AES - Earnings Call - Q1 2025

Executive Summary

• AES delivered an in-line quarter operationally but missed Street consensus: Adjusted EPS was $0.27 vs S&P Global consensus ~$0.33, and revenue was $2.93B vs ~$3.05B; management reaffirmed full-year 2025 Adjusted EBITDA ($2.65–$2.85B), Adjusted EPS ($2.10–$2.26), and Adjusted EBITDA with Tax Attributes ($3.95–$4.35B) guidance. EPS/Revenue estimates from S&P Global noted below.*
• Drivers of the year-over-year decline were the roll-off of 2024 one-time benefits (Warrior Run PPA monetization), lower realized tax attributes timing, and restructuring costs; these were partly offset by higher Utilities and Renewables contributions.
• Strategic execution continued: backlog is 11.7 GW (5.3 GW under construction), 643 MW completed in Q1, 443 MW of new PPAs signed; asset sale proceeds target for 2025 achieved with $450M AGIC minority sale; financing actions addressed 2025 maturities (86% of $900M 2025 notes tendered).
• Narrative catalysts: back-half weighted growth from 3.2 GW 2025 additions and $150M 2025 cost saves (ramping to >$300M in 2026), de minimis tariff exposure and safe-harbored U.S. backlog, and strong hyperscaler demand underpinning guidance.

What Went Well and What Went Wrong

• What Went Well

  • Guidance reaffirmed across all key metrics; management emphasized backlog conversion, Utilities rate base growth, and normalized LatAm results as 2025 drivers.
  • Utilities and Renewables momentum: Utilities revenue rose to $1.009B (+16% YoY), Renewables revenue to $666M (+4% YoY), and projects completed (643 MW) support 2025–2026 EBITDA growth.
  • Management de-risking actions: $450M AGIC stake sale met 2025 asset sale proceeds target; 86.25% of 2025 notes tendered (purchase price $995.97 per $1,000) reduces near-term refinancing risk.

• What Went Wrong

  • EPS and revenue missed S&P Global consensus as Adjusted EPS fell to $0.27 and revenue to $2.93B, vs ~$0.33 and ~$3.05B, respectively; GAAP diluted EPS fell to $0.07 (vs $0.60 in Q1’24) on roll-off of Warrior Run monetization, lower realized tax attributes, and restructuring costs. EPS/Revenue estimates from S&P Global noted below.*
  • Energy Infrastructure softness: segment revenue declined to $1.320B (from $1.609B), with consolidated operating margin down to $441M (from $619M) given prior-year one-time Warrior Run revenues and mix shift.
  • Non-GAAP adds elevated: restructuring costs ($46M), impairments ($33M), and disposal-related losses ($42M) were notable adjustments; Adjusted EBITDA fell YoY to $591M (from $640M) and Adjusted EBITDA with Tax Attributes to $777M (from $868M).

Transcript

Operator (participant)

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. After the presentation, you will have the opportunity to ask any questions, which you can do so at any time by pressing star, followed by the number one on your telephone keypad. I will now hand the call over to Susan Harcourt, Vice President of Investor Relations, to begin. Susan, please go ahead.

Susan Harcourt (VP of Investor Relations)

Thank you, Operator. Good morning and welcome to our Q1 2025 Financial Review Call. Our press release, presentation, and related financial information are available on our website at aes.com. Today, we will be making forward-looking statements. There are many factors that may cause future results to differ materially from these statements, which are disclosed in our most recent 10-K and 10-Q filed with the SEC. Reconciliations between GAAP and non-GAAP financial measures can be found on our website along with the presentation. Joining me this morning are Andrés Gluski, our President and Chief Executive Officer; Steve Coughlin, our Chief Financial Officer; Ricardo Falú, our Chief Operating Officer; and other senior members of our management team. With that, I will turn the call over to Andrés.

Andrés Gluski (President and CEO)

Good morning, everyone, and thank you for joining our Q1 2025 Financial Review Call. Today, I'm very pleased to reaffirm both our 2025 guidance and long-term growth rate targets, which reflect our strong execution to date, as well as the resilience of our business overall. I will discuss this in more detail and provide an update on the robust growth program at our US utilities. Following my remarks, Steve Coughlin, our CFO, will provide additional color on our financial performance and outlook. Beginning on slide three with our Q1 results, our financial performance was in line with our expectations, with an adjusted EBITDA of $591 million and an adjusted EPS of $0.27. We completed the construction of 643MW and signed or were awarded 443MW of new PPAs, bringing our backlog to 11.7GW.

