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spk00: Good day and welcome to the AES Corporation Q4 2020 Financial Review Conference Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. As a reminder, if you are viewing the webcast and intend to ask a question over the phone, Please mute your computer speakers before asking your question. As a further reminder, today's event is being recorded. At this time, I would like to turn the conference over to Ahmed Pasha, Treasurer and Vice President of Investor Relations. Please go ahead, sir.
spk08: Good morning, everyone, and welcome to our fourth quarter and full year 2020 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 Andres Klosky, our President and Chief Executive Officer, and Gustavo Pimenta, our Chief Financial Officer. With that, I will turn the call over to Andres. Andres?
spk04: Good morning, everyone, and thank you for joining our fourth quarter and full year 2020 financial review call. This morning, I will provide an update on our major financial and strategic accomplishments, which position us well for the future. Some of you may recall that last year I set out three short-term catalysts for our stock, hitting our numbers, getting a second investment grade rating, and becoming Norges Bank cold generation compliant. In 2020, we delivered on all three metrics and set ourselves up for continued progress. First, let me talk about hitting our numbers. We delivered adjusted earnings per share of $1.44. which was above our guidance range of $1.32 to $1.42. Our parent-free cash flow came in at $777 million, which also exceeded the top end of our range of $725 to $775 million. Second, in November, S&P upgraded us to an investment-grade rating of BBB-, joining Fitch, which had upgraded us in 2019. Third, by selling and retiring coal plants and building new renewables, we reduce the percentage of megawatt hours being produced by coal plants to 25% on a pro forma basis, which is comfortably below Norges Bank threshold of 30%. All of these results reflect the resilience of our business model, which is anchored on long-term dollar-denominated contracts with investment-grade off-takers and U.S. regulated utilities. In addition to these achievements, in 2020, we continue to advance our leadership in innovation and new green technologies. We signed three gigawatts of long-term contracts for renewables, which is also at the top end of our range of guidance of two to three gigawatts. As you can see on slide four, these three gigawatts of new renewable PPAs are mostly in the US and South America. In the US, we have merged our two development companies AES Distributed Energy and S-Power into one entity, AES Clean Energy, to better take advantage of synergies and economies of scale. In South America, our renewables growth was fueled, in part, by the continued success of our green blend and extend negotiations, which combined new renewables with existing long-term conventional capacity contracts. With the addition of these three gigawatts of new PPAs Our current backlog of projects reaches 6.9 gigawatts, as shown on slide five. About half of the total solar and most of the remainder is wind and energy storage. 100% of our backlog is renewable. We expect to bring almost four gigawatts of this backlog online in 2021, one of the largest capacity additions in AES's history. Finally, turning to slide six, Fluence, our joint venture with Siemens to provide energy storage systems, maintained its global leadership position, and signed 785 megawatts of new capacity. Its revenues grew 400% versus the prior year, and they acquired AMS's leading AI-enabled bidding software business. A capital raise was also announced with the Qatar Investment Authority, which will provide funds to further accelerate the development of its digital product offerings and the deployment of its systems around the world. As you can see, we are very well positioned to continue our solid renewables growth, aggressive decarbonization, and deployment of leading technology innovations. The electricity sector is changing rapidly, and we will be providing a comprehensive view of AES's long-term plans and opportunities in this new environment next Wednesday, March 3rd, at our Investor Day. Now, let me turn the call over to Gustavo, who will provide more color on our financial results for 2020 and guidance for 2021.
