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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.
Today, I will discuss our progress to-date on a number of key strategic objectives before turning the call over to our CFO, Gustavo Pimenta to discuss our financial results in more detail.
We had an excellent second quarter with a 24% increase in adjusted earnings per share from the second quarter of 2020 and a record 1.8 gigawatts of renewables under long-term contracts added to our backlog bringing our total to 8.5 gigawatt.
We remain on track to achieve 7% to 9% average annual growth in adjusted earnings per share and parent-free cash flow through 2025.
I will give more color on our accomplishments while covering the following three themes shown on slide 4.
One, the growth and transformation of our U.S. Utilities; two, our rapidly growing renewables business; and three, our strategic advantage from innovation.
As you may recall, during our Investor Day in March, we outlined our plan to invest $2.3 billion to transform our two U.S. Utilities, AES Ohio and AES Indiana.
During the second quarter we concluded key outstanding regulatory proceedings at both of our U.S. Utilities, clearing the path for investment in the latest technologies, which will enable us to deliver a higher level of service and reduce carbon emissions.
At the core of our efforts is a focus and deep understanding of the digital tools that vastly improved customer experience and enable the integration and orchestration of diverse and distributed renewable resources.
Starting with AES Ohio on slide 5 where we expect to nearly double the rate base by growing 12% annually through 2025.
Recently, we made a substantial headway on outstanding regulatory filings.
First, the Commission approved AES Ohio stipulation allowing predictable cash flows and investment in smart grid initiatives over the next four years.
And second, AES Ohio also received approval for the FERC-regulated formulary allowing recovery of transmission investments.
Now, moving on to AES Indiana on slide 6 where we're investing $1.5 billion over the next five years as part of our grid modernization program and our transition to more renewables-based generation.
We recently received regulatory approval for our 195 megawatt Hardy Hills Solar Project.
And we announced an agreement to acquire the Petersburg Solar Project, which includes 250 megawatts of solar and a 100 megawatt hours of energy storage.
We expect to grow the rate base at AES Indiana by more than 7% annually.
With many of the key regulatory approvals behind us, we are now positioned to execute on our utility modernization and decarbonization programs, which have been years in the making.
Now, turning to the second theme of renewables growth on slide 7; last year was a record-breaking year of renewable contracts for us with over 3 gigawatt signed.
So far this year, we have already signed almost 3 gigawatt of contracts for wind, solar, and energy storage nearly double the amount at the same time last year.
More than 90% of the new contracts are in the U.S. and we are well on our way toward achieving or exceeding our target of 4 gigawatts for 2021.
At the same time, more than 80% are with C&I customers negotiated on a bilateral basis.
Our new projects will yield after-tax returns at the project level in line with our low teens average for the U.S. and mid to high teens internationally.
Our progress so far this year includes our recent agreement to acquire 612 megawatts of operating wind assets in New York as shown on slide 8.
New York State's supportive renewables policies, combined with the scarcity of wind projects in the Northeast provides us with several pathways for long-term attractive cash flows to support repowering by 2025.
This wind acquisition complements our solar and energy storage pipeline providing us with another resource to offer diversified and differentiated products to our consumers.
Turning to slide 9, we're particularly pleased with our ability to advance new clean energy products.
This year we announced the world's first ever large scale 24/7 carbon-free energy netted on an hourly basis supplying Google's Virginia data centers.
We see this concept of real-time renewable generation as opposed to the purchase of offsetting renewable credits as the new highest standard in Clean Energy.
We have since replicated similar structures with other large-scale customers helping them to achieve their sustainability targets while supporting our renewables growth goals or a total of 1.5 gigawatts of these Clean Energy products signed or awarded thus far this year.
We see these innovative carbon free energy products as examples of our unique advantages both in our technical and commercial ability as well as our culture of working together with customers to understand their specific needs.
Turning to slide 10, with nearly 3 gigawatts of renewables and energy storage projects added this year we now have a backlog of 8.5 gigawatt including 2.5 gigawatts currently under construction.
We expect to bring 1.4 gigawatts online during the remainder of 2021.
The strength of our U.S. renewables growth in the rapidly expanding market will support achieving our goal of having 50% of our earnings from renewables and utilities and 50% of our earnings from the U.S. by 2025.
We also continue to aggressively grow our pipeline of early mid and late-stage development projects to support future growth.
As you can see on slide 11, we now have a pipeline of 37 gigawatts, among the largest in the world.
More than 60% of this pipeline is in the U.S. including 8 gigawatts in the hottest market in the country, California.