We have achieved our asset sale proceeds target for the year, including the sale of a minority stake in our global insurance company, AGIC, for $450 million. Now turning to the resilience of our business model and portfolio, our execution is proceeding as planned, and we expect to hit all of our financial metrics for the year. We have positioned ourselves for success even in the face of uncertainty around tariffs, changes to the Inflation Reduction Act, or potential recession. Our business model is based on long-term contracted generation with creditworthy off-takers, as well as growth in our US-regulated utilities. Our contracting, financing, and supply chain strategies have all been designed to minimize the impact of economic conditions, including inflation, interest rates, energy prices, and tariffs. As a result, we have clear visibility into our future financial performance.

I'll first discuss the performance of our renewable business and then address the ways we have ensured that this business is resilient to macroeconomic and policy shifts. Turning to slide four, a major driver of our renewables' EBITDA growth this year is the approximately 3GW of new projects we expect to bring online. I'm pleased to say that we are fully on track, with more than 600MW already completed, including the 250MW Morris Solar Project in Missouri serving Microsoft. Our remaining projects under construction for the year are now approximately 80% complete. Our 1GW Bellefield One project, which includes 500MW of solar and 500MW of storage, is virtually complete, and we will be fully operational this summer.

This is the first phase of what will be a 2GW project and the largest solar plus storage plant ever built in the United States, all of which is contracted with Amazon. Moving on to slide five, our supply chain strategy provides us strong protections from any current or potential future tariffs, as well as from the impact of inflation. For the 7GW in our backlog scheduled to come online in the US between 2025 and 2027, nearly all of the CapEx is protected with zero exposure to tariffs, as the equipment is already in the US, in transit, or contracted to be produced domestically. Our tariff exposure is limited to a small quantity of batteries that are being imported from Korea for projects coming online in 2026, with a maximum potential exposure of $50 million, which we are actively working to further mitigate.

This represents just 0.3% of the total US CapEx and is well within the normal project contingency. I would like to emphasize that our US supply chain protects us from any potential tariffs that could be announced, including reciprocal tariffs. We also serve our corporate customers outside the US, where we continue to see substantial demand. Contracts that we are signing outside the US are benefiting from lower equipment prices as a result of the increase in international equipment supply, with solar panels typically one-third the cost in Chile versus the US Turning to slide six, our business is also well protected from possible changes to US renewable policy for several reasons. First, we are the top electricity provider to premier corporate clients, including data center customers, that require capacity that can come online relatively quickly.

We have signed agreements for 9.5GW with data center companies, more than anyone else in the sector. There are few others in the industry who can develop, build, and operate the projects we offer, which are often large, geographically diverse, and with customized commercial structures. Furthermore, with our extensive history of working with large corporate customers, our development projects are tailored to meet their specific needs. We believe our customers will have strong demand for renewables in any scenario. Through the end of the decade, BloombergNEF sees increased electricity demand requiring at least 425GW of new capacity. While AES is committed to serving our customers with an all-of-the-above strategy, including new gas generation, we see renewables as the primary source of new energy to serve this demand for the following reasons.

First, they offer the fastest time to power, given their short construction period and advanced permitting and interconnection queue positions. Second, the fact that they are a low-cost source of power, particularly considering the rapidly rising cost of gas turbines and long lead times. Third, the price stability that they offer customers once contracted, unlike thermal power, which is subject to fluctuating fuel prices. In addition, roughly one-third of our backlog is in international markets, where we develop, build, and operate renewable projects without tax credits, usually with higher returns than in the US In the absence of tax credit, projects have higher net capital needs, but PPA prices are also higher to account for this funding structure. In these cases, we earn higher EBITDA per megawatt and are able to achieve our financial targets with fewer projects.

Turning to slide seven, another reason for our confidence in the resilience of our business is that nearly our entire US backlog has safe harbor protections. Once a project starts construction or incurs 5% of the cost of materials, the project has safe harbor protections and has a period of four years to be placed in service and begin receiving tax credits. For example, any project that reaches start of construction milestones in 2025 is safe harbored through 2029. Turning to slide eight, we're also resilient to any economic downturn. Our business is heavily contracted, with approximately two-thirds of our EBITDA coming from long-term contracted generation, essentially all of which are take-or-pay and not tied to underlying demand conditions. Looking to the future, nearly all of our growth through 2027 is already secured through our 11.7GW backlog of signed long-term contracts.