spk01: Thank you, Andreas, and good morning, everyone. Today, I'll cover the following key topics. Our financial performance during the fourth quarter and full year 2020, our capital allocation initiatives in 2020, and our 2021 guidance. As Andrés mentioned, our results for 2020 highlighted the resilience of our business model. We delivered strong financial performance while navigating challenging macro conditions, including the impacts of lower demand due to COVID-19 and a record dry hydrology in Colombia. We finished the year on a strong note, setting a solid foundation for continued growth. Turning to slide eight, four-year adjusted EPS of $1.44 exceeded the top end of our guidance range and was at the midpoint of our regional pre-COVID guidance range. As I noted, the key negative impacts on our results were from lower demand and adverse hydrology. Our generation business, which accounts for more than 80% of our earnings, is largely insulated from demand fluctuations. However, as we have discussed in the past, our U.S. utilities did experience a reduction in demand due to the economic impact of the pandemic. Although there has been a gradual recovery in demand in the second half of 2020, the impact on a full year basis was approximately 4 cents. Regarding hydrology, we experienced average hydrology in most of our markets except in Colombia, where it was one of the worst hydrological years on record. The total impact of hydrology on our full-year results was approximately 5 cents in South America, primarily in Colombia. We expected the hydrological conditions to be normal in Colombia in 2021, in line with the long-term historical average, and have already observed this trend in the year to date. Despite the headwinds from these two areas, we were able to deliver on our full-year guidance as a result of higher contributions from new businesses and improved operating performance in South America. We also benefited from our cost savings initiatives, interest expense savings resulting from $7 billion of refinancing across the portfolio, and a lower adjusted tax rate. Turning to slide nine, adjusted pre-tax contribution, or PTC, was $1.2 billion for the year, an increase of $7 million versus 2019. I'll cover our results in more detail over the next four slides, beginning with the U.S. in utilities SPU on slide 10. As you may have seen yesterday, we have rebranded our U.S. utilities, DPNL and IPL, to align with the new AS brand. From now on, these businesses will be known as AES Ohio and AES Indiana, respectively. In 2020, lower PTC at our U.S. in Utilities SVU reflects the impact of the reversion to ESPN rates at AES Ohio in 2019 and lower demand at our utilities due to the impact of COVID-19 and milder weather. These impacts were partially offset by the benefit from the commencement of BPAs at the Southland Energy CCGTs, as well as the contributions from new renewable projects. Higher PTC at our South America SBU was largely driven by higher contributions from AS Henare and a favorable revision of regulatory charts at ASTT in Brazil. These impacts were partially offset by drier hydrology and a planned major outage at the Chivo hydro plant in Colombia and the regulatory changes in Argentina in 2019. Lower PTC at our MCC SBU primarily reflects the impact from insurance recovery in prior year, as well as outages incurred in 2020 in Dominican Republic, partially offset by improved availability and hydrology in Panama. Finally, in Eurasia, high results reflect lower interest expense due to the debt repayment in 2020 in Bulgaria, partially offset by the impact of businesses sold in the United Kingdom in 2019. Now turning to our credit profile on slide 14. Our significantly reduced parent debt and growing free cash flow enabled us to improve our credit metrics by 400 basis points since 2018. At the end of 2020, our apparent free cash flow to net debt ratio was 23%, well above the 20% threshold required for an investment grade rating. Strong credit metrics remain one of our top priorities, and we continue to take steps to maintain and further improve upon current levels. Furthermore, we took advantage last year of a low interest rate environment and refinanced approximately $7 billion of debt across our portfolio. extending maturities and capturing annualized interest savings of $90 million. Now to our 2020 parent capital allocation in slide 15. Beginning on the left-hand side, sources reflect $1.3 billion of total discretionary cash. Asset sales of $530 million reflect the net proceeds from the sale of OPGC and the sell-down of 35% of our interest in the Southland repowering projects. Parent-free cash flow of $777 million exceeded the top end of our expectation. Moving to uses on the right-hand side. Roughly one-third of our discretionary cash was allocated to shareholder dividend and debt repayment. We invested $812 million in our subsidiaries, primarily in our renewables backlog, Southland Repowering, and AS Ohio. Approximately 90% of the total investments in subsidiaries were in the U.S. contributing to our goal of increasing the proportion of earnings from the U.S. to about half. Turning to our guidance on slide 16. Today, we are initiating guidance for 2021 adjusted EPS of $1.50 to $1.58, in line with our average annual growth target of 7% to 9%. Parent-free cash flow for 2021 is expected to be $775 to $825 million, which is based on 7% growth from the midpoint of our 2020 expectation of $750 million. Key drivers of our expected growth in adjusted EPS in 2021 include a full year of operations of our 1.3 gigawatt Southland repowering project, which came online in mid-2020, continued growth in renewables, including 4 gigawatt expected to reach commercial operation this year, efficient gains from cost savings and our digital initiatives, and an interest savings due to refinancing benefits and completed debt reduction. We look forward to discussing our long-term growth rates and drivers with you all at our investor day next week. With that, I'll turn the call back over to Andres.
