AES Corp (AES) — Q1 2021 Earnings Call Transcript

Thank you, Operator. Good morning and welcome to our first quarter 2021 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, 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 also be found on our website along with the presentation. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Gustavo Pimenta, our Chief Financial Officer and other senior members of our management team. With that, I will turn the call over to Andrés.

Good morning, everyone, and thank you for joining our first quarter financial review call. Our first quarter results put us on track to achieve our 2021 guidance and 7% to 9% average annual growth through 2025. Gustavo will provide more color on our financial results later in the call. As we spoke about on our Investor Day in early March, we see a great opportunity for growth given the momentum in changes in our sector, and we are very well positioned to capitalize on the shift to low carbon sources of energy. Over the past five years, we have transformed our company to be a leader in renewable energy and have invested in innovative technologies that will give us a competitive advantage for many years to come. Although it has been less than two months since our Investor Day, we have a number of significant achievements to announce, including a landmark deal with Google which I will describe in more detail later. A strategic collaboration to develop new battery technologies between Fluence and Northvolt, the leading European supplier of sustainable battery systems, and a significant increase in LNG sales in Central America and the Caribbean to support those economies in the transition away from heavy fuels. Let me lay out our strategic priorities for 2021 and the substantial progress that we have made year-to-date towards achieving those objectives. Our five key goals for the year are: one, sign contracts for 4 gigawatts of renewables; two, launch the 24-7 product for carbon-free energy on an hourly basis; three, further unlock the value of our technology platforms; four, continue to improve our ESG positioning through the transformation of our portfolio; and five, monetize excess LNG capacity in Central America and the Caribbean. Last year, we set and exceeded a goal of signing 2 to 3 gigawatts of PPAs for renewables and energy storage. This year we are increasing that goal by 60% to a target of 4 gigawatts. Today, I am pleased to report that year-to-date, we've already signed 1.1 gigawatts including a landmark deal with Google. We have a backlog of 6.9 gigawatts of renewables consisting of projects already under construction or signed power purchase agreements or PPAs. This equates to a 20% growth in our total installed capacity and a 60% increase in our renewables capacity. We continue to increase our pipeline of projects to support our growth and now have a global pipeline of more than 30 gigawatts of renewable projects, half of which is in the United States. With increasing demand from corporate customers and a much more favorable policy environment, we expect the need for renewables to grow dramatically and we're taking steps to ensure a continued competitive advantage. Our second key goal for this year is to launch the first 24-7 energy product that matches a customer's load with carbon-free energy on an hourly basis. To that end, earlier this week, we announced a landmark first of its kind agreement to supply Google's Virginia-based data centers with 24-7 carbon-free energy sourced from a portfolio of 500 megawatts of renewables. Under this innovative structure, AES will become the sole supplier of the data centers' energy needs, ensuring that the energy supplied will meet carbon-free targets when measured on an hourly basis for the next 10 years. The carbon-free energy will come from an optimized portfolio of wind, solar, hydro, and battery storage resources. This agreement sets a new standard in carbon-free energy for commercial and industrial customers who signed 23 gigawatts of PPAs in 2020. As we discussed at our Investor Day, we know that the nearly 300 companies that make up the RE 100 will need more than 100 gigawatts of new renewables by 2030. This transaction with Google demonstrates that a higher sustainability standard is possible, and we expect a substantial portion of customers to pursue 24-7 carbon-free objectives. Based on our leadership position, we are well-placed to serve this growing market.