At the same time we sign our PPAs, we contractually lock in all major capital costs, EPC arrangements, and hedge our long-term financing. This approach gives us a clear line of sight to our future EBITDA. We have also achieved our asset sale proceeds target for the year with the sale of a minority interest in our captive insurance company, and we have closed the sell-down of AES Ohio. Furthermore, with our March debt issuance, we have successfully completed all financings needed to address our 2025 debt maturities, and we have hedged 100% of our benchmark interest rate exposure for all corporate financings through 2027. Next, I'll discuss the robust growth program we're undertaking at our US utilities on slide nine. We are executing on the largest investment program in the history of both AES Indiana and AES Ohio, as we work to improve customer reliability and support economic development.

This year, we're on track to invest approximately $1.4 billion across the two utilities to support areas such as hardening the distribution network, smart grid, new generation, and transmission build-out for data centers. With signed agreements for 2.1GW of new data centers in AES Ohio's service territory, we're beginning construction on new transmission to service load. This summer, we'll be breaking ground on the $500 million transmission investment needed to serve a new Amazon data center in Fayette County. Additionally, last month, we completed the sale of a 30% stake in AES Ohio for $544 million to CDPQ, a global investment partner that also owns 30% of AES Indiana. This partnership helped support capital requirements for their substantial growth programs while also strengthening our balance sheet. Now turning to AES Indiana, we're continuing to invest in new generation to support our customers with affordable and reliable power.

In March, we brought online the Pike County Energy Storage Project, which includes 200MW of installed capacity and 800MWh of dispatchable energy, the largest operational battery project in MISO. We continue to make progress on the Petersburg Energy Center, a 250MW solar and 180MWh energy storage facility, which we expect to be operational by the end of the year. In April, we received final regulatory approval for the 170MW Crossvine Solar Plus Storage Project, which we expect to bring online in 2027. With that, I would now like to turn the call over to our CFO, Steve Coughlin.

Steve Coughlin (EVP and CFO)

Thank you, Andrés. Good morning, everyone. Today, I will discuss our Q1 results, our 2025 full-year guidance, and our parent capital allocation plan. Turning to slide 11, adjusted EBITDA was $591 million in the Q1 versus $640 million a year ago. This decline was anticipated in our guidance and was primarily driven by prior year revenues from the accelerated monetization of the Warrior Run PPA and the sale of our 5GW AES Brazil business, but partially offset by growth in our renewables and utilities businesses. Turning to slide 12, adjusted EPS for the quarter was $0.27 versus $0.50 last year and was also in line with our expectations.

Drivers include the prior year Warrior Run PPA monetization, the timing of US renewables tax attribute recognition, higher parent interest, and the prior year tax benefit associated with our transition to a more US-oriented holding company structure. This was partially offset by higher contributions from our utilities SBU. I'll cover the performance of our SBUs, or Strategic Business Units, on the next four slides.

Beginning with our renewables SBU on slide 13, higher EBITDA of approximately 45% year-over-year was driven primarily by contributions from new projects, which includes projects brought online over the prior four quarters. In addition, the renewables segment now includes all of our renewables in Chile, which were a part of the energy infrastructure SBU in prior years. This change was offset by the EBITDA impact from the sale of AES Brazil in the Q4 of last year. With this quarter's results, we are fully on track to achieve our full-year renewables SBU guidance of $890 to 960 million. Our construction program is proceeding on schedule, cost savings measures have been implemented, and we have already seen hydrological conditions in Colombia normalize year to date.

In other words, our main segment drivers are greatly de-risked, and we're well on our way to achieving 60% renewables growth year-over-year. Turning to slide 14, higher adjusted PTC at our utilities SBU was mostly driven by tax attributes from the completion of the Pike County Energy Storage Project, new rates implemented in Indiana in May of last year, demand growth, and favorable weather in the US Lower EBITDA at our energy infrastructure SBU primarily reflects prior year revenues recognized from the accelerated monetization of the coal PPA at our Warrior Run plant, as well as Chile renewables moving to the renewables segment. Finally, lower EBITDA at our new energy technologies SBU reflects lower contributions from Fluence in the Q1. Now turning to our guidance, beginning on slide 17, we are reaffirming our 2025 adjusted EBITDA guidance of $2.65 to 2.85 billion.

