AES plans asset sales, equity issuance to fund clean growth plan

AES Corp. management on May 8 outlined plans to capitalize on the company's "enormous" clean energy pipeline by taking advantage of federal tax credits and opportunities to recycle capital.

The company will rely on asset sales, as well as debt and equity issuances, to help fund its $38 billion-$43 billion gross capital expenditure plan over the next five years.

Arlington, Va.-headquartered AES plans to funnel the bulk of its capital into its renewables business, with the aim of adding 25-30 GW of solar, wind and energy storage from 2023 to 2027, executives said during a May 8 investor day presentation in New York. The company also plans to fully exit coal by the end of 2025 through asset sales, retirements and fuel conversions.

Markets were not immediately receptive to AES' financing plans. The company's stock fell more than 5% in trading May 8 before closing down more than 4% at $21.71 on more than double average trading volume.

AES plans to fund 15%-20% of its growth capex with parent equity, according to Executive Vice President and CFO Stephen Coughlin.

A breakdown of funding sources shows $5.4 billion-$5.6 billion of parent-free cash flow together with $2.7 billion-$3.0 billion of proceeds from potential asset sales will fund two-thirds of cash needs from 2023 through 2027. However, AES also outlines $2.2 billion-$2.4 billion in debt issuances, as well as $1.6 billion-$1.9 billion in equity issuances over the five-year strategy.

Assets over equity?

Several financial analysts and investors questioned whether the company would prioritize asset sales over issuing equity in the unstable economic environment.

Coughlin pointed out that once US renewables projects come online, the company sells down its position to about 51% in tranches, and it expects to continue this capital recycling program.

The CFO, however, said the company is not looking "today" to market its ownership interest in the Fluence Energy Inc. battery storage business. Fluence is a joint venture of AES and Siemens AG.

While Coughlin said "it is possible" that AES may look to sell a portion of some of its technology assets over the five-year period, he noted that the asset sale projection is not tied to offloading any particular business.

"It is based on a range of outcomes of selling portions [of assets] and the timing will depend on how fast we need that capital for some of the growth that we need to fund," Coughlin said. "Overall, we're so well-positioned for growth that I would still expect the equity to be part of the plan for the five-year period."

AES President and CEO Andrés Gluski dismissed the idea of spinning off the utilities business.

"Utilities are important to our investment-grade rating and we think its contributes to our growth story," Gluski said. "Look, we're always open to looking at how to maximize shareholder value. Nothing is closed. But I do think today we're in a unique position where we have really a tremendous turnaround of these utilities."

Executives also said they view the LNG and gas generation business in the Energy Infrastructure unit as core to AES. The company is the largest LNG infrastructure owner in Central America and the Caribbean, with executives pointing out that they view gas as an important fuel to displace coal and allow for expansion of renewables.

Management declined to comment on whether they would offload their ownership interest in software company Uplight Inc., a joint venture with Schneider Electric SE.

Green growth

AES has about 51 GW of wind and solar projects in the US positioned to take advantage of investment and production tax credits in the Inflation Reduction Act (IRA) of 2022.

"Our pipeline is enormous," said Leo Moreno, president of AES Clean Energy. Moreno highlighted the potential to grow AES Renewables to 40 GW to 45 GW by 2026.

AES also plans to take advantage of green hydrogen and energy storage tax credits in the IRA.

The company is working with Air Products & Chemicals Inc. on a $4 billion green hydrogen project to be located next to a decommissioned coal plant in Texas. The facility includes 1.4 GW of solar and wind power generation and an electrolyzer that can produce over 200 metric tons of green hydrogen per day.

A new strategic AES business unit, New Energy Technologies, will focus on green hydrogen development and other emerging technology initiatives. AES sees $20 billion of green hydrogen development opportunities.

In addition, Fluence has a pipeline of $10.3 billion of battery storage projects, including a $2.7 billion backlog.

Utilities business

About $5.2 billion in capex will be funneled to AES Utilities, which is expected to deliver 10% annual rate base growth through 2027.

The company has earmarked $2.9 billion in investments for AES Indiana with plans to upgrade existing infrastructure, fund grid modernization and transform the generation fleet.

In December 2022, AES Indiana outlined plans to add up to 1,300 MW of wind, solar and battery storage to its portfolio over the next five years while converting units 3 and 4 at its 1,507-MW Petersburg coal-fired power plant to run on natural gas. AES Indiana said in December 2019 that it would shut down Petersburg units 1 and 2 in 2021 and 2023.

The utility expects to expand its gas-fired capacity to 2,770 MW in 2027 from 1,720 MW in 2023, while renewables capacity is forecast to grow to 2,200 MW from 500 MW over the five-year time frame. AES Indiana's carbon intensity is set to drop 67% from 2015 to 2027.

The Dayton Power and Light Co., which does business as AES Ohio, will spend $2.1 billion on upgrading its distribution and transmission system including through smart grid investments.

About $215 million of the Utilities capex will be spent at AES El Salvador, which Kristina Lund, president of the US Utilities business, called a "stable and small" portion of the segment.

Earnings guidance

AES on May 8 initiated an adjusted earnings per share growth target of 6%-8% through 2027, based off of 2023 earnings guidance of $1.65-$1.75. The company also reaffirmed its adjusted EPS growth target of 7%-9% through 2025 from a 2020 base.

AES initiated 2023 adjusted EBITDA guidance of $2.6 billion-$2.9 billion with 3%-5% average annual growth. Management noted that the company's average annual EBITDA guidance grows to 17%-20% when excluding contributions from its Energy Infrastructure unit, which houses its coal assets.

Following AES' intended exit from coal in 2025, management expects 12%-15% adjusted EBITDA growth in 2026 and 2027.

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