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Text: 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.
Before discussing our progress since our last call, I want to introduce our new Chief Financial Officer, Steve Coughlin.
Steve has been with AES for 14 years and has served in a variety of roles, including as Chief Executive Officer 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 earnings per share and parent free cash flow through 2025.
We had a strong third quarter with adjusted earnings per share of $0.50, a 19% increase versus the same quarter last year.
We expect to deliver on our full year guidance, even with a $0.07 noncash 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 start-ups.
At the same time, our AES Next businesses provide us with unique capabilities that enable us to offer customers the differentiated product 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.
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 four 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 five gigawatts this year versus our prior expectations of four 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 this substantial opportunity.
Our success is a result of our strategy of working with our clients on long-term contracts that provides customized solutions for their specific energy and sustainability goals.
As such, almost 90% 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 design a 300-megawatt U.S. 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 U.S. These projects represent one of the main drivers for our growth through 2025 and beyond.
With this pace of growth, we are laser-focused on ensuring that we have adequate and reliable supply chain.
For several years, we have anticipated a boom in renewable development that could potentially lead to inadequate panel supply.
And as such, we took pre-emptive 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 derisk 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 earnings per share and parent free cash flow targets, but we also continue to improve our credit metrics and are on track to achieve BBB ratings 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 gross 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 combination 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 1/3 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 a 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 AES 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 earnings per share and parent free cash flow as well as PPAs 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' 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 through 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, early this year, another AES Next business, Uplight, received evaluation 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.
It's my pleasure to participate in my first earnings call as Chief Financial Officer 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 U.S. 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 assume 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 earnings per share 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 earnings per share 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 earnings per share was $0.50 for the quarter versus $0.42 for the comparable quarter last year.
This 19% increase was primarily driven by improvements in 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 that 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 US and 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 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 SBU, 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 531-megawatt Alto Maipo hydro project, owned by a subsidiary of AES 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.
Alto Maipo is in discussions with its nonrecourse lenders to restructure its debt to achieve a more sustainable and flexible capital structure for the long term.
AES Andes has honored its equity commitment to Alto Maipo and will not be assuming any additional equity obligations.
We expect the restructuring to be completed in 2022.
And AES Andes already assumed zero cash flow from Alto Maipo, 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 MCAC 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 earnings per share 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 noncash impact from the adjustment for the equity units issued earlier this year.
Prior to this adjustment, we had expected to be in the upper half of our 2021 adjusted earnings per share 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 impact of the higher share count and the dilution from AES 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 million from the sale of Itabo, 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 toward 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 remain resilient in the face of volatile macroeconomic conditions.
Continuing to drive the 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.
In summary, we have had a strong third quarter, with both our core business and AES Next doing well.
We are increasing our target for science renewable PPAs from four gigawatts to five gigawatts and Fluence 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 will 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.

user
aes reaffirms 7% to 9% annualized growth target through 2025; now expects to sign 5 gw of renewables under long-term contracts in 2021.
qtrly adjusted earnings per share of $0.50.
reaffirming 2021 adjusted earnings per share guidance range of $1.50 to $1.58; now expecting low end of the range.

assistant