spk04: Thank you, Gustavo. Before we take your questions, let me summarize today's call. Thanks to the extraordinary dedication of our people, and the resilience of our business model, we met or exceeded all of our strategic and financial goals in 2020. We are very well positioned to capitalize on significant growth opportunities arising from the rapid transformation of our sector. As always, our primary focus is to continue to deliver superior returns to shareholders. We look forward to discussing our strategy and longer-term financial outlook with you at our Investor Day next Wednesday, March 3rd. With that, I would like to open up the call to your questions.
spk00: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Again, as a reminder, if you are viewing the webcast and intend to ask a question over the phone, please mute your computer speakers before asking your question. At this time, we will pause momentarily to assemble our . Today's first question comes from Angie Storizynski with Seaport Global. Please proceed.
spk02: Thank you. Good morning. So two quick questions. One, on your 21 guidance, what effective tax rate is embedded in that guidance? And is this an indication that you are actually expecting lower effective tax going forward?
spk01: So, Angie, Gustavo, no, I think we are, I mean, we had a This year, 2020 was particularly lower, around 23%. For 2021, we're expecting to go back to our original expectation on the mid-20s to high-20s.
spk02: Okay, thank you. And then one of the points, a drag, a year-over-year drag on your 2021 guidance is some GSF adjustment in Brazil. Could you explain?
spk01: Yeah, so we had this positive gain there, but we also had, especially in Colombia, some negative, call it one-timer heat. So we had a life extension project there that was about five to six cents negative. So when you look at both businesses there, they pretty much net each other out. So I wouldn't expect any drag from the hydro businesses in 2021.
spk02: Okay, and I know that you're going to be talking about strategy and longer-term growth plans only next week, but do you have any sense when Moody's could review your rating?
spk01: Look, they came earlier this year with a positive update on their credit view for AS, basically lowering the overall FFO to that on a consolidated basis to 14% versus 16%. uh we are seeing as they're very close to these ratios so you know we are we are positive i think they will we expect them to make a move hopefully this year we'll see what is exactly the move that they make but the ratios are there and we think we were in a positive uh moment with them and then again i know the analyst day is next week but um
spk02: Can you comment if you see yourself issuing equity anytime soon, like, say, over the next five years?
spk04: Yeah. Hi, Angie. This is Andres. Look, you know, that's one of the tools available to us. And, you know, it depends. We'll, you know, see the growth rates we have. We have a lot of opportunities. So that's one of the tools in our kit.
spk02: Understood. Thank you.
spk00: Thank you, Angie. The next question comes from Richard Sunderland with JP Morgan. Please proceed, sir.
spk03: Hi, good morning. Thanks for taking my questions here. Just wanted to start off maybe on the events in Texas last week. What do you see as the role for storage in the state going forward, and how might AES benefit from the deployment of storage locally?
spk04: Sure. Look, storage can be used to make a more resilient grid, definitely. And so I think that, you know, storage, the potential for growth in storage is enormous. You know, what particularly happened in Texas, of course, was that you didn't have capacity payments. So you didn't have really an incentive to winterize a lot of the existing plants, you know, fossil plants, and also, quite frankly, the wind turbines. Interestingly, solar performed very well. So I think the follow-up is, yes, people are going to be concerned about more resilient networks. And, you know, storage can play a part, you know, transmission. It can also play a part locally. So I do think that this will, you know, cast, you know, more light, more attention on energy storage as part of a more resilient grid.