We continue to see strong growth in our renewables SBU and expect our utilities businesses to grow approximately 7% this year, despite the sell-down of AES Ohio. The cost savings actions we announced on our February call have already been implemented. We expect the $150 million cost savings in 2025 will primarily benefit the second half of the year, and we remain on track to achieve a full run rate of over $300 million of cost savings next year. We are also reaffirming our 2025 adjusted EPS guidance of $2.10 to 2.26. As you can see on slide 18, we expect growth in the three remaining quarters of this year to be driven by adjusted EBITDA growth in renewables and utilities and the monetization of tax attributes on new renewables projects, partially offset by higher interest and a higher adjusted tax rate.

Now to our 2025 parent capital allocation plan on slide 19. Sources reflect approximately $2.7 billion of total discretionary cash, including $1.2 billion of parent-free cash flow, which represents more than an 8% increase versus 2024. We also expect $700 million of planned parent debt issuance and closed the $450 million sell-down of a minority interest in our global insurance business earlier this week. Our captive global insurance business is a valuable asset within the AES portfolio that consistently produces attractive cash flow while managing property and business interruption risk within our operating portfolio. This structured transaction allows us to monetize a minority portion of this valuable business to support growth capital for renewables and utilities businesses. With this transaction, we have achieved our entire asset sale target for 2025. On the right-hand side, you can see our planned use of capital.

We will return approximately $500 million to shareholders this year, reflecting the 2% dividend increase announced last December. We also plan to invest approximately $1.8 billion toward new growth and have already repaid roughly $400 million of subsidiary debt. With the sell-down of a minority interest in AES Ohio at the beginning of April, we now have CDPQ as a 30% partner in both of our US utilities. This partnership is another example of how we use private capital to help fund growth and reduce parent investment requirements into our subsidiaries. Finally, turning to slide 20, our credit metrics are progressing in line with our expectations, benefiting from the actions we've taken since the beginning of this year. With the sell-down of our global insurance business, we have locked in our asset sales proceeds for the year.

The sell-down of AES Ohio and subsequent debt paydown enabled S&P's recent one and two-notch upgrades for DPL and AES Ohio, respectively. We have also refinanced this year's parent debt maturity and have already fully hedged the benchmark on all expected parent financings through 2027. Additionally, we implemented cost efficiencies and resized our development business to generate over $300 million in annual savings by next year. These actions provide us with a fully self-funded plan through 2027. In summary, I am very pleased with our results this quarter, which are fully in line with the guidance we gave in February. We expect significant growth in the year to go that will come from projects that have already been brought online, but which are still ramping to their full EBITDA, rate-based investments that have already been made, and cost reduction actions already implemented.

I am confident we will achieve our guidance regardless of changes in the economic environment or changes in policy due to our focus on regulated utilities and long-term contracted generation, which has minimal volume, interest rate, or foreign currency exposure. I look forward to providing an update on our progress on our second quarter call. With that, I'll turn the call back over to Andrés.

Andrés Gluski (President and CEO)

Thank you, Steve. In summary, our long-term contracted business model continues to demonstrate its resilience to tariffs, economic policies, and business cycles. Our Q1 results are in line with our expectations, and we are reaffirming our 2025 guidance and long-term growth rate targets. Demand from our core corporate customers remains very strong, and we're seeing no slowdown in the energy needs of hyperscalers in any scenario. As a result of our strategy to be a first mover in creating a domestic supply chain and working with existing suppliers to onshore imported equipment, the tariff exposure on our 11.7GW backlog is de minimis.

Similarly, our construction program of 3.2GW this year is on track and well advanced. We have completed construction of 643MW, and we are 80% complete for the remaining 2.6GW, including 99% complete on the 1GW of our Bellefield project, which will be the largest solar plus storage project in the US. Our two utilities are among the fastest growing in the country, and we continue to make progress on attracting new data centers to our service territory. Lastly, we have already completed all of our major asset sales and financings for the year, solidifying our commitment to self-funding through our long-term guidance period. With that, I would like to open up the call for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. As a reminder, if you would like to ask a question today, please do so now by pressing Star followed by the number one on your telephone keypad. If you change your mind or you feel like your question has already been answered, you can press Star followed by two to withdraw yourself from the queue. Our first question comes from Julien Dumoulin-Smith with Jefferies. Please go ahead, Julien.

Julien Dumoulin-Smith (Equity Research Analyst)

Hey, good morning, team. Thank you guys very much. Appreciate the time and the opportunity here. Nicely done on this insurance transaction. Actually, if I can just start off with a little bit of housekeeping there, how do you think about that transaction just in terms of the prospective EBITDA impact just when you think about the financials here? I mean, again, innovative idea in how to raise kind of equity indirectly, right, from private capital, as you say.

