Turning to slide 15, adjusted EPS was $1.76 in 2023 versus $1.67 in 2022. Drivers were similar to those for adjusted EBITDA with tax attributes. In addition, there was a $0.06 headwind from parent interest on higher debt balances primarily used to fund new renewables projects. I'll cover our results in more detail over the next four slides, beginning with the Renewable Strategic Business Unit or SBU on slide 16. Higher adjusted EBITDA with tax attributes at our renewables SBU was primarily driven by contributions from the 3.5 gigawatts of new projects that came online in 2023, as well as higher margins in Columbia, but partially offset by the sell down of select U.S. renewable operating assets.
At our utilities SBU, higher adjusted PTC was primarily driven by the recovery of prior year's purchase power costs at AES Ohio included as part of the ESP4 settlement, as well as rate-based growth in the U.S. Lower adjusted EBITDA at our energy infrastructure SBU reflects significant LNG transaction margins in 2022, lower margins in Chile, and the sale of a minority interest in our Southland combined cycle assets. These drivers were partially offset by the higher revenues recognized from the accelerated monetization of the PPA at our Warrior Run coal plant. Finally, at our new energy technologies SBU, higher adjusted EBITDA reflects improved results at Fluence, which achieves positive adjusted EBITDA in their fiscal fourth quarter of 2023.
Fluence also guided to positive adjusted EBITDA for their full fiscal year 2024. Now let's turn to how we allocated our capital last year on slide 20. Beginning on the left-hand side, Sources reflect $3 billion of total discretionary cash. This includes parent-free cash flow of just over $1 billion, which increased nearly 11% from the prior year to just above the top end of our guidance. We also significantly surpassed our asset sale target with $750 million in net asset sales proceeds to the AES parent after subsidiary level debt repayment, reinvestment, and taxes. And we issued $900 million of parent debt in May of last year. Moving to Uses on the right-hand side, we invested more than $2.1 billion in growth at our subsidiary, of which approximately two-thirds was in the U.S. We also allocated more than $500 million of discretionary cash to our dividends.
Overall, I'm extremely pleased with our financial performance throughout 2023. Now let's turn to our guidance and expectations, beginning on slide 21. Today, we're initiating 2024 adjusted EBITDA with tax attributes guidance of $3.6 billion to $4 billion, driven by over $500 million in contributions from new renewables projects and from rate-based growth at our U.S. utilities. We have also incorporated a $200 million partially offsetting impact from asset sales we either closed in 2023 or plan to close this year. Excluding the $1 billion in tax attributes we expect to recognize in 2024, adjusted EBITDA is expected to be $2.6 billion to $2.9 billion. The increase in tax attributes versus the prior year is partially due to our continued use of tax credit transfers, which results in earlier recognition of tax credit than typical tax equity structures.
In addition, last year's increase in new project completions will drive higher tax attribute recognition in 2024. As a reminder, we will recognize approximately one-third of tax attributes generated on 2023 projects in the 2024 fiscal year. Looking beyond this year, our head start on asset sales gives us greater visibility toward our longer-term growth and puts downward pressure on our capital budget. We expect EBITDA to increase each year through the remainder of our long-term guidance period. Turning to slide 22, we expect 2024 adjusted EPS of $1.87 to $1.97, which represents a 9% increase year-over-year and puts us on track to achieve our 7% to 9% long-term growth target through 2025. Growth will be primarily driven by our renewables and utilities businesses and will be partially offset by higher parent interest.
We also expect an 8% headwind from asset sales. Our construction program this year is more evenly spread than in recent years. As a result, we expect approximately 40% of our earnings to be recognized in the first half of the year and 60% in the second half. And we will have greater visibility throughout the year into our expected construction completion. Turning to slide 23, as Andres mentioned, our very strong market position in providing tailored solutions to corporate clients, including large data centers, has allowed us to realize higher returns on our renewable’s projects. In addition, as our renewables business continues to scale, we anticipate further realization of productivity and scale benefits. Based on these factors and our 2023 results, we now expect AES's U.S. renewables returns to be in the 12% to 15% range.
These higher returns in the U.S., along with productivity benefits, are directly accreted to our earnings and cash flow, and as a result, we are increasing our expected long-term adjusted EBITDA growth rate to 5% to 7% and our long-term adjusted EPS growth rate to 7% to 9% through 2027 off of base of our 2023 guidance midpoint. Now, turning to our 2024 parent capital allocation plan on slide 24, beginning with approximately $3.1 billion of Sources on the left-hand side. Parent free cash flow for 2024 is expected to be around $1.05 billion to $1.15 billion. We expect to generate $900 million to $1.1 billion of net asset sale proceeds this year. By the end of this year, we expect to be more than halfway toward the $3.5 billion gross asset sales target we announced on our third quarter earnings call.
Although we expect an increase of approximately $1 billion of parent debt this year, our business is well insulated from changes in interest rates. Our new projects are funded primarily with fixed rate or long-term hedged self-amortizing debt with tenors similar to the length of our PPAs, and more than 80% of our outstanding debt is non-recourse to AES Corp. Our exposure from floating rates and future issuances is managed with nearly $8 billion in outstanding hedging. Looking at the impact of a 100 basis point shift in rates on our future issuances, refinancing’s and outstanding U.S. floating rate debt, we have only one penny of EPS exposure from interest rates in 2024. Now to the Uses on the right-hand side. We plan to invest approximately $2.6 billion in new growth, of which about 85% will be allocated to growing our renewables portfolio and utility rate base.
More than 90% of this will be directed into the U.S., with the remainder going to growth projects in Chile and Panama. We expect to allocate approximately $500 million to our shareholder dividend, which reflects the previously announced 4% increase. Turning to slide 25, our long-term sources of parent capital through 2027 reflect the accelerated asset sales target we introduced on our third quarter call. We also expect higher organic cash generation as a result of our increased long-term growth rates. As a reminder, we will not issue any new equity until 2026 at the earliest, and we'll only do so in a way that creates value on a per share basis. Now to slide 26. Uses through 2027 reflect more than $7 billion of investment in our subsidiaries, primarily to grow our renewables and utilities businesses.
We also expect to allocate more than $2 billion to our dividend. Given our surplus of attractive investment opportunities and our desire to minimize equity issuance as a source of capital, we now expect to grow our dividend at 2% to 3% annually beyond 2024. We believe this provides an optimal balance between an already attractive dividend yield and strong earnings and cash flow growth throughout our planned period. In summary, 2023 was an extraordinary year for AES. We demonstrated our ability to adapt to the current market and execute on our growth commitments while we further advanced our competitive position. As we continue to perfect and scale our renewables machine, we expect to have another record year in 2024 and to deliver on our now higher long-term growth target.
We have positioned AES to achieve our strategic priorities and grow our business in a way that's highly value accretive to our shareholders. With that, I'll turn the call back over to Andres.
Andres Gluski: Thank you, Steve. In summary, 2023 was our best year ever as we met or exceeded all of our strategic and financial objectives across our guidance metrics, PPA signings, construction completions, and asset sales. We are seeing strong demand for renewables across the sector, particularly due to the unprecedented demand from data centers. As a result, we are not only upping our U.S. project return ranges, but increasing our expected average annual growth rates for adjusted EBITDA and adjusted earnings per share through 2027. Finally, our significant success with asset sales to date, as well as the outlook for the near future, gives us great comfort in our long-term funding plans. With that, I would like to open the call for questions.
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