The AES Corporation

Hello and welcome to the AES Corporation TechWorks 2021 Final Review. My name is Juan and I will be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing the star 1 on your telephone keyboard. I will now hand over to your host, Ahmed Pasha, Global Treasure Vice President of Investor Relations to begin with. Ahmed, please go ahead.

Thank you, operator. Good morning and welcome to our third 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 mayors can be found on our website along with the presentation. Joining me this morning are Andres Klosky, our President and Chief Executive Officer, Steve Copeland, our Chief Financial Officer, and other senior members of our management team. With that, I will turn the call over to Andres. Andres?

Good morning, everyone, and thank you for joining Our third quarter financial review call. Before discussing our progress since our last call, I want to introduce our new chief financial officer, Steve Kostin. Steve has been with AES for 14 years and has served in a variety of roles, including as CEO of Fluence and most recently as head of both strategy and financial planning. I am happy to report that we are making excellent progress on our strategic and financial goals and remain on track to deliver on our 7% to 9% annualized growth in adjusted EPS and parent-free cash flow through 2025. We had a strong third quarter with adjusted EPS of 50 cents, a 19% increase versus the same quarter last year. We expect to deliver on our full-year guidance, even with a $0.07 non-cash impact from an updated accounting interpretation related to the equity units of a convert we issued earlier this year. Steve will provide more details shortly. Today, I will discuss both the growth in our core business, as well as the strategy and evolution of our innovation business called AES Next. we see ourselves as the leading integrator of new technologies. The two parts of our portfolio are mutually beneficial to one another and enable us to deliver greater total returns to our shareholders. More specifically, and as we have proven, our core business platforms provide the optimal environment for exponentially growing technology startups. At the same time, our AS Next businesses provide us with unique capabilities that enable us to offer customers the differentiated products they seek to achieve their sustainability goals. Turning to slide four, I will provide you with an update on our core business, including our growth in renewables and an update on the overall macroeconomic environment. Beginning with renewables, we continue to see great momentum in demand overall. As we speak, we have senior members of our team attending the COP26 climate conference in Glasgow, meeting with governments, organizations, and potential customers. Since our last call in August, we have signed an additional 1.1 gigawatts of renewable PPAs, bringing our year-to-date total to 4 gigawatts. Additionally, we are in very advanced discussions for another 850 megawatts of wind, solar, and energy storage. Based on our current progress, we now expect to sign at least 5 gigawatts this year versus our prior expectations of 4 gigawatts. This represents the largest addition in our history and 66% more than in 2020. With our pipeline of 38 gigawatts of potential projects, including 10 gigawatts that are ready to bid in the u.s we are well positioned to capitalize on the substantial opportunity our success is a result of our strategy of working with our clients on long-term contracts that provide customized solutions for their specific energy and sustainability goals as such almost 90 percent of our new business has been from bilateral negotiated contracts with corporate customers. This allows us to compete on what we do best, providing differentiated innovative solutions. One example of our work with major technology companies to provide competitively priced renewable energy netted on an hour-by-hour basis. As we announced earlier this week, we signed a 15-year agreement to provide around-the-clock renewable energy to power Microsoft's data centers in Virginia. Year to date, we have signed almost two gigawatts of similarly structured contracts with a number of tech companies, integrating a mix of renewable sources and energy storage. Outside the U.S., we have a similar strategy of focusing on bilateral sales with corporate customers. which has enabled us to sign long-term U.S. dollar-denominated contracts with investment-grade customers. For example, in Brazil, we see demand for more than 25 gigawatts of renewables, providing a significant opportunity to earn mid- to high-teen returns in U.S. dollars, while at the same time diversifying our Brazilian portfolio of mostly hydro generation. To that end, For the first time ever in Brazil, we are in very advanced negotiations to sign a 300 megawatt US dollar denominated contract with a large multinational corporation for 15 years. Turning to slide five, our backlog of 9.2 gigawatts is the largest ever with 60% in the US. These projects represent one of the main drivers