Andrés Gluski (President and CEO)

Sure. Good morning, Julien. I'm going to pass that question to Steve.

Steve Coughlin (EVP and CFO)

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

Julien Dumoulin-Smith (Equity Research Analyst)

Awesome. Yeah, nicely done, Steve. I got to say, neat idea. If I can turn more substantively, right, just to clarify your earlier comments. First, just on the tariff exposure, is it principally that you have got recovery from your suppliers, i.e., they are taking the risk when you guys provide this 0.3%, that effectively the risk burden is effectively put on the vast majority of your suppliers versus going back to your customers? Just wanted to clarify that. Related, just given the 400-and-change megawatts of origination this quarter, given the backdrop today, would you say that this is kind of what we should be expecting for this year, or could you see some sort of more meaningful uptick? I'm just trying to get a sense of what that cadence should be against setting expectations for further down the line.

Andrés Gluski (President and CEO)

I'll have Ricardo answer the first question, and then I'll take the second.

Ricardo Falú (EVP and COO)

Thank you, Julien. I think let me provide a bit of more context on our supply chain. Three years ago, we have made the decision of basically building a reliable and USA-made supply chain. Guided by that sort of decision, we implemented three actions. The first one was that we entered into strategic partnerships with suppliers with manufacturing capacity outside of China. That was the first action. The second action, we were a first mover, as Andrés mentioned, in supporting US manufacturing to secure solar batteries and wind components.

Third, to bridge the gap as local manufacturing ramps up, we accelerated the import of all the equipment coming from abroad required to support our backlog through 2027. As a result of these actions, apart from the small quantity of batteries that Andrés mentioned that these are for a few projects coming online in 2026, we have no impact on tariff for our 2025-2027 backlog. I think with respect to who sort of bear the exposure, these contracts are with the Korean supplier for a very few projects. Of course, these tariffs were not in place at the time we signed the contract. What we are doing, the $50 million represents the full exposure to be shared between the parties.

Of course, the first action, as Andrés mentioned, is to actively reduce that exposure, which we've been so far very successful, and for the remaining impact to share it evenly. We expect the overall impact to be well below that $50 million that is the total exposure that Andrés mentioned. Other than that contract, we have no exposure to tariffs.

Andrés Gluski (President and CEO)

I'd like to clarify that what we did was we imported all of the equipment, the vast majority of it. We have all that equipment that we need, for example, for 2025, with the exception that we pointed out already in the US, most of it on-site. We have a lot of the equipment for 2026 that's imported as well. In 2026, we expect to shift over to domestic supply. When we say that the exposure is de minimis, we really got ahead of this. I will remind you, this is what we did in 2020 as well. In 2020, we achieved all of our targets, and we're the only large developer who did not abandon or significantly delay any large project, and we intend to continue that track record.

Now, getting to your question about the cadence of PPA signings. As we've been saying, look, we're concentrating on fewer, larger projects that are also more financially attractive. The 400MW is not a cadence that you should expect for every quarter. We are in final negotiations of a number of large projects. We expect to hit the 4GW, roughly, that we have talked about prior to this year, to hit sort of the three-year target we had talked about of 14-17GW. We remain on track. We've always said these are lumpy, so it's not like we're doing a lot of small projects. We're doing a few large ones, and sometimes they happen in a quarter, or they happen in the next quarter, or they come together. There's nothing to be read in the 400MW.

Julien Dumoulin-Smith (Equity Research Analyst)

Got it. All right. Excellent, guys. Thank you. I'll leave it there. Nice to see you down again on the transaction.

Andrés Gluski (President and CEO)

Thanks, Julien.

Operator (participant)

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

Nick Campanella (Senior Equity Research Analyst)

Hey, good morning, everyone. Thanks for taking my questions. I appreciate all the color. I just wanted to come back to the insurance sale quickly. I know you kind of disclosed the Class B dividends are like $148.5 to 198 million. Is that like a yearly number, or is that a cumulative number? I guess if you hit that call option in 2030 to 2035, what is that strike price? How should we kind of think of the cost of financing here that you just raised versus, I guess, deploying future CapEx at 13-15% returns? Maybe we could just unpack that.

Steve Coughlin (EVP and CFO)

Yeah. Hey, Nick, it's Steve. Those numbers are based on the first five-year target distribution. This would be the aggregate amount at that five-year call date that needs to get met. That is very much in line with a fairly conservative case on what this insurance business delivers. Keep in mind, this is a business that is captive, but it has a reinsurance behind it. We have a very predictable max amount of losses, and then the reinsurance kicks in. 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 a junior subordinated debt issuance at the parent. 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 to 40 million per year to the counterparty.

