AES - NYSE

Hello, everybody, and welcome to The AES Corporation Q1 2025 Financial Review Call. My name is Emily, and I'll be moderating your call today. [Operator Instructions]. I will now hand the call over to Susan Harcourt, Vice President of Investor Relations to begin. Susan, please go ahead.

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Julien Dumoulin-Smith with Jefferies. Please go ahead, Julien.

Yes, good morning, Julien. The EBITDA impact, expect in the 25 million to 30 million range. So overall, given that we've raised 450 million, we're reinvesting that in returns, 13%, 14%, 15%. It's very accretive for us so very pleased. This was an opportunity that we have seen quite a while ago. It had been part of the universe of potential asset sales. And so we've anticipated for some time, we did include it in our guidance in February. And it's effectively the low-cost equity financing that supports growth while also meeting our credit goal. So very happy to complete this early this year.

Thank you. Our next question comes from Nick Campanella with Barclays. Please go ahead, Nick.

Hi. Good morning, everyone. Thanks for taking my questions. And I appreciate all the color. I just wanted to come back to the insurance sale quickly. So I know you kind of disclosed the Class B dividends are like $145 million to $198 million. Is that like a yearly number or is that a cumulative number? And I guess if you hit that call option in 2030 to 2035, what is that strike price? And how should we kind of think of the cost of financing here that you just raised versus, I guess, deploying future CapEx at 13% to 15% returns? Maybe you could just unpack that.

Yes. Nick, it's Steve. So those numbers are based on the five year, the first five year target distribution. And so this would be the aggregate amount at that five year call date that needs to get met. And that's very much in line with a fairly conservative case on what this insurance business delivers. Keep in mind, this is a business that is -- it's captive but it has a reinsurance behind it. So we have a very predictable max amount of losses and then the reinsurance kicks in. So this was structured very conservatively that even in the event of max losses, we feel very comfortable servicing this financial structure. In terms of the cost of this, I would think about it as roughly in line with like a junior subordinated debt issuance at the parent. And given that this is getting equity treatment that effectively looks like a low-cost equity financing that is quite accretive. It will have target payments in the range of about $37 million to $40 million per year to the counterparty.

Okay, that's helpful. Appreciate that. And I'll try not to butcher it but just the Cochrane buyout that you disclosed in the 10-Q. Can you just give us a sense of what you're purchasing? And how much you paid for it, either on like a multiple basis or cash and just the rationale behind that transaction?

Yes. Look, I mean, this is an asset that we already own and operate. We have a minority partner that was looking to exit. So what we're doing is we're buying up the 40% minority and taking nearly complete ownership of the asset. It's very valuable. It's contracted well into the next decade, serving key customers for us in Chile. And the valuation was at a very low multiple so it's quite accretive immediately this year and beyond. So we're pleased with it. It's one of the assets that we had already guided that would be extended beyond 2027. So it's no additional new capacity, just taking advantage of an attractive financial return on owning the entire thing as opposed to just the share that we had.

Okay, thank you.

All right. Thanks, Nick.

Thank you. The next question comes from David Arcaro with Morgan Stanley. Please go ahead David.

Hi. Thanks so much. Good morning.

Good morning, David.

Thank you. Our next question comes from Durgesh Chopra with Evercore. Please go ahead, Durgesh.

Thank you. Good morning, team. Thanks for giving me time. Steve, congrats on this transaction. Maybe just a little bit more detail. You talked about the cash distributions being conservative. Can you just frame for us the $40 million or so average distributions a year? What is that as a percentage of total cash generated for that business?

Yes, it's roughly around -- depending on the year, 35%, 40% I would say, in terms of this business reliably generates about $100 million of cash, thereabouts, even with typical losses. And that includes some amortization of the instruments so this is self-amortizing over the full 20-year life. It's nothing like these convertible portfolio financings that you've heard about with some other yieldcos that were not amortizing and had a significant economic ownership flip. This doesn't have that kind of change. We have a call right at year five. And otherwise, there's no incentive to have to call it. It continues along the same economics for the full 20-year potential period. So it's priced, as I said, like a junior parent note and gives us access to cheap, what I call, cheap equity capital. And then we can continue to retain this so long as it's -- unless we had a better option down the road that's lower cost. But this one is a good way to monetize an asset that I think is perhaps underappreciated in the value that it generates. It's been in our disclosures around the distributions to the parent from this asset in the past, so you can see that. And this is capital that will be put to work to generate mid-teens returns. So I think it looks quite good.

Got it. Thank you for that clarity. Accretive transaction there. Just digging on the financing topic, there's been a lot of discussion around transferability. Some legislation recently proposed or is probably doesn't get much traction. But just in terms of thinking about risks, can you talk about like in an event the transferability is eliminated, do you go back to tax equity and perhaps even frame for us what percentage of your plan is being provided by cash financing, is being provided by transferability? Thank you.