for our growth through 2025 and beyond. With this space of growth, we're laser focused on ensuring that we have adequate and reliable supply chains. For several years, we have anticipated a boom in renewable development that could potentially lead to inadequate panel supply. And as such, we took preemptive measures to ensure supply chain flexibility. Despite current challenges in the market, We have non-Chinese panels secured for the majority of our backlog, which is expected to come online through 2024. We have benefited from a number of strategic relationships with various suppliers and a clear advantage stemming from our scale and visibility of our pipeline. More generally, we continue to proactively manage potential macroeconomic headwinds, including inflation, and commodity prices. As part of our efforts to de-risk our portfolio over the past decade, we have taken a systematic approach to risk management. In fact, in places where we use fuel, it is mostly a pass-through, and therefore we have limited exposure to changes in commodity prices. Furthermore, more than 80% of our adjusted pre-tax contribution is in U.S. dollars, insulating us from fluctuations in foreign currencies. We not only remain committed to achieving our long-term adjusted EPS and parent free cash flow targets, but we also continue to improve our credit metrics and are on track to achieve triple B rating from all agencies by 2025. Now to slide six. We continue to benefit from a virtuous cycle with our corporate customers. in which our ability to provide innovative solutions leads to more opportunities for collaboration and more projects. For example, this quarter we announced a partnership with Google to provide our utility customers cost savings and energy efficiency features, as well as opportunities to accelerate their own clean energy goals through Nest thermostats. Moving to slide seven. Through AES Next, we integrate new technologies to bring innovation to the industry and work with existing and new customers. AES Next operates as a separate unit within AES where we develop and incubate new businesses, including a combination of strategic investments and internally developed businesses, representing approximately $50 million of growth capital annually. As I mentioned, the combination of AES Next and our core business creates the optimal environment for growth, whereby we can better create solutions for customers by utilizing our industry insights and operating platforms. One example of this mutually beneficial arrangement is in the combinations of renewables plus storage. We first combined solar and storage in 2018 in Hawaii, and today, Nearly half of our renewable PPAs have an energy storage component. Another example is 5B, a prefabricated solar solution company that has patented technology allowing projects to be built in a third of the time and on half as much land while being resistant to hurricane force winds. We see 5B's technology as a source of current and future competitive advantage for AES, allowing us to build more projects in places where there is land scarcity, constraints around height or soil disruption, or hurricane risk. Likewise, 5B benefits greatly from the ability to grow rapidly on our platform, and we are currently developing projects in the U.S., Puerto Rico, Chile, Panama, and India. I am highlighting the AS Next portion of our business because it is increasingly clear that AES essentially has two distinct business models that add value to our shareholders in very different ways. With our core business, we continue to measure our success through growth in adjusted EPS and parent-free cash flow, as well as PPA signed. With AES Next, these businesses contribute value creation through their extremely rapid growth in valuation, with the potential for future monetization. Nonetheless, they are a drag on AES's earnings during their ramp-up phase. In 2021, this drag on earnings is expected to be approximately $0.06 per share. We assume these losses from AES Next in our 2021 guidance and our 7% to 9% annualized growth rate to 2025. Turning to slide eight, as you know, last week Fluence, our energy storage joint venture with Siemens, which began as a small business within AES, became a publicly listed company with a current valuation of around $6 billion. Similarly, earlier this year, another AES Next business, Uplight, received a valuation in a private transaction of $1.5 billion. The value of our interest in these two businesses is now at least $2.5 billion, or $3 per share, compared to the book value of our investments of approximately $150 million. In my view, this massive shareholder value creation more than justifies the temporary negative impact to earnings. In summary, our strategy of being the leading integrator of new technologies on our platform has yielded great results and we have several other innovations in development under AES Next. As they mature, we will continue to take actions to accelerate their growth and show their value. With that, I will now turn the call over to our CFO, Steve Cawthon.