Nick Campanella (Senior Equity Research Analyst)

Okay. That's helpful. Appreciate that. 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 a multiple basis or cash, and just the rationale behind that transaction? Yeah.

Steve Coughlin (EVP and CFO)

Look, I mean, this is an asset that we already own and operate. We have a minority partner that was looking to exit. 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. It's serving key customers for us in Chile. The valuation was at a very low multiple. It's quite accretive immediately this year and beyond. We're pleased with it. It's one of the assets that we had already guided that would be extended beyond 2027. 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.

Nick Campanella (Senior Equity Research Analyst)

Okay. Thank you.

Steve Coughlin (EVP and CFO)

All right. Thanks, Nick.

Operator (participant)

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

David Arcaro (Executive Director of Equity Research)

Hey, thanks so much. Good morning.

Andrés Gluski (President and CEO)

Good morning, Dave.

David Arcaro (Executive Director of Equity Research)

I was wondering, on the AGIC sale, just one other follow-up there. You sold a minority stake. I'm just wondering, is there any strategic reason that you want to retain control and the remaining stake there, or could that be a consideration for future asset sales out in the rest of the program, the financing plans going forward as well as any further sell-outs of?

Andrés Gluski (President and CEO)

Yeah. No, we want to maintain our control of this asset. As Steve said, the financial metrics are very conservative, and we're coming in with considerable margin on this. We do want to maintain it. It's been very successful. We set this up about 15-20 years ago. If it was an independent business, it's a unicorn. It's been very successful, lowered our insurance costs, and improved the quality of our reinsurers.

David Arcaro (Executive Director of Equity Research)

Okay. Great. Yeah, thanks for that detail. I was wondering if you could comment on just what you're seeing in terms of latest renewable demand trends. Has there been any pull forward ahead of potential IRA changes here or any just general change in customer demand levels that you're seeing?

Andrés Gluski (President and CEO)

Yeah, great question. Look, what we are seeing is continued strong demand. We're not seeing any sort of temporal shifts as a result. Our data center customers, continued strong demand. I think the keyword is time to power. That's why we mentioned that certainly for the next five years, the predominance of this is going to be renewables because it's the fastest to power. It's also very cost-effective. It's more sort of you can combine this with gas in many cases to reach the optimal solution. I think there's too much discussion about the technology and not really what the customer wants. We combine ways of producing energy in a way that satisfies our customer. Look, we're not seeing any pull forward. We are seeing, I would say, in some of the contracts we're signing today, that they have provisions for, say, changes in law, changes in tariffs, etc., to take that into account. Now, for our backlog, as I said before, we have imported the materials or have domestic supply. We have the EPC, and we have the financing. All that's locked in.

David Arcaro (Executive Director of Equity Research)

Okay. Sounds good. Thank you.

Andrés Gluski (President and CEO)

Thanks, Dave.

Operator (participant)

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

Durgesh Chopra (Managing Director of Equity Research)

Thank you. Good morning, team. Thanks for giving me time. Steve, congrats on this transaction. Maybe just a little bit more detail. You talk 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?

Steve Coughlin (EVP and CFO)

Yeah. 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 yield codes 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. Otherwise, there's no incentive to have to call it. It continues along the same economics for the full 20-year potential period. It is priced, as I said, like a junior parent note and gives us access to what I call cheap equity capital.

Then we can continue to retain this so long as it is, unless we have a better option down the road that is lower cost. This one is a good way to monetize an asset that I think is perhaps underappreciated in the value that it generates. It has been in our disclosures around the distributions to the parent from this asset in the past, so you can see that. This is capital that would be put to work to generate mid-teens returns. I think it looks quite good.

Durgesh Chopra (Managing Director of Equity Research)

Got it. Thank you for that clarity, accretive transaction there. Just sticking on the financing topic, there has been a lot of discussion around transferability. Some legislation recently proposed with our house view is probably does not get much traction. Just in terms of thinking about risks, can you talk about in an event that 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.

Steve Coughlin (EVP and CFO)

Yeah. Absolutely, Durgesh. 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. It is typically a little bit more efficient in transferring most of the tax benefit savings onto customers. There is less friction in these types of transactions.

