Thanks, everyone. Next up, we've got AES with the CEO, Andrés Gluski. Andrés, we'll give you five or 10 minutes-
Sure.
To tell the AES story, and then we'll do some questions. So thanks.
Thanks.
Thanks for coming.
Well, Steve, thank you very much for having me here, and thank all of you for being here. This is certainly an interesting time for AES. The way I would describe it is sort of the tale of two cities, like the best of times and the worst of times. In terms of the company itself and executing our plan, it's the best of times. We're going to build more renewables this year, sign more PPAs, hit our, you know, more earnings, more cash than ever. So I feel we're creating extremely valuable franchise. On the other hand, you know, we're very disappointed with our stock's performance this year. You know, as of December of last year, we were the best performer in our sector, whether you looked at it 5 years, 3 years, 2 years, 1 year.
You know, we understand that there are some clouds, let's say, about the sector. We don't think that they apply to us, but we've certainly been among the most affected. First, I would say that when you look at our businesses, I think of it; it's kind of like several buckets. So the first to realize whenever you do any sort of multiple comparison is that we have about $2 billion of value in what we call AES Next. So these are companies like Fluence, you know, the battery integrator, Uplight, which is a system company, et cetera, which have a lot of value. They help us grow in the renewable sector because they give us the leading-edge technologies, but they don't produce any earnings because they're very early in their stage. Actually, they produce losses.
So when you see a market valuation of us, let's say, $10 billion today, and you apply the multiples to our earnings or our cash flow by sector, you know, the truth is, there's $2 billion of value, which is not part of that. So I think we're even more undervalued than would appear at first. It's, it's more. You know, quite frankly, these companies have produced losses, and so that gets put into our multiple on our renewables or our core utilities. So getting to the core business... And by the way, you know, what we've always said is that, you know, we're an accelerator of these new businesses. We don't put in that much capital, but we allow them to accelerate their growth by providing a platform, by providing new applications, et cetera, and that's what we'll continue to do.
Now, if you think of our core businesses, our renewable business is growing very well. We have a, I'd say, differentiated or really a premium market that we address. We're the biggest seller, or defined by PPA signed, of clean energy to the corporate sector in the world. Be that 2021, 2022, and I'm pretty sure we're gonna be for 2023. We're the biggest seller of clean energy to data centers, so we're seeing that demand really explode. So what we have is a product that we've differentiated ourselves, because of the big renewable players, we're the only ones that haven't had to postpone or cancel large renewable projects because of supply chain issues. So that's been a real differentiator to us. First, and we were also the first to come out with the 24/7 hourly matched renewable product.
So we have some differentiation versus the rest of our sector, and this has put us in very good stead. We actually, you know, the sector has had difficulties. You know, it's. People have realized, hey, it's, renewables are tough. It's tough to get these things built. But quite frankly, that's actually been good for us because if you're able to build, and we've been working on supply chain before, you know, pre-COVID, we were already working on supply chain resilience, and you're able to deliver, you know, you have a premium product. So we've actually had clients and developers come to us and say, "Look, we can't get this across the finish line, you know, can you do it?" And that's the Bellefield project, for example, where the big client really wanted us to do it. That's very advantageous for us.
So I see in renewables, we have our supply chain is in very good shape. We feel confident that we're gonna hit our construction targets this year. We have a backlog of signed contracts of 13 GW. To put that in context, our existing renewable fleet is 11 GW. Now, most of this has to be delivered between now and 2025. Realize we are very strict on our definitions, so what we call backlog is a signed commitment of us to deliver energy and a signed commitment of a client to take that energy at a certain price. So it's not like, oh, I think I will sign. No, this is an existing obligation. And the other thing is, we're not susceptible to the, let's say, price swings that other companies have. Why?
Because when we sign that commitment, we lock in the financing, and we lock in the equipment costs. So we're not sort of running a naked equipment risk or financing risk from that contract. So we manage that to a very to minimize the risk. Then, if I move to our utilities, our utilities have a $5 billion investment program over the next five years. 80% of that's already been approved. In the case of our Ohio utility, that's already going into tariffs now. So basically, what we have is the IRP in a tariff case in Indiana, which will be our first tariff case since 2018. And what we're asking for is a 13% increase. So it's actually less than accumulated inflation.