Thank you, Andres, and good morning, everyone. It's my pleasure to participate in my first earnings call as CFO of AES. I have been at AES for 14 years and feel very fortunate to work at a company that is transforming the electric sector so profoundly along so many talented people in finance and throughout the company. With our strategic and financial progress to date, AES is well positioned to continue leading this transformation. In my previous role, I led corporate strategy and financial planning where we developed our plan to get to greater than 50% renewables, at least 50% of our business in the US, and to reduce our coal share to less than 10% by 2025, all while growing the company 7% to 9%. We are committed to those goals, and I look forward to continue executing toward them. Before I dive into our financial performance, I want to discuss the adjustment to our accounting that we made this quarter relating to the treatment of the $1 billion in equity units we issued in the first quarter this year. Our prior guidance assumed that the underlying shares would not be included in our fully diluted share count until 2024 upon settlement of the equity units. This approach was in line with industry practice and supported by our interpretation of the accounting literature and our external auditors. However, we are now subject to an updated interpretation of these instruments, and we are adjusting to include these shares in our fully diluted EPS calculations. This adjustment results in an annual impact of roughly $0.07 this year and $0.09 in 2022 and 2023, using a full year of an additional 40 million shares. It's important to keep in mind that this adjustment has no cash impact and has absolutely no impact on our business or longer-term growth rates, as we had included the underlying shares in our projections for 2024 and beyond. Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted EPS guidance range, but we now expect to be at the low end of the range. Now I'd like to cover two important topics, our performance during the third quarter and our capital allocation plan. Turning to slide 11, you can see the strong performance of our portfolio in this quarter. Adjusted EPS was 50 cents for the quarter versus 42 cents for the comparable quarter last year. This 19% increase was primarily driven by improvements at our operating businesses, new renewables, and parent interest savings. These positive drivers were partially offset by lower contributions from South America, largely due to unscheduled outages in Chile. Third quarter results also reflect an approximate $0.03 quarter-to-date impact from the higher share count due to the inclusion of 40 million additional weighted average shares relating to the equity units, as I just mentioned. Turning to slide 12, adjusted pre-tax contribution or PTC, was $428 million for the quarter, an increase of $97 million versus third quarter of 2020. I'll cover our results by strategic business unit over the next four slides, beginning on slide 13. In the U.S. in utilities SBU, PTC increased $69 million as a result of our continued progress in growing our U.S. footprint. The improvement was largely driven by higher contributions from Southland, which benefited from higher contracted prices, new renewables coming online at AES Clean Energy, and higher availability at AES Puerto Rico. In California, our 2.3 gigawatt Southland legacy portfolio demonstrated its critical importance by continuing to meet the state's pressing energy needs and its transition to a more sustainable carbon-free future. in fact as you may have heard last month the state water resource control board unanimously approved an extension of our 876 megawatt redondo beach facility for two years through through 2023 to align with our remaining legacy units if the demand supply situation remains tight some of our legacy portfolio could be available to meet california's energy needs beyond 2023 if state energy officials determine a need although we have not assumed this in our guidance. As you can see on slide 14, at our South America SVU, lower PTC was primarily driven by unscheduled outages in Chile due to a blade defect impacting six turbines across our fleet that has now largely been resolved. Our third quarter results were also driven by lower hydrology in Brazil. Before moving to MCAC, I would like to provide an update on the 531 megawatt Altamipo Hydro Project, owned by a subsidiary of A.S. Andes in Chile. Construction continues to go well, and generation is expected to begin in December of this year, with full commercial operation of the plant expected in the first half of 2022, in line with our expectations. Altamipo is in discussions with its non-recourse lenders to restructure its debt to achieve a more sustainable and flexible capital structure for the long term. A.S. Andes has honored its equity commitments to Alto Mipo and will not be assuming any additional equity obligations. We expect the restructuring to be completed in 2022. And A.S. Andes already assumed zero cash flow from Alto Mipo, so we don't see the restructuring impacting our guidance. Now, turning back to our third quarter results on slide 15, The higher PTC at our NCAC SBU primarily reflects higher LNG sales in Dominican Republic and demand recovery in Panama. And finally, in Eurasia, as shown on slide 16, higher results reflect improved operating performance in Bulgaria. Now to slide 17. To summarize our performance in the first three quarters of the year, we earned adjusted EPS of $1.07 versus $0.96 last year. As I mentioned earlier, in terms of our full-year guidance, we are incorporating the $0.07 per share non-cash impact from the adjustment to the equity units issued earlier this year. Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted EPS guidance range, but we now expect to come in at the lower end of the range of $1.50 to $1.58. It's important to note that this adjustment does not affect our longer-term growth expectations and has no impact on our cash flow. With three-quarters of the year behind us, our year-to-go results will benefit from contributions from new renewables continued demand recovery across our markets, reduced interest expense, and our cost savings programs. These positive drivers are offset by the impacts of the higher share count and the dilution from AS Next, as Andres discussed earlier. Now, turning to our 2021 parent capital allocation on slide 18. Beginning on the left hand of the slide and consistent with our prior disclosure, we expect approximately $2 billion of discretionary cash this year. We remain confident in our parent free cash flow target midpoint of $800 million and the $100 billion from the sale of Etabo. And we received the $1 billion of proceeds from the equity units issued in March. Moving over to the right-hand side, the uses are largely unchanged from the last quarter, with $450 million in returns to our shareholders this year. consisting of our common share dividend and the coupon on the equity units. We also continue to expect almost $1.5 billion of investment in our subsidiaries, with about 60% going towards renewables globally. Our investment program continues to be heavily weighted to the U.S., with approximately 70% targeted for our U.S. businesses. The increased focus on U.S. investments will contribute to our goal of growing the proportion of earnings from the U.S. to at least half of our base. Finally, as I ramp up in my new role, I've had the chance to speak with many of our internal and external stakeholders. It's clear that AES continues to successfully execute on our strategy, and we've remained resilient in the face of volatile macroeconomic conditions. Continuing to drive this successful execution and delivering on our financial goals is my top priority. I look forward to getting input from more of our investors and analysts and providing the information you need to understand the great future ahead for AES. With that, I'll turn the call back over to Andres.