Thanks Andrés and good morning everyone. As Andrés mentioned, we are off to a good start this year having already achieved significant milestones towards the strategic and financial objectives that we discussed on our Investor Day. We are also encouraged by the continued economic recovery across our markets with demand in line with pre-COVID levels. Turning to our financial results for the quarter, adjusted pre-tax contribution or B2C was $247 million for the quarter which was very much in line with our expectations and similar to last year's performance. I'll discuss the key drivers of our first quarter results and outlook for the year in the following slides. Adjusted EPS for the quarter was $0.28 versus $0.29 last year. With adjusted PTC essentially flat, the $0.01 decrease in adjusted EPS was the result of a slightly higher effective tax rate this quarter. In the US strategic business units, or SBU, PTC was down $27 million driven primarily by a lower contribution from our legacy units at Southland and higher spending in our clean energy business as we accelerate our development pipeline given the growing market opportunities. These impacts were partially offset by the benefits from the commencement of PPAs at the Southland energy combined cycle gas turbines. At our South America SBU, B2C was down $31 million mostly driven by lower contributions from AES Andes due to higher interest expenses and lower equity earnings from the Guacolda plant in Chile. These impacts were partially offset by higher generation at the Chivor hydro plant in Colombia. Lower PTC at our Mexico Central America and the Caribbean primarily reflects outages at two facilities in the Dominican Republic and Mexico, with both already back online since April. Results also reflect the expiration of the 72-megawatt barge PPA in Panama. Finally, in Eurasia, higher PTC reflects improved operational performance and lower interest expenses in our Bulgaria businesses.

Thank you, Gustavo. Before we take your questions, let me summarize today's call. As I have noted, we have made great progress on our 2021 and long-term strategic goals, and we are reaffirming our 2021 guidance and expectations through 2025. We see a tremendous opportunity for growth and further increasing our technological leadership as the industry transition unfolds. From advancing our renewables to unlocking the value of our new technology businesses, we have a competitive advantage that will continue to benefit our customers and investors. With that I would like to open up the call to your questions.

Hi, good morning. Thanks for taking my questions. Just wanted to start off on the North agreement and what it could be for Fluence and maybe the energy storage market more broadly.

Yes, that's a great question. This is really a landmark agreement as we move to essentially have strategic relationships with battery manufacturers. Northvolt is building a new plant in Sweden and in Poland, and we will have one train of the plant in Poland producing batteries for us. As this market expands and as you have a real growth in demand, this assures battery supply for one of our markets.

Got it, thank you for the color. And then, separately, thinking about this Google deal, you would have the ability to replicate that with other customers.

Or, you know, it's both in a sense. So let me take the second part first; the key point is that we're netting on an hourly basis carbon-free energy. This is really saying that, on an hourly basis, the energy that I'm getting is carbon-free. The key to achieving this is integrating small hydropower and, of course, battery storage. It’s about optimizing the use of various renewable energy sources to deliver the most cost-effective, carbon-free energy on an hourly basis. We believe this is an exciting development that we plan to replicate with several clients.

Good morning, team. Thank you for taking my question. I wanted to start with the 4 gigawatts target. During Analyst Day, the goal was set at three to four gigawatts of PPAs this year, and now it appears to be 4.

Yes, I mean, we did three in 2019 and 2020. We're seeing a strong start. We feel sufficiently confident to say that we expect to be at the upper end of our initial guidance range of 3 or 4. So we expect to be at four gigawatts of new renewable PPAs signed in 2021. We see a lot of competition out there in the market. Our strategy has been to offer more value to our clients. So we don't want to just compete for commoditized renewable PPAs. With our knowledge of energy storage, we've been really a leader in the new applications for energy storage, not only through Fluence in terms of the new design but also in how we combine them. So this unique angle of providing energy storage along with renewable energy, we believe is a competitive advantage. We are very well situated, and we feel optimistic about offering this suite of technologies and bringing them together and working with clients.

Wanted to talk through supply chain stresses. We regularly get questions just throughout the renewables value chain about, you know, shortages, cost increases, et cetera.

We're not seeing any real supply constraints, whether it be on batteries, solar panels, or wind turbines. However, with the expected increase in demand from renewable energy, we think there could be a problem in the future. So we're preparing for that possibility. We're not seeing it today, but I do expect there to be a pinch sometime in the future. We're making the kind of strategic agreements like Northvolt.

I was just curious on the strategic alliance with Google, are you guys still working on similar agreements?

We expect to expand that energy provided over time as their needs grow. We have a unique product that we will offer to them and other clients at this stage in time.

I wanted to follow up on the Vietnam project.

In Vietnam, this is a project which is very much needed because they have been relying on offshore gas and that's running out. So, this will be a project of immediate demand.

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. Thanks again and have a great day.