In both Ohio and Indiana, we have the cheapest residential rates. So I feel good about, you know, the execution, and I feel good about getting this built. So if you look at those two businesses, our renewables and our utilities, whether you look at it earnings or you look at it cash flow, they're growing solidly double digit. So you say, "Well, why isn't your whole business growing double digit?" Well, because we have the drag of getting out of coal. We made a commitment several years ago to get out of coal. Over the last 10 years, we've probably gotten out of 80% of our coal plants. I think we've done it in a smart way, because in many cases, we either ran out the PPA or we had people buy out our PPA.
So for example, this year, one of our plants, we had the Warrior Run in Maryland. We had the buyout of that PPA, which ran till 2030, for $357 million. So it's a way of de-risking, it's a way of getting cash now. So what we have left, basically, it's the big ones are in Indiana, as part of the IRP, we had the conversion of the last remaining. We've converted already several or shut down. In Chile, we have authorization to shut most of these down by 2025, the remaining ones, and we've already converted those contracts to financial contracts. So we have basically two other plants outside the States. Vietnam is for sale, it's an ongoing sales process.
And then we have one in Europe, which is Bulgaria, where the PPA runs out in March 2026. So we feel very good about hitting the target of being out of coal by end of 2025. You know, okay, we'll have one plant, 3 more months, you know, but basically, we'll be out of coal, so we'll have done this conversion. So, that's, you know, that is... If I look at that sort of infrastructure that's not renewable or not utilities, that's decreasing around 12% over the next 5 years. So those are the rates, but, you know, once we're out of coal, then we'll, we'll be growing very well. Now, when you look at the financing needs that this will have, you know, part of it's gonna come from cash, our internally generated cash flow, part of it will come from asset sales.
Since I've been CEO, we have sold $6 billion worth of equity in assets. So that's what's funded our conversion to a leader in clean energy. It's also paid for paying down half of my corporate debt and making us investment grade. It also financed the $2 billion worth of share repurchases. So I think we have a long track record of selling assets and, you know, of the two dozen or so, I think there's only one that I feel I did a bad sale. And it's actually in the States. It was.
I have to ask which one.
This was Ironwood, that there were some turbines that had a lot of problems, and the team told me, "Oh, we can't fix this." Somebody bought it, and they did fix it. So I have... And my chairman happened to be on the board of that company, so I got to hear a lot of it. So, that's the one. Everything else I feel very good about when we sold and the money. We just closed the sale, well, sorry, we just announced the sale last night, which was a further sell down of our AES LNG and gas assets in the Dominican Republic and in Panama. And we've done this, you know, over time. This is, I think, the third time we sell down. So we have a lot of flexibility there.
We also have AES Next, and, you know, we're not making any imminent announcement, but we've always said: Look, we're not a VC capitalist, we're an accelerator. So when these companies become mature, we don't necessarily have to be a shareholder, but there's no timeframe for this. So we did have some equity there toward, you know, the plan, but there's nothing... Certainly, we wouldn't do anything at these prices.
Mm-hmm.
So they're sort of back-end loaded. And, you know, in my professional career, I've only seen two or three times such a complete disconnect between what the company's doing and creating value and what's happening with the stock price. So that's it in the summary. And, you know, we feel we're creating a lot of value. We are executing well. We think we have risks very much under control. So, you know, the neighborhood may look, you know, more trouble, but to some extent, that's quite frankly, been good for us. So that's where I would leave it, that we feel very good about the business, very unhappy about our stock's performance this year.
Yeah. Thank you for that intro, by the way, but maybe just on the kind of broader issue that seems to be affecting renewables, which is concern over higher interest rates.
Mm-hmm.
I guess, an assumption that you're not gonna be able to earn the returns-
Right
-that you expect. Can you just talk to both on the existing projects that you're doing through your backlog, and as you're going and announcing new ones-
Right
... have you been able to get to your returns, and are you still able to sell?
Yeah.
Yeah.
No, that's a great question. Look, we think that, you know, to the extent you can sell a differentiated product, and in our case, it's whether it be hourly matching or whether it be the location. You know, locations, it's... You know, people talk about backlog. Well, it's very different to have sites in California and sites in New York and sites in Wyoming. So we have a lot of good sites because we really went out and built a pipeline in CAISO, in California, and in PJM. So we have very valuable sites that helps the ability to deliver. So we've been able to basically, let's say, pass through higher equipment costs and higher financing costs, and maintain our margin.