Thank you, Steve. In summary, we have had a strong third quarter with both our core business and AES Next doing well. We're increasing our target for science renewable PPAs from four gigawatts to five gigawatts, and Bullitt successfully completed its $6 billion IPO. We remain committed to delivering on our strategic and financial goals, including our 7% to 9% annualized growth rate in earnings and cash flow. And we'll continue to create greater shareholder value by being the leading integrator of new technologies. With that, I would like to open up the call to questions.

Thank you, Andres. If you would like to ask a question, please press the star followed by one on your telephone keypad now. If you change your mind, please press the star followed by two. When preparing a question, please ensure your phone is unmuted locally. And our first question comes from Richard Sutherland from JP Morgan. Please, Richard, your line is now open.

Hi, good morning. Thanks for taking my questions. Just wanted to start with the equity units change here. Will you look to offset any of the 9 cent impacts to 22 or 23? Just thinking about the incremental positives after the annual stay this year, such as the higher renewable signings and the Redondo extension, kind of how do you see all that shaking out with the latest change here?

Well, you know, as you know, we have a, we're a portfolio. And so we have, you know, pluses and minus. Overall, you know, it's a portfolio that it's shown its great resilience over the last two years. So right now, we're not, you know, ready to give guidance for, you know, next year. But, you know, we're committed to the 7% to 9% growth rates in earnings and in free cash flow. So, you know, we'll be getting back to you on that. But as you correctly point out, you know, there are positives. And then, you know, then we have the drag of the additional shares. And we will be working with that. I'd say overall, we feel we're in an excellent position. We had a very strong quarter and year to date. One of the things I'd like to highlight is that we had a design malfunction in our steam turbines in Chile. And this required them to undergo maintenance at 50,000 hours instead of 100,000 hours. And this happened during the worst drought in Chile's history. So, you know, we were short energy when energy prices were high. But nonetheless, if it weren't for the accounting, we would have been, you know, well within the mid or upper region of our earnings. So, you know, this is the way that our portfolio works. So I don't know, Steve, you want to add something?