Now to decarbonization on slide 12; last month, AES Andes announced that 1.1 gigawatts of coal-fired generation would be voluntarily retired as soon as January 2025 and will be replaced with 2.3 gigawatt of newly contracted renewable.
Since 2017, we have announced the sale or retirement of almost 12 gigawatts of coal-fired generation, which is among the largest programs of any American company.
I am pleased to report that these exits along with our substantial renewable additions reduce our generation from coal to approximately 20% of total generation on a pro forma basis, an additional reduction of 5 percentage points since last quarter.
I would like to address two key concerns that we're hearing from investors related to growth in renewables, inflationary pressures and supply chain bottlenecks.
As one of the largest global renewable developers with a strong reputation we have a long history of successfully negotiating strategic supply agreements resulting in preferential access and pricing.
Furthermore, we lock-in the hardware prices when we sign the PPA sheltering us from future price fluctuations.
With 90% of the equipment needed for our 8.5 gigawatt backlog already secured, we feel very comfortable in our ability to execute on our strong pipeline over the short- and medium-term.
Now, turning to slide 13 and our third theme of innovation; as our entire sector continues to rapidly evolve, we increasingly find that there is a competitive advantage for those who are able to effectively incorporate new technologies and business models.
For example, we have benefited significantly from our Energy Storage business, which we started over 10 years ago and which now is one of the largest in the industry.
There are important synergies between our core businesses and technology ventures.
For example, this year, about half of our renewables energy PPA include an energy storage component.
Last month, once again, we were awarded the highest honor in the Power and Utility sector, the Edison Award from the Edison Electric Institute for our work developing energy storage as a cost-effective alternative to new gas peaking plants.
Specifically, the award was for the AES Alamitos Battery Energy Storage System consisting of 400 megawatt hours of energy storage that can supply power to tens of thousands of homes in milliseconds.
This is our seventh Edison Award overall and third U.S. Edison Award over the last decade.
I would like to note that we have won many more Edison Awards than any other company in recent years.
Turning to slide 14, we also continue to build on our prior success in creating technology unicorns.
For example, we have previously mentioned our strategic investment in 5B, a prefabricated solar solution company that has patented technology allowing solar projects to be built in a third of the time and on half as much land while being resistant to hurricane force winds.
We continue to grow 5B's footprint across several markets including the U.S., Puerto Rico, Chile and Panama and they are now expanding into India where we are working with domestic partners to establish local manufacturing.
We hope India will enable 5B to reach much greater scale, much more quickly, which combined with our leading work in robotics construction will help us lower all-in solar costs as we advance on the learning curve.
Turning to slide 15, similarly, we continue to benefit from our investment in Uplight, which provide cloud-based energy efficiency solutions to more than a 110 million households and businesses through its numerous utility customers, including AES Ohio in AES Indiana.
In July, we closed the previously announced transaction with Schneider Electric and a group of investors that valued Uplight at $1.5 billion.
In conclusion, we're very pleased with our progress to-date across all of our key strategic initiatives.
Not only are we well-positioned to achieve all of our financial goals but we are on track to hit our transformational targets of more than 50% of our earnings from renewables and utilities and more than 50% from the U.S. while having less than 10% of our generation from coal by 2025.
As Andres mentioned, we are making excellent progress this year having already achieved significant milestones on our strategic and financial objectives.
We are pleased to see the continued economic recovery across our markets driven by the reopening of local economies.
In Latin America, many of our clients continue to benefit from record steel, copper and [Indecipherable] prices resulting in a significant improvement in electricity demand across our businesses.
This also reflects in our day sales outstanding, which remain at a historically low levels.
Turning to our financial results for the second quarter on slide 17; adjusted earnings per share was up 24% to $0.31, primarily reflecting execution on our growth plan, demand recovery at our U.S. Utilities and parent interest savings.
These positive drivers were partially offset by lower contributions from Chile and Brazil and a slightly higher adjusted tax rate.
Turning to slide 18, adjusted pre-tax contribution or PTC was $303 million for the quarter, an increase of $65 million versus the second quarter of 2020.
I'll discuss the key drivers of our second quarter results in more detail beginning on slide 19.
In the U.S. & Utilities Strategic Business Unit or SBU, PTC was up $71 million driven primarily by the demand recovery at our utilities, higher contributions from about 1 gigawatt of new renewable assets, and the commencement of Power Purchase Agreements or PPAs at Southland Energy in California.
