AES(AES) - 2023 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Adjusted EBITDA for 2023 was $2.8 billion, at the top end of the guidance range, with adjusted EBITDA including tax attributes reaching$ 3.4 billion [5] - Adjusted EPS for 2023 was $1.76, exceeding the guidance range of$ 1.65 to $1.75 [5] - Parent-free cash flow for 2023 was just over$ 1 billion, surpassing the guidance range of $950 million to$ 1 billion [5] - Asset sales proceeds for 2023 were $1.1 billion, significantly above the target range of$ 400 million to $600 million [5] - The company expects adjusted EBITDA to grow at an annual rate of 5% to 7% and adjusted EPS to grow at 7% to 9% through 2027 [6] Business Line Performance - The Renewable Strategic Business Unit (SBU) saw higher adjusted EBITDA, driven by 3.5 gigawatts of new projects coming online in 2023 and higher margins in Colombia [16] - The Utilities SBU experienced higher adjusted PTC due to the recovery of prior year's purchase power costs at AES Ohio and rate-based growth in the U.S. [16] - The Energy Infrastructure SBU saw lower adjusted EBITDA due to significant LNG transaction margins in 2022, lower margins in Chile, and the sale of a minority interest in Southland combined cycle assets [17] - The New Energy Technologies SBU reported higher adjusted EBITDA, with Fluence achieving positive adjusted EBITDA in their fiscal fourth quarter of 2023 [18] Market Performance - The company signed 5.6 gigawatts of new Power Purchase Agreements (PPAs) in 2023, the highest in its 43-year history, with a backlog of 12.3 gigawatts of projects [6][7] - Nearly 60% of the 3.5 gigawatts of projects brought online in 2023 were for corporate customers, particularly large technology companies [7] - The company is well-positioned to meet the growing energy demand from data centers, which is expected to more than double by 2030 [9] Strategic Direction and Industry Competition - The company is focusing on serving corporate customers, particularly in the data center sector, which is driving demand for renewable energy [7][9] - AES has a strong track record of delivering projects on time and on budget, which is a key differentiator in the industry [10] - The company has increased its U.S. return ranges by 200 basis points to 12% to 15% on a levered after-tax cash basis due to higher returns from renewable projects [9] Management Commentary on Operating Environment and Future Outlook - Management expressed confidence in the company's ability to adapt to market conditions and execute growth commitments, with a positive outlook for 2024 and beyond [27] - The company is well-positioned to meet the strong demand for renewables, particularly from data centers, and expects to achieve higher long-term growth targets [28] Other Important Information - The company has a multi-year strategic arrangement with top suppliers, including Fluence, which has helped achieve the best on-time project completion rate in the industry [11] - AES Ohio and AES Indiana are undergoing significant investment programs to improve service quality, decarbonization, and customer experience [12][13] Q&A Session Summary Question: Impact of Asset Sales on EBITDA Growth [30] - The flat EBITDA growth for 2024 is primarily due to the timing of asset sales, with a$ 200 million drag from the lag in redeploying capital [31] Question: Flexibility in Capital Allocation and Leverage Targets [32] - The company has flexibility in achieving its asset sale targets and is focused on maintaining investment-grade credit metrics [33][34] Question: Drivers of Higher Returns in Renewables [36] - Higher returns are driven by better-than-expected performance on prior PPAs, positioning in select markets with high demand, and increased efficiency in construction and development [37][38] Question: Contribution of Different Business Segments to Higher Growth Rates [41] - Both the utilities and renewables segments are contributing to higher growth rates, with utilities experiencing fast growth and renewables seeing improved returns [42] Question: Shift in Business Mix Due to Raised Growth Expectations [44] - The business mix is shifting slightly towards renewables, with a higher share of returns coming from this segment, while energy infrastructure is shrinking less than previously expected [45] Question: Capacity Additions and Returns Improvement [46] - The company is focusing on maximizing shareholder value rather than growth for growth's sake, with higher returns driven by cash generation rather than tax credits [48][51] Question: Timing of New Project Completions [53] - The flat level of gigawatts entering commercial operation in 2024 is due to project timing and the development of transfer projects, with no signal of underlying issues [54] Question: Credit Metrics and Leverage [56] - The company ended 2023 with a strong FFO to debt ratio of approximately 22%, with expectations to maintain or improve this ratio in 2024 [57] Question: Performance of Existing Assets [60] - The company has not seen any degradation in the performance of existing assets, with older projects performing better than forecasted [61] Question: Impact of Delayed Coal Plant Retirements [62] - Delayed coal plant retirements are providing some upside to EBITDA and smoothing out the reduction in EBITDA from coal exits [63][64] Question: Competition from Nuclear Power in Data Center Market [65] - The company does not see nuclear power as a significant threat to its renewable energy projects in the near term, given the strong demand for renewables and the challenges in building new nuclear plants [66][67] Question: Returns on Data Center Projects [68] - The company does not disclose specific returns for data center projects but notes that corporate customers are a key segment driving higher average returns [69] Question: Dividend Growth Policy [70] - The company has decided to grow dividends at a lower rate of 2% to 3% starting in 2025, reflecting the balance between attractive dividend yields and strong earnings growth [71][72] Question: Tax Credit Guidance for 2024 [75] - The $1 billion tax credit guidance for 2024 is driven by the success of the business, including the doubling of construction in 2023 and the earlier recognition of credits through transfers [76][77]