Sure. Yeah, no, thanks. Andres, and thanks for the question. So, you know, look, as I said in my script, really this is just a recalculation. So it's just a different denominator on the capital, on the equity units that we raised earlier this year. So it's purely just math, frankly. And looking ahead, you know, we do see we have many levers, as Andres said. So we're fully committed to the 7% to 9%. These shares were already incorporated as of 2024, so it has no impact on that longer-term growth rate. And then looking ahead, we have a number of value accretive opportunities in the portfolio. So we're in the midst of our planning process at this point, and we'll give 2022 guidance in February. But we feel very confident in the overall growth rate. And there's definitely things that we can do to stay within that range going forward.

Understood. Thank you for the color there. And then maybe just switching gears to the CNI side and the progress shown with the Microsoft field, curious if you could speak a little bit to the two gigawatts you cited of similarly structured solutions signed year-to-date and how that compares to initial expectations. And then just kind of broadly, any near-term limitations to your ability to further roll out this around-the-clock product, just how you think about scalability there overall. Thank you.

Sure. You know, I think we're rolling it out very well. We have said from the beginning when we did the first Google one that this was a product that was, there was a lot of interest from other large corporate customers. So, you know, we feel good that this is not the last deal we'll do. I think the key here is really the ability to provide around the clock. And so this is 100% renewable for 15 years. So the product keeps getting more sophisticated. Now, to do that, You know, you really need to be able to model, you know, all possible situations in a given area of service, you know, integrating also batteries and different forms of renewable power. So we've been very flexible on that. You know, we're very excited about that. And, you know, we see additional opportunities going forward. I think, as we mentioned, you know, 90% of the deals we have signed – in the last year to date, you know, have been with corporate customers. And so we really see this type of structured product really being a competitive advantage for us. So, you know, stay tuned. We think this is, you know, something that we've been talking about, and we're really seeing it come to fruition.

Understood. Thank you for your time today.

Thank you. Thank you.

Thank you. The next question comes from Dorcas Chopra from Eventcore ISI. Please, Dorcas, your line is now open.

Hey, good morning, Andreas and Steve. Welcome and look forward to working with you. So a couple questions from my end. First, just, Andreas, you made that comment that majority of the backlog to 2024 is now secured. Can I just ask you to clarify, when you say that, that means wind, solar, storage, everything?

No, we were basically talking about solar panels, but we also have the balance of plant. So we feel very secured about it. But the one that's been, let's say, more in the press and more top of mind for everybody has been solar panels. So we... or very early on, you know, started switching buying from Chinese panels to buying panels made in Malaysia, Vietnam, and in the future, you know, Cambodia. And we've also, you know, I think, been leaders in getting our suppliers to certify that there's no, let's say, polysilicon coming from Western China that could be, you know, questionable in terms of the labor practices. So, you know, we feel very comfortable. We have these supplies. We have, let's say, flexibility. And we've also bought a number of U.S. panels made in the U.S., without polysilicon, by the way. So, you know, altogether, we feel very comfortable that, you know, we have enough to meet our backlog, you know, through 2024. And that includes the balance of the plant, and that includes the batteries.

Got it. I mean, I guess in the last quarter, Andres, you'd mentioned batteries. something around maybe 90% of the equipment needed for your then stated backlog of like, I think it was eight and a half gigawatts. Are you in that similar percentage wise for this updated 9.2 gigawatt number?

Yes.