Now, the reality is, you know, if there are higher interest rates, the discount that you're going to apply to any cash flow in the future is going to be less. It's a higher discount, it has less value, but that's true about every single business. So we have maintained our margin, you know, basically getting between 10% and 13% IRRs in the U.S., and more like 15%-16% outside the U.S. Now, one thing that we can do that's also differentiated, is we can go to the big corporations and data centers and provide the same product in Chile for a data center, or Brazil, or in the future, in Mexico, than we can in the States. So since they have global carbon reduction goals, that's another differentiator that we have.
So, I think that the, you know, higher interest rates is an issue for the market. But what you're actually seeing—I think there's a tremendous amount of pent-up demand being created. Because in 2022, we actually, in the States, cut the ribbon on less renewables than we did in 2020. And this year, the first half has been in line with... at best, in line with last year. So the corporations aren't abandoning their decarbonization goals, that sector of the market. So if you add up the RE100's announced decarbonization goals, we're falling way short. So people have kicked the can down the road, but, you know, what we see is continued strong demand. Now, if you're talking about smaller developers, they're gonna face equipment shortages, they're going to face financing shortages.
So I think the developments are favoring the larger, more reliable, players, 'cause, you know, no longer are corporate clients willing to risk their decarbonization just to go for the lowest price. Now, utility RFPs are different because those are RFPs. You get a lot of bidders, depending on the state. You have to go to a public commission to justify it. So that's really where you get the sort of plain vanilla, you know, busbar PPA, which, you know, we do some of it, but it's much more interesting, quite frankly, to go for these differentiated products.
So, you feel good you can meet your, your 5 GW target for, for growth?
Yes.
for a year?
I mean, we announced on the last call, we had 2.2 GW signed. We are on the last stretch for another 2 GW, so that would put us very comfortably within the 5 GW for the year.
Okay. And then just on supply chain and such for renewables, how are you feeling about that, and latest thoughts on kind of shifting that domestic over time? 'Cause it does seem like there are hurdles to do that.
Yeah.
Yeah.
That's a very good question. Look, we started worrying about supply chain, you know, 3, 4 years ago. We actually had. We were, like 5 years ago, going to sign as an anchor tenant for a solar manufacturing in the U.S. But at that time, they also put a tariff on aluminum, so the numbers still were better to import it than produce it in the U.S. So one of the things we've lacked is a comprehensive view of supply chain, honestly. You know, the trade representatives have been very focused on one aspect.
So we were already getting, vast majority of our panels, that we were importing from Southeast Asia, and we worked with only top-tier suppliers that could, really document not only that all the polysilicon, processing, et cetera, was happening in eastern China, but you had to be able to demonstrate it, you know? So we have been able to get the supplies through, but the supply chain will be moving to the U.S. So I think more and more, whether it be batteries, whether it be solar panels, probably towards the end of next year. It's not going to occur immediately. And also, I don't think. What's basically happened is some of the, say, regulations of what is domestic content, the way it's defined, makes it more difficult, for example, in solar panels. So, it's actually ironic.
If they were a bit looser, you would onshore faster and better. For wind turbines, we think it's no problem. So regarding the sort of onshoring or nearshoring, I think it's occurring. It's not going to be overnight, but it hasn't been a problem for us. So as of today, you know, we have all the equipment that we need for complete the construction this year, part of next. Everything's contracted for 2023, 2024, and 2025. So, you know, we think, again, that's a differentiator for us, and we have strategic suppliers. And, you know, it's not only solar panels, there's a lot of talk about that, but it's like inverters. It's other equipment that have been the bottleneck in the system.
So I feel very good about the supply chain that we have in place.
Okay. And just on the hydrogen.
Yeah.
So you announced pretty much the first-
Right
... green hydrogen project. Maybe talk a little bit about that-
Sure
Any thoughts on getting the final hydrogen rules?
Sure.
And any other opportunities in hydrogen?
Yeah, we're in an interesting situation because that project, the one that we announced together with Air Products, we basically took the teams and gave them a blank map of the U.S., and said, "Where is the best place to locate a green hydrogen project?" But it means the whole way through marketing. It's not only producing it. So you wanted someplace that had big renewables, that was centrally located, that had favorable legislation to investment, and we really came upon Texas. And the site we have is a decommissioned coal plant, so it has water, it has rail links, it has everything. Next door is the second biggest ranch in the U.S.A., so we can put 1.5 GW right there. So it's really all inside the fence.