spk03: so do you do you see a kind of a different opportunity for solar than for solar plus storage or just storage in general you're going forward as a result of the events or you think it's more market design issues and kind of other specific factors that that maybe need to change well you know my my own personal opinion is that you know where you have a market where you don't remunerate capacity i think is is you know one of the the key sources uh for
spk04: Having said that, you know, of course, you know, energy storage has many uses, you know, not only solar plus storage, wind plus storage, you know, standalone storage, but also to make improved transmission with existing lines so you don't have to upgrade the whole line. So all of these, you know, attention to the robustness of the grid and the network is a positive for future sales of energy storage.
spk03: Great. Thanks. And then just one specifically on the 21 guidance here. Any way to frame assumptions around, you know, asset sales, you know, coal sales baked into 21 guidance versus, you know, what has been announced, you know, last year into this year?
spk01: Yeah. This is Gustavo. So, all of the announced asset sales and retirements are incorporated. Effectively, we have India that closed late last year, so it's in here. We've said Vietnam, which was the other large one, would probably close between the end of this year or the next year, so it doesn't hit 2021. But effectively, all of the announced asset sales and retirements are incorporated in this 2021 guidance.
spk03: And are there placeholders for incremental sales as well?
spk01: I mean, if they happen, they'll probably close later. So specifically for 2021 wouldn't make any difference here.
spk03: Got it. That's helpful. Thank you for taking the time. Thank you, Richard.
spk00: The next question comes from Steven Bird with Morgan Stanley. Please proceed.
spk05: Hi. Good morning. Good morning, Steve. I wanted to – explore your corporate partnership with Google and just get your overall views on the degree of interest you're seeing from other companies to partner with AES, given AES's global reach and renewables and storage capabilities to help those corporates to achieve zero emissions. Is that an area you're encouraged by?
spk04: Very much so. Very much so. You know, we've talked in the past about our – relationship and partnership with Google. You know, that continues to progress. But, you know, we're also seeing interest from other similar players about, you know, 24-7 renewables. So, definitely, you know, we're encouraged by this. And the fact that we have presence in other markets is an additional plus. You know, not immediately, but down the road.
spk05: Okay, so it sounds like something in the long term you're excited about, but, you know, nothing near term, but something we could see over time. Okay.
spk04: Well, no, I wouldn't say, you know, so long term.
spk05: Okay. Okay, that's great. And then I guess just stepping back, maybe building a little bit on Angie's question on financing, you know, you have a really great growth outlook in many different asset classes. And I was just curious, just at a high level, as you think about just innovative financing approaches, financing tools out there, there certainly strikes me there's a lot of folks who love to provide capital to high-quality clean energy and storage projects. Are you seeing anything sort of new in terms of innovation as AES gets bigger and bigger and renewables, just different approaches to financing all of this growth?
spk04: Well, it's a great question. Over the past, let's say, you know, eight years or so, we've sold about $6 billion of assets. And we have churned that money, right? And that's provided impetus for a lot of our new growth. We've also done partnerships. So, you know, those continue to, you know, we'll continue to do asset sales and we continue to do partnerships. So you're right. We're seeing a lot of interest in people co-investing with us in different shapes or forms. So this is very positive. I think we have a... good reputation as a partner who really looks at all shareholders in these joint ventures. So you're absolutely right. We're seeing a lot of new things. You know, as you know, in the past, I'd say the one thing that did not come to Fruition really was, you know, the effort that Tom led for about a year. Honestly, without COVID, it would have come to fruition, which was quite innovative. But, you know, as I always said back then, this was extra. We didn't need it to finance our growth. It was just a plus. So we're seeing, again, a lot of people who are interested in partnering with us in our different technology plays.
spk05: Very good. Thank you very much.