That said, for the IRA, while we did tax equity, the majority of what we continue to do is still through tax equity partnerships. 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. We can continue to do the tax equity partnerships for all of our future projects if this were removed. We do not 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. Effectively, the cash benefit to AES is the same. We bridge the tax financing with debt during construction as I walked through on the February call.

We immediately, when the tax value comes in either from the transfer counterparty or from the tax equity partner, 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. You have a significant deleveraging from this. The fundamental cash and credit profile is really exactly the same. I think it's been good a lot more for some smaller developers and to sort of democratize the participation in the market. 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.

Durgesh Chopra (Managing Director of Equity Research)

Thanks, Steve. Appreciate that discussion. Just real quick, sorry, this is my third question. I understand and realize. Just the hydrogen project that was canceled in Texas, are we still pursuing other customers for contracted the power generation that I believe it was over a gig?

Andrés Gluski (President and CEO)

The answer is yes. I mean, that was a very attractive asset to development. It's all on private land on one farm, and it's very well located for the grid and for anything else. Yes, we're continuing to pursue it. It's part of our pipeline. Yes.

Steve Coughlin (EVP and CFO)

Thank you, Andrés.

Andrés Gluski (President and CEO)

Thank you, Durgesh.

Operator (participant)

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

Michael Sullivan (Director of Equity Research)

Hey, good morning.

Andrés Gluski (President and CEO)

Morning, Michael.

David Arcaro (Executive Director of Equity Research)

Hey. 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?

Steve Coughlin (EVP and CFO)

Yeah. Hey, this is Steve. With respect to the 3.5, we're at 3.4. We're 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 2025 to 2027. 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 of a smaller scale. We have partnerships of operating assets. We've done partnerships with our LNG portfolio. As you've seen, those can and may be extended. We've done partnerships, sell-downs at attractive low-cost capital of our renewable operating portfolios. Those remain an option.

Our technology portfolio, at this point, Fluence is not at a value that we would tap that. It is significantly undervalued. We are optimistic down the road that that's a potential. We are not counting on that. We do have other assets in that portfolio, like Uplight that we've talked about, that may be a candidate. The universe is larger than what's remaining. What's remaining is only roughly $500 million in that target through 2027. 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.

Michael Sullivan (Director of Equity Research)

Okay. Great. That's helpful. Back to the IRA discussion here, do you all have any view on kind of when this starts to take shape in the reconciliation bill? It feels like things are starting to come to a head a little bit. Also, just specifically on transferability, your view on whether Safe Harbor would cover you on that, even in a scenario where that were to go away.

Andrés Gluski (President and CEO)

Okay. I spent some time up in the Hill with key senators and congressmen. What I would say is that I do expect a first draft to come out of the House Ways and Means Committee. That is to start the discussion. That is certainly, I do not think, the final point. That was made clear to us. I do think that what I heard was it was a very pragmatic approach.

One was the importance of, I would say, reliability in the sense that something like if you look at Safe Harboring, I think that everybody I spoke to said that that's a very important component to maintain because that's really the credibility of US laws or, let's say, US programs. I feel very good about that. I think regarding the IRA, it's a question of certainly going to be addressed, certain aspects of it. I think that you might have an earlier sunset of it. I would say very likely, actually, that's where the majority of the savings that they would score would come from. Having said all that, I think that at the end, it's going to be quite pragmatic. There are hundreds of thousands of jobs depending on this. A lot of people are going to be going into elections in 2026.

You do not want to have a jump in unemployment in rural areas where a lot of this is getting done. You also have the tax revenues that this is going to generate. My feeling on this is that we will have something relatively early. That is not the final. Whatever comes out is not final. When can reconciliation be done? Taken with a huge grain of salt, people think it is before the August recess that people will want to have this done before they go out of town. That is more or less the time frame. I think the discussions that I had were very encouraging about thinking about what is good for the country and what can realistically be done.

Michael Sullivan (Director of Equity Research)

Appreciate that, Color. Thank you.

Andrés Gluski (President and CEO)

Thank you.

Operator (participant)

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

Richard Sunderland (Managing Director of Equity Research)

Hey, good morning.

Andrés Gluski (President and CEO)

Morning, Richard.

Richard Sunderland (Managing Director of Equity Research)

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? How do you expect agencies to treat that?

Andrés Gluski (President and CEO)

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. In terms of S&P and Fitch, it really has no impact because they're focused on the parent free cash flow, whereas this comes in at the subsidiary level and pays down debt primarily. It does get captured in the Moody's metric. 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's placed in service, whether it comes from a transfer or from a tax equity partner, and the debt gets paid down. I think practically it has no impact. If we got to that point, we would, of course, work with Moody's as we have. They've been very constructive in understanding how renewables work, including the adjustments that they made in the last update that they gave. I don't see it as a negative at all for the credit profile.