Okay, perfect. Thank you. And then just obviously great execution, five gigawatts year to date. You have a target of three to four going to five up to 2025, right? Like five gigawatts a year for 2025. So as you sort of have this momentum, can you talk about sort of your margins, profitability, cash flow returns as you're seeing cost pressures?

Sure. Great question. Look, we are achieving, targeting and achieving low teen returns in the U.S., and we are targeting and achieving mid to higher teens outside of the U.S., So those are really our hurdle rates that we are achieving. We feel very good about that. Now, I realize there's a lag between signing a PPA and commissioning the project. So this year, we'll commission north of 1.5 gigawatts, maybe as high as 2. Next year, we should be somewhere between 3.5 and 4 gigawatts. So this momentum will continue. So we see it's not just the number of megawatts. We have to make sure that we're earning... on average, the right returns.

Perfect. Thanks for the time, guys.

Thank you. Our next question comes from David Peters from World Research. Please, David, go ahead.

Yeah, hey. Good morning, guys. Good morning. Just back to the different accounting treatment for the equity units. You know, you guys made the point to mention that it was consistent with other peers in the auditors that signed off. So, I guess I'm just wondering what specifically changed that you're now subject to this new interpretation?

Yeah, this is Steve. I'm kind of happy to describe a little more detail. So, we issued the one billion equity units back in March. And as I said, you know, it was the treatment that we used was very well vetted by our accountants, by our external auditors. and external advisors. So, at that point, we were using a Treasury stock method for the treatment, so it didn't show up in the share count. So, there's a number of companies that have used similar instruments, and in consultation with our auditors, the SEC had done a review of the treatment of these types of instruments, and has informed our auditors that they see a different interpretation. So, although we haven't had direct communications with the SEC, we felt it was most prudent that we go ahead and update the interpretation. So, we're really just taking a prudent course of action here. You know, this conversion was already assumed in the 2024 share count, so it's just an interim impact to the calculation. You know, there's no new transaction here. It's just this recalculation of the shares. So, ultimately, that's the source of it, and we're just trying to be as prudent as we can in terms of the treatment.

Great. I appreciate the detail there. Another question I had, just kind of switching gears, and I appreciate the slide and the deck that you, you know, showing the value you've created through Fluence and Uplight and And I guess now that Fluence is public would be a little bit more curious to hear about Uplight in terms of how you think about the value of that company today versus when you got the value mark and going forward, particularly because I think I just saw that Uplight completed an acquisition recently.

Yeah, thanks for the question. Look, we see Uplight in terms of its maturity two to three years behind Fluence. But we're very happy with the progress that Uplife has made. And, you know, very happy with what we've done with S-NEXT, because if you look at our capital contribution and today's valuation, that's a 20X. So that's, you know, some of this has been in, you know, even though we were working, for example, on batteries for a long time, but really in terms of having a business, it's been, you know, roughly about three years, three, four years, So these have created a lot, a lot of value for our shareholders. And it's very interesting because there are two sides of the business. The AS Next is really a value play, especially during this rapid growth phase, because you have to expense a lot of your investments, really. But at the same time, they're helping us grow. So, you know, when you talk about the structured products that we're selling to corporations, you know, having ASNEXT and the know-how from there has been extremely helpful. So, you know, as I said, you know, stay tuned. We have others in the works. You know, the most mature probably is 5B. We think 5B has a lot of potential because of what it offers. It offers, you know, speed of build. It offers less use of land. And hurricane resistant is very important. Hurricane wind resistant is very important. So I'm very happy with the progress there and very happy about the relationship between the AES core business and AES Next.

Great. And then just last one quickly, just a point of clarification. You said AES Next is roughly a six cent drag today, but as we get out into the outer years of your plan, I guess 24 and 25, are you expecting it to be contributing at that point or would it still be a drag?

Yeah, no, we are. So, I mean, I think there's a near-term dilution of a similar level, say, for 2022, and then that gradually reduces. And so by 2024, 2025, we're expecting positive contributions and then significant acceleration in the positive contribution from that point.