Turning to slide 20, we are very encouraged to see material recovery, consistent demand at our U.S. Utilities.
For Q2 on a weather-normalized basis demand at AES Ohio is up 9% and demand at AES Indiana is up 4%.
The net combined volume in Ohio and Indiana is largely back to 2019 pre-COVID levels.
This recovery is mainly driven by higher load from commercial and industrial customers this year as a result of the reopening of local businesses.
Separately, in California, our 2.3 gigawatt Southland legacy units are well-positioned to contribute to the State's pressing energy needs and its transition to a more sustainable carbon free future.
In fact, the State Water Board is considering the California Energy Agencies' recommendation for our 876 megawatt Redondo Beach facility to be extended for two years through 2023 to align with our remaining legacy units.
This proposed extension would be an upside to expectations through 2025.
Now, turning back to our quarterly results on slide 21; at our South America SBU lower PTC was mostly driven by recovery of expenses from customers in Chile in 2020, lower equity earnings from Guacolda also in Chile and drier hydrology in Brazil.
These impacts were partially offset by higher generation at the Chivor hydro plant in Colombia.
Higher PTC at our Mexico Central America and the Caribbean or MCAC SBU primarily reflects better hydrology in Panama, which was partially offset by the sale of Itabo in the Dominican Republic.
Finally, in Eurasia PTC remained relatively flat.
The impact from the sale of OPGC in India was largely offset by lower interest expense in Bulgaria.
Turning to slide 24; with our first half results we are on track to achieve our full year 2021 adjusted earnings per share guidance of $1.50 to $1.58.
As we have discussed in the past, our typical quarterly earnings profile was more back-end weighted with roughly 40% of earnings occurring in the first half of the year.
Growth in the year-to-go will be primarily driven by 1.4 gigawatts of new renewables assets coming online in the remainder of the year, continued demand recovery across our markets, reduced interest expense and cost savings benefits.
We are also reaffirming our expected 7% to 9% average annual growth target through 2025.
Now, turning to our credit profile on slide 25; strong credit metrics remain one of our top priorities.
In the last four years, we attained two to three notches of upgrades from the three credit rating agencies, including investment grade ratings from Fitch and S&P.
We are also very encouraged by the recent change in outlook to positive on our Ba1 rating at Moody's.
These actions validate the strength of our business model and our commitment to improving our credit metrics.
We expect the positive momentum in these metrics to continue enabling us to reach BBB ratios by 2025.
Now to our 2021 parent capital allocation plan on slide 26; consistent with our prior disclosures, sources shown on the left hand side of this slide reflect approximately $2 billion of total discretionary cash.
This includes $800 million of parent-free cash flow, $100 million of proceeds received from the sale of Itabo in the Dominican Republic, and the successful issuance of the $1 billion of equity units in March.
Now to uses on the right hand side, we'll be returning $450 million to shareholders this year consistent of our common share dividend and the coupon of the equity units.
And we plan to invest approximately $1.4 to $1.5 billion in our subsidiaries, as we capitalize on attractive opportunities for growth.
Approximately 60% of these investments are in global renewables reflecting our success in originations during 2020 and our expectations for 2021.
And about 25% of these investments are in our U.S. Utilities to fund rate based growth with a continued focus on grid and fleet modernization.
In the first half of the year, we invested approximately $700 million primarily in renewables, which is roughly 50% of our expected investments for the year.
In summary, we are making significant progress on executing on the strategic and financial objectives we laid out in our Investor Day in March positioning AES as a leader in the energy transition while delivering superior returns to our shareholders.
In summary, the world has decided to seriously tackle climate change, and this is driving unprecedented and accelerating growth in demand for renewables and energy efficiency applications and services.
In relative terms, I don't believe anyone is better positioned than AES to capitalize on this once in the lifetime transformation of our sector.
We have a proven track record of success.
We have the most innovative new products and an 8.5 gigawatt backlog and a 37 gigawatt pipeline of projects.
All-in-all we are enthusiastic about our future and we feel confident about delivering on our 7% to 9% average annual growth rate.
Our core Contracted Generation and Utilities businesses have shown great resilience in the face of global and regional effects of COVID.
Beyond our robust growth rates in earnings and cash flow from our core businesses, we are creating very significant value for our shareholders through our technology joint ventures.
There has never been a better time for AES.

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aes achieves key strategic milestones and reaffirms guidance through 2025.
q2 adjusted non-gaap earnings per share $0.31 including items.
reaffirming 2021 adjusted earnings per share guidance range of $1.50 to $1.58.

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