Richard Sunderland (Managing Director of Equity Research)

Got it. That was very clear. Presumably on a Moody's basis, this would push out the improvement you've called out for 2026, but you'd also expect Moody's to look through the impacts, given what you laid out earlier on the value through tax equity as being the same.

Andrés Gluski (President and CEO)

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

Richard Sunderland (Managing Director of Equity Research)

Understood. Maybe I'll just follow up with one more. I mean, I think there's been a lot of attention on transferability and maybe some fears out there that this first draft on the IRA could have a lot of negative headlines, and then we migrate to more reasonable middle ground. Do you think transferability is something that may come out in that initial draft and then goes back in? Any thoughts on sort of the magnitude of that headline risk initially versus where things might ultimately shake out in your earlier commentary?

Andrés Gluski (President and CEO)

No. What I would say is that there are two sort of groups. One is use a scaffold, and there's one that's sort of be more blunt. I think, again, there's going to be a compromise. I really have no insight in terms of what the initial language can be. It is clear bills always come out to start a discussion. It has to come from the House, and then it has to be resolved with the Senate. You have to have this reconciliation. I just think that anything that comes out now is the start, and it's not the ending point. I also, again, from my discussions, I think they were very constructive, very positive in general, that I think people understand the issues, which is what's most important.

Look, the most important thing is, among other things, we want two things: energy dominance and you want to win the AI race. Both of those require a lot of renewable energy. Actually, a lot of energy now. If you think about additional gas plants, if we order a new gas turbine today, the waiting period is between three to five years, to say nothing that it's not permitted and it's not in the interconnection queue. If you're coming out with something that was very negative, let's say, to new energy, you're forfeiting two of the most important goals of the administration. That is why I felt that there was clarity in terms of cause and effect and what it's going to take to have energy dominance and what it's going to be. It's a question also of time frame.

This is a question that must be resolved in the next four or five years. We have to be pragmatic about what we can get accomplished in that time period. I feel that that is understood. I am, let's say, reasonably optimistic about where it is going to end up. Who knows the political path or headlines? I cannot know, your guess is as good as mine.

Richard Sunderland (Managing Director of Equity Research)

Perfect. Thanks for the time today.

Andrés Gluski (President and CEO)

Thank you.

Steve Coughlin (EVP and CFO)

Thanks, Rich.

Operator (participant)

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

Anthony Crowdell (Managing Director)

Hey, good morning. Thanks for squeezing me in. Most of my questions, Rich had taken care of in front of me. Just quickly on Ohio, some legislation passed earlier, I think, this week, multi-year rate plans, but also maybe removal of OVAC revenues. Just curious the impact for AES Ohio and does it change your plan on rate filings?

Ricardo Falú (EVP and COO)

Thank you so much, this is Ricardo. I would start saying that overall, the impact of the bill is net positive for us, while on one side it eliminates the ESP. It is going to be now replaced by a three-year forward-looking distribution rate case with annual true-up, which is a more constructive regulatory framework in a growing business such as AES Ohio. In addition, the language clearly states that the current ESP 4 features will be extended from August 2026, which was the original expiration date, to May of 2027. This will give us enough time to have the new rates coming from this three-year forward-looking framework in place. I think this is very, very constructive. It eliminates regulatory lags. Again, very, very positive for a growing business such as AES Ohio.

I think in terms of our timing for filing the distribution rate case, more likely it is going to be by the end of this year. With respect to OVAC, the impact is estimated to be between $0 and 10 million. Why $0? Because it depends very much on the financial performance of the asset or assets, I should say, because we are talking about 2.3GW two-core assets that provide capacity to PJM. We are seeing a significant increase in capacity prices, where you may recall it was around $29 and now $270 per megawatt per day. It is going to be within that sort of range, $0 to 10 million, depending on the financial performance and capacity prices in PJM. All in all, net positive. I think this regulatory framework with a three-year forward-looking, it is extremely constructive for AES Ohio.

Anthony Crowdell (Managing Director)

Great. Thanks for taking my questions.

Andrés Gluski (President and CEO)

Thank you, Anthony.

Operator (participant)

Thank you. Those are all the questions we have for today. I will turn the call back over to Susan Harcourt for closing remarks.

Susan Harcourt (VP of Investor Relations)

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.

Operator (participant)

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your line.