Great. Thank you, guys. Thank you.

Thank you, David. The next question comes from Julian DeMolin Smith from Bank of America. Please, Julian, your line is now open.

Hey, good morning, team. Congratulations on everything. Well done. So just to come back to this AES next, again, kudos there. As you guys think about the drag here, you talked about 21 having a 6-10 drag. Through the 25 period here, how do you think about the cadence of that drag to evolve here? By the time you get to 25, what is that reflected in your expectations here? And then maybe I'll throw in another sort of nuanced question. EPS question. When you're thinking about the converts here, obviously you were able to offset that and be at the top end at 21. What does that say about by the time you get to 25, considering that the converts admittedly would have been sort of effectively fully diluted by then in terms of where you stand within your range as well? Again, against the backdrop of all your successes, be it origination or otherwise.

Sure. Steve and I will answer this one. Let me take the second one. So it's definitely within our 25 numbers, you know, because it was assumed that they would convert, and so that was the share count. So what is different is that we have a higher share count, 21 and 22 and 23. That is the only difference in these calculations. Regarding, you know, AS Next, you know, the one that's producing the largest drag is Fluence, quite frankly, and Fluence, as it matures, You know, and it made all these investments in new designs, in gearing up to be able to meet that supply in terms of guaranteeing supply of batteries around the world. You know, and as sales increase, you know, this will, you know, I would say gradually increase. turn positive. So I think maybe, Steve, you want to mention?

Yeah, no, I mean, obviously, as André said, I led Fluence for its first two and a half years, so I'm very familiar with the company and its trajectory. And look, you know, the opportunity for Fluence has just gotten massive, more massive than even we predicted when I started there. So, you know, going out and raising this capital was a clearly targeted to go big and go much bigger. And so this, in some ways, what it does is it increases the near-term dilution deliberately because we're investing to accelerate the scale of the company. And we know that it can be successful if we accelerate. But it's also then significantly increasing the upside when you get out into 24-25 period. So putting this capital to work is going to be near-term dilutive, but it's tremendously value accretive. And we've already seen some recognition of that in where it is today, and we think it's only going to go significantly upward from here. So, you know, in our numbers, it turns positive and it turns significantly positive by 2025.

And that significantly positive is reflected in that 25 number today? Do you want to understand, like, how much of the earnings are coming from that?

Yes. Yeah, so it is reflected, and I would say from the level of dilution today, it's going to flip-flop to being at least that level positive by that point.

And when you say at least that level positive, that is AES Next in entirety, right, not just Fluent?

yeah i think fluence will be at that point you know uplight will have grown too but i would expect fluence would likely be the a few ahead be the largest driver but i would say at least uh six cents positive uh from from from next by 2025. right okay got it excellent thank you for the clarity there and then if i can just a more strategic question here also again against your backdrop of 25 numbers

California's extension, you've only reflected this in your numbers through, you haven't reflected this through 25. That seems like a further upside, whether it's Redondo or the entirety of the legacy portfolio. And ultimately, just when you think about the portfolio altogether and this fossil transition, again, kudos on transition. How are you thinking about some of the lingering assets, especially some of the renewed interest across the marketplace, for instance, LNG?

So I'll take the Southland question, then we'll turn it over to Andres. So that's correct, Julian. The Southland extension is the Redondo extension provides some upside. So we had the Alameda's Huntington Beach through 2023. We had the recent decision. That's now upside for Redondo Beach. But at this point, everything is just through 2023 and not beyond that. So the extent there's an opportunity beyond that, that would be upside to our guidance. And in addition, you know, this year in the third quarter, we've seen in the numbers, we had, you know, the margin favorability from the hedges there. Those assets, those legacy assets are quite valuable. And we see, you know, the potential for further Q3 value recognition in our assets, which would also be upside to the guidance going forward.

