The AES Corporation (AES) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary reveals a strong focus on growth in renewables, data center demand, and utility investments, with a positive outlook for EBITDA and EPS growth. The Q&A highlights robust demand, strategic focus on profitable projects, and favorable PPA returns. Despite some challenges with Uplight, the overall sentiment is positive due to strong financial metrics, optimistic guidance, and strategic initiatives, suggesting a positive stock price movement in the near term.

Key Financial Performance

Renewables EBITDA 46% increase year-to-date, driven primarily by the organic growth of new projects coming online and the maturing of U.S. renewables businesses.

Adjusted EBITDA $830 million in Q3 2025 versus $698 million a year ago, driven by growth from new renewables projects, rate-based investment at U.S. utilities, and cost savings program. Partially offset by the sale of AES Brazil and sell-downs of AES Ohio and Global Insurance business.

Adjusted EPS Increased to $0.75 per share in Q3 2025 versus $0.71 in the prior year, driven by similar factors as adjusted EBITDA, partially offset by higher depreciation, interest expense, and lower renewable tax attribute recognition.

Utilities SBU Adjusted Pretax Contribution Higher in Q3 2025 due to $1.3 billion of rate base investments over the previous 4 quarters, partially offset by the 30% sell-down of AES Ohio.

Parent Free Cash Flow Expected to achieve upper half of $1.15 billion to $1.25 billion target for 2025.

Cost Savings Program $150 million in cost savings realized for 2025, on track to achieve $300 million annual run rate in 2026.

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Operating Highlights

Renewables EBITDA: 46% increase year-to-date, driven by organic growth of new projects and maturing U.S. renewables business. Installed capacity in the U.S. will be 60% larger by year-end compared to two years ago.

New PPAs: 2.2 gigawatts signed year-to-date, with an additional 1.8 gigawatts expected by year-end. Total of 4 gigawatts targeted for 2025.

Construction Projects: 3.2 gigawatts scheduled for completion in 2025, with 2.9 gigawatts already completed. 4.8 gigawatts of the 11.1 gigawatt backlog under construction, expected to be completed by 2027.

Powered Land Solution: Signed a development transfer agreement (DTA) with a data center customer to provide powered land for a data center site adjacent to two power projects.

Data Center Projects: 8.2 gigawatts of projects signed, with 4.2 gigawatts operational and 4 gigawatts in backlog. Half of the backlog is under construction and will be added in the next 18 months.

Safe Harbor Pipeline: 7.5 gigawatts of U.S. backlog is safe harbor, with an additional 4 gigawatts in pipeline and plans to safe harbor 3-4 gigawatts more by mid-2026. Projects qualify for tax credits through 2030.

Cost Savings Program: Achieved majority of $150 million in cost savings for 2025, on track for $300 million annual run rate by 2026.

Rate Base Investments: $1.3 billion invested over the past year to improve reliability and customer experience in U.S. utilities.

Long-term Growth: Reaffirmed 5%-7% adjusted EBITDA growth through 2027, with a strong step-up to low teens growth expected in the next two years.

Regulatory Framework Transition: Filed for a transition in Ohio's regulatory framework to optimize rate structure and reduce regulatory lag.

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Risk or Challenges

Regulatory Challenges: The company is undergoing rate reviews in Indiana and Ohio, which could impact revenue and customer affordability. The Indiana rate case involves a forward-looking test year, and the Ohio rate review includes a transition to a new regulatory framework. These processes carry risks of delays or unfavorable outcomes.

Supply Chain and Project Execution: While the company highlights a robust domestic supply chain and advanced pipeline, any disruptions or delays in construction projects could impact the completion of its 11.1 gigawatt renewables backlog and other infrastructure projects.

Economic and Inflationary Pressures: The company has held operations and maintenance costs flat for five years, but inflationary pressures could challenge this strategy, potentially impacting profitability and customer rates.

Debt and Interest Rate Risks: The company plans to borrow an additional $500 million to fund growth, which could increase financial risk, especially in a high-interest-rate environment.