Now, what Seifi Ghasemi and myself worked out is like, we wanted to have our interests perfectly aligned. So we own 50% of the electrolyzers, they own 50% of the renewables. And why is that? Well, in the last two weeks, you've had hours in Texas where the energy price is $5,000/MWh. You want to be able to shut down the electrolyzers and sell that energy. So that would only work if Air Products has the same benefit as I do. Otherwise, they say: "Look, give me the energy, I don't care." So that is aligned. I think it. The permitting is going very well. What we're waiting for is FAA clearance for our wind turbines in this site.
Mm-hmm.
That says that, you know, the critical path. Regarding the definition of what's green hydrogen, this is the lowest carbon footprint green hydrogen that we know how to produce. So we're not worried about getting to the $3, regardless of what the definition is. So actually, the more stringent, it's hourly matched. So the more stringent, this project will go ahead. Now, the question is, what is right for the sector? So, you know, I've had a lot of discussions with people in the White House and Treasury, other workplaces, and what I can say is that, to make it simple, it's going to have to be somewhat aligned with what they have in Europe, I believe. Because otherwise, you're not going to be able to load up a tanker of, say, green ammonia and ship it to Rotterdam.
You know, U.S. green hydrogen isn't green in Europe. So if you want a tradable good, that's important. So that will probably mean things like, I think additionality. Why? Because you don't wanna just be squeezing the balloon. So if you take existing, you know, renewable energy and just say: "Okay, now I'm gonna produce hydrogen with it," well, you're not helping decarbonize the world, so why are you getting a subsidy? I think that, there should be a regional element because you don't want to further congestion on transmission, which is the biggest bottleneck to build out renewables.
Mm-hmm.
I do think that hourly matching is part of that, to ensure that, you know, really the highest standards. But being realistic, I think there'll be a transition period, so like there is in Europe. I think in Europe, it's a three-year transition period. So that's what I think will come out. It should come out before the end of the year. It was supposed to come out in mid-August. If there is a government shutdown, you know, what I'm told is that a lot of external lawyers are working on this, may not slow it down that much. But this particular project is the most robust to whatever the rules come out. Personally, I think that the best use for green hydrogen, at least initially, is in hard-to-decarbonize sectors. For example, long-haul transport. You know, you don't wanna be carting heavy batteries around.
Green steel, some of the petrochemical processes. You know, sort of blending to use in gas plants, et cetera, I think it's still quite expensive. So, you know, it would have to be particular cases, but you certainly wouldn't want a base load with green hydrogen. Plus, most of the existing turbines can't burn, best case, 30% hydrogen mixed with methane.
Yep. I wanna start letting folks ask their own questions. So if you have one for Andrés, please... Everyone's being shy for you, Andrés, so-
Yeah.
Here you go.
Okay.
Andrew.
You mentioned at the beginning, oh, thanks. You mentioned at the beginning, the 24/7 matched renewable energy product. I'm curious how many of your customers are willing to pay for that? And just kinda what's the mix today-
Yeah.
or, like, willing to pay a little bit for renewables
Yeah
... really care about the matching or just want lowest price?
That's a great question. Look, 50% of our backlog in the States is with the high-tech companies. For them, the most important is, I think first is, you know, reliability, getting it built on time. And then second is, you know, quite frankly, is it how renewable is it? They always require additionality, and they also, in many cases, require a percentage of this hourly matching. Now, we customize it for each individual client. So, you know, somebody may want 16 by 7 or 18 by 7, 'cause obviously, as you get closer to 24, it becomes asymptotically expensive. And we're able to do this because financially, again, we have a trading desk and gas assets. So I would say, you know, it's already in the several gigawatts level.
You know, and obviously, in our case, we try to be as transparent as possible. I think we provide more information than anybody. But when it comes to individual projects, you know, we can't talk about, you know, what the return is, et cetera. But we haven't seen them to be as price sensitive as quality sensitive. You know, they really wanna make sure that they get, you know, first, that the project's going to be built, it's going to be available, and then the green characteristics that it has. Sure.
Random coal question. Earlier this year, there was discussion of forced coal burns because coal stocks were piling up. Seems like that didn't quite play out, but now there are kind of murmurs coming back around. Do you see that happening over the next year or so, impacting gas burns, like, kind of at an aggregate level, particularly-
Yeah.
As you retire plans?
Look, honestly, I haven't—I mean, first, it, you know, coal prices have been quite volatile the last couple of years, which isn't talked about a lot. I don't see us being in that situation, but I do see that some of these remaining coal plants, before they shut down, are really critical for the system. So, you know, a lot of these, I would say, I don't see any sort of, you know, being treated as must-run. You know, in the case of Mexico, they are treating the heavy fuel plants as must-run from Pemex, as if they were hydros, which has created great distortions in the system. But I can't think of any of our...