Yeah, Julian, regarding sort of the LNG, we have a very strong position in the Gulf of Mexico between the Dominican Republic and Panama. We have basically been contracting much more in terms of the Dominican Republic filling up the second tank and Panama filling up the first tank. So we see LNG as a necessary transition fuel. And I think what we're seeing a little bit in Europe and a little bit in China is it's very important to manage this transition. So while we're coming up with new technologies, making it possible to put more renewables on the grid, make renewables cheaper, make them more efficient and satisfy more what customers want, we see that in many places, LNG, natural gas, is the necessary transition fuel. these two will work together. And as we said, you know, we are, you know, on our way to filling up our full capacity of the two locations, of the three tanks.

Got it. So it sounds like literally and perhaps figuratively, you haven't quite filled the tank on the incremental contribution to Mellon G or California when it comes to 25 yet. There's more to go.

Yes, that's right. That's right. There's still more potential in You know, quite frankly, that's the most profitable thing we can do is to fill up an existing tank.

Yeah.

Yeah. Excellent, guys. Thank you. Best of luck. Thank you, Julian. Thanks, Julian.

Thank you, Julian. As a reminder, to ask any further questions, please press the star followed by one in your telephone keypad now. The next question comes from Steven Bird from Morgan Stanley. Please prevent. Your line is now open.

Thanks very much, and congrats on a very constructive update here. Thank you, Steve. Go ahead. Oh, yes, sir. I wanted to just explore the Google Nest agreement and just talk a little bit more about the magnitude, if you could. and sort of repeatability of that approach, it looks like a great solution where you can bring a lot of your skills to bear to provide some value. But I'm struggling sort of thinking about how to sort of try to assess the magnitude of the opportunity here.

Well, this is through Uplight. And, you know, Uplight has been, you know, I believe the biggest seller of nests in the U.S. because it reaches around 100 million final consumers in the U.S., So the idea is to continue to add on that platform more things and improve, you know, customers' experience and customers' capabilities of, you know, improving their energy efficiency use. Now, of course, you know, uplight works through large utilities. So that's really how it goes. So I think there is a lot of opportunity there. I agree with that. And, you know, what Uplight has been doing is acquiring additional capabilities by some of these acquisitions adding onto that platform. So it's really using that platform, using that entry into final consumers to provide additional value-add services.

Understood. And is there a way to think about that value in terms of sort of the

per customer value or some other metric in terms of the the benefit that utilities would receive from the kinds of services you could provide here uh i don't have that you know available right now um i think the way to think about it is this is the the value of the total you know uplight platform and as you know we partnered with uh schneider electric to have more capabilities we've made more acquisitions And we're working very closely with our utility customers. So I think the way this value will be reflected and captured is through the value of uplight. And as I said, I think it's two to three years behind Fluence in terms of its evolution.

Okay. Very clear. And then just last question for me just on LNG. Okay. You've been making great progress. You just described on Julian's question sort of the, you know, you're moving towards kind of filling up a number of these resources. I was thinking once they're essentially sort of filled to the capacity that you've targeted, they're fairly mature assets at that point, and there might be a more logical owner with a fairly low discount rate, you know, at that point once they're mature. Are these good monetization assets when they're mature? Are there reasons you kind of see further option value essentially around these assets longer term?

I think two things. As you know, we are growing very rapidly in renewables. We have plans to sell down coal. So, you know, we will continue to manage this portfolio to optimize its value for our shareholders. And so, you know, we'll see how that develops. Right now, our focus is really on filling up the gas tanks.

Okay. Understood. Thank you very much. Thanks, Steve. Thanks, Steve.

Thank you. As a reminder, to ask any further questions, please press the star followed by one on your telephone keypad now. We currently have no further questions. I would like to hand over to Ahmed Pasha for any final remarks.

Thank you. Thanks, 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. Next week, we look forward to seeing many of you at the EEI conference. Thanks again, and have a nice day.

This concludes today's call. Thank you so much for joining. You may now disconnect your lines and have a great rest of your day.