Renewables and Tax Credit Dependency: The company’s growth strategy heavily relies on safe harbor tax credits and renewables projects. Any changes in tax credit policies or delays in project completions could adversely affect financial performance.

Customer Demand and Competitive Pressures: The company is addressing increased demand in its service territories and competing to meet the urgent need for energy. Failure to secure new PPAs or delays in meeting customer demand could impact revenue and market position.

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Guidance & Outlook

2025 Guidance and Long-Term Growth Rates: Reaffirmed full year 2025 guidance and long-term growth rates, including adjusted EBITDA, adjusted EPS, and parent free cash flow. Positioned well for 2026.

New PPAs and Construction Projects: Confident in signing 4 gigawatts of new PPAs in 2025, with 2.2 gigawatts signed year-to-date and 1.8 gigawatts expected by year-end. On track to complete 3.2 gigawatts of construction projects in 2025, with 2.9 gigawatts already completed. An additional 4.8 gigawatts of the 11.1 gigawatt backlog is under construction and expected to be completed through 2027.

Repowering Natural Gas at AES Indiana: Repowering 1.2 gigawatts of natural gas at AES Indiana, scheduled to be operational in 2026.

Renewables Growth: 46% increase in renewables EBITDA year-to-date. U.S. renewables business capacity will be almost 60% larger by year-end compared to two years ago. Projects with higher returns are coming online, benefiting from economies of scale.

Data Center Projects: Completion of projects serving data centers, with 4.2 gigawatts in operation and 4 gigawatts in backlog. Nearly half of the backlog is under construction and will be added to the fleet in the next 18 months.

Safe Harbor Projects: 7.5-gigawatt U.S. backlog is entirely safe harbor. Additional 4 gigawatts in pipeline with safe harbor protections. Plans to safe harbor an additional 3 to 4 gigawatts by July 2026, enabling tax credits through 2030.

U.S. Utilities and Rate Cases: Focused on maintaining affordable and reliable power. Filed a rate review in Indiana with a final order expected in Q2 2026. Residential rates expected to remain 15% lower than state average. In Ohio, a unanimous settlement includes an annual revenue increase of $168 million and an ROE of nearly 10%. Rates effective as early as November 2025.

Integrated Resource Plan (IRP): Filed a 20-year IRP in Indiana, evaluating scenarios with potential new data center load towards the end of the decade. Committed to ensuring new load lowers costs for existing customers.

2025 Adjusted EBITDA and EPS Guidance: Reaffirmed 2025 adjusted EBITDA guidance of $2.65 billion to $2.85 billion and adjusted EPS guidance of $2.10 to $2.26. Growth driven by new renewables projects, rate base investment, normalized hydro conditions in Colombia, and cost savings.

Long-Term Growth Outlook: Reaffirmed 5% to 7% long-term growth rate for adjusted EBITDA through 2027, with a strong step-up to low teens growth in 2026. Incremental $400 million of run-rate EBITDA expected beyond 2027 from projects under construction or coming online in 2027.

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Shareholder Return Plan

Dividends: We will return more than $500 million of dividends to shareholders this year.

Share Repurchase: No mention of share repurchase program in the transcript.

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Key Q&A

Q:Are you trying to communicate that you're going to be above the 5% to 7% EBITDA growth range as we look out to 2027?

A:Stephen Coughlin reaffirmed the 5% to 7% EBITDA growth through 2027. He explained that the $400 million EBITDA beyond 2027 is from projects in the backlog that will come online in 2028 and 2029. He emphasized confidence in the guidance due to derisked business, long-term contracted generation, and utility rate base growth of roughly 11%.

Q:What is the balance sheet capacity for accelerating growth in renewables, and is there a need for additional equity?

A:Stephen Coughlin stated that the focus is on strengthening the balance sheet and maintaining investment-grade ratings. He highlighted actions taken to support the balance sheet, such as reducing overhead and executing sell-downs. He confirmed that the company is self-funded through 2027 and does not plan to issue equity within this horizon.