spk00: Thank you, Steve. Today's next question comes from Julian Dumoulin-Smith with Bank of America. Please proceed.
spk07: Hey, good morning, team. Congratulations again. Prebs, just to kick it off here on 21, and I'm going to try to hold back ahead of next week, obviously, but can you talk about the renewables contribution here in earnings as well as fluence? How are you thinking about those two pieces, and especially as you try to refine your expectations and given the success on renewable backlog here? I get renewables are not necessarily homogenous, but how do you think about renewable earnings contributions here? And I know this is getting a little bit ahead of next week, but can you speak to it, especially in the context of 21, for both fluids and renewables?
spk04: Let me start it, and then I'll pass it over to Gustavo. So, look, next year is very interesting, just from a cutting ribbon point of view. We have four gigawatts that's coming online. So that represents PPAs which were signed in the past. And this is one of the highest additions to our fleet in our history in a single year. So that we feel very good about. So the second thing is, as you correctly pointed out, our renewables come in different flavors. So about half is outside the U.S. And about half is solar and about half is – There is some hydro coming online, but there is mostly wind, some energy storage. Regarding fluence, I would say that fluence will not be a contributor to earnings next year because it's in a very rapid growth phase. What we see is a big increase in acceleration in demand for energy storage as more uses are seen. And there were some questions about prior on this call about grid stability. And yes, it can play an important role in that. So we see growth accelerating influence. And basically, as a result of that, it's harder to hit that break-even. But I would say that in terms of just a little bit postponed in time because you're gearing up. Now, we came out with the new CubeStack. We also bought the AI-enabled bidding platform from AMS. And that's a very interesting addition. And we've had sales of AMS bidding engine actually not using Fluence's hardware. So, you know, generally, I would say that these kind of software platforms, you know, have less of, you know, less capital intensive, you know, than building the cube stack itself. So that will help us turn profitability sooner. But, you know, there's this tradeoff between very rapid growth and starting to break even. But, you know, we feel very good about the company. So, I'll pass it now to Gustavo to talk a little bit about the breakdown of our earnings. Now, I realize a lot of these things are, you know, somewhat tied together because, you know, you have like green blend and extend. So, you basically have a capacity contract with a fossil plant plus, you know, renewables being added onto that. So, with that, I'll pass it on to Gustavo.
spk01: Thanks, Andres. So, So Julian, I would say that 2021 is mostly driven by new additions. So remember, we had just half of the year for Southland. So we're going to have a full year of Southland. That's about 4 cents. And then renewables altogether, we are bringing 4 gigawatts online, as Andres said. Renewables altogether is about 5 cents. So the Delta 2021 is mostly driven by those additions. And then you have some items that offset each other. So there is a dragon tax. Tax was particularly lower. But we have recovery, for example, in the demand side from the utilities. We're expecting some recovery there. We have the cost cuttings also that will offset some of the drag from tax. So, you know, if you clean all of that, I would say mostly of the growth, primarily the growth is coming from the new additions being Southland full year and five cents from renewables.
spk07: Excellent. If I can ask you the obvious question here. Your target for annual development, I suppose, is two to three gigs. doing four gigawatts next year. Obvious question is, how do you think about that long-term target? And then related, given your comment on continued drag on Fluence, why hold on to a business that continues to drag your primary valuation metric in light of accelerating and improving outlook?