Yes, absolutely, Durgesh. So look, first of all, transferability has only been around for a little over two years when the IRA was passed in 2022. It has been very good for the industry as it's opened up a broader participation in the market for monetizing tax value. And it is typically a little bit more efficient in transferring most of the tax benefit savings on to customers, just there's less friction in these types of transactions. But that said, for the IRA, we did tax equity. The majority of what we continue to do is still through tax equity partnerships. And in fact, we continue to form the partnerships anyway because we need to monetize the tax depreciation to maximize the opportunity even when we are doing transfers. So we can continue to do the tax equity partnerships for all of our future projects if this were removed. We don't think it will be because we think it goes with the tax credits in terms of getting the most benefit of the tax credit to the cost of the end consumer of the energy. And then effectively, the cash benefit to AES is the same. So we bridge the tax financing with debt during construction, as I walked through on the February call. And then we immediately, when the tax value comes in, either from the transfer counterparty or from the tax equity partner, we immediately monetize that at the place and service date and pay down a significant portion of the debt, typically more than 50% at that point. So you have a significant deleveraging from this. The fundamental cash and credit profile is really exactly the same. So I think it's been good, a lot more for some smaller developers and to sort of democratize the participation in the market. But as a large-scale developer with deep relationships with sophisticated tax equity partners, we still feel very comfortable that we can monetize all of the tax value that we create with the tax equity venue if needed.

Thank you. Our next question comes from Michael Sullivan with Wolfe Research. Please go ahead.

Hi, good morning.

Good morning, Michael.

Wanted to just ask on where we stand on the longer-term asset sale target. Are you still shooting for that 3.5 billion? Where are we against that? And what else are you looking at for potential sales?

Yes, this is Steve. So no, we -- so with respect to the 3.5 billion, we're at 3.4 billion, so we're right almost there to the finish line on that target. We did talk about getting to 800 million to 1.2 billion on the February call from '25 to '27. So with this sale, and that's not including the Ohio sell-down, which went to paying down debt. This was referring to proceeds up to the parent. With this insurance sell-down, we're halfway, roughly there, close to halfway on that target. What's remaining is we have the -- in terms of proceeds, the Vietnam sale. We have some other asset sales in the thermal portfolio that are on a smaller scale. We have partnerships of operating assets. We've done partnerships with our LNG portfolio. As you've seen, those can and maybe extended. We've done partnerships, sell-downs at attractive low-cost capital of our renewable operating portfolios. So those remain an option. And our technology portfolio. At this point, Fluence is not at a value that we would tap that. It is significantly undervalued, but we do -- we are optimistic down the road that, that's a potential. So we're not counting on that. We do have other assets in that portfolio like Uplight that we've talked about that may be a candidate. So the universe is larger than what's remaining. What's remaining is only roughly 500 million in that target through '27. And so I feel extremely comfortable that we'll be able to execute on that between now and 2027 across the range of things that I mentioned.

Thank you. The next question comes from Richard Sunderland with JPMorgan. Please go ahead, Richard.

Hi, good morning.

Good morning, Richard.

I just wanted to follow up on transferability one more time. On an agency metric basis, what would be the impact to your FFO without transferability and how do you expect the agencies to treat that?

So the transferability, as I said, Rich, is fundamentally the same cash and credit profile. The difference is the transfer credits do go through operating cash flow. So there's no -- in terms of S&P and Fitch, it really has no impact to their focus on the parent free cash flow, whereas this comes in at the subsidiary level and pays down debt primarily. And so it does get captured in the Moody's metric. So I think we will need to work with Moody's to ensure that this is well understood. I think they do understand it that it's fundamentally no change. The cash comes in when the project is placed in service, whether it comes from a transfer or from a tax equity partner and the debt gets paid down. So I think practically, it has no impact. And if we got to that point, we would, of course, work with Moody's as we have and they've been very constructive in understanding how renewables works, including the adjustments that they made in the last update that they gave. So I don't see it as a negative at all for the credit profile.

Got it. That was very clear. So presumably on a Moody's basis, this would push out the improvement you've called out for '26, but you also expect Moody's to look through the impacts, given what you laid out earlier on the value through tax equities being the same?

I mean, look, I can't speak for Moody's, but look it's very logical and we're talking about geography issue on the cash flow statement. So I have a hard time being that logic won't prevail there, that fundamentally the credit profile is exactly the same.

Thank you. Our final question today comes from Anthony Crowdell with Mizuho. Please go ahead, Anthony.

Thank you. Those are all the questions we have for today and so I'll hand the call back over to Susan Harcourt for closing remarks.

We thank 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. Thank you and have a nice day.