You know, we don't have any in the coal plant, you know, in the US, that would be under that sort of must-run to decrease coal stocks.
You've also obviously been a leader in short-duration energy storage-
Yeah.
Batteries. How is AES approaching long-duration energy storage technologies and use in the future?
Yeah, that's a good question. It's interesting, the closest to AES Next, honestly, is Breakthrough Energy Ventures from Bill Gates. So we're actually cooperating in some areas. And, you know, when I spoke to him on one occasion, he was very interested. He said, "Look, you know, these new technologies have to be created, and there's kind of a market failure, so I'm gonna go ahead and do it." So we have our finger in the pie in a lot of these. We, you know, again, what we offer is as an accelerator, but not the capital. I think the longer duration, you know, basically the Iron-air batteries are among the most attractive right now. You know, they have a longer duration, 100 hours.
You have basically some that are being implemented by some of the utilities. But they're sort of on, you know, either rate-based or being sort of done on an experimental level. So prices would have to come down for this to be much more attractive. So we still see a role for Lithium-ion. This would be complementary, and it could address, you know, situations where the Lithium-ion is not optimal. And I do think you have to be kind of technology agnostic here. So Fluence is here, so they should speak to it, but the strategy has always been to be battery agnostic. So Lithium-ion is the best.
Chemistries have changed, but if in the future, there's a solid state battery that's superior, you would plug that in. And, you would... You know, what's important is the control systems and the applications. So, there's a lot of interesting things coming up. I'm sure that if we meet in this room five years from now or 10 years from now, the electric system will look considerably different. We're really. These new technologies are not ready for the next two years, but certainly within the next five, there will be some of these technologies, I think, will be being applied.
Right.
So, I would say stay tuned, but I think for companies, it's very important to be, have a finger in the pie because you wanna be the first to apply them. You know, we talk a lot about polysilicon, wafers, et cetera, coming from China. You could have perovskite thin film made in the USA, and quite frankly, China would be left with a lot of stranded investments.
Right.
Again, it's not gonna happen tomorrow, but if you're talking 5, 10 years out, I think there's a reasonable chance that happens.
Mm-hmm.
Charles?
Yeah, thanks for the overview, Andrés. I guess when you came in as CEO, you did a really good job of-
Mm-hmm.
-taking what was a very complicated story-
Yeah.
That wasn't really growing. You simplified it. You got growth going, particularly in renewables.
Yeah.
It sets up very, very, very well. But just in the last Capital Markets Day, it became somewhat complicated again.
Yeah.
How can you get things back on track to try to keep a simple-
Yeah.
It should be a simple story to anybody, but it gave a lot of headaches to people trying to wade through all that.
That's true. No, that's a, that's a very fair comment. Look, the basic business is not as complicated, perhaps, as we might have made sound. We did introduce cash flow metrics because as renewable becomes a bigger proportion of the portfolio, that's the way renewable businesses are valued. And what we also introduced was a global renewable segment, and that is a little bit to reflect how our business is progressing. Because really, our sweet spot is, again, take these high-tech companies and provide, you know, renewable energy, not only in the States, but in some of these Latin American countries. We get higher returns there. It's also good to have some geographic diversification, and it's something unique that we can do to them.
So I and, you know, sometimes if I talk about, like, AES Next and these new things, those are more like an accelerator out there, that it's not really our core business for this. So in essence, you know, the three buckets, which is the renewables, and and, you know, admittedly, the, there's not a lot of peers out there to help with the valuation, how to value that. So that's why we gave it cash flow as well as earnings. We have our utilities, which are pretty simple. You know, they are, I believe, if not the fastest-growing, among the fastest-growing utilities in the country. And then we have the infrastructure, which, again, will not have coal, but will have some gas. So we will continue to be in less countries. We're not going to expand countries.
And try to simplify the story, 'cause I agree, I mean, nobody likes complication. I mean, ideally, as our track record improves, people can just, you know, use the aggregate number and not get into every little details. Like, okay, you're gonna build X number of gigawatts, fine. You know, 80% are in the States, but the 20% that's outside the States is not really... It's in dollars with a corporate offtake. So you shouldn't, you don't have to worry about local regulations or something like this. So, very fair point. You know, we'll keep trying. And so any advice will be well taken.
Well, great. I think, pretty much at the end of our time, Andrés, thank you so much.
All right.
Appreciate it. Good to see you.
Thank you very much.