spk04: Sure. Let's see. Let me take the first question, which was about the renewables growth. So, you know, we have two years where we've basically been about at three gigawatts. Now, when we talk about that, that's PPA signed. So those will be brought online, you know, normally in a period within 24 months, probably the average is about 18 months. So there's a lag there. So we have had two very strong years. So four gigawatts are going to come online. That means they're actually coming online. So, you know, the goal is signed PPAs. The second is what you're actually going to start contributing to your earnings. So, you know, we see continued, you know, acceleration, let's say, in the renewables business. So, you know, we feel very comfortable. You know, it's no longer sort of two to three. It's more three plus going forward. And this could, you know, we have to see, you know, we'll be talking about this on Wednesday. I don't want to get too far ahead of us. Now, regarding Fluence, and, you know, really, we do have a, you know, a number of unicorns that we've done. You know, it started with Atimos in Brazil, which was the telecom. fiber optic rings, that we had distributed energy. Fluence is one. And we have another, you know, some more potential ones that we're developing, you know. So I would say that we're creating a lot, a lot of values with Fluence in two different ways. First, half of our renewable PPAs that we're assigning have an energy storage component. So right there, it makes us competitive. You're really understanding how to use energy storage and how to be very creative. I mean, what we did in Kauai, as you know, we won a prize for that. We have other projects coming on in Hawaii. We have the world's first virtual reservoir. We have a number of new uses. So AES is part of that engine of growth of Fluence because we are creating many new applications. and that is helping Fluence. And then we're getting it through the valuation of Fluence itself. So if you look at the valuation of Fluence, I expect it to do very well. You know, we started with the Qatari Investment Authority. Qatar is a particularly excellent partner at this stage for its investments in other technologies, from batteries to, you know, potential clients like Nebrus in the Middle East or So, you know, this is kind of, you know, somewhere between a financial and a strategic investor here. So, no, I don't think the time is now to get rid of Fluent in any way. I think we're in it for the long term. I think there are opportunities in the future, you know, that we will evaluate. But, no, we're very pleased with it. And I think we're just starting to see the real inflection point here for energy storage.
spk07: Thanks for the time.
spk04: Speak to you guys next week. Congrats again. All right. Thanks, Julian.
spk00: As a reminder, if you do have a question, please press star then one on your touchtone phone. Our next question comes from Charles Fishman with Morningstar. Please proceed.
spk06: Good morning. Andres, I know you were targeting Altamipo for commercial operation by end of the year. Did you make it?
spk04: It will be this year. We were targeting this year, 2021, maybe originally. But I'd say over the last year or so, we've been targeting 2021. It's coming along very well. And, you know, we are very close to completing all the tunneling work. And we've already done a lot of work in terms of putting in the turbines in the machine room. So Alto Maipo is proceeding nicely, and it will come online this year. And as you know, you basically complete construction, then you've got to fill up all the various tunnels with water before you start producing. But we're very pleased with construction at Alto Maipo.
spk06: Okay. And then on dividend policy, I'm just looking back over the last six years, it looks like you've been pretty consistent on the dividend being 50% of the current free cash flow. Is that still the first metric the board looks at? Is that still, you know, the primary tool they're going to use or metric they're going to use for determining the dividend going forward?
spk04: We really look to see if we have a dividend that we think is competitive for our investors. So, you know, what we're targeting going forward is a growth between 4% to 6% in our dividend. I think if you go in the past five, Five years, we probably had the fastest growing dividend of seven years. We've had the fastest growing, you know, dividend of anybody, really, if you take a longer time frame. So, you know, we're happy with, you know, our growth of that we've been forecasting as seven to nine in the past. And, you know, we'll continue to grow our dividend four to six percent, which we think is, you know, is competitive in our sector.
spk06: So the fact that it's been about 50% of free cash flow is just, I won't say coincidental, but it's just secondary importance.
spk04: That's correct. We're not targeting a payout of our, you know, free cash flow in that sense. So that's really not the target. It's really to make sure that we have an attractive dividend payment for our shareholders.
spk06: Okay. That's all I have. Thanks, Andres.
spk04: All right. Thanks, Charles.
spk00: At this time, we are showing no further questions in the queue, and this concludes our question and answer session. At this time, I would like to turn the conference back over to Ahmad Pasha for any closing remarks.
spk08: Thanks. Thanks, everybody, for joining us on today's call. As always, the IR team will be available to answer any questions you may have. Next week, we look forward to speaking with you again at our Virtual Investor Day. Thank you, and have a nice day.
spk00: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
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