The AES Corporation (AES) 2024 Q2 Earnings Call Summary

Optimistic Highlights

• Strong Financial Performance: AES Corporation reported a strong second quarter in line with expectations, with adjusted EBITDA with tax attributes of $843 million, adjusted EBITDA of $652 million, and adjusted EPS of $0.38. The company is on track to meet its 2024 financial objectives and expects to be in the top half of its ranges for adjusted EBITDA with tax attributes and adjusted EPS.

• Significant Agreements Signed: Since the last call, AES has signed 2.5 gigawatts of new agreements, including 2.2 gigawatts with hyperscalers across its Utilities and Renewal businesses. This includes agreements to support 1.2 gigawatt of new load across AES Ohio and AES Indiana, expected to come online in phases beginning in 2026.

• Renewables Business Expansion: AES has expanded its partnership with Google, signing a 15-year PPA for 727 megawatts in Texas to power its datacenter growth. This agreement includes a combination of wind and solar to further Google's 24-7 carbon-free energy goals.

• Innovative Use of Technology: AES is incorporating generative AI in its portfolio to develop new competitive advantages. The company launched the world's first AI-powered solar installation robot, Maximo, which uses state-of-the-art AI and robotics to complement construction crews in the installation of solar modules.

Pessimistic Highlights

• Forced Outage Event: A forced outage event at the 1 gigawatt Chivor hydroplant in Columbia, caused by record water inflows in early June, brought significant sediment into the plant and damaged the units. This partially offset the higher EBITDA with tax attributes driven by contributions from new projects.

Company Outlook

• Positive Outlook for 2024: AES now expects adjusted EBITDA with tax attributes to be in the top half of its 2024 expected range of $3.6 billion to $4 billion. The company also expects its 2024 adjusted EPS to be in the upper half of its guidance range of $1.87 to $1.97.

Q & A Highlights

• Q: Can you update us on credit metrics, where did you end up as of Q2, and then where do you expect to be at the end of 2024 on FFO to debt? (Durgesh Chopra, from Evercore ISI)

  A: Credit is looking very strong, continuing on a path of improving credit. At the parent level, it is expected to be even higher than last year's year-end. The threshold of 20% FFO to debt is maintained, with expectations to be even higher by the end of this year. (Steve Coughlin)

• Q: Maybe just one election question. Andres, appreciate the commentary in your prepared remarks. But I'm just wondering, obviously a great quarter here. You added to the Utilities, you added on the Renewable side. But I'm just wondering if all the noise around repeal of tax credits and other policy chatter, does that hurt your ability to sign new contracts? (Durgesh Chopra, from Evercore ISI)

  A: It's not slowing down our signing of contracts. The biggest concern of our clients is actually time to power, can you get me the power on time to power datacenters. And that's their main constraint. So, no, there has been anything holding us down or, quite frankly, a major issue of conversation with them. (Andres Gluski)

• Q: Starting on the Utility announcements, can you outline the utility load opportunity in terms of the breakdown of that 3 gigawatt in advanced negotiations between Indiana and Ohio, plus how much of that capital could fall into the transmission and generation buckets relative to what's in the plant today? (Richard Sunderland, from J.P. Morgan)

  A: It's a little bit too early for us to give too much in term of exact load growth by business. We're certain that there's going to be a lot of load added, a lot of transmission assets added. But this is between two utilities, between multiple clients. So, right now it's a little bit too early for us to give too much in term of exact load growth by business. (Andres Gluski)

• Q: Your language in the slides on maximizing megawatt quality over quantity; that message has certainly been clear. But I'm curious if this is consistent with your raise per turn assumptions, I think that was back in 4Q. Or do you see further upside potential to returns given the supply and demand dynamics currently? (Richard Sunderland, from J.P. Morgan)

  A: Basically, I think there's several things. One, when we talk about pipeline, that means we have something in the interconnection queue. And we have some degree of land control. So, I would say not all pipeline were created equal. And when we talk about backlog, that's actually contracts that are signed and that we have to deliver, and people have to buy that energy. So, we've never taken anything material out of our backlog, even during COVID. So, what we're saying here with -- the basic message is, one, yes we increased our average rate of returns on these projects. We're not talking about mid-teens. (Andres Gluski)

• Q: Hey, guys. Hope you're well. Thank you for taking my question. (Antoine Aurimond, from Jefferies)

  A: Good morning. (Andres Gluski)

• Q: Hey, good morning. Thank you. Maybe back on the utility side of things, it's great to see all that load growth opportunity coming. When do you think you'd have an opportunity to relook at the CapEx outlook? And then at a high level, how do you think about financing, upsides in the utility CapEx trajectory? (David Arcaro, from Morgan Stanley)

  A: Yes, hey, David. Good morning. So, as we are looking through the details of the timing of what we've recently signed, we'll flesh that out in our planning process, in the second-half of this year and bake that into our update of guidance for the beginning of next year. So, definitely, I would see in the long-term horizon that we have out there through '27, this will start to come into play in the capital plan, but our funding plan, I don't expect to change at all. (Steve Coughlin)

• Q: Hi, good morning. Thanks very much for taking my question. So, I guess just first quickly on renewable execution, really great to see the guidance update in terms of EBITDA with tax attributes. I guess, could you maybe just talk about, given the backlog, the PPA signing cadence, the ability to bring projects online, how does your EBITDA excluding tax attribute would trend, I guess given where it is now year-to-date? Seems a little light, but just wanted to see how should we think about it going deeper into the year? Thanks. (Unidentified Analyst, from Barclays)

  A: Yes, good morning. Thanks. So, we do have a significant upside in our tax credits as I mentioned in my remarks, primarily that's driven by -- we're qualifying for more energy communities than originally anticipated. And we also have seen the valuation of our tax attributes, particularly through transfers, be valued at a higher level. What's important, as I've always emphasized is that these are cash. It's a very attractive profile. This is not just earnings, but it's cash coming in, which is a very early return of a significant amount of capital 30% up to 50%. So, we're really, really pleased with this upside. There are a few other upsides in EBITDA as well. So, we have had higher margins and higher dispatch in our gas business in the Dominican Republic. We've also continued to drive efficiency and productivity in our renewables and utilities businesses where we're very focused on growth. And in fact, growing those businesses is actually costing less than we anticipated. So, we see favorability in costs going through EBITDA this year. So, as you caught on, there has been an offset to that, and it's what I mentioned in my remarks, which is primarily the Columbia outage. It was a record amount of flooding and inflow that took the units out for all of the month of June and the first part of July. So, that unfortunately did offset and is a negative driver to EBITDA this year. And then, the other, and I think we mentioned this, we did have a very low wind resource in Brazil, more so in the first quarter, but that also had impacted our EBITDA this year. So, we have some offsets, but overall really pleased with the growth, the cash-driven growth, and that we continue to be even more efficient in our renewables and utilities growth machines. (Steve Coughlin)

• Q: Got it. No, that's very helpful. I guess second, we noticed a comment on being able to bring the majority of the backlog online by 2027. I guess with this year, 2024, a targeted 3.6 gigawatts of new projects online, could you talk about the cadence on bringing new projects online -- just on this front, from this year through 2027, and what kind of lumpiness should we expect coming out of it? (Unidentified Analyst, from Barclays)

  A: Yes, well, I think we've very much smoothed out the cadence of