Q:Have you seen an acceleration in demand following the treasury guidance, particularly from the data center industry?

A:Andres Ricardo Gluski noted strong interest from data centers and corporate customers. He explained that the company focuses on fewer, larger, and more profitable projects. He emphasized the importance of optimizing safe-harbored projects and highlighted the strong demand for renewables and batteries.

Q:What are you seeing in terms of storage demand, particularly for data centers?

A:Andres Ricardo Gluski stated that energy storage is critical to meet growing demand. He mentioned various uses for storage, including behind-the-meter applications for data centers and grid services. He noted that more than half of their solar projects include batteries and expects strong demand for stand-alone batteries in the future.

Q:Can you provide an update on the utility opportunity and advanced negotiations at AES Indiana?

A:Ricardo Manuel Falu mentioned that AES Indiana is in advanced negotiations and expects to announce deals in the next couple of months. He stated that the deals will likely range from 1.5 to 2.5 gigawatts and include building transmission and generation capacity. He also noted 2.1 gigawatts already signed in Ohio.

Q:What is the powered land opportunity, and how does it differ from a PPA?

A:Andres Ricardo Gluski explained that the powered land opportunity involves co-located sites interconnected with the grid and renewables. He stated that AES develops the site and monetizes it, providing more details as projects progress. He clarified that it differs from a PPA as it includes providing the site for data centers.

Q:Can you comment on Uplight and its market performance?

A:Andres Ricardo Gluski noted that Uplight, a JV with Schneider Electric, faced challenges due to market uncertainty and lower sales of new services. He mentioned that the market is picking up now but acknowledged a slowdown in absorbing new lines of business.

Q:How do contracted ROIC or unlevered returns on recent data center PPAs compare to the legacy book?

A:Stephen Coughlin stated that returns on recent data center PPAs are at the higher end of the 12% to 15% range. He attributed this to high demand, secure supply chains, and favorable arrangements with contractors. He emphasized the importance of time to power and the company's developed pipeline.

Q:How does the shift towards behind-the-meter or co-located structures by hyperscalers affect development returns or risk mix?

A:Andres Ricardo Gluski stated that the demand for their products is so large that it is not affected by hyperscalers' shift. He emphasized the importance of time to power and having opportunities in the right locations and markets.

Q:Will the company focus more on EBITDA guidance or earnings growth in the next period?

A:Stephen Coughlin stated that EBITDA remains the best way to measure the portfolio due to the lumpiness of tax credits affecting EPS. He highlighted significant growth drivers, including new capacity, utility rate base growth, and cost savings, leading to an inflection point in EBITDA.

Q:What is the nature of the DTA transaction, and does it include an ongoing PPA?

A:Andres Ricardo Gluski confirmed that the DTA transaction is a mix of build-own-transfer and includes an ongoing PPA.

Q:How important is it to get consumer groups on board with the AES Indiana rate case settlement?

A:Ricardo Manuel Falu stated that the partial settlement strikes a balance between affordability and necessary investments. He mentioned a 53% reduction in the original revenue increase and a commitment to no rate base increase until 2030. He expressed confidence in the settlement's approval but welcomed consumer groups to join.

Q:Will the company extend its outlook to 5 years in the next roll forward?

A:Stephen Coughlin stated that the company plans to keep the outlook limited to 3 years, going out to 2028.

Q:What are the key levers to hit the 2025 EBITDA guidance for the Renewable segment?

A:Stephen Coughlin explained that the 50% growth expectation includes adjustments for Chile renewables moved into the segment. He highlighted significant growth drivers, including new capacity and cost savings, to achieve the guidance.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the powered land opportunity, stating that more color would be provided as projects progress. Additionally, they did not elaborate on the virtual power plant business under Uplight, only mentioning market challenges and a slowdown in new services.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The AES Corporation (AES) Q3 2025 Earnings Call Transcript

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